SDI Group
Annual Report 2020

Plain-text annual report

20 20 SDI Group plc Annual Report 2 Strategic Report Chairman and Chief Executive’s Report Strategic Report Highlights 01 SDI Group plc (“SDI”) designs and manufactures analytical technology products for use in applications including –Life Sciences, Healthcare, Precision Optics, Consumer Manufacturing, Astronomy & Art Conservation, Thermal Control and Scientific & Industrial Analysis Contents Strategic Report 01 Highlights 02 Group Overview 04 Our Specialist Company Portfolio – Digital Imaging – Sensors & Control 08 Chairman’s Statement 10 Chief Executive Officer’s Report 16 Strategy and Key Performance Indicators 18 Principal Risks and Uncertainties 20 Chief Financial Officer’s Report Governance Report 23 Board of Directors 24 Corporate Governance Statement 29 Report of the Audit Committee 31 Report of the Remuneration Committee 32 Directors’ Remuneration Report 34 Directors’ Report 36 Section 172 (1) Report Financial Statements 38 Report of the Independent Auditor 48 Consolidated Income Statement and Statement of Comprehensive Income 49 Consolidated Balance Sheet 50 Consolidated Statement of Cash Flows 51 Consolidated Statement of Changes in Equity 52 Notes to the Consolidated Financial Statements 84 Company Balance Sheet 85 Company Statement of Changes in Equity 86 Notes to the Company Financial Statements 92 Five-Year Summary IBC Shareholder Information Revenue Adjusted operating profit* Adjusted diluted EPS Cash generated from operations +41% +48% +23% +44% £24.5m including 3.7% organic growth £17.4m £4.6m £5.2m 3.43p £3.1m 2.83p £3.6m FY2019 FY2020 FY2019 FY2020 FY2019 FY2020 FY2019 FY2020 One new acquisition added to the Group for consideration of £5.2m (on a cash free debt free basis) A number of the SDI companies have seen increased demand in medical products which are related to fighting COVID-19 *before reorganisation costs, share-based payments, acquisition and fundraising costs and amortisation of acquired intangible assets. Basic earnings per share 2.66p (2019: 2.10p) & diluted earnings per share 2.56p (2019: 2.05p) Why Invest in SDI? ● Buy and build model within science and technology sectors ● Good spread of niche technologies in diverse global markets ● Eleven acquisitions in six years ● Reputation of allowing companies to operate autonomously ● Track record of selecting sustainable businesses ● Management focused on shareholder value – cash generation, profitability and debt reduction ● Companies across the Group adapt quickly to changing market conditions 02 Strategic Report Group Overview . Digital Imaging Sensors and Controls SDI Group plc Annual Report 2020 03 SDI Group Acquisition Process and Timeline • Opus Instruments 2014 Why sell to SDI ? • The business will retain its independence, brands and culture • Focus on growth • Strong financial support and access to specialist resources within the Group • Knowledge sharing within the Group • Chell Instruments • Ionscope • MPB Industries • Thermal Exchange • Graticules Optics 2019 Main acquisition criteria • Scientific / technical instruments / manufacturing sector • Strong exporters within their niche sector • Profitable and cash generative • Strong track record • Strong local management team • Available at a fair price – recent acquisitions have been priced at 4-6 times EBIT • SDI have a reputation of being honourable and never changing the deal terms 2015 • Sentek Post acquisition • Implement strong financial controls • The business is run autonomously • Focus on the medium- to long-term strategy • Create an environment for the businesses to grow and develop with investment if required 2018 • Quantum Scientific Imaging • Fistreem 2017 • Astles Control Systems • Applied Thermal Control 04 Strategic Report Our Specialist Company Portfolio SDI Group plc Annual Report 2020 05 SynopticS ● Synoptics Health Synoptics based in Cambridge is the headquarters and manufacturing site for Syngene, Synbiosis, Synoptics Health and Fistreem International products. It also has a US sales and marketing office based in Frederick USA. Synoptics Health manufactures and supplies ProReveal, a highly sensitive fluorescence- based patented protein detection test for checking the presence of residual protein on surgical instruments after going through a washer disinfector process. ● Syngene ● Fistreem international Fistreem International (Fistreem) designs and manufactures water purification products and vacuum ovens. The firm’s Cyclon Water Still and Gallenkamp vacuum ovens are recognised as leading brands. The Company, originally based in Loughborough UK, successfully relocated its technology portfolio in 2020 to Synoptics’ facility in Cambridge UK, where it is now manufactured. Syngene develops and manufactures systems and software for automated gel-based DNA and protein fluorescence/chemiluminescence imaging and includes the popular global G:BOX and NuGenius brands. ● Synbiosis Synbiosis provides automated and manual systems for microbiological testing in food, water, pharmaceutical and clinical applications. Its ProtoCOl 3 system is used in the major pharmaceutical companies for vaccine and antibiotic development and in 2019 Synbiosis launched AutoCOl, the world’s first fully automated colony counter. SDl Group plc, formerly known as Scientific Digital Imaging plc (SDI) is an AIM-listed company specialising in the design and manufacture of products for use within a number of imaging and sensing and control applications including life sciences, healthcare, astronomy, precision optics, measurement instrumentation and art conservation markets. Corporate expansion is via organic growth within its subsidiary companies and through the acquisition of complementary, niche technology businesses with established reputations in global markets. Digital Imaging ATIK CAMERAS GRATICulES OPTICS Based in Norwich, Atik Cameras is the headquarters for the brands: Atik, Quantum Scientific Imaging and Opus Instruments. The cameras are all designed and developed in Norwich and its cameras are manufactured in its dedicated factory in Lisbon, Portugal. ● Atik Atik Cameras designs and manufactures highly sensitive cameras for life science and industrial applications, as well as deep-sky astronomy imaging. ● Quantum Scientific Imaging Quantum Scientific Imaging (QSI) designs and manufactures a range of high-performance cameras that have applications in astronomy, life sciences and flat panel inspection. ● Opus Instruments Opus Instruments is a world leader in the field of Infrared Reflectography cameras for use in the art conservation market. It developed its OSIRIS camera as a collaboration with the UK’s National Gallery and all its cameras including Apollo, a higher specification version of OSIRIS, are manufactured by Atik. Graticules Optics is a proven designer and manufacturer of precision micropattern products. The firm, based in Tonbridge Kent, is unique in offering photolithographic products on glass, film and in metal foil, with the added bonus of coatings, cementing, mounting and small optical assembly. Our nine Digital Imaging brands increased their revenue to £11.1m and achieved a 21% operating profit in FY2019/2020 06 Strategic Report Our Specialist Company Portfolio continued SDI Group plc Annual Report 2020 07 Our six Sensors & Control brands grew from £8.0m to £13.4m in revenue, an increase in this financial year of 70% Sensors & Control SENTEK Sentek manufactures and markets off-the shelf and custom-made, reusable and single-use electrochemical sensors for use in laboratory analysis, food, beverage, pharmaceutical and personal care manufacturing, as well as the leisure industry. The company, based in Braintree, Essex and Auchtermuchty, Scotland serves global markets and has long-term contracts to supply sensors to two major life science companies. APPlIED THERMAl CONTROl AND THERMAl EXCHANGE Applied Thermal Control (ATC) and Thermal Exchange (TE) are based at their new manufacturing site in Barrow Upon Soar, UK, where they relocated in 2020. Both companies design, manufacture, and supply a range of chillers, coolers and heat exchangers used within scientific and medical instruments. ASTlES CONTROl SYSTEMS Astles Control Systems (Astles) is a supplier of chemical dosing and control systems to different industries including manufacturers of beverage cans, engineering and motor components, white goods, architectural aluminium and steel. The company is located in Princes Risborough, Buckinghamshire, UK. CHEll INSTRuMENTS Chell Instruments (Chell) specialises in the design, manufacture and calibration of pressure, vacuum and gas flow measurement instruments for a variety of sectors including aerospace, vehicle aerodynamics, gas and steam turbine testing and power generation. The company is based in North Walsham, Norfolk. MPB INDuSTRIES MPB Industries (MPB) designs and manufactures flowmeters, flow alarms, flow indicators, flow switches, calibration cylinders and sight glasses for the measurement of liquids and gases by well-known industrial and scientific users. Based in East Peckham, Kent, MPB operates across a broad range of applications including water treatment, oil and gas production, medical anaesthesia, and scientific analysis. 08 Strategic Report Chairman’s Statement for the year ended 30 April 2020 SDI Group plc Annual Report 2020 09 Ken Ford Chairman 20 July 2020 Consistent Revenue Growth (£m) +41% +20% +35% +25% 8.5 10.7 14.5 17.4 24.5 FY2016 FY2017 FY2018 FY2019 FY2020 Performance I am pleased to report that in the financial year ended 30 April 2020, SDI Group plc (SDI) achieved another record year of revenues and pre-tax profits, whilst completing one of our largest acquisitions and managing the disruption of the global pandemic in the final two months of the financial year. Despite the slowdown in orders from March 2020, SDI finished the year with profits in line with market expectations and a strong cash flow, positioning the Group to take advantage of new market opportunities as they may arise. SDI completed the acquisition of Chell Instruments in November 2019 paying £5.2m for the business, and therefore part-year revenues from this new company are included in this financial year. Chell is a high-quality instrumentation company, reflected by its roster of customers within aerospace and vehicle aerodynamics (including Formula One). It is the Group’s tenth acquisition in the past four years, highlighting its buy and build strategy. Chell was identified as an attractive acquisition with a number of parties expressing interest. The fact that SDI was successful supports our belief that SDI is seen by vendors as having a clear strategy with the right cultural fit. The new business has become part of our Sensors and Control segment. Full-year Revenues of £24.5 million show an increase of 41% from 2019 and Adjusted Profit before Tax at £4.3 million is up 45% from the previous year. Reported Profit before Tax has increased by 56% to £3.3m. This performance has been achieved through 3.7% organic sales growth from the businesses already in the Group’s portfolio at the start of the financial year, demonstrating continued commercial demand for the niche technologies and expert services SDI provides. The newly acquired Chell Instruments business also delivered a contribution in line with the Board’s expectations for the financial year. Strategy Team The Group’s strategy continues to be one of buy and build adding carefully selected acquisitions, ideally funded by cash and a debt facility. The Group’s policy is to acquire niche technology companies within the digital imaging and sensing and control sectors. To obtain immediate, continuing earnings enhancements, we only acquire businesses with complementary technologies that have long-lasting profits and cash flows. In the current financial climate, there may be greater opportunities for purchasing companies requiring a rapid sale and we would expect to acquire at least one business in the coming financial year. The need for digital imaging and sensing and control products, particularly in the life science and medical industries, remains robust and there has been strong demand for several of the Group’s products for use in the fight against the COVID-19 pandemic. Since our businesses trade globally, we do expect volatility in some markets caused by the pandemic to have an impact in the current financial year. Long-term market drivers such as the global expansion of automation and in- process measurements, as well as medical and pharmaceutical research, means many of our technologies and services will be increasingly required especially by original equipment manufacturers (OEMs) with which SDI companies have long-term supply contracts. Delivering returns to our shareholders is a key objective of the SDI Group, and with the uncertainty arising from the global pandemic, the Group has been particularly focused on reducing SDI’s overall costs. These included a cut of 33% in all SDI Board salaries and fees for a period of three months. The Group has also furloughed 17% of its staff with Government support, ensuring the retention of skilled staff for the future. Due to the current global pandemic the Board has decided not to pay a dividend for the financial year 2020 but will review again in 2021. The pleasing results achieved during the 2019- 2020 financial year are due to the hard work of our staff. Since the lockdown came into force on 23 March 2020, the Group is proud to confirm that all companies remained open for business despite challenging working conditions. We have taken all necessary steps to protect the health of our employees, clients, and suppliers. Protocols have been introduced in the workplace and, where possible, staff have been working from home. The Board is extremely proud of the way the Group’s employees have adapted to their changing working conditions and is grateful to them for their contribution to this year’s positive performance. Outlook and COVID-19 SDI Group has started the current year in a strong financial position and a number of our companies have seen increased demand for medical products which are being used to address the COVID-19 challenges. Other companies within the Group face some uncertainty and a downturn in orders although all our manufacturing facilities remain in operation. There are early signs of a return to normality in trading and overall SDI remains profitable and cash generative. SDI continues to seek acquisitions and looks forward to growing organically and through acquisition as conditions improve. Reported Profit before Tax increased by 56% to £3.3m (£2.1m 2019) 10 Strategic Report Chief Executive Officer’s Report for the year ended 30 April 2020 SDI Group plc Annual Report 2020 11 Mike Creedon Chief Executive Officer 20 July 2020 Group revenues for the financial year ended 30 April 2020 increased by 41% from £17.4 million to £24.5 million. This reflects organic growth and the full year contributions of Fistreem International, Thermal Exchange, Graticules Optics and MPB Industries, all acquired during 2018/2019. During this financial year, we acquired one new company, Chell Instruments, at a cost of £5.2 million for the business. Acquisition costs were funded by existing cash flows from SDI companies and a bank loan due for repayment in April 2023. Revenues and Profit SDI’s nine digital imaging brands delivered £11.1 million revenue and a 21% operating profit during the 2019/2020 financial year. Revenues have been enhanced by organic growth and full year contributions of Fistreem and Graticules Optics. Synoptics also had an outstanding year achieving the highest profit the company has reported in eight years. Atik Cameras, the largest business in the SDI Group, achieved profits which were in line with budget for the year. Demand for products from the Atik companies was robust across all global markets until March 2020, when orders began to slow due to the global pandemic and lockdown, resulting in a decline in orders from Atik’s main US-based OEM customer. This reduction in orders is however being replaced by an increase in orders from another OEM to supply cameras for a system used in COVID-19 detection. Our six sensors and control brands grew from £8.0 million to £13.4 million in revenue, an increase of 70% in this financial year. Revenues have been enhanced by the full year contribution of MPB Industries and Thermal Exchange and part year revenues from Chell Instruments, as well as organic growth of existing companies within the division during the period. The segment adjusted operating profit increased by 41% to £3.0 million, or 23% of sales. Basic earnings per share increased by 27% from 2.10p to 2.66p; fully diluted earnings per share also improved by 25% to 2.56p (2019: 2.05p). Operations SDI is continually investing in improving its existing products, as well as developing new technologies and additional manufacturing capacity where required. ATIK CAMERAS’ new larger production site in Lisbon, Portugal became operational in the first quarter of 2020 and has allowed implementation of efficient, batch production. Since the facility is double the size of its previous manufacturing site, this has enabled social distancing measures to be put in place, allowing staff to continue safely producing cameras without interruption. Orders for cameras from Atik’s main OEM customer, a major US life science laboratory supplier, decreased from March 2020 during the pandemic. However, these have been replaced by orders for low-light cameras from another major OEM manufacturer of real-time RT-PCR systems (DNA amplification), used to detect the SARS-COV-2 virus which causes COVID-19. Atik, which has worked with this OEM supplier for three years, has increased camera production for them by approximately 10-fold. Atik forecasts it will continue to supply at this increased rate for the next 6-9 months, enabling Atik production to continue at full pace. Case Study 1 Investment for Growth Atik Lisbon is a good example of the long-term investment we make in the business. Atik Lisbon has been based in Santa Iria (near Lisbon) since it started many years ago. We did have an opportunity last year to move the business to Nations Park (a high-profile business park). After consulting the workforce, we have agreed that the manufacturing facility will remain within its current vicinity. Every move over the years has been driven by a need for increased capacity because of increased volumes which is fuelled by the steady increase in demand from science related OEMs. 47m2 300m2 720m2 Pre-2013 Post-2020 2013 2017 2020 160m2 720m2 12 Strategic Report Chief Executive Officer’s Report for the year ended 30 April 2020 continued SDI Group plc Annual Report 2020 13 The SYNOPTICS Group of companies had a good year for orders of its Syngene DNA imaging systems in India, the US and Europe and has also sold three Synbiosis AutoCOL systems meeting revenue targets before March 2020. The AutoCOl is a new, large fully automated system for colony counting. Two of these will be shipped to a major contract research organization, where they will be used for vaccine research and since interest remains high in this new system, Synoptics forecasts more orders when research laboratories are again fully operational. FISTREEM’s technology was also successfully transferred to the Synoptics manufacturing site and in 2020, began OEM production of its water purification systems for a major US life science supplier. Since Fistreem products include a number of associated consumables, its addition to Synoptics is providing a steady flow of orders, which is helping Synoptics increase sales and profitability. This year we have invested in MPB, one of our newer companies, putting in place new material requirements planning (MRP) and IT systems, as well as purchasing glass-washing automation and tooling technology. This has enabled MPB to take on a major contract from medical devices company, Penlon, to supply 30,000 human anaesthetic variable Case Study 2 Company Co-operation Atik cAmerAS continues to serve its astronomy customers although it has seen significant growth in recent years for cameras for the life sciences market. Our cameras are incorporated into the products of OEM customers. One of those OEM customers is the Syngene brand owned by SynopticS. The end product is a gel documentation system. It is widely used in molecular biology (i.e. biological activity between biomolecules in various systems of cell including DNA, RNA and protein) laboratories for the imaging and documentation of nucleic acid (DNA and RNA) and protein suspended within gels. A gel documentation system includes light trans illuminator, a darkroom to shield external light sources and a camera (in our case, an Atik camera) for image capturing. area flowmeters for production of Rapidly Manufactured Ventilator Systems as part of the VentilatorChallengeUK consortium. The consortium, which includes MPB alongside Penlon and over 30 other UK manufacturers, has seen significant cross industry collaboration and effort to deliver two different models of ventilator into the UK’s National Health Service (NHS) to help treat patients in UK hospitals suffering with COVID-19. MPB has worked with Penlon for 25 years and has increased its supply rate 20-fold to meet critical delivery timescales. To fulfil this contract, MPB staff have responded heroically to meet this challenge with the contract signed during the last quarter of the 2019-2020 financial year. MPB has also had assistance from engineers seconded from Ford Motor Company whom they have trained in glass tube forming, as well as time and motion experts to improve the productivity of their manufacturing process. The additional investment SDI has made into MPB has strengthened the company’s manufacturing position. MPB has already had enquiries from other medical device companies about supplying tubes for ventilators, making their business more resilient and providing growth opportunities going into the new financial year. Case Study 3 COVID-19 How our technology is being used to assist COVID-19 patients and help save lives. mpB induStrieS produces, designs, manufactures and sells a range of flowmeters and process control instrumentation for water, oil and gas, medical and other scientific applications all over the world. They are based in East Peckham, Kent. SDI Group acquired the business in April 2019. MPB Industries was contacted by Penlon Ltd, a long-term customer, for a requirement of 30,000 flowmeters to be incorporated into the Penlon medical ventilator. Due to the size of the order and complexity, a consortium, called Ventilator Challenge UK, was set up consisting of significant UK industrial, technology and engineering businesses from across the aerospace, automotive and medical sectors. They have come together to produce medical ventilators for the UK. These include Ford and McLaren. For MPB, being a niche business, rapidly scaling production capacity was an issue. With the help of members of the consortium and support of our engineers and suppliers we worked around the clock six days a week, for what will be a total of approximately 15 weeks, to increase output from a standard order to Penlon of 20 units per day, to 500 units per day. This was a major achievement for MPB and its staff in such a short period of time in support of a national effort to address the COVID challenge. The Penlon ESO 2 Emergency Ventilator using MPB flowmeters at the NHS Nightingale Hospitals 14 Strategic Report Chief Executive Officer’s Report for the year ended 30 April 2020 continued SDI Group plc Annual Report 2020 15 Acquisitions The UK is a centre of excellence for product innovation and manufacturing with world-leading businesses in many niches of digital imaging and sensing and control sectors. As a buy and build Group, the acquisition of businesses with complementary technologies is key to our success. The SDI Group has a reputation as a supportive buyer that trusts subsidiary management teams with their day-to-day operations. Our acquisition of Chell Instruments this year for £5.2 million, has added a new manufacturing site with calibration expertise and world-class engineering capability in vacuum, gas flow and pressure measurement and control. To date our new acquisition has added £2.0 million of revenue to the Group in this financial year, and has contributed positively to earnings in the period. CHeLL InSTRuMenTS contributed £2.0m of revenue to the Group in this financial year CHEll INSTRuMENTS (acquired in November 2019) has had a successful financial period since joining SDI and the Board believes the company has integrated well into the Group. One of the main highlights since the acquisition has been the design and delivery to an aggressive timeline of the nanoDaq-lT – the smallest and lightest pressure scanner currently on the market. Chell engineers redesigned the electronics and case, and manufactured and calibrated 30 units of the nanoDaq-LT within six weeks, for a major Formula One racing car manufacturer. The pressure scanner performed well at Formula One testing sessions in Barcelona in March 2020. Towards the end of the financial year, orders from the aerospace and automotive industries had begun to slow due to the global pandemic and lockdown but work in Chell’s calibration laboratory began increasing. Chell forecasts that this trend will continue into the next quarter as their calibration laboratory is working with more medical ventilator and oxygen sensor suppliers to test and calibrate their equipment. To date, this is providing sufficient workflow and revenues to compensate for order losses in other areas of the Chell business. Pressure Scanning is instrumentation that measures a number of air pressures on the aerodynamic surfaces of a race car or aircraft – either in real life or a wind tunnel. Case Study 4 The Evolution of Pressure Scanning in Formula One We were approached by various F1 teams, approximately 20 years ago, to design a system that could be used on the car as they needed to validate the results from the wind tunnel in the real world – on a track, through corners and following other cars. The original product was around the size of a small shoe box and was difficult to locate within a F1 car, which made its integration non-trivial. We have continued to develop updated products to reduce their size, interface into the car’s acquisition system, and to significantly increase features and performance. In 2018, we developed the nanoDaq-lT range (shown right) which further reduced the size to that of a match box and also had the advantage of being a complete Chell solution – no other sensing components were required. During this time, the testing regime used in F1 also changed. Wind tunnel time and test sessions became strictly limited in an effort to reduce costs. The end result of this was that teams needed more instrumentation to get more information from each test they did. Our latest products; the nanoDaq-lT range fitted this application well due to package size, accuracy and features. 