Solid State PLC
Annual Report 2022

Plain-text annual report

CONTENTS 2. Directors, Secretary and Advisers 3. Chairman’s Statement 7. Strategic Report 23. Corporate and Social Responsibility Report 27. Corporate Governance Report 41. Audit Committee Report 46. Remuneration Committee Report 59. Directors’ Report 63. Report of the Independent Auditors 70. Consolidated Statement of Comprehensive Income 71. Consolidated Statement of Changes in Equity 73. Consolidated Statement of Financial Position 74. Consolidated Statement of Cash Flows 75. Notes to the Financial Statements 120. Company Statement of Financial Position 121. Company Statement of Changes in Equity 122. Notes to the Company Financial Statements 126. Notice of Annual General Meeting 0 CONTENTS 2. Directors, Secretary and Advisers 3. Chairman’s Statement 6. Strategic Report 23. Corporate and Social Responsibility Report 27. Corporate Governance Report 41. Audit Committee Report 46. Remuneration Committee Report 59. Directors’ Report 63. Report of the Independent Auditors 70. Consolidated Statement of Comprehensive Income 71. Consolidated Statement of Changes in Equity 73. Consolidated Statement of Financial Position 74. Consolidated Statement of Cash Flows 76. Notes to the Financial Statements 119. Company Statement of Financial Position 120. Company Statement of Changes in Equity 121. Notes to the Company Financial Statements 125. Notice of Annual General Meeting 1 DIRECTORS, SECRETARY AND ADVISERS Directors: Nigel Rogers, Non-Executive Chairman Gary Marsh, Chief Executive Officer Peter James, BSc FCA, Chief Financial Officer John Macmichael, Executive Director Matthew Richards, Executive Director Peter Magowan, Non-Executive Director Peter Haining, FCA, Non-Executive Director Company Secretary and Registered Office: Peter Haining, FCA Solid State PLC 2 Ravensbank Business Park Hedera Road, Redditch B98 9EY Company Number: 00771335 Nominated Adviser and Broker: Joint Broker: Auditors: Solicitors: Bankers: Registrars: Country of Incorporation of Parent Company: Legal Form: Domicile: WH Ireland Limited 24 Martin Lane London EC4R 0DR finnCap Limited One Bartholomew Close London EC1A 7BL RSM UK Audit LLP St Philips Point, Temple Row Birmingham West Midlands B2 5AF Shakespeare Martineau LLP 1 Colmore Square Birmingham West Midlands B4 6AA Lloyds Bank PLC 125 Colmore Row Birmingham West Midlands B3 3SF Neville Registrars Limited Neville House Steelpark Road Halesowen B62 8HD England and Wales Public Limited Company United Kingdom 2 CHAIRMAN’S STATEMENT Introduction I am pleased to report that the Group has delivered another year of record adjusted profits despite the supply chain challenges and volatile global markets. We have delivered growth in both revenue and adjusted profits; however, the macro- economic environment has somewhat curtailed the increase in the period. Group management continues to make good progress in the implementation of its strategy by investing in people and technology, and through the integration of the two bolt-on acquisitions completed in March 2021. The acquisitions’ performance and positive attitude to being part of the Group has surpassed management’s expectations and have enhanced the value we can offer in both our Components and Systems Divisions. The Group’s sector diversity continues to provide a resilient business model. Order intake has been strong across all sectors including in those markets which had previously shown some weakness during the pandemic, specifically energy and aerospace. This has resulted in a record open order book on 31 May 2022 of £89.7m, (comparatives: 31 March 2022: £85.5m; 31 March 2021: £41.3m; 31 May 2021: £51.0m). The record open order book and strong balance sheet, where we have invested in inventories, provide confidence in our ability to continue to deliver growth. Whilst the most volatile period of the supply chain challenge is starting to stabilise, component lead times remain extended, logistical delays are common and inflationary pressures are rising. These challenges are expected to continue through the year ahead into 2023. These are complex issues that can be difficult to navigate and call upon the full range of skills and experience of our highly competent team. Having delivered on the five year goal of doubling adjusted diluted EPS to > 60p, the Board is refining its five-year strategic plan to 2027. The ambition for the next five years is to replicate or beat historic performance which saw the Group deliver >20% CAGR (Compound Annual Growth Rate) in total shareholder return over the five years to 2022. Financial overview Set out below are the financial key performance indicators which reflect the record year and a very pleasing result: KPI Reported revenue Reported operating profit margin Adjusted operating profit margin* Reported profit before taxation Adjusted profit before taxation* Reported EPS Adjusted fully diluted EPS Adjusted cash flow from operations Net cash/(net debt)** Dividend Open order book @ 31 May 2022 £85.0m 4.4% 8.7% £3.5m £7.2m 29.5p 70.6p £6.0m £(5.2)m 19.5p £89.7m 2021 £66.3m 6.5% 8.3% £4.2m £5.4m 46.4p 54.7p £6.9m (£4.4m) 16.0p £51.0m Change +28.2% -210bps +40bps -16.7% +33.3% -36.4% +29.1% -13.0% -18.2% +21.9% +75.9% * Adjusted performance metrics are reconciled in note 31, the adjustments relate to IFRS 3 acquisition amortisation, share based payments charges, and non-recurring charges in respect of redundancies and acquisition costs and fair value adjustments. ** Net cash / debt includes net cash with banks £1.4m (2021: £3.1m) less the fair value of deferred contingent consideration of £6.6m (2021: £7.5m) and excludes the right of use lease liabilities of £2.1m (2021: £2.5m). The Group has delivered: • Revenue growth of 28.2%, including the first full year of acquisitions, with record revenue of £85.0m (2021: £66.3m) reflecting our pro-active approach to working in partnership with customers to manage supply and demand. • Record profitability with adjusted operating margins increasing 40bps to 8.7%, based on solid margins in both divisions. • Adjusted fully diluted EPS up 29.1% to 70.6p (2021: 54.7p). • Strong operating cash generation of £6.0m (2021: £6.9m) supported investment in inventory of £6.9m with reported cash conversion of 161% (2021: 162%). • A dividend increase of 21.9% on the prior year, reflecting record adjusted performance in the year. • An open order book on 31 May 2022 of £89.7m (31 May 2021: £51.0m) highlighting 75.9% organic growth. 3 CHAIRMAN’S STATEMENT (continued) Strategic Achievements in 2021/22 Notable achievements to advance our strategy included: • • Integration of the acquisitions of Willow Technologies Group (“Willow”) and Active Silicon Group (“Active Silicon”): o Enhanced technology adding a portfolio of own brand image processing products and electro-mechanical components (including component manufacturing capabilities in USA). o Broadened the international sales capabilities and resources in the USA and Europe. Continued investment in technical capabilities through our capital investment programme: o Semi automated battery pack wire bonding - providing improved quality and efficiency for volume battery pack production runs. In-house electromagnetic compatibility (“EMC”) testing capabilities. o Post period events: Proposed acquisition of Custom Power LLC (“Custom Power”), a strategically aligned, profitable, cash generative battery pack manufacturer for a total consideration of up to $45.0m. The acquisition is expected to complete in early August following the general meeting on 29 July 2022. Strategy The Group provides customers broad-based access to trusted electronic technology for demanding applications and extreme environments and has a commercial focus on high growth markets including security & defence, medical, green energy, transport, communications and industrial. Our medium-term financial objective is to double fully diluted adjusted earnings (“aeps”) over each five year period. This was exceeded in the five years to 31 March 2022, when aeps increased from 30 pence to 71 pence per share. The accelerated growth rate achieved in recent years reflects the benefit of the foundations which have been laid and the resulting new and exciting businesses. The Directors are fully committed to continuous development of our capabilities to build on this success, further strengthening our partnership approach with major customers, and continuing to share rewards equitably amongst all our stakeholders. Not withstanding the acknowledged short term supply challenges, the demand outlook for customised electronic solutions offers exciting opportunities. Many ground breaking technologies are embedded within our current activities, and there is scope for further investment in specialist skills and knowledge to expand and differentiate our offering to existing and prospective customers, both through internal development and acquisition as we target international expansion. We are building ever closer relationships with our customers, adding substantial value through early stage integration into their design and development road maps, and interlocking with their operational and logistics processes. This will be achieved by further strengthening channels of co-operation between Group entities and building cross-selling specialist teams to facilitate ease of customer access to our full range of products and services. Governance and Accountability The Board structure continues to evolve as we strive towards full implementation of all the principles of the Quoted Companies Alliance code on Corporate Governance. The Board currently comprises four executive directors and three non- executive directors, including an independent non-executive Chair and a senior independent non-executive Director. It is the intention of the Board to recruit an additional independent non-executive Director in the coming year, ensuring appropriate access to an open and transparent process for all candidates, being cognisant of the breadth of diversity. Following this appointment, the Board will have an equal balance of executive and non-executive directors with a casting vote for the chair. An annual formal Board effectiveness review is undertaken, and any updates to Board structure, processes and documentation are actioned without delay. There is a continuous improvement approach to addressing the Environmental, Social and Governance (“ESG”) agenda, which is set out in this report, and this will continue to evolve in future reports as additional metrics are identified and progressed. In communication with our shareholders and others, our primary aim is to provide timely, well balanced, and succinct information about our business and its prospects to a wide audience on a regular basis. In addition to our Annual General Meeting and scheduled meetings with key institutional shareholders, we participate in periodic on-line presentations which are open to all by prior arrangement on the “Investor Meet Company” platform (www.investormeetcompany.com). . 4 CHAIRMAN’S STATEMENT (continued) Acquisitions The trading contribution from the two acquisitions made at the end of financial year 2020/21, Willow and Active Silicon, have each exceeded management’s expectations. The Willow acquisition provided the Components Division with a wider customer base and product offering, significantly increasing the portfolio of own brand components, enabling record revenues. The combined skillsets of the Systems Division and the Active Silicon acquisition enabled the award of the Transport for London Piccadilly line upgrade contract and will provide further opportunities. Active Silicon bring expertise in the design and manufacture of imaging products and embedded vision systems. Post year end, the intended acquisition of US battery manufacturer Custom Power was announced on 12 July 2022, subject to shareholder approval at the general meeting on the 29 July 2022. Custom Power is a strategically significant US based power specialist operating at scale in target growth markets for Solid State . This transaction aligns with the Group’s four key strategic goals and is a good fit with the existing power business unit. Custom Power is a profitable, cash generative business in high growth market sectors that will provide broader technical competencies and opportunities for stronger relationships with key suppliers. This will enable the enlarged Group to cross sell to both businesses’ international blue- chip customers. The size of this acquisition will be transformational to the Power business unit providing a step change, with Custom Power delivering revenues of approximately $29.8m in their financial year ended 31 December 2021. People There has been further investment in the Group HR function in the current year supporting the welfare of our people. Although the impact of the COVID-19 pandemic is receding, there has been ongoing attention to keep workplaces safe and a focus on broader social welfare. This includes access to a wellbeing at work support programme for employees and their families, cash back opportunities, pay reviews, bonuses and a commitment to a one-off energy bonus payment for all employees in the next financial year. Dividend The Group has paid dividends