16 Strategic Report Strategy and Key Performance Indicators SDI Group plc Annual Report 2020 17 Strategy SDI Group is an AIM-quoted group specialising in the acquisition and development of a portfolio of companies that design and manufacture products for use in digital imaging and sensing and control applications in science, technology and medical markets. Corporate expansion is being pursued, both through organic growth within its subsidiary companies and through the acquisition of high-quality businesses with established reputations in global markets. The Board believes there are many businesses operating within the market, a number of which have not achieved critical mass, and that presents an ideal opportunity for consolidation. This strategy will be primarily focused within the UK but, where opportunities exist, acquisitions in Europe and the United States and elsewhere will also be considered, particularly if these also enable geographic expansion of our existing businesses. Asia 4,492 Americas 3,290 RoW 1,338 Geographical Analysis of Revenue by Destination FY2019/20 (£’000) Europe 5,129 UK 10,249 We keep a lean headquarters, and our businesses are run by seasoned local management with broad discretion within defined limits. Our aim is to grow them, profitably, and we seek to provide them with the resources necessary to grow. Acquired businesses often find that they can grow faster within the SDI Group than they were prepared to do under private ownership, and they are able to learn from and share experience with other companies in the Group. Our current businesses fall broadly into two segments, which we call Digital Imaging and Sensors & Control, and within these groupings there are significant commonalities of applications, industries served and technologies employed. This provides additional opportunity for knowledge sharing, which we encourage. Growth in revenues and profit within our businesses depends on both technology advancement and seeking new customers, often by expanding geographical reach, and the Board sees geographical expansion as a driver of organic growth for the future. By lowering the cost of capital of businesses we acquire and by facilitating their profitable growth, our business model has demonstrated that it can provide good returns to shareholders and can be scaled into the future. We intend to continue to buy stand-alone businesses as well as smaller entities and technology acquisitions which bolt onto our existing ones. Our track record over the last six years has been good, with eleven businesses acquired across our Digital Imaging and Sensors and Controls segments. An important element of our strategy is that we are known to be a good acquirer, able to help sellers to achieve a sale quickly and easily, and without surprises. Adjusted Operating Profit 3,028 Digital Imaging Group Segment Analysis FY2019/20 (£’000) Sensors & Control 13,448 Revenue Revenue 11,050 2,382 Adjusted Operating Profit Key Performance Indicators A range of financial key performance indicators are monitored on a monthly basis against budget by the Board and by management, including order pipeline, revenue, gross profit, costs, adjusted operating profit, and cash. The Board regularly discusses progress in all major research and development and other projects with project and business leaders, including with respect to cost, timelines and adherence to the projects’ initial objectives. In support of our acquisition strategy as outlined above, we monitor our acquisition pipeline, including any prospects that fail to progress. Post-acquisition, the Board discusses integration progress, and monitors financial performance against our initial plans. Over a longer period, we monitor the return on total invested capital of all of our businesses. Additionally, the Board reserves a specific agenda item for discussion of health and safety and other employee welfare-related issues. SDI Group Share Price Performance £1.00 £0.90 £0.80 £0.70 £0.60 £0.50 £0.40 £0.30 £0.20 £0.10 £0.00 2016 2017 2018 2019 2020 SDI FTSE AIM All Share Index 2000 1600 1200 800 400 0 18 Strategic Report Principal Risks and uncertainties SDI Group plc Annual Report 2020 19 The following represent, in the opinion of the Board, the principal risks and uncertainties of the business. It is not a complete list of all the risks and uncertainties and the priority, impact and likelihood may change over time. Competition and technological obsolescence Competition from direct competitors or third- party technologies could impact upon our market share and pricing. In order to mitigate this risk the Group continues to invest in researching its markets and continues to offer new products in response to changing customer preferences. In addition the Group invests in research and development to maintain its competitive advantage. Dependence on key distributors and OEM customers Failure to effectively manage our distributors of products could damage customer confidence and adversely affect our revenues and profits. In order to mitigate this risk the Group dedicates significant resource to maintaining close relationships with our distributors and OEM customers, including at Group level. Acquisitions Acquisitions are a key element of our strategy, and the failure to identify and prosecute acquisition opportunities would impact future growth in profit and share price. The Group spends significant time and energy in identifying acquisition opportunities, and receives suggestions from various sources as well as directly or through our own businesses and management. These are carefully filtered, and the most attractive ones are managed to a possible successful conclusion. An additional important risk is that an acquisition does not provide the financial return expected. The Group’s disciplined due diligence process helps to avoid this, but the Group is also able to marshal resources in support of an acquired entity’s management team to help them improve performance as necessary. Currency translation The results for the Group’s overseas businesses are translated into Pounds Sterling at the average exchange rates for the relevant year. The balance sheets of overseas businesses are translated into Pounds Sterling at the relevant exchange rate at the year end. Exchange gains or losses from translating these items from one year to the next are recorded in other comprehensive income. As with the majority of international companies, the Group’s UK and overseas businesses purchase goods and services, and sell some of their products, in non-functional currencies. Where possible, the Group nets such exposures or keeps this exposure to a minimum. The Group’s principal exposure is to US Dollar and Euro currency fluctuations against Pound Sterling, and in both currencies, we sell more than we purchase and we have a higher level of debtors than creditors. This typically means that a relative devaluation of the Pound results in exchange gains and an improvement in competitiveness, whereas a revaluation has the opposite effect. We do not hedge our exposure using financial derivative products, but we do have some activity in both Europe and USA, including a factory in Portugal, which acts a partial natural hedge. We keep cash balances in Euros and Dollars to a minimum, and we have recently taken out loans under our revolving credit facility in Euros and Dollars, to reduce our net exposure to those currencies. If the Pound revalues, we will review all opportunities to realign our costs to the changed circumstances. Recruitment and staffing If the Group fails to recruit and retain individuals with the appropriate skills and experience its performance may suffer. To ensure the Group retains the highest calibre staff it has implemented a number of schemes designed to retain key individuals, both financial and non- financial, including bonuses and share option schemes. In the current COVID-19 pandemic, the Group has sought to maintain all staff on the payroll, using the UK government furlough scheme where appropriate. Brexit The Group manufactures its products in the UK and in Portugal, and sells worldwide. The exit of the UK from the European Union, which is currently in a transitional phase, may cause some disruption to goods movements, may increase barriers to trade between the UK and the EU, and may impact the investment plans of some of our customers. There are likely also to be macroeconomic developments impacting exchange rates, interest rates, GDP growth and government spending levels. The Group has operating flexibility to mitigate some of the potential effects, but is exposed to economic downturns within the markets in which it operates. The Group has taken appropriate steps to minimise disruption, and has cooperated with customers to ensure continuity of their supply chain. The Group continues to monitor the progress of the British Government’s negotiations with the EU. COVID-19 The COVID-19 pandemic has impacted the Group’s revenues and operations and may continue to have severe implications for the financial year to 30 April 2021 and beyond. Further waves of the COVID-19 pandemic may occur. The Group is exposed to the risks that OEM customers and distributors close down their own production and selling activities; that lower economic activity reduces demand for the Group’s products and services; that supply chains are interrupted; that our own factories and offices are closed in in order to prevent the disease spreading or in consequence of a local outbreak; or that our own key personnel are affected. The Group may incur additional costs to mitigate these risks. It is likely that acquisitions become more difficult to consummate in the short term, in particular because sellers may struggle to accept pricing which reflects any reduction in sales and profits. The Group has some product lines whose demand has increased as a result of the pandemic, but the overall effect has been to reduce demand, in March and April of the financial year ending 31 April 2020 and in the opening weeks of the new financial year. The Group has followed all government guidelines, but has been able to keep all of its factories open with staff working from home where possible. The Group has continued to be profitable and to generate cash. The Group remains alert to continuing risks. liquidity A review of the Group’s exposure to liquidity risk is provided in note 27. Going Concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out within this Strategic report. The financial position of the Group, its cash flows, and liquidity position are provided in the financial statements on pages 48-51. In addition, notes to the financial statements include the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to liquidity risk. The Board has reviewed forecasts for the period to 30 April 2022. These reflect sales projections taking into account various outcomes for both Brexit and the current COVID-19 pandemic, including cash requirements when sales recover and possible worsening of customer payment times and inventory turns, as well as for new products coming on stream as a result of the Group’s research and development activity and continued cost management. The Group meets its cash flow and borrowing requirements through bank loans as detailed in note 20. The Board’s forecasts indicate that the Group will continue to trade within its existing facilities with scope to further manage its cost base if necessary. The Board considers that the Group will have adequate cash resources within its existing facilities to continue to trade for the foreseeable future and therefore continues to adopt the going concern basis of accounting in preparing the annual financial statements. 20 Strategic Report Chief Financial Officer’s Report SDI Group plc Annual Report 2020 21 Revenue and Profits Group revenue for the year was £24.5 million, an increase of 41% over 2019, achieved through approximately 3.7% organic growth and from the additional contribution of £6.3 million from our acquisitions of last year (in their first 12 months in the group) and of Chell Instruments this year. Gross profit increased to £16.6m (2019: £11.5m) with increased gross margin at 67.8% (2019: 66.1%). Operating profit for the year was £3.5m (2019: £2.2m), and Adjusted Operating Profit (AOP) was £4.6m (2019: £3.1m) before reorganisation costs, share-based payments, acquisition and fundraising costs and amortisation of acquired intangible assets, an increase of 48%. The main driver of the increased profit has been the contribution from the businesses acquired in 2019 and 2020. Jon Abell Chief Financial Officer 20 July 2020 The Group experienced a contraction in March and April, influenced by the developing COVID-19 pandemic, with sales approximately 18% lower in those months than in the equivalent period in 2019, excluding the contribution from Chell Instruments. The Group took several measures to mitigate the financial impact of the pandemic. These measures have included: • The furloughing of approximately 17% staff (as of 30 April 2020), making use of the UK government’s Coronavirus Job Retention Scheme • A temporary 33% reduction in Directors’ salaries and fees • All other costs have been reviewed to prioritise expenditure that will help us to maintain operations and resume normal business as soon as possible. The Board is aware that some of these actions, as well as restrictions caused by adhering to government social distancing guidelines, may result in delayed R&D projects and missed marketing and selling opportunities. The Board will review staffing levels required as the Group returns to more normal levels of activity. Financing expense was £254k (2019: £77k), reflecting both increased usage of our loan facility to fund the acquisitions and £82k of financing cost resulting from the application of IFRS 16 (Leases). Investment in R&D Under IFRS we are required to capitalise certain development expenditure and in the year ended 30 April 2020 £536k (2019: £585k) of cost was capitalised and added to the balance sheet. Much of the work of our growing R&D teams does not qualify for capitalisation, and is booked directly to expense. Amortisation and write- offs for 2020 were £528k (2019: £591k). The carrying value of the capitalised development at 30 April 2020 was £1.174m (2019: £1.18m) to be amortised between 3-5 years. Reorganisation The Board carried out a thorough review of the operations and cost structure of the Group and this gave rise to £110k (2019: £124k) of reorganisation costs in the year impacting several businesses, which should bring benefits in the current year. During the year, the Group’s Synoptics Limited subsidiary took the decision to cease the activities of its Ionscope product line. The product line had been acquired in January 2019 for a consideration of £49k, which was recovered by a sale within the 2019 financial year. It was judged, however, that further investment in the product would not be an optimal use of resources, and the product line has been ceded to a former employee. Acquisition and Fundraising Costs £58k of costs relate to stamp duty, legal fees, and other advisor remuneration for the acquisition completed in the year (2019: £288k). In 2019, £190k of brokers fees and legal expenses relating to a share placing were booked directly to the share premium account within equity. Taxation Taxation for the year was £666k (2019: £209k) arising through improved profitability, but impacted adversely by the reversion to a 19% enacted UK statutory tax rate (2019: 17%) on our deferred tax liabilities which resulted in additional expense of £158k. Earnings per Share Basic earnings per share for Group was 2.66p (2019: 2.10p) and diluted earnings per share for the Group was 2.56p (2019: 2.05p). Adjusted diluted EPS, an alternative performance measure which excludes certain non-cash and non-recurring expenses was 3.43p (2019: 2.83p). Accounting Standards In the year, beginning 1 May 2019, we implemented IFRS 16, which requires us to capitalise “right of use” assets held under operating leases, such as the Group’s building leases. The effects on the consolidated income statement are minor resulting in a decrease in profit before tax of £40k, but the change had the effect of increasing both fixed assets and debt by £2.48m on 1 May 2019. Including leased assets held by Chell Instruments, the total net value of “right of use” fixed assets resulting from the standards change on our balance sheet at 30 April 2020 was £2.84 million. 22 Strategic Report Chief Financial Officer’s Report continued Governance Board of Directors 23 Cash Flow and Working Capital Funding Our investments were financed by a combination of our own cash flow, an increase in our use of our revolving credit facility, and by the addition in November 2019 of a new amortising term loan of £4.8m, taken out in conjunction with the Chell acquisition. In the light of the developing COVID-19 pandemic, in March and April 2020 we took steps to secure our liquidity position by drawing down almost all of our available borrowing capacity under the revolving facility, and by requesting and obtaining from our bank a deferral of the £342k repayment due in April under the term loan. These actions, plus the release of working capital resulting from the sales slowdown, resulted in the build-up of a significant cash balance at 30 April which is in excess of our immediate needs. We continue to monitor the situation closely, and we would expect to reduce our borrowing and surplus cash again over time as the pandemic recedes and our working capital position permits it. In parallel with the deferral of the loan repayment, we agreed with our bank a precautionary waiver for two quarters of one of the three covenants relating to the credit facility, which provides for a minimum level of cashflow-to-debt-service. In any case, we were compliant with the covenant at 30 April 2020 and we would expect to remain compliant. We closed the year with a cash balance of £5.3m (2019: £2.5m), and net debt (debt, including £3.0m of lease debt under IFRS 16, less cash) of £7.1m (2019: net debt of £1.7m). There is no deferred or contingent consideration outstanding for any of our acquisitions. During the year the Group generated cash from operations of £5.2m (2019: £3.6m). Working capital increased in the year, but we saw strong reductions in April as the COVID-19-related slowdown took effect. Taxes paid increased from £319k to £786k, partly as a result of more of our businesses moving to HMRC’s quarterly instalment payment regime. Cash Generated from Operations (£m) 5.2 3.6 2.9 1.3 2.5 FY2016 FY2017 FY2018 FY2019 FY2020 Our investment in fixed assets increased to £919k (2019: £419k) with notable investment in our new Atik factory in Portugal and in the new facility housing the combined Applied Thermal Control and Thermal Exchange entities in Leicestershire, UK. Capitalised Research and Development expense at £536k (2019: £585k) was broadly equal to amortisation. However, our biggest investment was in the acquisition of Chell Instruments Limited, and we deployed £5.2m of funds, on a cash-free basis, to that end in the year (2019: £6.7m across 5 smaller acquisitions). Despite the slowdown towards the end of the year, Chell has contributed positively to earnings, and we look forward to its full-year contribution in 2021. 1 2 4 3 5 1 Ken Ford Chairman Ken joined the Board in 2010, and became Chairman in 2012. He was previously Chief Executive of Teather & Greenwood, the investment bank, and brings over 36 years of City experience to the Company, including a strong understanding of shareholder value, strategic planning and corporate transactions. His previous roles include Aberdeen Asset Management, Morgan Grenfell and Wedd Durlacher. Ken is currently Chairman of AIM-listed Gear4music. He is a Fellow of the Chartered Securities Institute. 2 Mike Creedon Chief Executive Officer Mike joined the Board in 2010 as Finance Director, and was appointed CEO in 2012, maintaining also the Finance Director role until July 2018. A Chartered Certified Accountant with an MBA from Henley Management College, Mike brings to SDI considerable experience of working within quoted companies and technology businesses, and fundraising, mergers and acquisitions. In particular, he has recent experience of AIM-listed technology companies. Previous Finance Director posts include Ninth Floor plc and Ideal Shopping Direct Limited. 