every year since joining AIM in 1996. The Board is committed to maintaining a progressive dividend policy, however the Board’s focus when deploying capital is to continue to drive strong total shareholder returns comparable to historic periods. Accordingly, the Board is proposing a final dividend of 13.25 pence (2021: 10.75 pence) resulting in full year dividends of 19.5 pence (16.0 pence) which is covered 3.6 times by adjusted earnings (2021: 3.4 times). Subject to approval of the final dividend by shareholders at the AGM on 7 September 2022, the final dividend will be paid on 5 October 2022 to shareholders on the register at the close of business on 2 September 2022, and the shares will be marked ex-dividend on 1 September 2022. Opportunities and prospects for 2022/2023 The Group’s business model now serves a wide customer base of over 2,000 clients, operating across multiple sectors, offering a broad product range with specialist production facilities. This diversification provides the Group with resilience when markets are challenging. Whilst the forthcoming period will no doubt continue to be adversely affected by component shortages, having invested in inventories, in partnership with our customers, the Group is well placed to take advantage of the market conditions and emerge in a stronger position than many competitors. The acquisition of Custom Power, which is expected to complete following the general meeting on the 29 July 2022, will be transformational for our Power business unit providing a production facility in the USA. This clearly presents a very exciting opportunity for the Group in the power sector which is the area of the business which has the highest growth potential. The Group has achieved high order intake in Q1 2022/23 across its diverse sector exposure. The strong open order book provides opportunities for significant growth in the current year, albeit this is expected to be influenced by component lead times. Presently the timing of supplies and programmes remains somewhat difficult to predict. The group has seen a strong start to the year with Q1 billings up 31% on a like for like basis with margins comparable with FY22. This excellent start, combined with the Group’s strong financial footing, technology, capabilities, engineering specialisms, and its sector penetration in areas which are political priorities, for example in defence, transportation and medical, mean the Board is confident that the Group is well placed to deliver continued growth. N Rogers Chairman 27 July 2022 5 STRATEGIC REPORT Introduction to Solid State PLC The Group supplies electronic products, technology, and solutions, primarily designed for demanding applications where safety, performance, reliability, and quality are critical; enabling customers to focus on their core business with confidence by delivering trusted technology for demanding environments. Our Purpose – Why we do what we do! To establish our position as an international leader in providing sustainably engineered electronics technology systems and components enabling our stakeholders to realise value, maximise efficiencies, and reduce waste. Solid State’s mission and strategy to deliver growth Our Strategy – What we are doing The Group’s stated strategy to deliver on our purpose and mission has four key elements: 6 STRATEGIC REPORT (continued) The Group is focused on the design-in, supply and support of sustainably engineered, specialist electronics equipment and solutions from components, sub-assemblies, products, and embedded systems, through to complete integrated electronic solutions. The market for the Group’s products and services is driven by the need for bespoke specialist electronic solutions to address complex needs, typically in harsh environments where enhanced durability and resistance to extremes of humidity, temperature, pressure, vibration, and wind is vital. Long life expectancy is built into our products regardless of application. A key part of the Group’s offering is its industry leading workforce. To ensure the Group builds on this, it invests significantly in the development of its technical staff and other professional personnel, through a combination of internal and external training and development programmes to ensure they remain as industry experts at the forefront of their respective technology areas. Furthermore, the Group is constantly looking to broaden its talent pool through recruitment. The Group’s organic growth strategy is based on targeting the structural growth markets of security & defence, medical, greentech, transport, energy, and industrial where there is significant Government and industry investment in technology aligned to the Group’s strengths. In implementing this strategy, the Group will continue to focus on retaining its diverse, customer and sector exposure ensuring Solid State maintains the resilience it has benefited from in recent times. The Group actively targets markets with high barriers to entry, requiring accreditations, long standing reputations and specialist test and measurement capabilities. This enables the business to differentiate its offering, develop long term symbiotic customer relationships where premium products and services are valued and reflected in the margins. The Group continues to invest in enhancing the range and scope of its accreditations. It holds multiple accreditations covering health and safety, environmental, international aerospace standards, ATEX (controlling explosive atmospheres) and others. Where required, facilities and personnel are security cleared to allow secure Government work to be conducted. The Group has industry leading test & measurement and assembly capabilities, including a Class 7 clean room assembly facility, environmental and vibration testing capabilities, and a world class near-field RF test chamber. In the current year, the Group has continued to make significant investments to further enhance its manufacturing and assembly capabilities with new wire bonding technology and an EMC chamber commissioned during first quarter. These facilities, combined with the technical and engineering expertise, mean the Group has a differentiated offering, providing class leading capabilities which are utilised across Solid State. Solid State PLC operating structure Note: Custom Power acquisition is subject to shareholder approval on 29 July 2022 The Group has two operating Divisions, Components and Systems (previously Value Added Supplies and Manufacturing), with a shared mission, strategy and consistent business values. The illustration above shows the product focus areas. The Group’s principal operations are based in the UK with its head office in Redditch, where component supplies warehousing and computing product manufacturing are located. The Group’s Power business unit (BU) battery pack manufacturing centre of excellence is in Crewkerne, Somerset, with Leominster in Herefordshire housing the bulk of the Group’s Communications BU. 7 STRATEGIC REPORT (continued) The recent acquisitions have added industry leading opto-electronic assembly capabilities in Weymouth, computing board level design and and production administration offices near to London Heathrow and Gatwick, respectively. component sales and The 2020/21 Willow and Active Silicon acquisitions provided a more established sales function in the USA as well as a significant freehold R&D and manufacturing facility for key electromechanical products in Elkhart Indiana. Components The Components Division primarily supplies designed-in products and solutions at the component and sub assembly level. It is a market leader in delivering innovative, designed-in technical solutions for customers. The Division serves the needs of the original equipment manufacturing (“OEM”) and the contract electronics manufacturing (“CEM”) communities, principally in the UK. The appointment of several new third party representative companies in the USA will be used to continue to accelerate the development of its international sales channels. Components represents a select number of Franchised suppliers who manufacture semiconductors, related electronic and opto-electronic components, modules, sensors, switches and displays as well as more recently developing a portfolio of own brand components with the acquisitions of Pacer (opto-electronic components) and Willow (electromechanical components). The team’s depth of understanding of these products and components enables the Group to offer outstanding levels of commercial and “added value” technical support to its customers. The products and components supplied are from globally recognised manufacturers and include those for 5G and the Internet of Things (“IoT”), embedded processing, control, wireless and wired communications, electromechanical, power management, optical emitters, and sensors, displays and LED lighting. Systems Operating with three principal business units (“BUs”), computing, power and communications, the Systems Division is a market leader with capabilities extending from the supply of simple electronics technology products and systems to the delivery of turnkey integrated solutions with significant engineering-based value-added content. Capabilities encompass design, production, testing, commissioning, training and through life support. The Division manufactures high specification industrial computers, sophisticated custom battery packs and advanced communication systems, including specialist antennas and high-performance video transmission products. Latterly the acquisition of Active Silicon has enhanced the Division’s computing offering to include board level design and manufacturing capabilities primarily for image capture, processing, and transmission. It is the technical knowhow, design skills, production and testing resources, product quality and customer service levels, combined with over 30 years of experience of supplying products into the most demanding of environments, that provides significant differentiation from the Group’s competitors across the three BUs. Consistent with the Components Division, the strong and established partnerships with key suppliers in Asia and the USA are critical (including industry leading technology partners) and include Nvidia, IEI, Intel, Innodisk, Molicel Panasonic, LG, Cisco and Persistent Systems. Competitive Advantage The Group is the subject matter expert for its customers, with deep industry knowledge and longstanding key supplier relationships. In designing-in solutions to address the customer needs, the Group selects the most appropriate component, module, computing technology, battery chemistry, or communications solution to ensure Solid State is a trusted partner. The Group constantly seeks to add value for its customers, who are typically looking to embrace the adoption of the enabling technologies where Solid State has industry leading component and manufacturing expertise, such as electronic and optoelectronic component design-in, image processing, Artificial Intelligence (“AI”), IoT, fossil fuel replacement, switching, cordless & portable power, and leading-edge communications / antenna solutions. 8 Chief Executive’s Review STRATEGIC REPORT (continued) Given the macro-economic backdrop, with the component supply shortages, Brexit and latterly inflationary pressures and volatile exchange rates, this reporting period again served up some of the most challenging business conditions in our history. As a result, I am very pleased to report 29.1% growth in adjusted diluted earnings per share over the prior year’s record result and a significant step change in revenue year on year at £85.0m (2021: £66.3m). The Group benefitted from the first full year of the two acquisitions and a few pull ins of demand at the end of the year where our team’s supplier relationships secured product pre year end, meaning we were able to fulfil some of the strong customer demand. The Group has a record open order book which, combined with our inventory management plan, positions Solid State to proactively manage the well-publicised electronics supply chain issues with our customers. Despite these ongoing challenges, the Group has been able to make considerable strides in delivering its growth strategy in the current year. Solid State reports a strong year-end balance sheet with net assets of £27.1m and net cash at the bank of £1.4m. The balance sheet strength has meant we have been able to proactively invest in inventories, which has been a critical factor in enabling the Group to provide the differentiated customer service which is core to our success. Furthermore, this strength means the Group is well placed to continue to gain a competitive advantage when managing the challenging market conditions which are expected to continue through 2022 and into 2023. On 12 July 2022, the Group announced its intention to acquire Custom Power, a battery pack manufacturing business based in California USA, for a total consideration of up to $45.0m subject to achieving an earn out hurdle. The acquisition is expected to complete in early August following the general meeting on 29 July 2022 to approve the transaction. Full details of the transaction have been provided to shareholders within the circular which was posted on the 13 July 2022. This acquisition will be transformational for our Power business unit, enabling the Group to meet the increasing demand from its blue-chip tier one customers to provide power solutions on a transatlantic basis. Custom Power is a profitable and cash generative battery pack manufacturer. Like our business, they are engineering led and target markets with high barriers to entry where the engineering expertise is valued, and the production horizons are longer. As reported previously in the circular issued to shareholders, Custom Power delivered record proforma results in the year ended 31 December 2021 with revenue of approximately $29.8m, EBITDA of $3.5m and proforma net profit of $2.5m (reported net profit $1.9m). Building on last year’s record performance, we look forward to delivering further strategic progress and this acquisition is a critical building block for the Group in the execution of its strategy. The scale and broader portfolio of products now offered by the Group’s Components Division, has enabled like for like Components’ revenues to grow 11% year on year to £52.5m. Furthermore, the Systems Division also saw like for like revenue growth at 4% at £32.5m but most pleasing was the significant improvement in adjusted systems gross margins to 42.0% from 38.7%. Key stakeholder engagement Solid State’s pro-active approach to managing both customer and supplier stakeholders during the year has been recognised positively with many providing positive feedback about how the Group has supported their businesses in these very difficult times. This is evidenced by the Group being awarded the British Aerospace Supply to Win Gold award and several supplier awards recognising the Group’s value to their businesses. Throughout the pandemic and component supply challenges the business worked hard to ensure that it maintained timely and relevant communication and engagement with all stakeholders. The teamwork, support, and commitment from and by the staff has been a real success factor. The workforce has recognised and valued the investment in enhancing the Group’s staff welfare programmes to provide both physical and mental health support, resources and benefits which are available to all employees. The Group continues to recognise the value of, and invest in, its staff with various ongoing professional development initiatives. This is critical to the Group continuing to both retain and attract exceptionally high calibre staff which is necessary to maintain its market position and retain its trusted business partner relationships. We have continued to develop the Group’s staff and communities’ engagement activities; highlights in the year being a new initiative to support local food banks near each of our UK facilities; sponsoring a room at a local YMCA to provide safe accommodation for young people in our community and repeating the Solid State charity walk. In support of all our employees, at the year end the Group committed to paying an energy grant in the autumn of 2022 to help our colleagues with managing the very significant increase in the cost of living and energy costs ahead of the winter. 9 STRATEGIC REPORT (continued) Delivery of the strategy In FY21/22 Solid State has continued to execute on its strategy, delivering improved financial performance with important strategic steps being taken across both operating divisions. Internationalise the business In developing our international sales channels, the acquisitions of both Active Silicon and Willow have accelerated our overseas sales. During the year within our Components Division we have added resources into our USA and UK sales force which, in conjunction with adding several third-party representative companies in the USA, provides a foundation for growth in sales which is starting to be translated into orders reflected in our record order book. Post year end, the expected acquisition of Custom Power as part of our Systems Division, provides a step change for this division to penetrate the US power market. Investment in and enhancement of our talent During the year we have made significant strides in developing the senior management team, which has benefitted from the acquisitions of Willow and Active Silicon, both of which had a strong and talented work force which have been additive to the Group. The integration of our new colleagues from the acquisitions has been very positive, providing additional depth in talent and resource across our business. We have strengthened the USA component manufacturing facility (“AEC”) leadership team by appointing a general manager, and bolstering the local engineering and sales resource, to accelerate the development of our own brand electromechanical product range. Furthermore, we have invested in our sourcing team where, because of the semiconductor shortages, we have seen very significant demand for the expertise this team offers. This has translated into significant new revenue opportunities for our design-in Components Division. Within our Systems Division, the divisional MD has established an integrated functional leadership team to drive this division forward which has benefitted from the additional HR resource and talent who joined the Group as part of the Active Silicon acquisition. Post year end, the acquisition of Custom Power will add battery industry expertise and talent. Custom Power has a particularly strong complimentary engineering capability which will help to differentiate the Group’s power offering. Develop our portfolio of own brand products and complementary 3rd Party products Our Components Division has continued to develop its portfolio of franchise manufacturers in the period, taking on the ASUS industrial computing component line which provides IoT platforms, enhancing our portfolio of industrial computing components. During this period of shortages in the electronics sector, our breadth of components has enabled us to support customers in designing-in and supplying second sources for many components, providing customers with some resilience. This work adds value and provides new opportunities for the Group. The Group continues to invest in R&D projects to develop our portfolio of own brand products and components. The Computing business unit has extended our own brand fanless computing offering to include a low magnetic signature computing product which is increasingly important for defence applications, including those with demanding EMC requirements. In addition, we have seen our TEMPEST accredited security product portfolio become market ready, which includes the Group’s keyboard video mouse (“KVM”) product and high-attenuation-smart-enclosure HASE units. In the Communications business unit, the development of the standard and semi-custom antenna portfolio (horns, spirals and sinuous antennas) has delivered a stable platform of run rate business which is enabling longer term and larger programmes to be targeted to provide sustainable organic growth. Within our Power business unit, we are keeping pace with the emerging battery chemistries and technology being driven by the automotive sector. We remain a subject matter expert, offering our customers the most appropriate chemistry for their given application. The development of our scalable and flexible modular pack solutions continues to progress positively, albeit COVID-19 and supply chain challenges have meant the progress has been hindered somewhat.. These products are applicable to multiple high growth, un-commoditised industrial markets that are adopting either a low carbon power source, cordless solutions and next generation autonomous technologies. 10 STRATEGIC REPORT (continued) Broaden our technical manufacturing expertise / technology portfolio / designed in product base The Group has made significant investments to further enhance its manufacturing and assembly capabilities with new automated die bonding capabilities, state of the art spectrum analysis equipment, and an in-house electromagnetic compatibility (“EMC”) chamber which was commissioned during first quarter of FY21/22. The EMC chamber now gives us the ability to complete pre-compliance EMC testing in-house. These facilities, combined with technical and engineering expertise, mean the Group has a differentiated offering, providing class leading manufacture, test and measurement capabilities that are utilised across the Group. Further investments are planned to encompass pre compliance TEMPEST test capabilities. The Group also upgraded its environmental chamber to enable Solid State to conduct pre-compliance testing of its products to aerospace standards. Post year end, the Power business unit commissioned its first wire bonder to enable semi automation of battery pack manufacturing, which is proving to be a point of differentiation with our customers, and we have already seen significant interest arising from new and existing prestigious customers looking to benefit from this technology on their new projects. Furthermore, this is a capability we will look to roll out to Custom Power once the transaction is complete. In addition to the investment in manufacturing equipment, we continue to enhance our capabilities and accreditations such as ATEX and our certification to build battery packs that are used in explosive atmospheres. Pleasingly, we are seeing growth in this particular specialist capability. The strength of the Group Cross-Group collaboration has been a key strategic focus to ensure the business maximises the commercial value of its extensive customer relationships. The Group wide “Senior Leadership team” which was formalised last year in conjunction with the implementation of a Company Share Option Plan (“CSOP”) aligns the incentives of those individuals with Group performance. This approach has changed the level of engagement and aligned behaviours and the benefits are continuing to be seen with a further step change in cross-Group engagement and collaboration. The acquisitions of Active Silicon and Willow provided additional breadth and depth to the Group’s product and technology offering. In addition, the enlarged Group’s active customer base now exceeds 2,000, presenting significant opportunities to sell more of the broadened product range to the enlarged customer base. Managing and mitigating risk The business risks have been considered and, where practical, mitigated. However, the macro-economic and geopolitical risks including conflict in Ukraine, the aftereffects of COVID-19, electronic component shortages, uncertainty in international trading relationships and the associated impact on foreign exchange, means that it continues to be difficult to predict supply and demand and therefore mitigate fully. Component lead-times remain at unprecedented lengths of over 40 weeks for many critical components, such as semiconductors, computer processors, PCBs, some embedded processing modules, and battery cells. The Group has continued to deliberately increase the working capital investment in inventory to attempt to secure future supply. The lengthening order book coverage means that scheduled orders as at 30 June 2022 go beyond the end of FY25; FY23 (69%), FY24 (21%) and FY25 and beyond (10%). The Group’s diversity in suppliers, technology, markets, and territory is a key strength. It provides resilience and some mitigation against global headwinds and has enabled Solid State to deliver record results. Looking forward to the current year, we continue to believe that this diversity positions the Group well to weather the impact of any ongoing supply chain issues and take advantage of new opportunities. 