3 Jon Abell Chief Financial Officer Jon joined the Board in July 2018 and has over 35 years of business experience. Prior to joining SDI he was Divisional VP of Finance, Electronic Instruments Group at Ametek, Inc. where his principal duties include performance management, M&A, business controls and accounting for several scientific and industrial instrument businesses. Jon started his career with industrial companies in the UK and in Italy, before obtaining his MBA at Columbia Business School in New York. He subsequently went on to senior financial management roles in Germany, the Netherlands, USA and UK including at Philips Electronics and Broadcom Inc. 4 Isabel Napper Non Executive Chair of the Remuneration & Nomination Committee Isabel joined the Board in February 2017 and has more than 25 years’ experience in advising clients in the technology and healthcare/life science areas, both public and private sector, leading on business development and managing regulatory issues, governance risk and strategic change. Isabel was previously a Partner at the law firm Mills & Reeve where she acted as legal adviser and company secretary to a number of boards. Her extensive business development and marketing skills are invaluable to the Board. Isabel is also a non-executive director at Tristel plc. 5 David Tilston Non Executive Chair of the Audit Committee David joined the Board in July 2017. He has over 30 years’ experience in finance functions within public companies, and is a Fellow of the Institute of Chartered Accountants in England and Wales. Most recently, David held the role of Interim Group CFO of Northgate plc, and before that Interim Group CFO at Consort Medical plc. Previously, David held senior finance roles at Innovia Group, Mouchel Group Limited, Findel plc, SABMiller plc and SThree plc. He has 8 years’ experience as Audit Committee chairman at two companies. David is also Treasurer and Trustee at British Exploring Society, a youth development charity. 24 Governance Corporate Governance Statement SDI Group plc Annual Report 2020 25 Chairman’s Introduction As Chairman I am responsible for the leadership of the Board and for ensuring the Board’s effectiveness. I also have the responsibility for conducting Board meetings and making sure that there is effective and timely communication to our shareholders. In my role as chair I also provide advice, counsel and support to the executive. The 2018 QCA Corporate Governance Code The AIM Rule 26 introduced during our 2019 year requires the Group to follow a recognised corporate code of governance. The Board, after due consideration, agreed to follow the 2018 QCA Corporate Governance Code after concluding that it was the one best suited to SDI’s business, aims and ambitions. The Board believes that the Group complies with the Code, but is committed to continuously improving its governance over time. Principle Commentary 1 A strategy and business model which promotes long-term value for shareholders The Board has a shared view of SDI’s purpose, business model and strategy. Our vision is to develop our existing technologies and to grow through strategic acquisitions. We believe that acquiring companies which complement the capabilities within SDI will promote organic growth and give us the opportunity to explore challenges and new markets within the fast-evolving science and technology sectors. Further Information The Strategy section of this Annual Report and our website 5 Maintaining the board as a well- functioning, balanced team led by the Chair 2 understanding and meeting shareholder needs and expectations Responsibility for shareholder liaison rests principally with our CEO supported by our CFO. However, all our Board members attach a high degree of importance to providing shareholders with clear and transparent information on the Group’s activities, strategy and financial position. Details of all shareholder communications are provided on our website The Board holds meetings with institutional investors and other large shareholders following the release of the interim and financial results. We regard our Annual General Meeting as a good opportunity to engage directly with shareholders through a question and answer session. We provide the market and shareholders with the results of AGM and GM voting via RNS and other communication channels including the Group’s website. SDI also participates from time to time in investor shows offering smaller and private investors insight into our business and also access to our management team. Principle Commentary 4 Embed effective risk management, considering both opportunities and threats, throughout the organisation We have addressed the principal risks we face by the appointment of an experienced executive team supported by experienced non-executive directors and a team of appropriately qualified professional advisers. Our executive directors are closely involved in the day to day operations of the Group and of our operating subsidiaries and report to the board in detail at regular intervals. Relevant papers are distributed to members of the board in advance of board and committee meetings. Detailed financial reports of the Group’s financial performance are also provided on a regular basis. Our directors’ knowledge and understanding of the Group is further enhanced by on-site visits to operational units; directors also receive presentations from senior management on the performance and strategies of their business units. We have included in our strategy meetings with our operating subsidiaries a specific agenda item on risk management, to understand individual business risks and to confirm appropriate mitigating actions. Directors also have the contractual right to take independent professional advice on any matter – at SDI’s expense – if they deem it necessary in order to carry out their responsibilities. Our board consists of three executive directors (Chairman, CEO and CFO) together with two non-executive directors. We believe this to be a good balance for a business of our size. Due to their working backgrounds and professional experience the non-executive directors provide a solid foundation for good corporate governance for the Group. They are also independent of management and ensure that no individual or group dominates the board’s decision-making process. To ensure the board functions well, our non-executive directors are requested to attend eleven board and board committee meetings per year. They are also required to be available at other times between meetings when necessary for face-to-face and phone/web meetings. We also hold an annual strategy meeting at which directors’ attendance is mandatory. Each non-executive director continues to demonstrate that they have sufficient time to devote to our business. To support the board we have put in place Audit, Remuneration and Nomination Committees all of which have agreed formal terms of reference. Further Information The Principal Risks and Uncertainties section of this Annual Report sets out some of the principal risks and uncertainties faced by the Group Biographies of the Directors are presented on page 23 in this Annual Report and on our website. Reports of the Board committees are also presented on pages 29-31 in this Report. 6 Ensuring the directors have the necessary up-to-date experience skills and capabilities Our directors have been chosen because of the skills and experience they offer. Of our five directors one is female and four are male. All have listed company experience and one was the CEO of an investment bank, three are accountants, one a lawyer. Our directors attend industry and regulatory learning and networking events in order to keep up to date with relevant developments. Biographies of the Directors are presented on pages 23 in this Annual Report and on our website. 3 Taking account of wider stakeholder and social responsibilities and their implications for long- term success SDI’s vision involves encouraging our subsidiary businesses to work together to help advance medical and scientific knowledge, increase the technical capabilities of industry and ultimately improve the standard of living of the population as a whole. The “Section 172” report in this Annual Report provides further information As well as that overarching purpose, the Board recognises that long-term business success relies on good relations with a range of different stakeholder groups both internal and external such as staff, suppliers and customers. We also seek to understand the impact our business activities have on the communities in which we operate and consider our corporate social responsibilities and how these issues are integrated in to our long-term strategy. We encourage feedback from all our stakeholders and where appropriate use that feedback to shape our future direction e.g new methods or product offerings. 7 Ensuring the directors have the necessary up-to-date experience skills and capabilities We undertake annual monitoring of personal and corporate performance. The responsibility for assessing and monitoring the performance of the executive directors lies with the independent non-executive directors. Agreed personal objectives and targets are set each year for the executive directors and performance measured against these metrics. This year we instituted a formal board evaluation process. The process was led by our Chairman assisted by the Chair of the Nominations Committee, and required directors to answer a set of questions setting out their views on the effectiveness of the Board and on the value of their board contributions. The results of that assessment process were used by the Chairman to facilitate discussions with each individual director and with the Board as a whole. The questions were based around issues arising from the ten principles of the QCA Code and the results have assisted in continuing our focus on strategy and risk management. 26 Governance Corporate Governance Statement continued SDI Group plc Annual Report 2020 27 Principle Commentary Further Information 8 Promote a corporate culture that is based on ethical values and behaviours 9 Maintain governance structures and processes that are fit for purpose and support good decision making by the Board 10 Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders We believe it is the responsibility of the Board and senior leaders to ensure that the culture of our organisation is based on ethical values and behaviours. As well as leading by example, our ethics-based culture is promoted through our business behaviours, decisions, processes and operations, as well as the management of the risk of ethical misconduct. In addition, we have mechanisms to support high ethical standards – e.g for raising concerns and reporting misconduct. We also aim to include ethical criteria in recruitment and in performance appraisals, and have detailed policies relating to important issues such as discrimination, harassment, bribery and corruption, and conflicts of interest. We expect all our staff to adhere to these high standards. We are keen to invest in our people not just our companies. With that in mind we seek to make our workplaces a better environment and to encourage all our staff to undergo relevant training and development. Our non-executive directors scrutinise the performance of management against the Group’s objectives and also monitor the reporting of performance. The Board has considered mechanisms by which the business and the financial risks facing the Group are managed and reported to the board. The principal business and financial risks have been identified and control procedures implemented. The Board acknowledges its responsibility for reviewing the effectiveness of the systems that are in place to manage risk. To achieve this aim the Board has a formal schedule of matters specifically reserved to it for decisions including the approval of annual and interim results and recommendation of dividends, approval of annual budgets, approval of larger capital expenditure and investment proposals, review of the overall system of internal control and risk management and review of corporate governance arrangements. Other responsibilities are delegated to the Board Committees, being the Audit, Remuneration and Nomination committees, which as explained in section 5 above operate within clearly defined terms of reference, and which report back to the Board. We have set out in section 2 above how we maintain a regular dialogue with our shareholders including welcoming all shareholders to our AGMs. Reports of the Board committees are also presented on pages 29-31 in this Report. Further information and the resolutions put to a vote at annual general meetings can be found on our website. The Board The Board comprises the Chairman, two Executive Directors and two Non-Executive Directors. The Non-Executive Directors are considered to be independent, provide a solid foundation for good corporate governance for the Group, and ensure that no individual or group dominates the Board’s decision-making process. The Non-Executive Directors are independent of management. Each current Non-Executive Director received a grant of 250,000 stock options following appointment, which the Board considers to be not material and does not compromise independence. Each Non-Executive Director continues to demonstrate that they have sufficient time to devote to the Company’s business and attendance at Board and Committee meetings is summarised later in this report. The Non-Executive Directors constructively challenge and assist in developing the strategy of the Group using their experience and knowledge of acquisition targets and fundraising. They scrutinise the performance of management against the Group’s objectives and also monitor the reporting of performance. The Board is provided with regular and timely information on the financial performance of the Group as a whole, together with reports on trading matters, markets and other relevant matters. There are clearly defined roles for the Chairman and CEO. The Chairman is responsible for leadership of the Board, ensuring effectiveness of the Board in all aspects, conducting Board meetings and the effective and timely communication of information to shareholders. The Chairman is able to provide advice, counsel and support to the Chief Executive. The Chief Executive has direct charge of the Group’s day-to-day activities and sets the operating plans and budgets required to deliver the agreed strategy. The Chief Executive is also responsible for ensuring that the Group has in place appropriate risk management and control mechanisms. The Board is collectively responsible for the performance of the Group and is responsible to shareholders for proper management of the Group. A statement of Directors’ responsibilities is given on page 34 and a statement on going concern is given on page 19. The Board has a formal schedule of matters specifically reserved to it for decisions including the approval of annual and interim results and recommendation of dividends, approval of annual budgets, approval of larger capital expenditure and investment proposals, review of the overall system of internal control and risk management and review of corporate governance arrangements. Other responsibilities are delegated to the Board Committees, being the Audit, Remuneration and Nomination committees, which operate within clearly defined terms of reference, and which report back to the Board. Relevant papers are distributed to members in advance of Board and Committee meetings. Directors’ knowledge and understanding of the Group is enhanced by visits to the operations and by receiving presentations by senior management on the results and strategies of the business units. Directors may take independent professional advice on any matter at the Company’s expense if they deem it necessary in order to carry out their responsibilities. The Company has secured appropriate insurance cover for Directors and Officers. Board Committees The following committees deal with specific aspects of the Group’s affairs. Audit Committee The Audit Committee, which is chaired by D Tilston and has I Napper as the other member, meets not less than twice annually and more frequently if required. The Board considers that both members of the Audit Committee have recent and relevant financial experience and an understanding of accounting and financial issues relevant to the industries in which SDI Group operates. The Committee provides a forum for reporting by the Group’s external auditors. Where appropriate meetings are also attended by the Chairman and executives at the invitation of the Committee. A report of the Audit Committee is provided on pages 29-30. Remuneration Committee A report of the Remuneration Committee and the Directors’ remuneration report can be found on pages 31-33. 28 Governance Corporate Governance Statement continued Governance Report of the Audit Committee 29 Board Committees continued Nomination Committee This Committee is chaired by Isabel Napper and has David Tilston as its other member and meets at least once per annum. Where appropriate meetings are also attended by the Chairman, the CEO and the CFO at the invitation of the Committee. The Nomination Committee focusses on evaluating the board of directors, examining the skills and characteristics which are needed in board candidates, and on succession issues. Its principal focus during the last financial year was instituting and assisting the Chairman with the board evaluation process as set out in Principle 7 of our Governance Statement above. Attendance at Board and Committee Meetings The members’ attendance at Board and Committee meetings during the year is disclosed in the table below. K Ford M Creedon I Napper D Tilston J Abell Board 11/11 11/11 11/11 10/11 11/11 Audit - - 4/4 4/4 - Remuneration 4/4 - 4/4 4/4 - Nomination - - 1/1 1/1 - Conformance with Best Practice The Board has reviewed its composition against certain non-statutory “best practice” guidelines and makes the following observations: That remuneration of non-executive directors should be with basic fees only (excluding historical, one-off options grants if the quantum is not considered material) – The Board considers the one-time share option awards made on appointment to its non- executive directors to be not material and that they do not impair their independence. The Board therefore considers its non-executive directors to be independent of management and expects them to exercise their independence to the fullest extent. That the remuneration committee should not include non-independent or executive members – The Board considers Ken Ford’s membership of the Remuneration Committee to be an asset in its determination of the remuneration of executive directors and other key personnel, and the Committee as a whole is aware of any potential conflict. That the Company Secretary should not be an executive director – The Board members have significant external board of directors experience and are aware that they may seek independent professional advice at the company’s expense to discharge their duties. The Board believes that the company is currently best served by combining the roles of CFO and Company Secretary, in the interests of efficiency and cost. The Board expects to keep such matters under at least annual review. • advise on the appointment of external Auditors and to review and monitor the extent of the non-audit services undertaken by the Group’s external Auditor; • review of the risk management and internal control systems; • review the assessment of going concern; and • assess the need for an internal audit function. Role of the external Auditor The Committee monitors the relationship with its external Auditor, Grant Thornton UK LLP, to ensure that auditor independence and objectivity are maintained. As part of its review the Committee has established a policy in respect of the provision of non-audit services by the external Auditor which it monitors. No issues impacting upon the Auditor’s independence were observed or brought to the Committee’s attention. Audit Process The external Auditor prepares an audit plan for its review of the full year financial statements. The audit plan sets out the scope of the audit, specific areas of risk to target and the audit timetable. This plan is reviewed and agreed in advance by the Committee. Following completion of audit fieldwork the Auditor presented their findings to the Committee for discussion, including accounting judgements undertaken in respect of various matters including acquisition accounting and research and development capitalisation. Internal Audit At present the Group does not have a formal internal audit function and the Committee will keep this matter under review as the Group’s activities expand. I am pleased to present the Audit Committee report for the year ended 30 April 2020. The Committee consists of myself (as Chairman) and Isabel Napper. The Chairman, Executive Directors and Group Financial Controller may be invited to attend Committee meetings if required. During the year, the Committee met four times, to approve the audit plan, review the audit conclusions and interim findings and to consider other matters delegated to the Committee. The Board is satisfied that I, as Chairman of the Committee, have recent and relevant financial experience. I am a Chartered Accountant; I have served as Group Finance Director in several quoted companies and have prior experience as an Audit Committee Chairman. I report the Committee’s activities at Board meetings and the minutes of each meeting are made available to all members of the Board. The Committee has satisfactorily completed a self- assessment exercise on its effectiveness using externally sourced material. Responsibilities The duties of the Committee are set out in its Terms of Reference, which are available on the Company’s website. During the year the Committee undertook a review of its Terms of Reference following the issue of The Audit Committee Guide by the Quoted Companies Alliance and agreed minor changes which were approved by the Board. The Committee’s main duties are to: • ensure the integrity of the financial statements (including annual and interim accounts and results announcements); • review significant financial reporting judgements and the application of accounting policies thereon; • ensure the Annual Report and Accounts are fair, balanced and understandable and recommend their approval to the Board; • manage the relationship with the Group’s external Auditor and review their suitability and independence; • negotiate and approve the external Auditor’s fee, the scope of their audit and terms of engagement; 30 Governance Report of the Audit Committee continued Governance Report of the Remuneration Committee 31 Risk Management and Internal Controls The Corporate Governance Statement on pages 24-28 explains the measures taken to embed effective risk management throughout the Group which is dependent upon the close involvement of the executive directors in the day-to-day operations of the Group, the strength of subsidiary management teams and reporting from the operating subsidiaries. This oversight was strengthened during the current year with the appointment of a Group Financial Controller. The Committee is responsible for reviewing the risk management and internal control framework and ensuring that it operates effectively. During the year the Group was impacted by the economic and logistical challenges related to the COVID-19 pandemic which resulted in a proportion of its administrative workforce operating remotely. The Committee has reviewed the framework by (a) receiving papers and discussing oversight practices with the Group CEO and Group CFO and (b) participating in strategic risk discussions with operating subsidiaries, and determined that it remains appropriate for the Group’s current scale of operations. Going Concern As explained in the Strategic Report the Group has reviewed forecasts for the period to 30 April 2022 and has considered the profile of the Group’s debt facilities which mature in April 2023. Various scenarios have been considered taking account of downside risks which might be anticipated from the current COVID-19 pandemic and Brexit and the impact that this could have on the Group’s cash generation, net debt levels and financial covenants. These scenarios recognise both the Group’s recent trading experience during the early months of the COVID-19 pandemic and an assessment of management actions that could be taken to mitigate further macro- economic uncertainties should they arise. The Audit Committee considers that the Group will have adequate cash resources within its existing facilities to continue to trade for the foreseeable future and that it remains appropriate for the going concern basis of accounting to continue to be used in the preparation of the annual financial statements. These conclusions have been further considered and agreed by the Group’s Board of Directors. David Tilston Audit Committee Chairman 20 July 2020 I am pleased to present the report of the Remuneration Committee for the year ended 30 April 2020. The Committee is