11 STRATEGIC REPORT (continued) Principal risks and uncertainties The Group has a process for the identification and management of risk as part of the governance structure operated by the Board. Management of risk is the responsibility of the Board of Directors. In managing and mitigating risk, a comprehensive and robust system of controls and risk management processes has been developed and implemented by the Board. The Board’s role in risk management includes: • • • • • • promoting a culture that emphasises integrity at all levels in the business; embedding risk management within the core processes of the business; setting the appetite for risk; determining the principal risks; ensuring that these are communicated effectively to the businesses; and, setting the overall policies for risk management and control. The principal risks affecting the Group are identified by the Group Executive team within their functional areas of responsibility and are reviewed by the Board. In identifying the business risks below, the Group analyses risks across four key areas: • • • • strategic risk; operational risk; commercial risk; and, financial risk. The assessment of the potential impact is the pre-mitigation assessment and the year on year change reflects the change in likelihood of the risk having a significant impact on the business. Principal risks and uncertainties Acquisition risk – (Strategic risk) Business risk • • • • Loss of key customers. Loss of key employees. Loss of key suppliers. Erosion of Intellectual property base. Failure to identify and complete profitable acquisitions. Failure to mitigate FX risk arising due to international acquisitions. Failure to integrate management reporting structures and control disciplines. • • • Mitigation and Strategy After successful completion of two acquisitions in the previous financial year, the Group expects to complete on another transaction in Q2 of FY23. In managing these deals the following process was adopted: • Rigorous due diligence to ensure that acquisitions can be effectively integrated, and all the relevant stakeholders are engaged, supportive and aligned. Pro-active and early engagement with: o key customers and suppliers; and, o employees through the on-site presence of Solid State PLC management. Preparation and execution of a cross functional integration plan. Continued investment in development of technology in the acquired businesses. Integration into existing internal control frameworks, processes and reporting systems. • • • • Year on year change in likelihood: Potential impact: Medium Effect: Integration of acquired business is not effective 12 STRATEGIC REPORT (continued) Principal risks and uncertainties Legislative environment and compliance – (Strategic risk) Business risk • Mitigation and Strategy • Conflict in Ukraine, the enduring effects of Covid-19, Brexit and global trade restrictions have caused an increased level of complexity in the legislative and trading environment in which the Group operates. • • Overseas competitors are favoured in their domestic markets. Failure to comply with applicable legislation, to include but not limited to: o Export Control and • International Traffic in Arms Regulations (ITAR); o Bribery Act; o General Data Protection Regulation (GDPR); and, o Employment legislation and company legislation. Year on year change in likelihood: Potential impact: Medium Effect: Trading may be disrupted / restricted, reduced sales volumes and profitability. Solid State PLC has continued to trade while being compliant with the government’s COVID-19 restrictions. The business operates across seven independent operational sites, which have remained operational and adhered to best practice social distancing and hygiene protocols. The Group has invested in technology and equipment to ensure that staff who can work from home do so when appropriate. Post Brexit international trading has become more challenging with a significant increase in the administrative burden. The Group’s international exposure is increasing as it delivers on the strategy of growing international sales. As such the Group continues to consider establishing a mainland EU operation to support the Group’s international growth ambitions. The Board believes that the Group’s size and diversified structure gives it resilience, and places it in a far stronger position than smaller competitors within the customers’ supply chains. • • Regular reporting of export / ITAR compliance, and detailed internal control processes and procedures. Continuing education of the Group’s employees on the legislative developments and requirements. Internal reviews and external audits. • • Adopt suitable software systems where appropriate to aid export control procedures and assist with other compliance issues. The individual operating companies maintain operating procedures and are certified to internationally recognised standards, e.g. ISO 9001-2015, AS9100, AS9120, SC21. • 13 STRATEGIC REPORT (continued) Principal risks and uncertainties Supply chain interruption and cost inflation – (Operational risk) Business risk • Mitigation and Strategy • Active programme to maintain cross qualified second The ongoing significant electronics supply chain challenges (caused by demand outstripping supply) resulting in long lead times and Industry wide component shortages. • Dependency on significant suppliers or dependency on a qualified supplier within a controlled supply chain. • Risk of actual customer demand falling short of open orders recorded as a consequence of double- ordering, over ordering, inability to obtain other necessary components and subsequent cancellation or re-scheduling. • Risk of suppliers increasing component costs as a pre- requisite to delivery placing margins at risk. sources of supply. • Rigorous supplier quality management processes. • Maintain close relationships with key suppliers to be • aware of potential supply issues. Place scheduled orders and hold buffer stock to minimise the effects of extended lead times. • • Requiring customers to place orders on non-cancellable terms, and in some cases requiring cash deposits in advance providing milestone payments Close monitoring of gross margins and supply chain cost escalation, with back-to-back pricing adjustments with customers. The mitigation and strategy meant that through FY20/21 and FY21/22 the Group has been able to manage the disruption and extended lead times with limited impact. However, if the disruption continues or worsens the Group may see delays in projects / programmes in the current and subsequent years. • Retention of key employees – (Operational risk) Business risk • Loss of key people and critical skills. Insufficient skilled employees Poor engagement and morale. • • Mitigation and Strategy • Retention & development of talent is critical to the long • • • • • • term success of the Group. Senior HR resource has been added to the team during the FY21/22 year. Reviewing and refining contracts of employment and conditions for best practice. Low staff turnover, many employees having been with the Group for more than ten years. The Group encourages and invests in CPD and training in core skills and competencies as appropriate. The Group pro-actively looks to develop its own talent and will be making further use of the government apprenticeship schemes. The Group pro-actively communicates with its employees. The Group reviews & benchmarks employee rewards to ensure the Group is fairly rewarding its employees. • Active review of succession planning. • Investigation and sourcing of upgraded HR system to streamline people management processes. 14 Year on year change in likelihood: Potential impact: High Effect: Quality issues, costs, sales volumes and profitability Year on year change in likelihood: Potential impact: Medium Effect: Quality and or service level issues rise, and costs increased STRATEGIC REPORT (continued) Principal risks and uncertainties Failure of or malicious damage to IT systems – (Operational risk) Business risk • Mitigation and Strategy • • The inability to access business critical data. The inability to efficiently run the operating companies. • The existing systems are reliable and functional. The Group has started to upgrade & standardise systems where appropriate providing improved functionality and support the development of the business. Certified as meeting the “Cyber Essentials” standards and post period our Systems Division achieved “Cyber Essentials Plus” status. Also considering “IASME” where appropriate. • • Where businesses are acquired, the Group implement the “Cyber Essentials” standards as a key priority if they do not already meet this standard and “Cyber Essentials Plus / IASME” in due course. • Automated daily back-ups of all business critical data. • Operates off site storage of business critical data. • Has established, documented, and tested disaster recovery plans. Natural disasters – (Operational risk) Business risk • Natural disaster or medical epidemic / pandemic disrupts production capability, supply of materials or customer demand. • Mitigation and Strategy • The Group has a documented disaster recovery plan for each site. In addition, the Group has business interruption insurance, which subject to the terms of the cover purchased providing some insurance mitigation. The Group has documented COVID-19 protocols to mitigate the impact of any further variants. Competition risk – (Commercial risk) Business risk • Loss of distribution supplier franchise agreement would result in significant loss of product lines and customers. Loss of a major contract / customer or business to a competitor. Price / margin erosion due to predatory pricing from a competitor. • • Setting a commercial strategy to gain share by: Focusing on quality, value and customer service; Mitigation and Strategy • o o Develop and maintain close relationships with suppliers and customers to become the “partner of choice”, by forming multi-level partnerships; o As a trusted partner providing product solutions from design, to pilot & volume production; and, o Winning additional business from existing customers and capturing new customers and revenue streams. Continue to invest in product development to ensure competitive advantage. Continued investment in the recruitment of high quality personnel. • • 15 Year on year change in likelihood: Potential impact: Medium Effect: Costs, sales, profitability and reputational damage Year on year change in likelihood: Potential impact: Low Effect: Trading may be disrupted, reduced sales volumes and profitability Year on year change in likelihood: Potential impact: High Effect: Loss of market share, reduced sales volumes and profitability Year on year change in likelihood: Potential impact: Medium Effect: Sales volumes and profitability Year on year change in likelihood: Potential impact: High Effect: Going concern / Financial loss and reputational damage STRATEGIC REPORT (continued) Principal risks and uncertainties Product / Technology change – (Commercial risk) Business risk • Mitigation and Strategy • Failure to maintain the Group’s leading technical capabilities and knowledge which allows us to develop electronic solutions in partnership with the Group’s customers. Failure to manufacture solutions that meet the agreed specification. Failure of key distribution franchises to innovate and introduce new products. Continued investment in the technical training and development of sales, engineering and operations staff, building their capabilities. Investment in joint R&D programmes with partners to ensure the Group is at the forefront of technical electronic solutions. • • Maintain rigorous quality and engineering control processes to ensure that the Group’s products meet the required specifications. Perform all necessary detailed product testing to ensure that products are fit for purpose. Continuously seek new franchises, suppliers and partners at the forefront of electronics technology. • • Forecasting and financial liquidity – (Financial risk) Business risk • Mitigation and Strategy • • • • The business does not maintain sufficient funding and liquidity to meet its obligations as they fall due. The business commits to a materially significant loss making contract. The Group prepares financial forecasts to evaluate the level of funding required for the foreseeable future. These forecasts are reviewed and approved by the Board. Extensive disclosure has been provided in respect of going concern and longer-term viability (see page 39, 40 76 and 77). • • Based on these forecasts appropriate funding and liquidity solutions are put in place to ensure that adequate headroom is maintained. • At the year-end 31 March 2022, the Group had a revolving credit facility of £7.5m (£6.0m undrawn) and net cash (excluding deferred consideration and lease obligations) of £1.42m (2021: £3.18m). Subsequent to year-end, to finance the expected acquisition of Custom Power, the Group has completed an equity raise of up to £28.4m (assuming full subscription under the open offer, the issue of the maximum number of subscription shares and subject to shareholder approval) and entered in to two new term loan facilities with Lloyds; a £6.5m five year amortising term loan at 2.85% and a second £6.5m three year interest only term loan at 2.95%. The Group has a defined delegation of authority matrix and contract risk register. The Group ensures sufficient funding is in place prior to completion of acquisitions. • • • 16 STRATEGIC REPORT (continued) Chief Financial Officer’s Review To provide a fuller understanding of the Group’s ongoing adjusted performance, several adjusted profit measures as supplementary information are included on a consistent basis with that reported by the financial analysts that review our business. As detailed in note 31, the adjusted measures eliminate the impact of certain non-cash charges and non-recurring items together with the associated tax impact. Revenues Group revenues of £85.0m (2021: £66.3m) reflect the inclusion of a full 12 months of revenue from the two acquisitions made at the end of financial year 20/21, both of which outperformed management expectations. Like-for-like revenue (based on proforma 2021: £81.3m) was £3.7m (4.6%) ahead of prior year. This is an excellent result in the ongoing context of well-publicised supply challenges as well as circa 5% foreign exchange headwinds with the average US dollar rate moving from circa 1.30 in FY21 to 1.37 during FY22, which suppressed the revenue growth. The UK electronics distribution and semiconductor components industry expected growth of around 2.7% in the period while noting the absence of clear guidance from customers (source ECSN). The Components Division achieved revenues of £52.5m (2021: £39.0m) including the Willow acquisition, with like-for-like revenues exceeding expectations up 11.5% on the prior year at £52.5m (2021 proforma: £47.1m). The Systems Division reported revenue of £32.5m (2021: £27.3m), with like-for-like revenue up £1.1m (3.5%) to £32.5m (2021 proforma: £31.4m) against a very challenging macro-economic backdrop. Supply chain pressures, including component availability, and the requirement for board and system redesigns as a result, have caused project delays. The two acquisitions considerably outperformed initial expectations contributing significantly to the overall Group result. The acquired businesses saw significant benefit from being part of the enlarged Group, driving considerable organic growth. Willow had an excellent year with like for like revenues increasing by 26% to £11.5m (2021: £9.1m). Similarly, Active Silicon saw like for like revenues increase 45% to £6.4m (2021: £4.4m), reflecting a strong recovery from the adverse impact of COVID-19 in the comparative period. Gross profit Reported gross margins of £27.5m (2021: £19.9m) are up £7.6m. There was an adverse impact of acquisition accounting charges in both years which have been excluded in the adjusted gross margins (see note 31). Adjusted gross profit for the year is up £7.7m to £27.7m (2021: £20.0m). The Group’s adjusted gross margin has increased to 32.6% (2021: 30.2%) reflecting increased margins in both Divisions, Components seeing a 2.5% increase and Systems a 3.5% increase. In managing forex we look to mitigate the profit impact by quoting in currency of main supply when possible. The improvement in the reported margin percentage is in part driven by the dollar exchange rate movements as result of the Group benefitting from being largely naturally hedged against foreign exchange movements at a gross margin level. The acquisitions of Active Silicon and Willow have improved the margins of their respective Divisions as they have a higher proportion of own brand manufactured products and components, which command stronger margins. Components contributed adjusted gross margin of £14.0m (2021: £9.4m) and the Systems Division contributed £13.7m (2021: £10.6m). 17 STRATEGIC REPORT (continued) Sales, general and administration expenses Sales, general and administration (“SG&A”) expenses increased to £23.8m (2021: £15.6m), with the acquisitions adding approximately £4.1m to base overheads. The increase is partially driven by a resumption of business activities such as travel, marketing, and events with the easing COVID-19 restrictions. In addition, in recognition of this record performance there was further investment in our team to attract new, and retain our existing, talent as we look to enhance our technical expertise and drive continued growth. Post COVID-19 there was no significant grant income in 2022 (2021: £0.3m). Furthermore, there were non-recurring expenses within SG&A, being a £1.7m increase in the Active Silicon earn-out provision and £0.5m in relation to acquisition costs. Other exclusions from adjusted profit measures, consistent with previous years, include acquisition intangibles amortisation of £1.0m (2021: £0.7m) and the share-based payments charge of £0.3m (2021: £0.2m). Adjusted SG&A expenses increased by £5.8m to £20.3m (2021: £14.5m) reflecting the addition of the acquisitions to base costs and the decision to resume spending on controllable costs which were restricted in the COVID-19 period. Operating profit Adjusted operating margins increased to 8.7% (2021: 8.3%) with adjusted operating profit up to £7.4m (2021: £5.5m) reflecting stronger margins and contribution from acquisitions. Reported operating profit was down 14% to £3.7m (2021: £4.3m) primarily because of the increase in acquisition related accounting charges. The adjustments to operating profit are set out in further detail in note 31. We have recognised £0.01m (2021: £0.01m) within operating profit in respect of research and development expenditure credit (“RDEC”) in addition to the tax credits recognised within the tax line, where we are eligible for the SME R&D tax scheme. These development programmes are a cornerstone of the Group’s future high value add revenue streams. 18 STRATEGIC REPORT (continued) Profit before tax Adjusted profit before tax was up 33.2% to £7.2m (2021: £5.4m). Reported profit before tax was down 16.7% to £3.5m (2021: £4.2m). This is reported after a share-based payments charge of £0.3m (2021: £0.2m), amortisation of acquisition intangibles of £1.0m (2021: £0.7m) and non-recurring charges of £2.4m (2021: £0.3m). The £2.4m non recurring charges include a £1.7m increase in the deferred contingent consideration, £0.5m of transaction costs in relation to the planned acquisition of Custom Power and £0.2m of fair value acquisition accounting charges in relation to Willow. Profit after tax The Group benefits from the R&D tax credit scheme which reduces the underlying effective tax rate for the year to 14% (2021: 12%) from the standard rate of 19%. As the Group grows and profitability increases the benefit of R&D tax credits will diminish, furthermore once the Group exceeds the SME thresholds and is no longer eligible for the SME scheme, there will be a step up in effective tax rate as the SME scheme is much more generous that the large company scheme. Adjusted profit after tax was up 30.1% to £6.2m (2021: £4.7m). Reported profit after tax was down 37.5% to £2.5m (2021: £4.0m), as we recognised the impact of the expected future tax rate change from 19% to 25%, and did not have the benefit of the non-recurring R&D tax credits recognised in 2021, in addition to the non-recurring charges as noted above. EPS Adjusted fully diluted earnings per share for the year ended 31 March 2022 is up 29.1% to 70.6p (2021: 54.7p). Reported fully diluted earnings per share is down 36.8% to 28.9p (2021: 45.7p). Dividend The Board is proposing a final dividend of 13.25p (2021: 10.75p), giving a full year dividend of 19.50p (2021: 16.0p) as set out in the Chairman’s statement on page 5. Cash flow from operations Cash inflow from operations for the year of £6.0m is down from £6.9m in 2021, primarily due to our investment in inventories, resulting in a working capital outflow of £2.5m (2021: £0.4m inflow). This delivers an adjusted operating cash conversion percentage of 81% (2021: 127%) and a reported operating cash conversion percentage of 161% (2021: 162%). The working capital cash outflow in the period of £2.5m is driven by an increase in receivables of £3.7m and inventories of £6.9m offset in part by an increase in payables of £8.1m. The increase in inventories reflects our strategic investment in product to support our significant increase in customer orders. The strength of customer and supplier relationships has helped us to manage the cash challenges of the working capital investment effectively. This investment to secure product has provided us with a competitive advantage and is critical in these times of shortages to ensure product is available to fulfil customer demand. Investing activities During the year, the Group invested £1.1m (2021: £0.4m) in property plant and equipment, and £0.6m (2021: £0.3m) in software and research & development intangibles. The Group’s capital expenditure programme saw the installation of the new EMC test and measurement capability completed. In addition, investment in a wire bonder and improved battery test equipment will deliver a step change in technology for the Power business unit in Systems. 19 STRATEGIC REPORT (continued) Investing activities – cont’ In the Components Division, there was investment into the Willow sites and further replacement of older vehicles with hybrid and electric models. There are capital commitments of £0.3m (2021: £0.4m) at the balance sheet date, primarily relating to planned upgrades to existing IT systems. During the year payments in respect of the acquisitions of Active Silicon and Willow totalled £2.6m (2021: £4.1m). Furthermore, at year end we have reassessed and increased the Active Silicon deferred contingent consideration by £1.7m to take the total to £6.6m (2021: £7.5m). A reconciliation of deferred contingent considerations is included in Note 21. Financing activities The Group has entered or extended leases during the year which has resulted in the recognition of £0.3m of additional right of use assets with a corresponding right of use liability, in accordance with IFRS16. Cash payments were made in the period in respect of lease liabilities of £0.9m (2021: £0.6m). Two properties were exited in the period, with Willow inventory moved to the Redditch location to rationalise activities. The financing activities reflect a part repayment of the revolving credit facility (RCF) of £2.25m where the £3.75m drawdown in 2021 was used to fund the acquisition of Willow and Active Silicon at the end of the last year. Solid State continues to have a strong relationship with Lloyds Bank and Lloyds has extended the term of the £7.5m (2021: £7.5m) revolving credit facility which is now committed until 30 November 2023. At 31 March 2022 £1.5m of the facility was drawn. The Group has deferred contingent consideration liabilities where, at 31 March 2022, the fair value has been estimated to be £6.6m, of which £4.6m was paid in Q1 2022/23. The Group utilised the RCF facility to fund the final £3.5m deferred consideration payment for Willow and initial £1.1m payment for Active Silicon. Subject to Active Silicon meeting the year two earn out performance target, it is expected that a final payment of approximately £2.0m will be payable in Q1 2023/24. The Group paid out £1.5m (2021: £1.2m) in respect of dividends and purchase of own shares. Statement of financial position During the year, the Group has continued to strengthen its balance sheet position. The Group’s net assets have increased to £27.1m (2021: £25.5m) reflecting the retained profits in the year. Excluding deferred contingent considerations and IFRS16 lease obligations, the Group had a net cash position of £1.4m at the year-end (2021: £3.2m) having paid a further £2.6m consideration for the acquisitions of Active Silicon and Willow. As a result of the unprecedented supply chain challenges, the Group has increased the working capital investment in inventory by £6.9m. Securing the supply of critical components is essential to enable the delivery of customer demand in the next financial year. The Group has also paid suppliers on a proforma basis where required to secure inventory in short supply (now often on lead times of six months or more). We have worked in partnership with customers who have, in many cases, made payments in advance to secure supply, and this has been a critical part of managing working capital. KPIs In addition to the KPI information provided in the Chairman’s Report and this Strategic Report, the Directors use several key performance indicators to manage the business, disclosed in the financial review on pages 17 to 20. Non-financial KPIs are not disclosed other than in the environmental CO2e reporting on page 24. Companies Act Section 172 requirements and disclosures Disclosure of how the Group complies with the section 172 requirements are included on page 30. 20 STRATEGIC REPORT (continued) Outlook The recovery of sectors which were adversely impacted by COVID-19, such as oil & gas and commercial aviation, has progressed. Engineering work undertaken during the pandemic particularly in the Power business unit of the Systems Division is now converting to production orders. The Group continues to see demand in these core areas, whilst also developing its presence in new and emerging growth markets. Two of the key technology areas where the Company expects to see significant growth in demand; are first in image capture, processing, and transmission, driven by increased adoption of industrial AI and the roll out of 5G; and secondly power control and switching driven by the need to reduce carbon emissions and development of the EV (Electric Vehicle) market. The Group’s acquisitions of Willow and Active Silicon have enabled Solid State to strengthen its position in these sectors, with the opportunities to further penetrate these markets and so gain market share. The Group has a strong and long established position in the security and defence sector. As a result of geo-political uncertainties this market is seeing significant investment in technology where the Group is well placed to deliver. Furthermore, the shift by prime contractors following the pandemic away from globalised supply chains to buying more of their vital electronics and services closer to home continues to be positive for Solid State. On the 12 July 2022, Solid State PLC announced the planned acquisition of Custom Power, which is expected to be transformational for the Power business unit, providing a step change in the Group’s power capabilities giving this business unit scale. The Group is actively developing its pipeline of future acquisition opportunities albeit these are at an early stage. These opportunities are primarily focused on broadening the Group’s product offering and further strengthening its international sales channels. The Company will remain agile, continuing to look to be opportunistic should a strategically aligned acquisition target arise. Margin improvement, in conjunction with technology developments both from internal R&D and acquisitions across both Divisions has placed the Group in a strong position. The Group will remain focused on cross Group collaboration initiatives to drive organic growth. The technologies added through recent acquisitions further add scale and capability which the Group can provide to the enlarged customer base. During the financial year Solid State has seen record order intake, increasing the open order book 107% to £85.5m at 31 March 2022 from £41.3m at 31 March 2021. Positively, post year-end the Group has continued to drive order intake increasing the open order book at 30 June 2022 to £92.0m up 7.6% from 31 March 2022. This provides confidence over customer demand for the coming year. As Solid State looks forward to FY22/23, the continuing well-publicised supply chain issues within the electronics and particularly semiconductor sector mean the inconsistencies in the traditional supply and order fulfilment balance remain. The strength of the Group’s balance sheet means it is better placed to manage the working capital demands than some of its smaller competitors, which is presenting new customer opportunities. Pleasingly, the collaboration with customers and suppliers to secure product which began in the late summer of 2020 is now delivering a strong start to sales this financial year. The opportunities for significant growth across both Divisions are very exciting and the acquisition of Custom Power is expected to be an important catalyst enabling Solid State to deliver on its five year ambition of matching or exceeding the performance achieved over the preceding five years. 