chaired by myself and has Ken Ford and David Tilston as its other members. Other regular attendees, at the invitation of the Committee, include the CEO and the CFO. The Committee meets at least two times per year and determines the Group’s policy for executive remuneration and the individual remuneration packages for executive directors and other designated senior management. The Committee’s terms of reference are available on the Group’s website. In setting the Group’s remuneration policy, the Committee considers a number of factors including the following: • Salaries and benefits available to executive directors of comparable companies; • The need to both attract and retain executives of appropriate calibre; and • The continued commitment of executives to the Group’s development through appropriate incentive schemes (including the award of shares and share options). Remuneration of Executive Directors Consistent with this policy, benefit packages awarded to executive directors comprise a mix of basic salary and performance-related remuneration that is designed as an incentive. The remuneration packages cover the following elements: • Base salary: the Remuneration Committee sets base salaries to reflect the responsibilities and the skills, knowledge and experience of the individual; • Bonus Scheme: the executive directors are eligible to receive a bonus dependent on both individual and Group performance as determined by the Remuneration Committee. This is capped at 50% of the individual’s salary; • Long-Term Incentive Plan shares: the executive directors are eligible to receive share options, related to Group performance under the terms of a long-term incentive scheme determined by the Remuneration Committee; • Equity: share options; and • Group contribution into a personal pension scheme, life assurance, and private medical insurance. The CEO and CFO are engaged under separate contracts which require a notice period of six months given at any time by the Group or the individual. During 2019/2020 the Committee looked at the operation of the LTIP scheme adopted by the Board in December 2018. The Committee took the view that it was appropriate to make another round of awards under the scheme as being a fair reward for, and a reflection of, the Group’s executive directors’ significant responsibility for growth. The LTIP awards granted in 2020 were made on the same terms as the previous year i.e. they have a three-year vesting period and are made in respect of the CEO, Mike Creedon and Group CFO, Jon Abell. The Group Chairman, Ken Ford, was again included in the award as a reflection of the significant amount of time and experience he provides to the Group in relation to acquisitions and other important strategy issues. The details of the LTIP are set out in the Remuneration Report on pages 32-33. Remuneration of Chairman and Non-Executive Directors The fees paid to the non-executive directors are determined by the Board. The Chairman and non-executive directors do not receive any other forms of benefits such as health cover or pension. Although both non-executive directors were recipients of non-tax advantaged share options in 2017 that was part of a one-off occurrence on joining the Board and is not intended to be repeated in the future. The notice periods of the Chairman and the non-executive directors are three months which can be given at any time by the Group or the individual. Executive and Non-Executive Board Remuneration under COVID-19 One part of the Group’s response to the global pandemic was to seek an active reduction in the Group’s overall costs. As part of those measures and in recognition of the furlough arrangements affecting some of the workforce, each member of the Board agreed to take an immediate cut of 33% in their salaries and fees for a period of three months. Isabel Napper Chair, Remuneration Committee 20 July 2020 32 Governance Directors’ Remuneration Report SDI Group plc Annual Report 2020 33 Statement about Basis of Preparation SDI has produced this report, read in conjunction with the Report of the Remuneration Committee, to comply with AIM rule 19. Directors’ remuneration and pension entitlements The remuneration of the Directors is set out below: Salary / Fees £’000 Gain on exercising share options Bonus £’000 Taxable Benefits £’000 Pension £’000 K Ford M Creedon I Napper D Tilston J Abell 49 141 29 29 109 357 – 40 – – – 40 – 45 – – 30 75 – 2 – – 2 4 – 8 – – 6 14 2020 Total £’000 49 236 29 29 147 490 2019 Total £’000 48 204 27 27 105 411 Directors’ beneficial interests Directors’ beneficial interests in shares in the Company are set out below: K Ford M Creedon I Napper D Tilston J Abell 2020 Number 2019 Number 1,250,000 1,450,000 442,452 311,924 65,472 35,472 90,000 90,000 100,000 59,608 None of the Directors had or has an interest in any material contract relating to the business of the Company or any of its subsidiary undertakings. Directors’ beneficial interests in share options in the Company are set out below: K Ford M Creedon I Napper D Tilston J Abell 2020 Number 850,672 2019 Number 715,217 1,952,327 1,872,173 250,000 250,000 250,000 250,000 1,134,103 1,021,739 Service contracts The service contracts with M Creedon dated 25 April 2010 and with J Abell dated 4 April 2018 include a notice period of six months if given by either party. The non-executive Directors’ service contracts and the service contract of the Chairman include a notice period of three months if given by either party. long-Term Incentive Plan (“lTIP”) This LTIP was introduced in December 2018 to provide an effective mechanism for senior executives to participate in the company’s equity, aligning their interests with those of the shareholders. The LTIP scheme overall has a duration of ten years and provides for a maximum of 10% of the company’s equity to be granted (under all schemes) to executives in that period, subject to performance conditions which are set for each award. An award was made on 19 March 2020 with performance conditions based for 50% on the growth in fully-diluted Earnings Per Share in the three years starting 1 May 2019 and for 50% on the total shareholder return for SDI shareholders compared with a basket of twenty comparable companies. Subject to the rules of the LTIP, vesting is on the third anniversary of the date of grant, to the extent that the performance conditions are met. The directors participating in the scheme at the date of this report and their maximum respective entitlement under the scheme to shares in SDI Group plc are as follows: M Creedon J Abell K Ford March 19 2020 Award Previous Award Total 210,682 652,173 862,855 112,364 521,739 634,103 135,455 215,217 350,672 The above table is a subset of the share option table on page 32. The market price of the company’s shares at the end of the financial year was 52.5p and ranged from 36.25p to 91.5p during the year. The exercise price of the ordinary options ranges from £0.205 to £0.385, and of LTIP options is nil. 34 Governance Directors’ Report SDI Group plc Annual Report 2020 35 Directors’ Responsibilities Statement The directors are responsible for preparing the Annual Report comprising Strategic Report, Governance Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the Directors have to prepare consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and have elected to prepare separate parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws, including FRS101 Reduced Disclosure Framework). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and the profit or loss of the Company and the Group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently • make judgements and accounting estimates that are reasonable and prudent • state whether applicable IFRSs and UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and parent company financial statements respectively • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company or the Group will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors confirm that: • so far as each director is aware there is no relevant audit information of which the Group’s auditor is unaware; and • the directors have taken all steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the Group’s auditor is aware of that information. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Group Results The Group’s profit for the year after taxation amounted to £2.6m (2019: £1.9m) and has been transferred to reserves. All KPIs and risks are disclosed in the Strategic Report on pages 16-19. The Board does not recommend the payment of a dividend. Directors The directors who served during the period are set out below. K Ford M Creedon I Napper D Tilston J Abell The interests of the directors and their families in the share capital of the Company are shown in the directors remuneration report on pages 32-33. The appointment and replacement of directors of the Company is governed by its Articles of Association and the Companies Act 2006. The Articles of Association may be amended by special resolution of the shareholders. The Company must have a minimum of two directors holding office at all times. There is no maximum number of directors. The Company may by ordinary resolution, appoint any person to be a director. The Board may appoint a person who is willing to act as director, either to fill a vacancy or as an addition to the Board. A director appointed in this way may hold office only until the dissolution of the next Annual General Meeting unless he or she is reappointed during the meeting. Power of Directors The directors are responsible for the management of the business of the Company and may exercise all powers of the Company subject to applicable legislation and regulation and the Memorandum and Articles of Association. At the Annual General Meeting held on 25 September 2019, the directors were given the power to: • Arrange for the Company to purchase its own shares in the market up to a limit of 15% of its issued share capital; • Allot ordinary shares up to an aggregate nominal value of £324,000; • Issue equity securities for cash, otherwise than to existing shareholders in proportion to their existing shareholdings, up to an aggregate nominal value of £48,600. Similar powers will form part of the resolutions to be put to the forthcoming AGM expected to be held on 23 September 2020. Structure of Share Capital As at 30 April 2020 the Company’s authorised share capital was £10,000,000 comprising 1,000,000,000 ordinary shares of 1p each. As at 30 April 2020 the Company had 97,503,951 (2019: 97,203,951) ordinary shares in issue with a nominal value of 1p each. Financial Risk Management Objectives and Policies Financial risk management objectives and policies are discussed in note 27 ‘Financial risk management objectives and policies’. Employee Involvement During the year, the policy of providing employees with information about the Group has been continued through regular meetings which are held between local management and employees to allow a free flow of information and ideas. The Group gives full and fair consideration to applications for employment from disabled persons where the requirements of the job can be adequately fulfilled by a handicapped or disabled person. Employees who become disabled are provided, where practicable, with continuing employment under normal terms and conditions and are provided with training and career development where appropriate. Health and Safety Policies The Group is committed to conducting its business in a manner which ensures high standards of health and safety for its employees, visitors and general public. It complies with all applicable and regulatory requirements. Substantial Shareholdings As at 20 July 2020 the Company is aware of the following shareholders who hold an interest of 3% or more in the Company’s ordinary share capital. Number of ordinary shares Percentage of ordinary shares 9.90% 8.99% 8.39% 5.17% 3.81% 3.72% 3.59% 3.55% 3.20% Berenberg Wealth and Asset Management 9,651,726 Business Growth Fund Herald Investment Management Tellworth Capital Octopus Investments Hargreaves Lansdown Dana Investments BV Killik stockbrokers Charles Stanley Auditor 8,765,731 8,178,149 5,043,989 3,719,640 3,629,335 3,496,494 3,463,534 3,123,307 A resolution to re-appoint Grant Thornton UK LLP as auditors for the ensuing year will be proposed at the Annual General Meeting in accordance with section 489 of the Companies Act 2006. On behalf of the Board Ken Ford Chairman 20 July 2020 Mike Creedon Chief Executive Officer 20 July 2020 36 Governance Section 172(1) Report SDI Group plc Annual Report 2020 37 These meetings do not give attendees any insider information and presentations made are excerpts from publicly available documents such as this Annual Report. We welcome requests from all shareholders to speak with directors, and we will usually be able to accommodate that. The Group is acquisitive, and has occasionally funded acquisitions via the placing of new shares (for example, most recently in February 2019). In assessing the mechanism for offering new shares, the directors have to balance the desire of all shareholders to be able to participate in an offering with the need to execute a simple and timely process, in order not to compromise the acquisition which is dependent on the funding. We have typically used an accelerated book-building process, in which larger shareholders and non- shareholders are canvassed by our brokers to subscribe to the new shares. In the 2019 placing, for the first time we reserved a portion of the new shares for subscription (on equal terms to the larger buyers) by retail investors via an electronic platform. Directors occasionally consult with some of our larger shareholders on matters of executive benefits, to ensure that these are aligned with the expectations of the market. The directors keep the payment of a dividend under review. We are aware that different shareholders (and current non-shareholders) may have different dividend appetites, and we cannot please everyone. Our judgement to date has been that funds were better reserved for acquisitions, and this year we also took into account the potential impacts of the COVID-19 pandemic. Statement by the directors in performance of their statutory duties in accordance with s172(1) of the Companies Act 2006 When making decisions, the directors of SDI Group plc must act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole (having regard to the stakeholders and matters set out in s172(1)(a-f) of the Companies Act 2006). The directors are committed to developing the Group to create value for shareholders over the long-term, and believe that attention to the interests of all stakeholders will provide the best platform for sustained value creation. Here we provide some detail regarding our engagement with key stakeholders, our understanding of their interests, and our actions and decisions taken which may affect them. Shareholders and their Representatives SDI Group plc is quoted on the AIM market, and has shareholders ranging from investment funds to retail investors, directors and employees and former employees. All shareholders are entitled to share equally in the Group’s success, and we aim to provide all with the information they need to understand the progress of their investment. We believe that a mixed shareholder base provides benefits to all in maintaining liquidity in the shares. In addition to public announcements made, directors meet from time to time with some of the Group’s larger shareholders and potential shareholders to discuss the state of the Group, usually following annual or interim results announcements and with the presence of our Nominated Advisor. These meetings are important in providing large investors with comfort for their investment decisions, and are for many a requirement prior to investing. We also present occasionally at events aimed at retail investors, to provide them with a similar opportunity to hear directly from directors. The culture at SDI Group, as experienced by our staff, is generally that of a successful small business, which is the recent history of each of our operating businesses. As part of the SDI Group, however, opportunities for career development and learning from other businesses can be enhanced, and we look for ways to develop our staff across the Group. The ongoing COVID-19 pandemic has disrupted normal life for our staff, and the directors have emphasised staff safety and well-being across the Group, but have also been pleased by the commitment of employees to keep the business operating in challenging times. The Group has operated according to relevant government guidelines, with some employees working throughout the crisis from our business locations with enhanced regimes of safety and social distancing, others working from home, and up to 17% of staff on temporary furlough. Acquisition Partners For SDI Group, acquisitions are not one-time events, but a repeatable process. We seek to make the process as easy as possible for sellers and for their advisors to realise their goals. Our management of the businesses post- acquisition is also a key factor in enhancing our reputation as a good acquirer. By treating sellers openly and fairly, and by executing on our commitments, we seek to remain the acquirer of choice for businesses that will fit well into the Group. Customers and Suppliers SDI Group is organised as a constellation of individual operating businesses, each with its own general management, and customer and supplier bases. Our engagement with customers and suppliers generally takes place within those businesses. Some customers and suppliers are common to several of our businesses, although we may deal with different divisions of the same group. The directors encourage our businesses to deal correctly with their customers and suppliers, and to look for long-term relationships that can add value to all parties. Our businesses report on key relationships to our executive directors and in their reports to the wider Board, and we look for opportunities to expand our relationships with good customers and suppliers across the Group. We aim to develop new products and technologies that satisfy future customer needs, and provide the highest quality and most reliable products for the markets we serve. Employees Our business is built on the hard work, knowledge, skills and experience of staff across the Group. We expect them to go the extra mile in looking after our other stakeholders, and they do so. Our commitment is to look after them fairly, both in economic terms and in providing a stimulating working environment where they can use and develop their capabilities to the full. Executive directors of SDI Group engage with employees across the Group during regular visits to all locations, and the Board’s policy is to rotate its meetings around the locations so that all directors can meet with staff. The Board receives monthly reports from the Group’s operating businesses which include sections on staffing matters, and reserves specific agenda slots for staff and health and safety matters at each regular meeting. Key staff remuneration, and remuneration policy for the wider Group, is decided by directors, and our aim is to pay people competitively and provide additional reward for exceptional performance. 38 Financial Statements Report of the Independent Auditor SDI Group plc Annual Report 2020 39 Independent Auditor’s Report to the Members of SDI Group plc Opinion Our opinion on the financial statements is unmodified We have audited the financial statements of SDI Group plc (the ‘parent company’) and its subsidiaries (the ‘Group’) for the year ended 30 April 2020, which comprise the consolidated income statement and statement of comprehensive income, consolidated balance sheet, consolidated statement of cash flows, consolidated statement of changes in equity, company balance sheet, company statement of changes in equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (United Kingdom Generally Accepted Accounting Practice). In our opinion: • 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 30 April 2020 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the financial statements have been prepared in accordance with the requirements 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 are 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. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. The Impact of Macro-Economic uncertainties on our Audit Our audit of the financial statements requires us to obtain an understanding of all relevant uncertainties, including those arising as a consequence of the effects of macro-economic uncertainties such as COVID-19 and Brexit. All audits assess and challenge the reasonableness of estimates made by the directors and the related disclosures and the appropriateness of the going concern basis of preparation of the financial statements. All of these depend on assessments of the future economic environment and the Group’s and the parent company’s future prospects and performance. COVID-19 and Brexit are amongst the most significant economic events currently faced by the UK, and at the date of this report their effects are subject to unprecedented levels of uncertainty, with the full range of possible outcomes and their impacts unknown. We applied a standardised firm- wide approach in response to these uncertainties when assessing the Group and parent company’s future prospects and performance. However, no audit should be expected to predict the unknowable factors or all possible future implications for a Group and parent company associated with these particular events. Conclusions Relating to Going Concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. In our evaluation of the directors’ conclusions, we considered the risks associated with the Group’s and the parent company’s business model, including effects arising from macro-economic uncertainties such as COVID-19 and Brexit, and analysed how those risks might affect the Group’s and the parent company’s resources or ability to continue operations over the period of at least twelve months from the date when the financial statements are authorised for issue. In accordance with the above, we have nothing to report in these respects. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor’s report is not a guarantee that the Group and the parent company will continue in operation. Overview of Our Audit Approach • Overall Group materiality: £243,000, which represents 1% of the Group’s revenue – Key audit matters were identified as improper revenue recognition, valuation of goodwill and capitalised development costs, accuracy of intangible assets on recognition of the acquired businesses, and going concern; • We performed full scope audit procedures on the financial statements of the UK parent entity, SDI Group plc, and on the financial information of the 10 significant UK components; and • We performed specified audit procedures on the financial information of the non-significant Group components in the USA and Portugal. 