21 STRATEGIC REPORT (continued) Cautionary statement This report contains forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could, is confident, or other words of similar meaning. Undue reliance should not be placed on any such statements because they speak only as at the date of this document and, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and Solid State PLC’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. There are a number of factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements. These risks and uncertainties include, among other factors, changing economic, financial, political, business or other market conditions. Solid State PLC is under no obligation to revise or update any forward-looking statement contained within these financial statements, regardless of whether those statements are affected as a result of new information, future events or otherwise, save as required by law and regulations. The strategic report on pages 6 to 22 has been approved by the Board of Directors and signed on its behalf by: G S Marsh Chief Executive Officer 27 July 2022 P O James Chief Financial Officer 22 CORPORATE AND SOCIAL RESPONSIBILITY REPORT Environmental Principles The two guiding principles that underline the Group’s environmental objectives are to reduce consumption and to reduce waste. These principles can be embraced by everyone in the business in a small or large way to make a positive contribution to delivering a sustainable business operation. The Group’s activities can be summarised as largely supply, manufacturing/assembly operations, combined with office based research, product development and other commercial functions, where we essentially receive materials and products from suppliers, assemble them into a new product and dispatch them to customers. Examples of how the Group can embrace these principles include direct engineering solutions such as utilisation of technology which optimises/minimises power consumption in our systems and re-use of surplus heat. Indirect solutions include improvement to customer yields, reducing waste and solutions that reduce power consumption. Scope 3 The most significant impact on the environment, over which the Group has some control, is the sourcing of products and materials (primarily from Asia and USA) and the supply of finished product to customers (Scope 3 carbon impact). To date the Group has not been able to capture and assess the level of Scope 3 Carbon it has consumed to meet additional voluntary disclosure requirements, however the Group does capture its scope 1 and 2 carbon consumption data. We continue to evaluate how we best approach capturing the data from our scope 3 emissions. This is an important step in continuing to deliver on reducing the Group’s carbon footprint and part of integrating the Group’s ESG strategy within the 2022-2027 Group strategy review. Solid State Plc is committed to achieving net zero by 2050. This is compliant with new measures introduced in September 2021 requiring suppliers bidding for major government contracts (>£5m) to commit to net zero by 2050 and to produce a credible carbon reduction plan. This will require the reporting of certain Scope 3 emissions, including business travel, employee commuting, transportation, distribution, and waste. The most significant component of the Group’s scope 3 emissions is expected to be the impact of third-party carriers the Group utilises to receive and deliver their products. The Group’s ability to control the environmental impact of its logistics partners is not absolute. However, we can and do look to use preferred suppliers who are positively engaged with a carbon reduction commitment to align with our ambitions. The first potential step change we are exploring is to move where possible our inbound freight to sea freight rather than air freight given the significant environmental benefit of sea freight. Scope 1 & 2 In terms of the Scope 1 and 2 emissions, the operations consume normal business energy sources such as heating and power, which the Group aims to reduce by focusing on minimising energy consumption through the efficient operating practices and compliance with relevant environmental legislation. However, the largest factor impacting energy consumption in our facilities is the weather. In a year with moderate summer / winter weather our energy consumption is low, however if we face extreme hot / cold weather the energy consumption increases significantly. Waste management is a critical part of conducting our business. We comply with all the relevant waste legislation with the key areas of legislation being The Waste Batteries and Accumulators Regulations 2009 and the Waste Electrical and Electronic Equipment (WEEE) Directive in conjunction with RoHS. Where appropriate the Group actively works with its customers to ensure that all hazardous waste is properly managed. In complying with the waste legislation, the Group ensures that all waste is disposed of properly and waste is recycled where it is practicable to do so. The Group has a fleet of company cars which have been included in the Group’s carbon reporting. The Group continues to actively move the company owned cars to be low CO2, Hybrid or Electric vehicles as they are replaced. All Group facilities participate in recycling paper, plastic and cardboard. Local management teams are committed to good environmental practices and are responsible for implementing appropriate programmes to meet their local obligations. The Group also intends to explore greener options at the point of renewing the gas heating contracts for various sites. 23 CORPORATE AND SOCIAL RESPONSIBILITY REPORT (continued) Carbon data reporting As a company quoted on AIM, the Group is required to report its Scope 1 and Scope 2 CO2e. The Board believes there are direct benefits to our organisation in the measuring and reporting of environmental performance, which should assist the Group to reduce its energy consumption and therefore resource costs, as well as gaining a better understanding of the Group’s exposure to the risks of climate change. This is year 3 of collecting the data which can be compared to the baseline CO2 consumption for the financial year 2019– 20. Where possible the Group has reported its figures using billed data, which relates to its premises and activities. Data has been collected for the following CO2 emission sources: electricity consumption; gas consumption; water consumption; company owned vehicles and waste processing. In collating this data, we have utilised the 2021 conversion factors (2021: 2020 conversion factors) to obtain a figure for the CO2 consumption of the Group compared to the baseline reported last year. Our 2020 baseline was 434 tonnes of CO2e equating to 1,843,758kwh. On a like for like basis (excluding the acquisitions) 2022 continued to see a reduction due to the actions we have taken to reduce travel and activity (reflecting behavioural changes post COVID-19) to 216 tonnes of CO2e, which equates to 1,010,900 kwh. Including the Willow and Active Silicon acquisitions, the value for 2022 is 462 tonnes of CO2e, equating to 2,334,523kwh. This is in-line with our expectations as the new US AEC manufacturing site is energy intensive due to the furnace for baking the glass to metal seals. Added value is used as the intensity ratio (CO2e / £1M added value). The Group defined “added value” as the “gross margin” as it is believed that this best represents business output. In 2019/20 our baseline intensity ratio was 20.9 Tonnes per £1m of value added. Including the acquisitions, the 2022 ratio is 14.37 Tonnes per £1m of value added (2021: 11.3 Tonnes). Maintaining a lower intensity ratio than 2020 is considered very positive given the change in operating activities with the acquisition of Willow and Active Silicon. We have developed a plan to see continued mid-term reduction through best practice actions we continue adopt to minimise and reduce our carbon consumption. Code of business conduct, ethics, and anti-corruption The Group’s policy sets out the values and standards of behaviour expected from all employees. In addition, it addresses expectations relating to the day-to-day conduct of business partners and agents who act as representatives of the Group. The policy also deals with how employees, business partners and agents can report any concerns that may arise. The policy actively promotes corporate social responsibility across our Group. It addresses how the Group works with a wide range of third-party organisations in areas such as ethical employment policies, educational and community work. It sets out the responsibilities of employees in ensuring that they carry out their business activities in a manner aligned with the Group’s values and business principles. All staff are required to ensure that they comply with all relevant laws and regulations of the countries in which we operate and do business. The policies also set out behaviours that are unacceptable and which could bring Solid State PLC’s reputation into disrepute. The policy contains guidance on avoiding conflicts of interest, confidentiality, adherence to export controls, our approach to gifts and hospitality, bribery and corruption and managing relationships with third parties. Upholding the policy is the responsibility of all Solid State PLC employees and business partners. We actively encourage everyone to report any behaviour which may be in breach of the Code, is unethical or illegal. This is achieved by fostering a culture of openness and accountability, and by providing a clear procedure that enables any individual to raise breaches of policy or malpractice directly at the highest level. All those working for, or on behalf of, Solid State PLC are required to confirm that they have read and understood the Anti- corruption & Bribery Policy, and a copy of the policy is readily available to all employees. Bribery Act The Group implements and enforces effective systems to uphold a zero tolerance approach to bribery and corruption. To ensure it only works with third parties whose standards are consistent with the Group’s, all agents and third parties who act on behalf of the Group are obliged by written agreement to comply with the standards set out in the Group’s Anti- corruption & Bribery Policy. 24 CORPORATE AND SOCIAL RESPONSIBILITY REPORT (continued) Commercial business practices The Group is committed to acting professionally, fairly and with integrity in all our business dealings and relationships. We work with our partners to adopt best business practices, which include: In our dealings with customers Working closely in partnership with customers and potential customers to help us improve the value we can add to them through our products and services; Being open and honest about our products and services, communicating with customers all appropriate information they need to ensure we consistently meet their expectations; Ensuring that any issues or problems are dealt with efficiently, with fairness and in a timely manner; Ensuring that we seek feedback to benchmark and evaluate what we do in order to help us deliver continuous improvement in our products and services to maintain our value. In our dealings with suppliers Working with our suppliers to help us improve the value of the products and services we offer to customers with the benefit of the access to the supply chain that we have; Identifying and selecting suppliers to work in partnership with using fair and reasonable methodologies; Identifying and working with suppliers who operate to ethical business standards; The semiconductor shortages which the industry is facing has meant we are working closely with suppliers to help us improve the value of the products and services we offer customers to the benefit of the supply chain by making the supply chain as efficient as possible. We are actively looking to improve the efficiency of the supply chain and stock utilisation to meet customer demand wherever possible. In our relationships with employees and other stakeholders The Group ensures employment practices throughout the Group are fair and in full compliance with employment legislation. The team are encouraged to volunteer and support community activities and the Group is supportive of initiatives and projects which enable our staff to make a positive contribution in their communities. In the current year, this has included donations to local food banks and sponsoring a room at a local Youth Hostel. Furthermore, the Group continue to support employees participating in voluntary mentoring and business advisory services via professional bodies and educational institutions which provide fantastic development opportunities for all. How we invest in our people The Group’s success depends on its people. The Group recognises the important role its employees play, and that effective teamwork is critical to achieving its corporate goals. The Group is committed to making Solid State a “great place to work” where the teams’ actions and behaviours demonstrate this commitment each and every day. This is aimed at providing an environment of teamwork and collaborative respect, where the staff are all valued for their contribution, and everyone is proud to be part of “the Solid State team”. The Group provides employees with access to a Health cash plan to support day to day and more specialist medical needs, including access to a GP 24 hours a day. A fully funded Employee Assistant Program is available to help employees with financial, legal and/or mental health challenges. Employees also have access to a high street discount platform giving the opportunity to make savings on their daily purchases. Tangible support for each employee relating to the cost of living crisis includes at least a 5% pay rise and a commitment to make a one-off energy payment in the FY23 financial year. The Group maintains equality of opportunity in all employment practices, policies, and procedures regardless of race, nationality, gender, age, marital status, sexual orientation, disability and religious or political beliefs. As part of our policies, we set out our approach to diversity. 25 CORPORATE AND SOCIAL RESPONSIBILITY REPORT (continued) Human rights Solid State PLC is committed to respecting the human rights of all those working with or for us. We do not accept any form of child or forced labour and we will not do business with anyone who fails to uphold these standards. Modern slavery The Modern Slavery Act addresses the role of businesses in preventing modern slavery within their organisation and in their supply chains. The Group has a zero-tolerance approach to modern slavery and is committed to acting ethically and with integrity in all its business dealings and relationships and to implementing and enforcing effective systems and controls to ensure modern slavery is not taking place anywhere in its business or in any of its supply chains. The Group has developed and implemented policies to comply with the requirements of the UK’s Modern Slavery Act. Reference to the policy may be found on the corporate website at www.solidstateplc.com. Health and Safety Solid State PLC places health and safety at the core of all the business activities to ensure a safe working environment for everyone involved in the business. As a corner stone of our business operations health and safety reporting is a standing item on the Board agenda and Key management meetings. All employees are encouraged to take an active role in ensuring that our working environment is a safe place to work and visit by actively reporting all safety observations and incidents, being involved in safety audits, risk assessments and regular awareness training sessions. The operations teams are actively involved in electronics industry-wide initiatives, working with industry associations, and proactively registering under new regulatory directives such as Registration, Evaluation, Authorisation & restriction of Chemicals (REACH) and Waste Electrical and Electronic Equipment recycling (WEEE). Confidentiality The Group’s policies emphasise the need for confidentiality to be maintained in all our business activities. Maintaining confidentiality is a critical part of our culture. Our policy and practices help to ensure that all staff understand what constitutes confidential information and restricts internal access based on a “need to know basis”. Information relating to third parties is not disclosed without the third parties’ written consent. Where the Group conducts work for customers, including government agencies, where specific confidentiality requirements exist such as The Official Secrets Act, process and procedures are in place to ensure the Group complies with these requirements. G S Marsh Chief Executive Officer 27 July 2022 26 CORPORATE GOVERNANCE REPORT Statement of compliance against the UK Corporate Governance Guidance The Board of Directors believes in high standards of corporate governance and is responsible for ensuring that the Group has in place appropriate governance practices and is accountable to shareholders for the Group’s performance in this area. Solid State PLC, as a quoted company on AIM, a market operated by The London Stock Exchange PLC, is required in accordance with AIM rule 26 to adopt a corporate governance code. Solid State PLC has chosen to adopt the QCA corporate governance code (the “Code”) over the FRCs UK Corporate Governance Code. In adopting the Code, the Directors have provided corporate governance disclosures and explain how the Group and company adopt the ten principles of the Code in a manner that is considered appropriate. The Code is available on the QCA website at: www.theqca.com. This statement describes how the Group is applying the relevant principles of governance, as set out in the Code. Throughout the year ended 31 March 2022, the Group has applied the principles of the Code. In adopting the Code, the Board has also been cognisant of the guidance issued from other regulatory bodies in respect of best practice corporate governance such as the FRC to ensure that the governance framework adopted at Solid State PLC is rigorous, robust and appropriate for its size and structure. How the corporate governance principles are adopted at Solid State PLC The Board considers that throughout 2021/22, Solid State PLC has sought to comply with the “Ten Principles” within the code and this report sets out how the Board has done this through the year. This statement addresses the main subject areas of the Code namely; delivering growth, maintaining a dynamic management framework, and building trust. Principle Compliance status Explanation Further disclosure(s) Delivering growth Principle 1: -“Establish a strategy and business model which promote long-term value for shareholders” Principle 2: - “Seek to understand and meet shareholder needs and expectations” Fully compliant Fully compliant Group business strategy is set out in the Chairman’s statement and the Strategic Review above. See the Chairman’s Statement on pages 3 to 5 and Strategic review on pages 6 to 22. Strategic issues, and the appropriate business model to exploit opportunities and mitigate risks, are under continuous review by the Board. Regular meetings are held with shareholders at the release of interim and full year results, the AGM and a number of additional ad hoc meetings. See further reporting on the stakeholder engagement provided on page 30 to 31 and page 37 to 38 of this report and pages 24 to 26 of the corporate and social responsibility report. Fully compliant Principle 3: - “Take into account wider stakeholder and social responsibilities and their implications for long-term success” Directors and the management team adopt a broad view during decision making to take meaningful account of the impact of its business activities on all key stakeholder groups. See further reporting on the stakeholder engagement provided on page 30 to 31 of this report and pages 24 to 26 of the corporate and social responsibility report. 27 CORPORATE GOVERNANCE REPORT (continued) Compliance status Fully compliant Principle Principle 4: - “Embed effective risk management, considering both opportunities and threats, throughout the organisation” Explanation Further disclosure(s) The Group operates a system of internal controls to safeguard Group assets and protect the business from identified risks. These controls are subject to examination during the annual external audit process. See the principal and emerging risks identified and the mitigation and the report on its risk management processes on pages 38 to 40 of this report and on pages 12 to 16 of the strategic report. See the Board and its sub committees’ section in this report on page 34 to 37. See the Board section in this report on pages 34 to 37. Maintain a dynamic management framework Principle 5: - “Maintain the Board as a well- functioning, balanced team led by the chair” Fully compliant At the year-end the Board comprises the Non-Executive Chairman; Mr N Rogers, the Chief Executive Officer; Mr G S Marsh, three Executive Directors and two Non-Executive Directors. The board intends to appoint an additional independent non- executive director during the coming year. Compliant Principle 6: - “ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities” The Board is satisfied that the current composition provides the required degree of skills, experience, diversity, and capabilities and conducted continued professional development appropriate to the needs of the business. In appointing an additional independent non-executive director in the coming year, candidates offering greater breadth of diversity will be actively encouraged. Principle 7: - “Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement” Fully compliant The Board completes an annual internal evaluation of performance which is led by the Chairman. See the Board performance evaluation section in this report on page 37. The Chairman also actively encourages self-evaluation by all Board members, and feedback on the conduct and content of board meetings. The Board will continue to keep under review whether a more structured independent review is required in future. 28 CORPORATE GOVERNANCE REPORT (continued) Principle Principle 8: - “promote a corporate culture that is based on ethical values and behaviours” Compliance status Fully compliant Explanation Further disclosure(s) The Board expects high ethical and moral standards. The Board and all employees expected to be accountable for their actions and in compliance with the Company handbook. Employees are actively encouraged to participate in training courses and maintain CPD. See the Board section in this report on pages 34 to 37 and the corporate and social responsibility report on pages 24 to 26. Principle 9: - “Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board” Fully compliant The Board as a whole take responsibility for ensuring appropriate corporate governance practices are adopted. See the Board section in this report on pages 34 to 37 and the audit committee report on pages 41 to 45. Fully compliant Building trust Principle 10: - “Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders” The roles and responsibilities of each of the Directors (including committee memberships) are clearly defined. Regular meetings with shareholders and other key stakeholder groups provide a specific opportunity for raising any concerns related to corporate governance, including any significant votes cast against or abstaining from shareholder resolutions. Further narrative disclosure is provided in: this report on pages 30 to 39, the corporate and social responsibility report on pages 24 to 26 and the Remuneration Committee report on pages 46 to 58. The Board views maintaining high standards in its governance and management of the affairs of the Group as a fundamental part of discharging its stewardship responsibilities. Accordingly, both the Board and the Audit Committee continue to keep under review the Group’s whole system of internal control, which comprises not only financial controls but also operational controls, compliance and risk management. This process was in place throughout the 2022 financial year and accords with the Revised Guidance for Directors on Risk Management, Internal Control and Related Financial & Business Reporting (formerly called the Turnbull Guidance). 