40 Financial Statements Report of the Independent Auditor continued SDI Group plc Annual Report 2020 41 Key Audit Matters 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. These matters included those that 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. Key Audit Matter – Group How the matter was addressed in the audit – Group Improper Revenue Recognition The Group has recognised revenue of £24,498,000 (2019: £17,427,000) in its consolidated income statement during the year, which is comprised of revenue from sales of goods and income from service contracts. The nature of the Group’s revenue involves the processing of a high volume of transactions, with each stream following different revenue recognition criteria under IFRS 15 ‘Revenue from Contracts with Customers’. As the Group’s revenue comprises various individually material streams which are each subject to different recognition policies, the risk that revenue may be improperly recognised has been identified as a significant risk, which was one of the most significant assessed risks of material misstatement. Key Observations Our audit testing did not identify any material misstatements in the revenue recognised during the year or any instances of revenue not being recognised in accordance with the Group’s accounting policies and the requirements of IFRSs as adopted by the European Union. Our audit work included, but was not restricted to: • assessing whether the revenue recognition accounting policy for each type of revenue was consistent with IFRS 15 and testing that these policies were followed; • undertaking analytical procedures to identify and assess key movements in revenue streams and significant transactions which have occurred in the year; • performing data analytic procedures designed to highlight any unusual transactions or postings recorded in revenue; • substantively testing a sample of revenue transactions in respect of sale of goods and agreeing them to a cash receipt or proof of delivery to check that the sale did occur; • testing a sample of revenue transactions in respect of contract income for services by obtaining purchase orders and supporting documentation, recalculating the revenue recognised, and assessing the appropriateness of any deferred or accrued income at year end; and • agreeing a sample of transactions before and after the year end to supporting documentation to determine whether transactions had been recorded in the correct period. The Group’s accounting policy on revenue recognition is shown in note 3 to the financial statements and related disclosures are included in note 6. Key Audit Matter – Group How the matter was addressed in the audit – Group Valuation of Goodwill and Capitalised Development Costs The carrying value of goodwill included in the consolidated statement of financial position at the year-end was £10,895,000 (2019: £8,391,000). The net book amount of capitalised development costs included in the consolidated statement of financial position at the year-end was £1,174,000 (2019: £1,180,000), including amortisation charged in the year on capitalised development costs of £528,000 (2019: £585,000). These costs are amortised by the Group to ensure the capitalised cost reflects the anticipated benefit of the development project to the Group over time. In accordance with International Accounting Standard (IAS) 36, ‘Impairment of Assets’, an annual review is required to assess whether goodwill or capitalised development costs may be impaired. Management’s impairment reviews of goodwill are based on forecasting cash flows relating to cash generating units (CGUs) using a discounted cash flow model. Management’s impairment reviews of capitalised development costs are based on identifiable assets for which future revenues and gross margins can be assigned to calculate a value in use based on a discounted cash flow model. Due to the inherent estimation uncertainty and the existence of key assumptions when forecasting and discounting future cash flows, we identified the valuation of the carrying value of capitalised development costs and goodwill as a significant risk, which was one of the most significant assessed risks of material misstatement. Our audit work included, but was not restricted to: • assessing whether the accounting policy for the amortisation of capitalised development costs was consistent with prior year and assessing the appropriateness of the determined useful economic life; • comparing the carrying value of a sample of development projects against management’s calculation of their value in use, based on management’s assessment of their future cash flows; • checking the mathematical accuracy of a selection of management’s impairment models applied to capitalised development costs; • testing the accuracy of management’s forecasting by comparing the budgeted sales and gross profit to the results achieved for the year; • challenging management on the basis of key assumptions used within the forecasts, such as the growth rate and the discount rate; • performing sensitivity analysis of cash flow model inputs, including the discount rate applied; • discussing and corroborating the ongoing viability and recoverability of development projects with relevant Group personnel, focussing on project progress and sales generated for new products where possible; and • comparing the carrying value of each CGU including goodwill and other intangible assets against the net present value calculations, produced by management, based on future cash flows. The Group’s accounting policy on the carrying value of capitalised development costs and goodwill is shown in note 3 to the financial statements and related disclosures are included in note 11. Key Observations Our audit testing did not identify any material misstatements in the carrying value of capitalised development costs or goodwill. We are satisfied that the judgements applied in estimating the discounted future cash flows are reasonable. 42 Financial Statements Report of the Independent Auditor continued SDI Group plc Annual Report 2020 43 Key Audit Matter – Group How the matter was addressed in the audit – Group Key Audit Matter – Group How the matter was addressed in the audit – Group Valuation of Intangible Assets on Recognition of the Acquired Business The Group has an acquisitive business model. It made one acquisition in the year, purchasing 100% of the share capital of Chell Instruments Limited. There is a risk that the intangible assets, including goodwill, are not recognised in accordance with IFRS 3 ‘Business Combinations’. There is significant judgement and complexity associated with the allocation of excess consideration over net assets acquired between separable intangible assets and remaining goodwill. Management have prepared workings that incorporate, for the fair value of the intangible assets, assumptions of growth rates, margins, discount rates and attrition rates. Due to the inherent uncertainty and key assumptions involved in determining the accurate valuation of acquired intangible assets and goodwill, we therefore identified the valuation of intangible assets on recognition of the acquired business as a significant risk, which was one of the most significant assessed risks of material misstatement. Our audit work included, but was not restricted to: • obtaining and assessing management’s acquisition accounting workpaper which calculated the split between net assets acquired, fair value of acquired intangible assets and goodwill to be recognised on consolidation; • assessing the Group’s accounting for acquisitions to check whether it was in accordance with the Group’s financial reporting framework, including IFRS 3; • using our internal valuations team to assess the appropriateness of the valuation methodology used by management, including the methodology adopted for identifying separate intangible assets distinct from goodwill and assessing the appropriateness of discount rates and growth rates applied; • evaluating the acquisition workings prepared by management and checking its mathematical accuracy; and • challenging the assumptions used in the valuation models, to assess whether they are reasonable and consistent with our knowledge of the acquired business. The Group’s accounting policy on the recognition of intangible assets and goodwill is shown in note 3 to the financial statements and related disclosures are included in note 11. Key Observations Our audit testing did not identify any material misstatements in the valuation of intangible assets on recognition of the acquired business. We are satisfied that the judgements made in determining the split between acquired intangible assets and goodwill are reasonable. Going Concern As stated in ‘the impact of macro-economic uncertainties on our audit’ section of our report, COVID-19 is one of the most significant economic events currently faced by the UK, and at the date of this report its effects are subject to unprecedented levels of uncertainty. This event could adversely impact the future trading performance of the Group and as such increases the extent of judgement and estimation uncertainty associated with management’s decision to adopt the going concern basis of accounting in the preparation of the financial statements. As such we identified going concern as a significant risk, which was one of the most significant assessed risks of material misstatement. Our audit work included, but was not restricted to: • Obtaining management’s base case forecasts covering the period to April 2022, assessing how these forecasts were compiled and assessing their appropriateness by applying sensitivities to the underlying assumptions, which we also challenged; • Assessing the accuracy of management’s forecasting by comparing the reliability of past forecasts to the base case forecast; • Obtaining management’s more extreme case scenario prepared to assess the potential impact of COVID-19, evaluating the assumptions regarding the impact of an extended lockdown period and delays in cash receipts from customers and considering whether the assumptions are consistent with our understanding of the business derived from other detailed work undertaken; • Assessing the impact of the mitigating factors available to management in respect of the ability to restrict cash impact, including the level of available facilities; • Considering the forecasts prepared in respect of the most likely impact of COVID-19; and • Assessing the adequacy of related disclosures within the annual report and financial statements. The Group’s going concern accounting policy and related disclosures are shown in the going concern note within note 3 to the financial statements. Key Observations We have nothing to report in addition to that stated in the ‘Conclusions relating to going concern’ section of our report. We did not identify any key audit matters relating to the audit of the financial statements of the parent company. 44 Financial Statements Report of the Independent Auditor continued SDI Group plc Annual Report 2020 45 Our Application of Materiality An Overview of the Scope of Our Audit We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent of our audit work and in evaluating the results of that work. Materiality was determined as follows: Materiality Measure Group Parent Company Financial statements as a whole Performance materiality used to drive the extent of our testing Specific materiality £243,000, which is approximately 1% of the Group’s revenue. This benchmark is considered the most appropriate because the Group are strategically looking to increase Group revenues and it is identified as a KPI for stakeholders. Materiality for the current year is higher than the level that we determined for the year ended 30 April 2019 to reflect increased Group revenue. £129,000, which is approximately 10% of the parent company’s profit before tax for the year. This benchmark is considered the most appropriate because this metric is actively monitored by management. Materiality for the current year is higher than the level that we determined for the year ended 30 April 2019 because of an increase in profit before tax during the year. 70% of financial statement materiality. 70% of financial statement materiality. We determined a lower level of specific materiality for certain areas such as directors’ remuneration and related party transactions. We determined a lower level of specific materiality for certain areas such as directors’ remuneration and related party transactions. Communication of misstatements to the audit committee £12,000 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. £6,450 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for potential uncorrected misstatements. 30% Overall materiality – Group 70% ■ Performance materiality ■ Tolerance for potential uncorrected mis-statements 30% Overall materiality – Parent company 70% Our audit approach was a risk-based approach founded on a thorough understanding of the Group’s business, its environment and risk profile and in particular included: • Assessment of the Group’s centralised processes and controls, including understanding and testing design and implementation effectiveness of controls for significant risk areas. Whilst Group management are responsible for all judgemental processes and significant risk areas in respect of the consolidated financial statements, each trading subsidiary has a decentralised local accounting function which reports to the local subsidiary management who are responsible for the operations and financial management of the subsidiary companies. We have tailored our audit response accordingly with all Group audit work undertaken by the Group audit team. • An evaluation by the Group audit team of identified components to assess the significance of that component and to determine the planned audit response based on a measure of materiality. We determined significance as a percentage of the Group’s total assets, revenue and profit/(loss) before tax; • We performed full scope audit procedures on the financial statements of SDI Group plc and on the financial information of Synoptics Limited, Atik Cameras Limited, Sentek Limited, Astles Control Systems Limited, Applied Thermal Control Limited, Fistreem International Limited, Thermal Exchange Limited, Graticules Optics Limited, MPB Industries Limited and Chell Instruments Limited; • We performed specified procedures on the financial information of Synoptics Inc and Perseu • No procedures were performed on the dormant subsidiaries of the Group as they did not include Comercio De Equipamento Para Informatica E Astronomica SA; any material balances or areas of risk. Other Information The directors are responsible for the other information. The other information comprises the information included in the annual report, 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. In connection with our audit of the financial statements, 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 audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. 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. 46 Financial Statements Report of the Independent Auditor continued SDI Group plc Annual Report 2020 47 Our opinion on other matters prescribed by the Companies Act 2006 is unmodified In our opinion, based on the work undertaken in the course of the audit: • 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. Matters on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the Group and the 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 required to report by exception We have nothing to report in respect of the following matters in relation to which the Companies 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 for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; 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. Responsibilities of directors for the financial statements As explained more fully in the directors’ responsibilities statement set out on page 34, 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. A further description of our responsibilities for the audit of the financial statements is located 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 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 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 company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. David White Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Cambridge 20 July 2020 48 Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 49 Consolidated Income Statement and Statement of Comprehensive Income Consolidated Balance Sheet Revenue Cost of sales Gross profit Other income Operating expenses Analysed as: Reorganisation costs Share-based payments Acquisition and fundraising costs Amortisation of acquired intangible assets Expected credit loss Other operating costs Operating expenses Operating profit Net financing expenses Profit before tax Income tax Profit for the year Earnings per share Basic earnings per share Diluted earnings per share Note 6 9 7 2020 £’000 24,498 (7,899) 16,599 2019 £’000 17,427 (5,902) 11,525 19 (13,107) – (9,327) (110) (276) (58) (647) (165) (11,851) (13,107) (124) (136) (288) (356) (123) (8,300) (9,327) 3,511 2,198 (254) (77) 3,257 2,121 10 (666) (209) 2,591 1,912 23 23 2.66p 2.56p 2.10p 2.05p All activities of the Group are classed as continuing. The results attributable to business combinations in the year are disclosed in note 30. The accompanying accounting policies and notes form an integral part of these financial statement. Profit for the year Other comprehensive income Items that will subsequently be reclassified to profit and loss: Exchange differences on translating foreign operations Total comprehensive income for the year 2020 £’000 2019 £’000 2,591 1,912 41 2,632 31 1,943 Company registration number: 6385396 Assets Intangible assets Property, plant and equipment Deferred tax asset Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Liabilities Non-current liabilities Borrowings Deferred tax liability Current liabilities Trade and other payables Provisions for warranties Borrowings Current tax payable Total liabilities Net assets Equity Share capital Merger reserve Share premium account Own shares held by Employee Benefit Trust Share-based payment reserve Foreign exchange reserve Retained earnings Total equity Note 2020 £’000 2019 £’000 11 12 14 15 16 17 20 14 18 19 20 22 24 21,650 3,901 246 25,797 3,728 3,617 5,290 12,635 38,432 10,376 2,134 12,510 3,350 85 1,910 513 5,858 18,368 20,064 975 3,030 8,746 – 467 181 6,665 20,064 17,194 767 180 18,141 2,576 3,340 2,494 8,410 26,551 4,016 1,448 5,464 3,280 11 84 626 4,001 9,465 17,086 972 3,030 8,696 (17) 284 140 3,981 17,086 The financial statements were approved and authorised for issue by the Board of Directors on 20/07/2020. Mike Creedon Director Jon Abell Director The accompanying accounting policies and notes form an integral part of these financial statements. 50 Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 51 Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Operating activities Net profit for the year Depreciation Amortisation Finance costs and income Impairment of intangible assets Increase/(decrease) in warranty provision Taxation in the income statement Employee share-based payments Operating cash flows before movement in working capital (Increase)/decrease in inventories Decrease/(increase) in trade and other receivables (Decrease)/increase in trade and other payables Cash generated from operations Interest paid Income taxes paid Cash generated from operating activities Investing activities Capital expenditure on fixed assets Sale of property, plant and equipment Expenditure on development and other intangibles Acquisition of subsidiaries, net of cash Net cash used in investing activities Financing activities Finance leases net repayments Proceeds from bank borrowing Repayment of borrowings Issues of shares and proceeds from option exercise Net cash from financing Net changes in cash and cash equivalents Cash and cash equivalents, beginning of year Foreign currency movements on cash balances Cash and cash equivalents, end of year Note 2020 £’000 2019 £’000 12 11 9 19 12 30 20 20 20 2,591 831 1,189 254 22 74 666 276 5,903 (539) 726 (921) 5,169 (253) (786) 4,130 (506) – (582) (5,182) (6,270) (511) 6,496 (1,143) 80 4,922 1,912 231 971 77 – (12) 209 136 3,524 65 (415) 446 3,620 (77) (319) 3,224 (419) 45 (591) (6,668) (7,785) (30) 3,600 (970) 2,449 5,049 2,782 488 2,494 14 5,290 2,007 (1) 2,494 The accompanying accounting policies and notes form an integral part of these financial statements. Share capital £’000 Merger reserve £’000 Foreign exchange £’000 Share premium £’000 Own shares held by EBT £’000 Share- based payment reserve £’000 Retained earnings £’000 Total £’000 Balance at 30 April 2018 896 3,030 109 6,390 (82) 148 2,069 12,560 Shares issued Share-based payments Transactions with owners Profit for the year Foreign exchange on consolidation of subsidiaries Total comprehensive income for the period Balance at 30 April 2019 Restatement for IFRS 16 (“Leases”) Adjusted balances at 30 April 2019 Shares issued Share-based payment transfer Share-based payments Transactions with owners Profit for the year Foreign exchange on consolidation of subsidiaries Total comprehensive income for the period Balance at 30 April 2020 76 – 76 – – – – – – – – – – – 31 2,306 – 2,306 – – 65 – 65 – – – 136 136 – 2,447 136 – – 2,583 – 1,912 1,912 – – 31 – – 972 3,030 31 140 – 8,696 – (17) – 284 1,943 1,912 3,981 17,086 – – – – – – – – 972 3,030 140 8,696 (17) 284 3,981 17,086 3 – – 3 – – – – – – – – – – 975 3,030 – – – – – 41 41 181 50 – – 50 – – – 8,746 17 – – 17 – – – – – (93) 276 183 – 93 – 93 70 – 276 346 – 2,591 2,591 – – 41 – 467 2,591 2,632 6,665 20,064 The accompanying accounting policies and notes form an integral part of these financial statements. 52 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 53 1 2 Reporting Entity SDI Group plc, a public limited company, is the Group’s ultimate parent. It is registered and domiciled in England and Wales. The consolidated financial statements of the Group for the year ended 30 April 2020 comprise the Company and its subsidiaries (together referred to as the “Group”). The details of subsidiary undertakings are listed in note 4 to the Company Financial Statements. Basis of Preparation The consolidated financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and as applied with the provisions of the Companies Act 2006. The consolidated financial statements have been prepared under the historical cost convention as modified by the recognition of certain financial instruments at fair value. The principal accounting policies of the Group are set out below. The consolidated financial statements are presented in British pounds (£), which is also the functional currency of the ultimate parent company. All values are rounded to the nearest thousand (£’000) except where otherwise indicated. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out within the Strategic report. The financial position of the Group, its cash flows, and liquidity position are provided in the financial statements on pages 48-51. In addition, notes to the financial statements include the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The Board has prepared forecasts for the period to 30 April 2022. These reflect the sales projections for new products coming on stream as a result of the Group’s research and development activity and continued cost management. The Group meets its cash flow and borrowing requirements through a bank loan as detailed in note 20. The Board’s forecasts indicate that the Group will continue to trade within its existing facilities with scope to further manage its cost base if necessary. The Board is confident that continued focus on research and development, new product development and sales & marketing will deliver growth. The Board considers that the Group will have adequate cash resources within its existing facilities to continue to trade for the foreseeable future and therefore continue to adopt the going concern basis of accounting in preparing the annual financial statements. Accounting Judgements and Estimates The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. These judgements and estimates are based on management’s best knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts included in the consolidated financial statements. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: Judgements in applying accounting policies Intangibles – development costs The Group is required to capitalise any development costs that meet the criteria as per IAS 38. (See Research and Development accounting policy, page 55 and in note 11). The point at which development costs meet the criteria for capitalisation is critically dependent on management’s judgement of the point at which technical feasibility is demonstrable. The carrying value of development assets also depends on management’s ability to demonstrate the future economic benefits they will deliver. This judgement requires assumptions about factors outside the business’s control such as medium-term economic conditions, technological developments and market changes. The Group tests annually whether the capitalised development costs have been impaired by reference to expected future generation of cash from the technologies developed and the timing of when these will be released. IFRS 16 Leased assets (see note 13) There are various judgements that management are required to make, as follows: ● Identifying whether a contract (or part of a contract) includes a lease and establishing whether there are multiple leases in an arrangement; ● Determining whether it is reasonably certain that an extension or termination option will be exercised; ● Determination of whether variable payments are in-substance fixed; and ● Determination of the appropriate rate to discount the lease payments. Sources of estimation uncertainty Fair value assessments of business combinations Following an acquisition, management makes an assessment of the fair value of all assets and liabilities acquired, including intangible assets and goodwill. The valuation process requires a number of estimates to be made. For details of assumptions see note 30. Carrying value of goodwill and other intangible assets The impairment analysis of intangible assets is based upon future discounted cash flows and a number of assumptions are made to estimate the future cash flows expected to arise from the cash generating unit as well as a suitable discount rate in order to calculate present value. Factors like lower than anticipated sales and resulting decreases of net cash flows and changes in discount rates could lead to impairment. For details of assumptions see note 11. Principal Accounting Policies 3 Other than the introduction of IFRS 16 this year, the principal accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 April 2019. The adoption of new accounting standard and interpretations which came into effect, including IFRS 16, has had a material impact on the Group’s financial statements in this period of initial application. Basis of consolidation Subsidiaries are entities controlled by the Group where control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The subsidiaries transitioned to FRS 101 from previously extant UK Generally Accepted Accounting Practice for all periods presented. Intra group balances and any unrealised income and expenses arising from intra group transactions are eliminated in preparing the consolidated financial statements. 54 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 55 3 Principal Accounting Policies continued Going concern The Board has prepared trading and cash flow forecasts for the period to 30 April 2022. These reflect a reduction in trade due to the impact of COVID-19 which affects the whole of the current financial year and beyond, as well as the sales projections for new products and services coming on stream as a result of the Group’s research and development activity and continued cost management. The Board’s forecasts indicate that the Group will continue to trade within its existing facilities which are detailed in note 20. Specifically to assess the potential impact of the COVID-19 pandemic, the Board has prepared various downside scenarios from its base case, involving further reductions to sales, margin reductions and additional delays in collecting amounts due and other working capital effects. Under these scenarios, the Group continues to generate cash, and has scope to further manage its cost base if necessary. After specifically taking into account the impact of COVID-19 on the Group’s future trading, the directors believe that it remains appropriate to continue to adopt the going concern in preparing the financial statements. The Board considers that the Group will have adequate cash resources within its existing facilities to continue to trade for the foreseeable future and therefore continues to adopt the going concern basis of accounting in preparing the annual financial statements. The Board is confident that continued focus on research and development, new product development and sales & marketing will deliver growth. Business combinations Business combinations are accounted for using the acquisition method under the revised IFRS 3 Business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair value of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration agreement. Acquisition costs are expensed within administration expenses as incurred. The Group recognises identifiable assets acquired and liabilities assumed including contingent liabilities in a business combination regardless of whether they have been previously recognised in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition- date fair values. Foreign currency Transactions entered into by Group entities in a currency other than the functional currency of the company which incurred them are recorded at the rate of exchange at the time of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in the income statement. For the purpose of presenting the consolidated financial statements the assets and liabilities of the Group’s overseas operations are translated using exchange rates prevailing on the balance sheet date. Exchange differences on net assets arising from this policy are recognised in other comprehensive income and accumulated in the foreign exchange reserve; such translation differences are reclassified from equity to profit or loss as a reclassification adjustment in the period in which the foreign operation is disposed of. Income and expense items of overseas operations are translated at exchange rates approximating to those ruling when the transactions took place. Property, plant and equipment Property, plant and equipment is stated at cost, less accumulated depreciation. Depreciation is charged to the income statement on a straight- line basis over the estimated useful lives of each part of property, plant and equipment to write down the cost of the asset to its residual value. Residual values are reviewed annually. The estimated useful lives are as follows: Motor vehicles Computer equipment Tools and other equipment Furniture, fixtures and fittings 3 years 3 years 3 years 5 years Building and leasehold improvements 5 years Goodwill Goodwill represents the excess of the fair value of the consideration transferred over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative, it is recognised immediately in the income statement as a gain from a bargain purchase. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Goodwill is also reviewed for impairment immediately following an acquisition. The impairment of goodwill is based upon value in use, determined using estimated future discounted cash flows. Research and development Expenditure on research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding is recognised in the income statement as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the following conditions are met: ● Completion of the intangible asset is technically feasible so that it will be available for use or sale; ● The Group intends to complete the intangible assets and use or sell it; ● The Group has the ability to use or sell the intangible asset; ● The intangible asset will generate probable future economic benefits. Among other things, this requires that there is a market for the output from the intangible asset or the intangible asset itself, or, if it is to be used internally, the asset will be used for generating such benefits; and ● The expenditure attributable to the intangible asset during its development can be measured reliably. The expenditure capitalised includes direct cost of material, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised development is stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. Amortisation is shown within administrative expenses in the income statement. The estimated useful lives of current development projects are three years. Until completion of the project the assets are subject to impairment testing. 56 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 57 3 Principal Accounting Policies continued Other intangible assets Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill providing the assets are separable or they arise from contractual or other legal rights and their fair value can be measured reliably. The fair value of intangible assets in a business combination includes the value of any tax benefit. Intangible assets with a finite life are amortised over their useful economic lives. Amortisation is recognised in the income statement within administrative expenses on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. Capitalised development costs 3 years Other intangible assets 3-15 years Customer relationships and trade marks 15 years Impairment The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management monitors goodwill. An impairment loss is recognised if the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses for cash- generating units reduce first the carrying value of any goodwill allocated to that cash generating unit. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit. With the exception of goodwill, all assets are subsequently reassessed for indicators that an impairment loss previously recognised may no longer exist. Any impairment in respect of goodwill is not reversed. Impairment losses on other assets recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss 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 had been recognised. Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their location and condition at the balance sheet date. Items are valued using the first in, first out method. When inventories are used, the carrying amount of these inventories is recognised as an expense in the period in which the related revenue is recognised. Provisions for write-down to net realisable value and losses of inventories are recognised as an expense in the period in which the write-down or loss occurs. Cash and cash equivalents Cash and cash equivalents comprise cash balances and deposits. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any difference between the proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liabilities for at least 12 months after the balance sheet date. Equity Equity comprises the following: ● “Share capital” represents the nominal value of equity shares ● “Merger reserve” represents the difference between the parent company’s cost of investment and the subsidiary’s share capital and share premium where a group reorganisation qualifies as a common control transaction. ● “Share premium account” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. ● “Own shares held by Employee Benefit Trust” represents shares held in trust for the benefit of employees ● “Foreign exchange reserve” represents the differences arising from translation of investments in overseas subsidiaries. ● “Share-based payment reserve” represents equity-settled share-based employee remuneration until such share options are exercised. The equity component of convertible loan stock, if any, is also included. On conversion of the loan stock the equity component is transferred into the retained earnings reserve. ● “Retained earnings” represents retained profits. Contributions to pension schemes Defined Contribution Scheme Obligations for contributions for defined contribution plans are recognised as an expense in the income statement when they are due. 58 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 59 3 Principal Accounting Policies continued Financial assets The Group’s financial assets comprise trade receivables, other receivables, cash and cash equivalents. Trade and other receivables are recognised and carried at the original invoice amount less a provision for the expected credit loss, where collection of the amount is no longer probable. Management uses historical experience of losses applied to the specific circumstances of the receivable, including trading history with the debtor and period overdue to determine the need for and amount of any provision to cover expected future losses. Uncollectable amounts are written off to the Income Statement when identified. Financial liabilities Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group becomes a party to the contractual provisions of the instrument. The Group’s financial liabilities comprise trade payables, other payables, other loans and bank borrowings. All financial liabilities are measured at fair value plus transaction costs on initial recognition and subsequently are measured at amortised cost. Contingent consideration is measured at fair value through profit and loss in the income statement. Revenue recognition In accordance with IFRS 15 ‘Revenues from Contracts with Customers’, revenue is measured by reference to the fair value of consideration received or receivable by the Group, excluding value added tax (or similar local sales tax), in exchange for transferring the promised goods or services to the customer. The consideration is allocated to each separate performance obligation that is identified in a sales contract, based on stand-alone selling prices. Sales of instruments and spare parts, and sales of services, such as non-specialised installation, support, training or consultancy, are assessed to be separate performance obligations. Revenue is recognised when (or as) the Group satisfies the identified performance obligation. For sales of instruments and spare parts, the performance obligation is satisfied at a point in time; for revenue from services, the performance obligation is satisfied over time. As the period of time between payment and performance is less than one year, the Group does not adjust revenue for the effects of financing. Revenue from sales of instruments and spare parts is recognised at the point at which the customer obtains control of the asset. This is usually on despatch of the instrument but in some cases (depending on the contract with the customer) it is when the customer receives the goods. Revenue from services is a separate performance obligation and is recognised when the service is performed. Interest income is recognised using the effective interest method which calculates the amortised cost of a financial asset and allocates the interest income over the relevant period. Dividend income, if any, is recognised when the shareholder’s right to receive payment is established. Leased assets For any new contracts entered into on or after 1 May 2019, the Company considers whether a contract is, or contains a lease (note 4). A lease is defined as ‘a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. To apply this definition the Company assesses whether the contract meets three key evaluations which are whether: ● the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Company; ● the Company has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract; and ● the Company has the right to direct the use of the identified asset throughout the period of use. The Company assess whether it has the right to direct ‘how and for what purpose’ the asset is used throughout the period of use. Contingent consideration Contingent consideration on acquisitions is measured at fair value. Taxation Income tax expense comprises current and deferred tax. The tax currently payable is based on the taxable profit for the year. Current tax is recognised in profit or loss, except that current tax relating to items recognised in other comprehensive income is recognised in other comprehensive income and current tax relating to items recognised directly in equity is recognised in equity. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and are accounted for using the balance sheet liability method. However, deferred tax is not provided on the initial recognition of goodwill, or on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with investments in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group or it is probable that reversal will not occur in the foreseeable future. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the temporary difference can be utilised. The carrying value of deferred tax asset is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow part or all of the assets to be recovered. Deferred tax is calculated using tax rates that are enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited to the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax relating to items recognised in other comprehensive income is recognised in other comprehensive income. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. 60 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 61 3 Principal Accounting Policies continued Changes in Accounting Policies 4 Segment reporting The Group identifies reportable operating segments based on internal management reporting that is regularly reviewed by the chief operating decision maker. The chief operating decision maker is the Board of directors. Provisions Provisions are recognised when present obligations as a result of a past event will probably lead to an outflow of economic resources from the Group and the amounts can be estimated reliably. A provision for warranties is recognised when the underlying products are sold. The provision is based on historical warranty data and a weighting of possible outcomes against their associated probabilities. Employee benefit trust The employee benefit trust (EBT) was a separately administered discretionary trust for the benefit of employees, the assets of which comprised shares in the Company. The EBT was wound up during the year, its assets having been used to satisfy shares required on the exercise of options. The material assets, liabilities, income and costs of the EBT were consolidated within the Group’s financial statements until its dissolution. Share-based payments SDI Group plc regularly issues share options to employees. The fair value of the award granted is recognised as an employee expense within the Income Statement with a corresponding increase in equity. The fair value is measured at the grant date and allocated over the vesting period based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. When shares are issued for the purchase of intangibles, the fair value is measured at the issue date. The fair value of the grants is measured using the Black-Scholes model or a Monte Carlo simulation as appropriate, taking into account the terms and conditions upon which the grants were made. Furlough scheme SDI Group plc have accrued for a government grant receivable under IAS 20 and recognised a credit to match the related employee costs as and when they are incurred, on the assumption that there is reasonable assurance that it will comply with the conditions attaching to the scheme and that the grant will be received. Under IAS 20, it is permissible to present the grant and the expenses on either a gross or net basis. However, any related balance sheet items (i.e. grant receivable and amounts payable to employees) cannot be netted off. Any decision to top up the furlough payments to employees (e.g by choosing to pay more than the government guaranteed 80% of salary up to a maximum of £2,500 per month) is a voluntary decision and should not be provided for in advance. This is because there is no obligation to make these additional payments and to do so would constitute providing for future operating costs. Standards adopted for the first time IFRS 16 ‘Leases’ IFRS 16 ‘Leases’ replaces IAS 17 ‘Leases’ along with three Interpretations (IFRIC 4 ‘Determining whether an Arrangement contains a Lease’, SIC 15 ‘Operating Leases-Incentives’ and SIC 27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’). The adoption of this new Standard has resulted in the Group recognising a right-of-use asset and related lease liability in connection with all former operating leases except for those identified as low-value or having a remaining lease term of less than 12 months from the date of initial application. The new Standard has been applied using the modified retrospective approach, with the cumulative effect of adopting IFRS 16 being recognised in equity as an adjustment to the opening balance of retained earnings for the current period. Prior periods have not been restated. For contracts in place at the date of initial application, the Group has elected to apply the definition of a lease from IAS 17 and IFRIC 4 and has not applied IFRS 16 to arrangements that were previously not identified as lease under IAS 17 and IFRIC 4. The Group has elected not to include initial direct costs in the measurement of the right-of-use asset for operating leases in existence at the date of initial application of IFRS 16, being 1 May 2019. At this date, the Group has also elected to measure the right-of-use assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments that existed at the date of transition. Instead of performing an impairment review on the right-of-use assets at the date of initial application, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of IFRS 16. On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for leases of low-value assets the Group has applied the optional exemptions to not recognise right-of-use assets but to account for the lease expense on a straight-line basis over the remaining lease term. For those leases previously classified as finance leases, the right-of-use asset and lease liability are measured at the date of initial application at the same amounts as under IAS 17 immediately before the date of initial application. On transition to IFRS 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 3.1%. The following is a reconciliation of the financial statement line items from IAS 17 to IFRS 16 at 1 May 2019: Carrying amount at 30 April 2019 £’000 Reclassification £’000 IFRS16 carrying amount at 1 May 2019 £’000 Tangible fixed assets Trade and other receivables Lease liabilities 767 3,340 (100) 2,477 (22) (2,455) 3,244 3,318 (2,555) The following is a reconciliation of total operating lease commitments at 30 April 2019 (as disclosed in the financial statements to 30 April 2019) to the lease liabilities recognised at 1 May 2019: Total operating lease commitments disclosed at 30 April 2019 Recognition exemptions: ● Adjustment to commitment disclosures Operating lease liabilities before discounting Discounted using incremental borrowing rate of 3.1% Total lease liabilities recognised under IFRS 16 at 1 May 2019 £’000 2,706 282 2,988 (533) 2,455 62 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 63 5 Alternative Performance Measures The Group uses Adjusted Operating Profit, Adjusted Profit Before Tax, Adjusted Diluted EPS and Net Operating Assets as supplemental measures of the Group’s profitability and investment in business-related assets, in addition to measures defined under IFRS. The Group considers these useful due to the exclusion of specific items that are considered to hinder comparison of underlying profitability and investments of the Group’s segments and businesses, and is aware that shareholders use these measures to evaluate performance over time. The adjusting items for the alternative measures of profit are either recurring but non-cash charges (share-based payments and amortisation of acquired intangible assets) or exceptional items (reorganisation costs and acquisition and fundraising costs). The following table is included to define the term Adjusted Operating Profit: Operating Profit (as reported) Adjusting items (all costs): Non-underlying items Share-based payments Amortisation of acquired intangible assets Exceptional items Reorganisation costs Acquisition and fundraising costs Total adjusting items 2020 £’000 2019 £’000 3,511 2,198 276 647 110 58 1,091 136 356 124 288 904 Adjusted Operating Profit 4,602 3,102 Adjusted Profit Before Tax is defined as follows: Profit before tax (as reported) Adjusting items (all costs): Non-underlying items Share-based payments Amortisation of acquired intangible assets Exceptional items Reorganisation costs Acquisition and fundraising costs Total adjusting items 2020 £’000 2019 £’000 3,257 2,121 276 647 110 58 1,091 136 356 124 288 904 Adjusted Profit Before Tax 4,348 3,025 Adjusted EPS is defined as follows: Profit for the year Adjusting items (all costs): Non-underlying items Share-based payments Amortisation of acquired intangible assets Exceptional items Reorganisation costs Acquisition and fundraising costs Total adjusting items Less taxation on adjusting items calculated at the UK statutory rate Adjusted profit for the year 2020 £’000 2,591 276 647 110 58 1,091 (207) 3,457 2019 £’000 1,912 136 356 124 288 904 (172) 2,644 Divided by diluted weighted average number of shares in issue (note 23) 101,206,148 93,330,500 Adjusted Diluted EPS 3.43p 2.83p The following table is included to define the term Net Operating Assets: Net assets Deferred tax asset Corporation tax asset Cash and cash equivalents Borrowings and lease liabilities (current and non-current) Deferred tax liability Current tax payable Total adjusting items within Net assets 2020 £’000 2019 £’000 20,064 17,086 246 52 5,290 (12,286) (2,134) (513) (9,345) 180 – 2,494 (4,100) (1,448) (626) (3,500) Net Operating Assets 29,409 20,586 64 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 65 6 Segment Analysis The Digital Imaging segment incorporates the Synoptics brands Syngene, Synbiosis, Synoptics Health and Fistreem, the Atik brands Atik Cameras, Opus and Quantum Scientific Imaging, and the Graticules Optics business. These businesses share significant characteristics including customer application, technology, and production location. Revenues derive from the sale of instruments, components for OEM customers’ instruments, from accessories and service and from licence income. The Sensors & Control segment combines our Sentek, Astles Control Systems, Applied Thermal Control, Thermal Exchange, MPB Industries and Chell Instruments businesses. All of these businesses provide products that enable accurate control of scientific and industrial equipment. Their revenues also derive from the sale of instruments, major components for OEM customers’ instruments, and from accessories and service. The Board of Directors reviews operational results of these segments on a monthly basis, and decides on resource allocations to the segments and is considered the Group’s chief operational decision maker. Revenues Digital Imaging Sensors & Control Group Adjusted Operating Profit Digital Imaging Sensors & Control Other Group Amortisation of acquired intangible assets Digital Imaging Sensors & Control Other Group 2020 Total £’000 2019 Total £’000 11,050 13,448 24,498 9,434 7,993 17,427 2,382 3,028 (808) 4,602 (182) (465) – (647) 1,954 2,165 (1,017) 3,102 (50) (306) – (356) Adjusted Operating Profit has been defined in note 5. Analysis of amortisation of acquired intangible assets has been included separately as the Group considers it to be an important component of profit which is directly attributable to the reported segments. The Other category includes costs which cannot be allocated to the other segments, and consists principally of Group HQ costs. Operating assets excluding acquired intangible assets Digital Imaging Sensors & Control Other Group Acquired intangible assets Digital Imaging Sensors & Control Group Operating Liabilities Digital Imaging Sensors & Control Other Group Net operating assets Digital Imaging Sensors & Control Other Group 2020 Total £’000 2019 Total £’000 6,281 5,993 120 12,394 4,828 3,020 27 7,875 5,370 15,068 20,438 5,552 10,451 16,003 (1,190) (2,087) (158) (3,435) (1,281) (1,361) (649) (3,291) 10,550 19,042 (183) 29,409 9,099 12,110 (623) 20,586 Net Operating Assets has been defined in note 5. The geographical analysis of revenue by destination, analysis of revenue by product or service, and non-current assets by location are set out below: Revenue by destination of external customer United Kingdom (country of domicile) Europe Americas Asia Rest of World Revenue by product or service Instruments and spare parts Service Non-current assets by location United Kingdom Portugal America 2020 £’000 10,249 5,129 3,290 4,492 1,338 24,498 2020 £’000 23,894 604 24,498 2020 £’000 25,292 412 227 25,931 2019 £’000 6,624 3,216 2,805 4,539 243 17,427 2019 £’000 16,867 560 17,427 2019 £’000 17,943 106 92 18,141 66 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 67 7 Profit before Taxation Profit for the year has been arrived at after charging: Amortisation and write-down of intangible assets Depreciation charge for year – Right-of-use assets Depreciation charge for year – Other assets Auditor’s remuneration Group: – Audit of Group accounts Fees paid to the auditor and its associates in respect of other services: – Audit of Company and of subsidiaries – Tax compliance services – Audit related assurance services Currency exchange loss Reorganisation costs Acquisition and fundraising costs 8 Directors’ and Employees’ Remuneration Staff costs during the year were as follows: Wages and salaries (including reorganisation costs and other termination benefits £58k (2019: £124k)) Furlough income Social security costs Share-based payments Other pension costs 2020 £’000 1,189 490 342 18 151 34 12 9 110 58 2019 £’000 971 – 234 34 82 14 10 16 124 288 2020 £’000 2019 £’000 7,221 (55) 731 276 345 8,518 4,905 – 441 136 281 5,763 The share-based payment charge and reorganisation costs are included in the income statement separately. Key management for the Group is considered to be the directors of the Group. Remuneration of directors is set out in the directors’ remuneration report on pages 32-33. Pensions The Group operates defined contributions pension schemes for the benefit of the employees. The assets of the schemes are administered by trustees in funds independent from those of the Group. Total contributions for the Group were £345k (2019: £281k). The average number of employees of the Group during the year was: Administration Production Product development Sales and marketing 2020 Number 2019 Number 50 129 30 23 232 24 95 13 16 148 Share-based employee remuneration The company has two active EMI option schemes, “approved” and “unapproved”, which share similar features, but may be treated differently regarding taxation of the option holder. Both schemes have been approved by shareholders in general meetings. The approved scheme has been approved by HM Revenue & Customs. The options can be exercised three years after the share options are granted. Upon vesting, each option allows the holder to purchase one ordinary share. The options lapse if share options remain unexercised after a period of 10 years after the date of grant or if the employee leaves. During the year, 425,000 of such options were granted under these schemes, at exercise prices ranging from £0.172 to £0.896. The weighted average remaining contractual life of all outstanding options under these schemes is 7.75 years. In addition, in December 2018, a Long-Term Incentive Plan (LTIP) was approved by the Board of directors and in March 2020 458,501 options were granted under this plan to certain Directors. Under the terms of the grant, a proportion of the options will vest after three years, depending on a) the ranking of Total Shareholder Return (TSR) to Group shareholders compared with a basket of twenty comparator companies, and b) the earnings per share growth for the Group over the three-year period. The exercise price for these options is 1p each, being the nominal value of SDI shares. A summary of options outstanding currently is as follows: Options outstanding at 1 May Scheme 2019 Granted Lapsed Exercised Options outstanding at 30 April 2020 Weighted average exercise price of which exercisable EMI, Approved and Unapproved LTIP Total 5,180,000 425,000 1,389,129 458,501 6,569,129 883,501 – (430,528) – – – (430,528) 5,174,472 1,847,630 7,022,102 299,472 – 299,472 0.350 0.010 0.259 In accordance with IFRS 2, Share-based compensation expense is calculated on the issue of share options. For options under the LTIP scheme vesting based on TSR, a Monte Carlo simulation performed by a third party was used to value the compensation expense. For the other options issued during the year, the compensation expense was valued using the Black Scholes model, with the following inputs: Current pension obligations included in liabilities 2020 £’000 60 2019 £’000 12 ● interest rate 0.37%-0.58% ● volatility 37%-50% ● expected life of option 3 years. The charge for the year ended 30 April 2020 was £276k (2019: £136k). 68 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 69 9 Finance Costs Bank loans Leases and hire purchase contracts 10 Taxation Corporation tax: Prior year corporation tax adjustment Current tax charge Deferred tax expense/(income) Income tax charge Reconciliation of effective tax rate Profit on ordinary activities before tax Profit on ordinary activities multiplied by standard rate of Corporation tax in the UK of 19% (2019: 19%) Effects of: Expenses not deductible for tax purposes Additional deduction for R&D expenditure Share-based payment expense in excess of share scheme deductions Prior year tax adjustments Update deferred tax liabilities and assets to enacted future tax rate of 19% (2019: 17%) Other 2020 £’000 2019 £’000 172 82 254 74 3 77 2020 £’000 2019 £’000 17 544 561 105 666 37 469 506 (297) 209 2020 £’000 2019 £’000 3,257 2,121 619 403 22 (135) – 17 158 (15) 666 156 (136) (176) 37 (82) 7 209 The Group takes advantage of the enhanced tax deductions for Research and Development expenditure in the UK and expects to continue to be able to do so. Intangible Assets The amounts recognised in the balance sheet relate to the following: 11 Customer relationships £’000 Other intangibles £’000 Goodwill £’000 Development costs £’000 7,899 – 2,318 – 10,217 719 603 – 1,322 8,895 7,180 810 41 261 (17) 1,095 367 58 (16) 409 686 443 8,391 5 2,499 – 10,895 – – – – 2,678 536 – (310) 2,904 1,498 528 (296) 1,730 10,895 1,174 21,650 8,391 1,180 17,194 Customer relationships £’000 Other intangibles £’000 Goodwill £’000 Development costs £’000 4,241 3,658 – 7,899 389 330 – 719 7,180 3,852 650 223 (63) 810 380 50 (63) 367 443 270 5,419 2,972 – 8,391 – – – – 2,458 585 (365) 2,678 1,272 591 (365) 1,498 8,391 1,180 17,194 5,419 1,186 10,727 Total £’000 19,778 582 5,078 (327) 25,111 2,584 1,189 (312) 3,461 Total £’000 12,768 7,438 (428) 19,778 2,041 971 (428) 2,584 Cost At 1 May 2019 Additions Additions on acquisition Disposals/Eliminations At 30 April 2020 Amortisation At 1 May 2019 Amortisation for the year Disposals/Eliminations At 30 April 2020 Net book amount at 30 April 2020 Net book amount at 30 April 2019 Cost At 1 May 2018 Additions Disposals/Eliminations At 30 April 2019 Amortisation At 1 May 2018 Amortisation for the year Disposals/Eliminations At 30 April 20219 Net book value at 30 April 2019 Net book value at 30 April 2018 Capitalised development costs include amounts totalling £385k (2019: £674k) relating to incomplete projects for which amortisation has not yet begun. 70 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 11 Intangible Assets continued Property, Plant and Equipment Goodwill relates to various acquisitions, and impairment has been tested for the following cash-generating units: ● Atik, consisting of the acquisitions of Artemis CCD Ltd, Perseu Comercio De Equipamento Para Informatica E Astronomica SA, Opus Instruments, and the assets of QSI. Motor vehicles £’000 Computer equipment £’000 Tools and other equipment £’000 Furniture fixtures & fittings £’000 Building and leasehold improvements £’000 71 12 ● Sentek ● Astles Control Systems ● Applied Thermal Control and Thermal Exchange ● Synoptics and Fistreem International ● Graticules Optics ● MPB Industries ● Chell Instruments The individual impairment assessments for the cash generating units were based on value-in-use calculations covering a five-year forecast followed by an extrapolation of expected cash flows to perpetuity using a long-term growth rate of 2%. A risk-adjusted, pre-tax discount rate of 14% was used which was judged to be appropriate for each of the entities given that they operate in similar markets and the risk profiles of each CGU are similar. Management’s key assumption for all cash generating units and resulting cash flows is to maintain market share in their markets. The Directors have concluded that Goodwill is not impaired for any of the cash generating units. They have further considered the sensitivity of the key assumptions, including reduced growth rates and increased discount rates, and do not consider it probable that any reasonable change in the key assumptions would result in an impairment, given the available headroom. Two of the cash generating units approach the trigger for impairment if growth rates are reduced to zero. The average remaining amortisation period of intangible assets excluding Goodwill is 9.1 years (2019: 9.4 years). Cost At 1 May 2019 IFRS16 adjustment Restated cost at 1 May 2019 Additions Additions on acquisition FX movement Disposals At 30 April 2020 Depreciation At 1 May 2019 Charge for year FX movement Disposals At 30 April 2020 Net book value At 30 April 2020 At 30 April 2019 64 – 64 6 3 – (57) 16 4 36 – (30) 10 6 60 231 – 231 20 57 2 (15) 295 91 52 1 (16) 128 167 140 950 – 950 394 – 3 (217) 1,130 634 197 1 (214) 618 512 316 182 – 182 25 93 1 (119) 182 114 44 – (121) 37 145 68 Total £’000 1,700 2,477 4,177 919 585 16 (408) 5,289 933 831 5 (381) 1,388 273 2,477 2,750 474 432 10 – 3,666 90 502 3 – 595 3,071 183 3,901 767 Motor vehicles £’000 Computer equipment £’000 Tools and other equipment £’000 Furniture fixtures & fittings £’000 Building and leasehold improvements £’000 56 – 64 – (56) 64 51 5 – (52) 4 60 5 124 108 7 – (8) 231 65 34 – (8) 91 140 59 946 243 93 3 (235) 950 661 163 1 (191) 634 316 285 123 30 30 – (1) 182 100 15 – (1) 114 68 23 141 138 – – (6) 273 82 14 – (6) 90 183 59 Total £’000 1,390 419 194 3 (306) 1,700 959 231 1 (258) 933 767 431 Cost At 1 May 2018 Additions Additions on acquisition FX movement Disposals At 30 April 2019 Depreciation At 1 May 2018 Charge for year FX movement Disposals At 30 April 2019 Net book value At 30 April 2019 At 30 April 2018 Included in the net carrying amount of building and leasehold improvements are right-of-use assets of £2,821k and of Motor vehicles are right-of-use assets of £11k. 72 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 73 13 Leases Deferred Tax 14 Lease liabilities are presented in the balance sheet as follows: Current Non-current 2020 £’000 539 2,414 2,953 2019 £’000 84 16 100 Note 4 provides the impact of the adoption of IFRS 16 (Leases) at 30 April 2019. The lease liabilities shown for 2020 include both leases which were formerly classified as operating leases and leases which were formerly classified as finance leases. The lease liabilities shown for 2019 exclude leases formerly classified as operating leases. The Group has leases for the main warehouses and offices, and for some vehicles and equipment. With the exception of short-term leases and leases of low-value underlying assets, each lease is reflected on the balance sheet as a right-of-use asset and a lease liability. Variable lease payments which do not depend on an index or a rate are excluded from the initial measurement of the lease liability and asset. The Group classifies its right-of-use assets in a consistent manner to its property, plant and equipment (see note 12). Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another party, the right-of-use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by incurring a substantial termination fee. For leases over office buildings and factory premises the Group must keep those properties in a good state of repair and return the properties in their original condition at the end of the lease. Furthermore, the Group must insure items of plant and machinery and incur maintenance fees on such items in accordance with the lease contracts. The lease liabilities are secured by the related underlying assets. Total contractual undiscounted lease liabilities at 30 April 2020 were as follows: Within one year Within two to five years After five years Total undiscounted lease liabilities 2020 £’000 583 1,668 1,255 3,506 2019 £’000 88 19 – 107 Lease payments not recognised as a liability The Group has elected not to recognise a lease liability for short term leases (leases with an expected term of 12 months or less) or for leases of low value assets. Payments made under such leases are expensed on a straight-line basis. In addition, certain variable lease payments are not permitted to be recognised as lease liabilities and are expensed as incurred. At 30 April 2020 the Group had not committed to any leases which had not yet commenced. Opening Capitalised R & D Deferred tax on share options Acquired deferred tax assets/liabilities Intangibles recognised on business combinations Amortisation acquired intangible assets Adjustment to enacted tax rate Trading losses recognised/used Adjustment to prior year Other temporary differences At 30 April 2020 Deferred tax on capitalised R&D Other temporary differences Deferred tax on acquired intangible assets Deferred tax on share option exercises Trading losses recognised At 30 April 2020 2020 Deferred tax asset £’000 Deferred tax liability £’000 2019 Deferred tax asset £’000 Deferred tax liability £’000 180 – 47 – – – 23 (26) 40 (18) 246 (1,448) – – (25) (490) 122 (181) – (8) (104) (2,134) 37 – 154 – – – (3) (8) – – 180 (969) (20) – – (661) 61 82 – – 59 (1,448) 2020 Deferred tax asset £’000 Deferred tax liability £’000 2019 Deferred tax asset £’000 Deferred tax liability £’000 – 22 – 224 – 246 (189) (145) (1,800) – – (2,134) – – – 154 26 180 (204) 40 (1,284) – – (1,448) Deferred tax assets are recognised for tax losses available for carrying forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. The Group did not recognise deferred tax assets of £355k (2019: £308k) in respect of losses. Total losses (provided and unprovided) totalled £1.8m (2019: £1.8m). 74 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 75 15 Inventories Cash and Cash Equivalents Raw materials and consumables Work in progress Finished goods There is no material difference between the replacement cost of inventory and the amounts stated above. In the year ended 30 April 2020 a total of £7,975k (2019: £5,902k) of inventories were consumed and charged to the Income Statement as an expense. 16 Trade and Other Receivables Trade receivables Corporation tax Other receivables Prepayments 2020 £’000 1,948 289 1,491 3,728 2019 £’000 1,943 229 404 2,576 2020 £’000 3,009 52 171 385 3,617 2019 £’000 2,963 – 157 220 3,340 All amounts are short-term. All of the receivables have been reviewed for potential credit losses, and expected credit loss has been estimated. A reconciliation of the movement in the expected credit loss provision for trade receivables is as follows: Cash at bank and in hand Trade and Other Payables Trade payables Social security and other taxes Other payables Accruals and deferred income 2020 £’000 2019 £’000 5,290 2,494 2020 £’000 1,427 379 90 1,454 3,350 2019 £’000 1,632 300 151 1,197 3,280 Accruals and deferred income includes an amount of £398k (2019: £192k) in respect of contract liabilities for service revenues recognised over time but invoiced in advance, relating to performance obligations expected to be satisfied within the next 12 months. All amounts are short-term. The carrying values are considered to be a reasonable approximation of fair value. Provision for Warranties As at 1 May 2019 Provided for in year (net) Warranty provision as at 30 April 2020 2020 £’000 2019 £’000 11 74 85 11 – 11 Expected credit loss provision as at 1 May 2019 Increase in provision Provision as at 30 April 2020 2020 £’000 2019 £’000 132 165 297 9 123 132 Warranties of between one and three years are given with the sales of products. There are potential costs associated with the repair of goods under these warranties which could occur at any time over the next three years. The level of costs is uncertain. The warranty provision is based on the historical cost of warranty repairs over the last three years. It is expected that the majority of this expenditure will be incurred in the next financial year. In addition, some of the unimpaired trade receivables are past due at the reporting date. There are no indications that financial assets past due but not impaired are irrecoverable. The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. 17 18 19 76 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 77 20 Borrowings Reconciliation of Liabilities Arising from Financing Activities 21 Borrowings are repayable as follows: The changes in the Group’s liabilities arising from financing activities can be classified as follows: Within one year Bank finance Leases After one and within five years Bank finance Leases Total borrowings 2020 £’000 2019 £’000 1,371 539 1,910 7,962 2,414 10,376 12,286 – 84 84 4,000 16 4,016 4,100 Bank finance relates to amounts drawn down under the Group’s bank facility with HSBC Bank plc, which is secured against all assets of the Group. The facility consists of a revolving facility of £5m and an amortising facility which reduces in quarterly instalments from £4,800k when it was taken out in November 2019 to zero by April 2023, when the current agreement expires. The facility has covenants relating to leverage (net debt to EBITDA), interest coverage, and cash flow to debt service. In March and April 2020, as a precautionary response to the COVID-19 pandemic, the Group requested and was granted a deferment (to April 2023) of the quarterly repayment due in April 2020, and a waiver of the cash flow to debt service covenant for two quarters. Debt under the amortising facility at 30 April 2020 was £4,457k. The Group also drew down substantially all of its revolving facility, with loans denominated in UK Pounds, Euros and US Dollars totalling £4,876k, to maximise available cash balances. Leases in 2019 include only those leases formerly classified as finance leases. At 30 April 2019 Impact of IFRS 16 At 1 May 2019 Movements: – Repayments – New liabilities – Assumed on acquisition – FX difference – Reclassification between ST and LT At 30 April 2020 Long-term borrowing £’000 Short-term borrowing £’000 4,000 – 4,000 (800) 5,125 – (21) (342) 7,962 – – – (342) 1,371 – – 342 1,371 Leases £’000 100 2,457 2,557 (515) 412 499 – – 2,953 Total £’000 4,100 2,457 6,557 (1,657) 6,908 499 (21) – 12,286 Share Capital 22 Authorised 1,000,000,000 (2019: 1,000,000,000) Ordinary shares of 1p each Allotted, called up and fully paid 97,503,951 (2019: 97,203,951) Ordinary shares of 1p each 2020 £’000 2019 £’000 10,000 10,000 975 972 During the year 300,000 Ordinary shares of 1p were issued due to the exercise of options. The 300,000 options had an exercise price of £0.172, and the Group received £53k, which was allocated £3k to share capital and £50k to share premium. Additionally, a total of 130,528 share options were exercised and satisfied by the release of shares from the Synoptics Employee Benefit Trust which has now been wound up. 78 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 79 23 Earnings Per Share The calculation of the basic earnings per share is based on the profits attributable to the shareholders of SDI Group plc divided by the weighted average number of shares in issue during the period. All profit per share calculations relate to continuing operations of the Group. Basic earnings per share: – Year ended 30 April 2020 – Year ended 30 April 2019 Dilutive effect of share options: – Year ended 30 April 2020 – Year ended 30 April 2019 Diluted earnings per share: – Year ended 30 April 2020 – Year ended 30 April 2019 Profit attributable to shareholders £’000 Weighted average number of shares Earnings per share amount in pence 2,591 1,912 97,277,721 91,209,753 2.66 2.10 3,928,426 2,120,747 2,591 1,912 101,206,148 93,330,500 2.56 2.05 At the year end, there were 425,000 share options which were anti-dilutive but may be dilutive in the future. 24 Own Shares Held by Employee Benefit Trust The Group Investment in own shares 2020 £’000 2019 £’000 – 17 As at 30 April 2020 the trust held nil shares (2019: 130,528) in SDI Group plc. During the year, a total of 130,528 ordinary shares (2019: 130,528 outstanding) were satisfied through the exercise of share options and the Synoptics Employee Benefit Trust has now been wound up. 25 Contingent Liabilities Contingent liabilities Performance guarantees totalling £32k (2019: £32k) are held by the bank. These would become payable by the Group if, once the customer has placed an order, the Group fails to deliver goods to the customer. 26 27 Related Party Transactions and Controlling Related Party Transactions with directors are disclosed within the Directors’ Remuneration Report and note 8. Additionally, Ken Ford is a non-executive director of Primary Bid, a technology platform that allows retail investors to access share offerings at the same price as institutions. During the previous year, the Company placed £100k of shares with retail investors using Primary Bid’s platform alongside its institutional placing associated with the Group’s acquisition of Graticules Optics in February 2019. Fees for the placing were approximately £5k. The Company is not required to disclose transactions with its wholly owned subsidiaries. Unless otherwise stated, none of the transactions incorporated in these financial statements include any special terms or conditions. There is no ultimate controlling party. Financial Risk Management Objectives and Policies Financial instruments The Group uses various financial instruments, including loans and leasing arrangements, and has certain assets and liabilities which are denominated in foreign currencies. The main purpose of the financial instruments is to raise finance for the Group’s operations. The existence of these financial instruments and other financial assets and liabilities exposes the Group to a number of financial risks, primarily interest rate risk and currency risk. Interest rate risk The Group finances its operations through a mixture of retained profits, short- and long-term bank borrowings, and shareholders’ equity. The Group has an exposure to interest rate fluctuations on its borrowings which are generally linked to LIBOR at 1 or 3 months. An increase in LIBOR of 1% would result in an increase in interest costs of approximately £94k annually, based on the loan outstanding at 30 April 2020. Currency risk A significant proportion of the Group’s monetary assets (principally bank balances and trade receivables) and liabilities (principally borrowings) are denoted in Dollars and Euros but held in entities with Sterling as the functional currency. An adverse movement in exchange rates could lead to losses on these positions. As at 30 April 2020 an adverse movement in the dollar of 5% would result in a reduction in the Group’s equity and profit or loss of £3k (2019: £28k). An adverse movement in the Euro of 5% would result in a reduction in the Group’s equity and profit or loss of £7k (2019: £36k). The carrying amount of the Group’s Dollar and Euro-denominated monetary assets with a differing functional currency at the reporting date is as follows: US Dollars Euros Assets 2020 £’000 413 841 2019 £’000 562 721 Liabilities 2020 £’000 (479) (696) 2019 £’000 – – In addition significant proportions of the Group’s revenue, purchases and overhead costs are transacted in foreign currencies, mainly Dollars and Euros. The Group does not attempt to hedge its exposure using derivative instruments. 80 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 81 27 Financial Risk Management Objectives and Policies continued Summary of Financial Assets and Liabilities by IFRS 9 Category 28 Credit risk The Group’s exposure to credit risk is limited to the carrying amount of cash deposits and trade and other receivables recognised at the balance sheet date of £8,999k (2019: £5,834k). Risks associated with cash deposits are limited as the banks used are reputable with quality external credit ratings. The principal credit risks lies with trade receivables. In order to manage credit risk credit limits are set for customers based on a combination of payment history and third-party credit references. Details of overdue trade receivables are provided below. Liquidity risk Liquidity risk is that the Group might be unable to meet its obligations and arises from trade and other payables. The Group manages liquidity risk by maintaining adequate reserves and banking facilities and by continuously monitoring forecasts and actual cash flows. As at 30 April 2020, the Group’s financial liabilities have contractual maturities as summarised below: Trade and other payables Borrowings As at 30 April 2019 Trade and other payables Borrowings Ageing of receivables: Past due less than 1 month Past due 1-3 months Past due 3-6 months Past due 6-12 months Past due greater than 12 months Current Non-current Within 6 months £’000 Between 6 and 12 months £’000 Between 1 and 5 years £’000 Later than 5 years £’000 3,376 1,017 – 893 – 10,376 – – Current Non-current Within 6 months £’000 Between 6 and 12 months £’000 Between 1 and 5 years £’000 Later than 5 years £’000 3,280 44 – 40 – 4,016 – – 2020 2019 Gross £’000 Provision £’000 Gross £’000 Provision £’000 1,611 1,137 276 136 96 3,256 – – (43) (124) (81) (247) 2,465 337 233 32 28 3,095 – – (102) (16) (14) (132) The carrying amounts of the Group’s financial assets and liabilities as recognised at the balance sheet date of the years under review may also be categorised as follows: Financial assets at amortised cost 2020 £’000 Non- financial assets 2020 £’000 Financial liabilities at amortised cost 2020 £’000 5,290 3,232 – – – 8,522 – 385 – – – 385 – – (1,910) (10,376) (2,971) (15,257) Financial assets at amortised cost 2019 £’000 Non- financial assets 2019 £’000 Financial liabilities at amortised cost 2019 £’000 2,494 3,120 – – – 5,614 – 220 – – – 220 – – (84) (4,016) (2,980) (7,080) Financial liabilities measured at fair value through profit & loss 2020 £’000 – – – – – – Financial liabilities measured at fair value through profit & loss 2019 £’000 – – – – – – Non- financial liabilities 2020 £’000 – – – – Total balance sheet heading 2020 £’000 5,290 3,617 (1,910) (10,376) (379) (379) (3,350) (6,729) Non- financial liabilities 2019 £’000 – – – – Total balance sheet heading 2019 £’000 2,494 3,340 (84) (4,016) (300) (300) (3,280) (1,546) Balance sheet headings Cash and cash equivalents Trade and other receivables Borrowings – current Borrowings – non-current Trade and other payables – current Total Balance sheet headings Cash and cash equivalents Trade and other receivables Borrowings – current Borrowings – non-current Trade and other payables – current Total The fair values of the financial assets and liabilities at 30 April 2020 and 30 April 2019 are not materially different from their book values. 82 Notes to the Consolidated Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 83 Chell Instruments Limited contributed £2,036k revenue and approximately £422k (after management charges) to the Group’s profit before tax for the period between the date of acquisition and the balance sheet date, not including £84k of acquired intangible asset amortisation. If the acquisition of Chell Instruments Limited had been completed on the first day of the financial year, the additional impact on group revenues for the period would have been £2,888k and the additional impact on group profit would have been approximately £260k (after management charges), before additional £117k of amortisation expense. The goodwill of £2,499k arising from the acquisition relates to the assembled workforce and to expected future profitability and growth expectations. Management performed a detailed review of the acquired intangible assets, and recognised acquired customer relationships, trademarks and domain names, and non-compete agreements. The customer relationships intangible asset was valued using a multi-period excess earnings methodology. The estimated fair value of the customer relationships therefore reflects the present value of the projected stream of cash flows that are expected to be generated by existing customers going forwards. Key assumptions are the discount rate and attrition rate. Values of 15% and 11% were selected. The fair value of stock has been adjusted downwards from its previous book value to account for estimated excess and obsolescence. The deferred tax liability has been calculated on the amortisable intangible assets using the current statutory tax rate of 19%. The last financial year for Chell Instruments Limited before the acquisition closed was to 31 December 2018. The current financial year has been extended by 4 months to April 2020 to align with that of SDI Group plc. 29 Capital Management Policies and Procedures The Group’s capital management objectives are: ● to ensure the Group’s ability to continue as a going concern; and ● to provide an adequate return to shareholders; and ● be in a position to make acquisitions (‘buy and build’ strategy) The Group monitors capital by tracking and forecasting its Debt-to-EBITDA ratio as required by its bank facility covenant. The Group has historically acquired companies using a combination of cash on hand, increased borrowing, issue of shares to the sellers, and new equity share placings, taking care to retain adequate liquidity reserves. The Group will keep its dividend policy under review. 30 Business Combinations On 29 November 2019, the Company acquired the entire share capital of Chell Instruments Limited, a company incorporated in England and Wales, for a consideration payable in cash. The assets and liabilities acquired were as follows: Assets Non-current assets Intangible assets Property, plant & equipment Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Liabilities Trade and other payables Borrowings – lease commitments Corporation tax Deferred tax liability Net assets acquired Goodwill Consideration and cost of investment Fair value of consideration transferred Cash paid in year Book value £’000 IFRS 16 adjustment £’000 Fair Value adjustment £’000 Fair Value £’000 – 153 153 800 968 295 (889) (66) (58) (26) 1,177 – – 432 432 – – – – (432) – – – – 2,579 – 2,579 (178) – – (110) – – (490) 1,801 2,499 2,579 585 3,164 622 968 295 (999) (498) (58) (516) 2,978 2,499 5,477 5,477 5,477 84 Company Balance Sheet For the year ended 30 April 2020 Company Statement of Changes in Equity For the year ended 30 April 2020 85 Share capital £’000 Merger reserve £’000 Share premium reserve £’000 Share- based payment reserve £’000 Profit and loss account £’000 At 1 May 2019 Shares issued Share-based payment transfer Share-based payments Transactions with owners Profit for the year At 30 April 2020 972 3 – – 3 – 975 424 – – – – – 424 8,698 50 – – 50 – 8,748 284 – (93) 276 183 – 467 4,973 – 93 – 93 1,043 6,109 Share capital £’000 Merger reserve £’000 Share premium reserve £’000 Other reserves £’000 Profit and loss account £’000 896 76 – 76 – 972 424 – – – – 424 6,389 2,309 – 2,309 – 8,698 111 – 173 173 – 284 2,567 – – – 2,406 4,973 At 1 May 2018 Shares issued Share-based payments Transactions with owners Profit for the year At 30 April 2019 Total £’000 15,351 53 – 276 329 1,043 16,723 Total £’000 10,387 2,385 173 2,558 2,406 15,351 Fixed assets Property, plant & equipment Investments Intangible assets Deferred tax asset Current assets Debtors Cash Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Note 2020 £’000 2019 £’000 4 5 6 7 8 2 21,298 – 164 21,464 3,374 2,091 5,465 – 15,739 – 120 15,859 3,674 437 4,111 (2,244) (619) 3,221 3,492 24,685 19,351 Creditors: amounts falling due after more than one year 9 &10 (7,962) (4,000) Net assets Capital and reserves Called up share capital Share premium account Share-based payment reserve Merger relief reserve Profit and loss account Shareholders’ funds 11 16,723 15,351 975 8,748 467 424 6,109 16,723 972 8,698 284 424 4,973 15,351 The parent company has taken advantage of section 408 of the Companies Act 2006 and has not included its own profit and loss account in these financial statements. The parent company’s profit for the financial year was £1,043k (2019: £2,406k). The financial statements were approved and authorised for issue by the Board of Directors on 20/07/2020. Mike Creedon Chief Executive Officer Chief Financial Officer Jon Abell Company registration number: 6385396 86 Notes to the Company Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 87 1 Principal Accounting Policies Basis of preparation The separate financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework. The financial statements are prepared under the historical cost convention. Disclosure exemptions adopted In preparing these financial statements the Company has taken advantage of all disclosure exemptions conferred by FRS 101. Therefore these financial statements do not include: ● A statement of cash flows and related notes ● The requirements of IAS 24 related party disclosures to disclose related party transactions entered between two or more members of the group as they are wholly owned within the group. ● Disclosure of key management personnel compensation ● Capital management disclosures ● Presentation of comparative reconciliation of the number of shares outstanding at the beginning and at the end of the period ● The effect of future accounting standards not adopted ● Certain share-based payment disclosures ● Disclosures in relation to impairment of assets ● Financial instrument disclosures under IFRS 9 Investments SDI Group plc qualifies for merger relief under Companies Act 2006 s612, and has recorded the investment in Synoptics Limited at the nominal value of the shares issued, less provision for impairment. The shares issued on acquisition of Opus Instruments Limited also qualified for merger relief under Companies Act 2006 s612 and so the premium has been classified as a merger relief reserve. All other investments are recorded at cost, less any provision for impairment. Share options SDI Group plc regularly issues share options to employees, including to employees of subsidiary companies. The fair value of the employee services received in exchange for the grant of options is recognised as an expense which is written off to the income statement over the vesting period of the option. The amount to be expensed is determined by reference to the fair value of the options at the grant date adjusted for the number expected to vest. The expense relating to these options is recognised in the relevant subsidiary company income statement. The carrying value of the investment in those subsidiaries is increased by an amount equal to the value of share- based payment charge attributable to the option holders in the respective subsidiaries. Financial instruments Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that results in a residual interest in the assets of the Company after deducting all of its financial liabilities. Equity instruments do not include a contractual obligation to deliver cash or other financial asset to another entity. Any instrument that does have the obligation to deliver cash or another financial asset to another entity is classified as a financial liability. Financial liabilities are presented under creditors on the balance sheet. Pension The pension costs charged against profits represent the amount of the contributions payable to the defined contribution scheme in respect of the accounting period. Employee Remuneration Remuneration in respect of directors paid by the Company was as follows: Emoluments Pension 2020 £’000 2019 £’000 547 14 561 400 12 412 During the period one director exercised 430,528 share options held over ordinary shares of SDI Group plc. Details of directors’ interest in the shares and options of the Company are provided in the directors remuneration report on pages 32-33. The highest paid director aggregate entitlements were £236k (2019: £204k) in addition to Company pension contributions of £8k (2019: £7k) made to a money purchase scheme. As at 30 April 2020 the highest paid Director held a total of 1,952,327 share options (2019: 1,872,123 share options). Key management for the Company is considered to be the directors of the Company. Employer’s National Insurance in respect of directors was £62k (2019: £46k). Share-based employee remuneration Further details of the Company’s share-based remuneration are set out in note 8 to the consolidated financial statements. The share-based payment expense for the Company totalled £194k (2019: £105k). Auditors’ Remuneration Auditors’ remuneration attributable to the Company is as follows: Taxation compliance services/taxation advisory services Fees payable to the company’s auditor for the audit of the financial statements 2020 £’000 2019 £’000 6 13 4 11 2 3 88 Notes to the Company Financial Statements For the year ended 30 April 2020 SDI Group plc Annual Report 2020 89 4 Investments Investments in Group undertakings Cost and net book amount as at 1 May 2019 Additions Share-based payment expense recognised as capital contributions in subsidiaries Cost and net book amount as at 30 April 2020 £’000 15,739 5,476 83 21,298 Details of the investments are as follows: Subsidiary undertakings Country of Incorporation Synoptics Limited Atik Cameras Limited Perseu Comercio De Equipamento Para Informatica E Astronomica SA Opus Instruments Limited Sentek Limited Astles Control Systems Limited Applied Thermal Control Limited Fistreem International Limited Thermal Exchange Limited Graticules Optics Limited MPB Industries Limited Chell Instruments Limited England and Wales England and Wales Portugal England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Proportion of voting rights Nature of Business 100% Design and Manufacture 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Design Manufacture Dormant Design and Manufacture Design and Manufacture Design and Manufacture Dormant Design and Manufacture Design and Manufacture Design and Manufacture Design and Manufacture Holdings Ordinary shares Ordinary shares Share quotas Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares Ordinary Shares The following companies are all held by Synoptics Limited: Scientific Digital Imaging Limited England and Wales Ordinary Shares 100% Dormant Synoptics Inc USA Ordinary 100% Distributor Each of the above investments has been included in the consolidated financial statements Intangible Assets Cost at 30 April 2020 & 2019 Amortisation at 30 April 2020 & 2019 Net book value as at 30 April 2019 Net book value as at 30 April 2020 Deferred Tax Asset Deferred tax asset 2020 £’000 164 164 The deferred tax asset relates to tax deductions for share options as they are exercised. Debtors Inter-group debtors Prepayments and accrued income Other debtors 2020 £’000 3,254 111 9 3,374 2020 £’000 50 50 – – 2019 £’000 120 120 2019 £’000 3,625 40 9 3,674 All debtors fall due within one year of the balance sheet date. No provisions are made for inter- group debtors as the credit risk is not thought to be significant. Creditors: Amounts Falling Due Within One Year Amounts owed to other group companies Trade creditors Bank loans Lease liabilities Social security and other taxes Accruals and deferred income 2020 £’000 713 31 1,371 2 11 116 2,244 2019 £’000 69 149 – – 14 387 619 5 6 7 8 90 Notes to the Company Financial Statements For the year ended 30 April 2020 SDI Group plc 91 9 Creditors: Amounts Falling Due After One Year Called Up Share Capital Bank loans 10 Borrowings Within one year Bank finance After one and within five years Bank finance Total borrowings 2020 £’000 7,962 7,962 2019 £’000 4,000 4,000 2020 £’000 2019 £’000 1,371 1,371 7,962 7,962 9,333 – – 4,000 4,000 4,000 Bank finance relates to amounts drawn down under the Company’s bank facility with HSBC Bank plc, which is secured against all assets of the Group. The facility consists of a revolving facility of £5,000,000 and an amortising facility which reduces in quarterly instalments from £4,800,000 when it was taken out in November 2019 to zero by April 2013, when the current agreement expires. The facility has covenants relating to leverage (net debt to EBITDA), interest coverage, and cash flow to debt service. In March and April 2020, as a precautionary response to the COVID-19 pandemic, the Company requested and was granted a deferment (to April 2023) of the quarterly repayment due in April 2020, and a waiver of the cash flow to debt service covenant for two quarters. Debt under the revolving facility at 30 April 2020 was £4,457k. The Company also drew down substantially all of its revolving facility, with loans denominated in UK Pounds, Euros and US Dollars totalling £4,876k, to maximise available cash balances. Authorised 1,000,000,000 Ordinary shares (2019: 1,000,000,000) of 1p each Allotted, called up and fully paid 97,503,951 (2019: 97,203,951) Ordinary shares of 1p each 2020 £’000 2019 £’000 10,000 10,000 975 972 During the year 300,000 Ordinary shares of 1p were issued due to the exercise of options. The 300,000 options had an exercise price of £0.172, and the Company received £53k, which was allocated £3k to share capital and £50k to share premium. Additionally, a total of 130,528 share options were exercised and satisfied by the release of shares in the Company from the Synoptics Employee Benefit Trust which has now been wound up. Share options A summary of options outstanding currently is provided in note 8 to the consolidated financial statements. Related Party Transactions Transactions with directors are disclosed within the Directors’ Remuneration Report and note 8 to the consolidated financial statements. Additionally, Ken Ford is a non-executive director of Primary Bid, a technology platform that allows retail investors to access public share offerings at the same price as institutions. During the previous year, the Company placed £100k of shares with retail investors using Primary Bid’s platform alongside its institutional placing associated with the Group’s acquisition of Graticules Optics in February 2019. Fees for the placing were approximately £5k. The Company is not required to disclose transactions with its wholly owned subsidiaries. 11 12 92 Five-Year Summary Shareholder Information For the year ended 30 April 2020 Revenue Cost of sales Gross profit Gross margin % Other income All other operating costs Adjusted operating profit Reorganisation costs Share-based payments Acquisition and fundraising costs Amortisation of acquired intangible assets Operating profit Net financing expenses Profit before tax Income tax Profit for the year 2020 £’000 24,498 (7,899) 16,599 2019 £’000 17,427 (5,902) 11,525 2018 £’000 2017 £’000 14,496 (4,954) 9,542 10,748 (3,837) 6,911 2016 £’000 8,473 (3,298) 5,175 67.8% 66.1% 65.8% 64.3% 61.1% 19 (12,016) 4,602 (110) (276) (58) (647) 3,511 (254) 3,257 – (8,423) 3,102 (124) (136) (288) (356) 2,198 (77) 2,121 – (7,196) 2,346 (63) (65) (165) (277) 1,776 (63) 1,713 (666) (209) (98) 2,591 1,912 1,616 – (5,575) 1,336 – (4,346) 819 (87) (2) (165) (118) 964 (61) 903 (75) 828 (17) (7) (178) (81) 536 (40) 496 75 571 Cash generated from operations 5,169 3,620 2,854 1,406 1,298 Earnings per share Basic earnings per share Diluted earnings per share Adjusted diluted earnings per share 2.66p 2.56p 3.43p 2.10p 2.05p 2.83p 1.81p 1.79p 2.30p 1.17p 1.14p 1.55p 1.17p 1.15p 1.61p The implementation of IFRS16 this year has resulted in a decrease in profits before tax of £40k. The prior year comparatives have not been restated to reflect the impact of IFRS16. Group Revenue (£m) +41% Gross Profit (£m) +20% +35% +25% +43% +38% +21% +35% 8.5 10.7 14.5 17.4 24.5 5.1 6.9 9.5 11.5 16.5 FY2016 FY2017 FY2018 FY2019 FY2020 FY2016 FY2017 FY2018 FY2019 FY2020 SDI Group plc Company registration number 6385396 Registered office Beacon House, Nuffield Road, Cambridge CB4 1TF Directors E K Ford Chairman M Creedon Chief Executive Officer I Napper Non-Executive Director D Tilston Non-Executive Director J Abell Chief Financial Officer Company Secretary J Abell Bankers HSBC Bank Plc St John’s Innovation Park, Cowley Road, Cambridge CB4 0DS Solicitors Mills & Reeve LLP Botanic House, 100 Hills Road, Cambridge CB2 1PH Auditor Grant Thornton UK LLP Registered Auditor Chartered Accountants 101 Cambridge Science Park, Milton Road, Cambridge CB4 0FY Nominated Advisor and Broker finnCap Group plc One Bartholomew Close, London EC1A 7BL Registrar Share Registrars Limited The Courtyard, 17 West Street, Farnham, Surrey GU9 7LL Report Design and Production: FOX www.foxdc.co.uk Printed digitally by Park Lane Press on a Co2 neutral HP Indigo press on FSC certified paper, power from 100% renewable resources. Print production systems registered to ISO 14001, ISO 9001, and over 97% of waste is recycled. SDI Group plc Beacon House Nuffield Road Cambridge CB4 1TF T +44 (0)1223 727144 F +44 (0)1223 727101 E info@thesdigroup.net www.thesdigroup.net 

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