29 CORPORATE GOVERNANCE REPORT (continued) How Solid State PLC has complied with the Companies Act Section 172 requirements and disclosures The following disclosure describes how the Directors have acted 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, and in doing so have regard (amongst other matters) to the factors set out in section 172(1)(a) to (f). When performing their duties under section 172 of the Companies Act, they have considered the long-term consequences of decisions, matters affecting the Company’s employees and other stakeholder relationships, and the need to act fairly between members of the Company. Furthermore, they have recognised that companies are run for the benefit of their shareholders, but that the long-term success of a business is dependent on maintaining relationships with all significant stakeholders. The Board continuously reviews relationships that support the generation and preservation of value in the Company. These relationships include those with employees, suppliers, customers and industrial partners, and the Group’s bankers. Stakeholder engagement Stakeholder Engagement method Investors The key investors identified are the shareholders and lenders. The major interests in the Group’s shares are set out in page 38 of the corporate governance report. Key metrics for both the Group’s bank and shareholders are the share price, adjusted profit before taxation, adjusted earnings per share, cash generation and net debt. Through the publication of half year and full year financial reports and the Group’s engagement with shareholders and the bank it looks to provide insight where possible into the Group strategy and how the Group aims to create value for its shareholders by delivering strong and sustainable results that translate into earnings and cash. The Group seeks to promote an investor base that is interested in a long term holding in the company. Further disclosure of how management engage with the Group’s Investors is set out in the corporate governance report. Disclosure cross ref Pages 27 – 40 Employees Employees are those individuals who are contracted to work for the company both full and part time. Pages 25 – 26 The Group’s success is reliant on retaining the knowledgeable and skilled workforce who are committed to the Group and the delivery of the strategy; maintaining and delivering on the high standards that the Group sets for itself. The Group has policies and procedures in place to look after the welfare of its employees. The Board is proud of the “Solid State family” culture which is friendly and supportive of all members of the team. Given the nature of the business, health and safety is taken extremely seriously and ensuring a best practice safe working environment is essential. Employee engagement is promoted from the top down, encouraging employees to share ideas and to help the Group deliver on its goal of continuous improvement. The knowledge and ability of the teams is a critical cornerstone of the Group’s value. Therefore, the Group promotes, encourages, and offers training where it is considered beneficial to the employee and the company. Further disclosures are provided in the corporate and social responsibility report. 30 CORPORATE GOVERNANCE REPORT (continued) Stakeholder Engagement method Customers and Industrial Partners The Group uses its teams’ knowledge and ability to work collaboratively with customers and industrial partners to provide a tailored component, product, or service to meet their specific requirements and add value. The Group always aims to design, manufacture, and supply products of the highest quality. This differentiates the Group’s offering in terms of how the Group engages with its customers and the relationships it builds in providing a tailored solution. To meet these objectives the Group ensures that its teams have the knowledge and expertise to meet or exceed the expectations of its customers and industrial partners. The Group’s customer engagements help to focus where the Group invests in R&D to enable the Group to deliver relevant and continuously evolving technical solutions. Further disclosures are provided in the corporate and social responsibility report. Disclosure cross ref Pages 24 – 26 Suppliers The Group’s extensive supply chain relationships with component manufacturers are critical to ensuring that the Group can meet the customers’ technical requirements for their specific application. Pages 24 – 26 The Group’s supplier relationships and partnerships are underpinned by the technical knowledge that its team has of the components which the Group distributes and designs into its manufactured solutions. As a result, the teams’ relationships with the Group’s suppliers are a critical part of both the suppliers’ and the Group’s success. The Group regularly engage with the Group’s suppliers to discuss performance, price and how to continue to improve the Group’s supply chain relationships to deliver mutual benefit. While there are global shortages within the semiconductor electronics industry supply chain managing these relationships is critical, and the strength of engagement will help to ensure the Group manages the supply and demand in the times of shortage as effectively as possible. Key topics of engagement for the year were price and supply with the challenges that Brexit, COVID-19 and most significantly the global semiconductor material shortages are causing. Where possible the Group extended order schedules with suppliers as early as 2020, even when customers were not providing the same scheduled visibility, and plans were made with suppliers to look to minimise any supply chain disruption. Further disclosures are provided in the corporate and social responsibility report. 31 CORPORATE GOVERNANCE REPORT (continued) Principal decisions linked to our strategy and the stake holders impacted Principal decision Setting of annual financial budget and periodic updating of forecasts Basis of the decision and conclusion The Board receives regular financial reports from the executive management, both historic and forward looking. The Board endeavours to meet or exceed all stakeholder expectations where possible. Based on this the Board issues appropriate stakeholder and market communication through relevant channels. Pleasingly, during the financial year ending 31 March 2022 the Board has seen significant commercial progress and have been able to significantly exceed the adjusted profit before tax expectations set at the beginning of the financial year with £7.2m reported in this annual report. The annual financial budget for 2023 for the Group was approved in March 2022, indicating a reasonable view that the results for the financial year would meet or exceed market expectation, albeit there are continued risks associated with potential impact of electronics supply chain shortages. Based on a solid start to the year with minimal adverse supply chain impacts to date, the Board remained confident to continue to provide investor guidance for the year ahead which is reflected in the notes published by the analyst and shared on the Group’s website. Primary Stakeholders Shareholders, lenders, employees Changes to Board The Directors seek to ensure that the composition of the Board is appropriate to the current circumstances and has enough capacity to manage growth and succession planning. Shareholders, employees The Directors are satisfied that the current board structure and composition offers an appropriate balance between executive and non-executive directors, a broad diversity of thought, approach and background, and an environment of constructive challenge. In seeking to buttress compliance with the code on Corporate Governance, the board considers it appropriate to seek an additional independent non-executive director in the coming year, with enhanced gender and/or ethnic diversity a significant factor in selecting an appropriate candidate. Acquire Custom Power The Group actively sought to acquire a battery pack producer with a profitable, cash generating business model in markets aligned to the existing Group. There were limited options that fulfilled these criteria, however Custom Power meet this criterion. This transaction delivers on all the Groups strategic goals • Internationalisation, given the strong position in the US market and a manufacturing partner in Mexico. • Own Brand products and technology advancement as the business is active in the growth markets of Industrial, Medical and Defence and are the market leader of high reliability battery pack solutions for drones in the USA. Talent development, given the strong engineering capabilities and battery industry expertise. • Custom Power has complementary strengths to the existing Crewkerne power business unit in the Systems Division, providing an opportunity to supply blue chip customers in the key territories of North America and Europe. Based on rigorous due diligence the board made the decision to proceed with the transaction having renegotiated the deal to factor in the changes in the macro- economic environment and the confidence in the capital markets. Full details of this acquisition are set out in the circular issued to shareholders on the 13 July 2022. 32 Employees, customers, commercial partners and shareholders Primary Stakeholders All Employees, Customers and commercial partners CORPORATE GOVERNANCE REPORT (continued) Principal decision Basis of the decision and conclusion Banking facilities Mitigation of component shortages The Group has a proactive and constructive relationship with its bankers, Lloyds Bank PLC. In March 2022, Lloyds agreed to extend the term of the Group’s £7.5m revolving credit facility to 30 November 2023 to maintain funding flexibility. The facility is subject to financial covenants which are assessed on a six monthly basis. Term loan facilities totalling £13m have also been agreed, subject to completion of the Custom Power acquisition, subsequent to year end. It became clear in 2020/21 that component supply shortages were going to become a global issue in the semiconductor electronics sector in particular. The Board evaluated the options available at that point in time to try to manage and mitigate the issues wherever possible. The Board concluded that the Group was well positioned to make strategic investments by placing scheduled orders. In many cases these were non-cancellable, non-refundable orders to secure inventories. Shortages and lead-time increases have continued throughout the 2021/22 financial year and are expected to persist throughout 2022/23. The risk has the potential to adversely impact performance, however, is mitigated by the deliberate decision to continue to invest in working capital to secure supply to enable delivery of the open orderbook. The Group has sought to manage the increased requirement for proforma supplier payments in advance by establishing similar payment terms with customers to mitigate the working capital impact. Continued unprecedented demand coupled with the massive supply chain disruptions mean that this is a risk that will continue to need careful management. The component sourcing team is a particularly valuable resource for the Group and its customers as product becomes difficult to source. Their expertise is helping to secure product for the Group’s customers, albeit in some cases at premium prices. 33 CORPORATE GOVERNANCE REPORT (continued) The Board The structure and composition of the Board has been undergoing a process of evolutionary change since Nigel’s appointment as the first truly independent non-executive director in 2019. Since that time, this process has continued with the addition of Pete Magowan as Senior Independent Director and Nigel’s appointment as Chairman in November 2020. Whilst Peter Haining does not strictly meet all the criteria for an independent director set out in the QCA guidelines, we continue to consider that he actively fosters an attitude of independence of character and judgement at all times. The QCA guidelines acknowledge for growing companies it may not be possible for Boards to meet the definition of “independence” for all Non-Executive Directors and sets out the fact that if a Director has served for more than nine years it does not automatically affect independence. The Board is mindful of the threats to independence and actively manages the potential risk to ensure that the Non- Executives provide independent constructive challenge. The terms and conditions of appointment of the Non-Executive Directors are available for inspection upon request to the Company Secretary. Rules concerning the appointment and replacement of Directors of the Group are contained in the Articles of Association (“Articles”). Amendments to the Articles must be approved by a special resolution of shareholders. Under the Articles, all Directors are subject to election by shareholders at the first Annual General Meeting following their appointment, and to re-election thereafter at intervals of no more than three years. The Board has considered the FRC’s guidance to companies outside the FTSE 350 to consider the annual re-election of all Directors and considers that this is now appropriate to the Group’s circumstances and will do so from the upcoming Annual General Meeting and in future. Biographies of the Directors are set out on page 61. These show the range of business and financial experience upon which the Board can call. The Board’s goal is to ensure that its membership should be balanced between Executives and Non-Executives and have the appropriate skills and experience and knowledge of the business. At present, there is not a majority of Non-Executives, however it is the intention of the Board to seek to appoint an additional independent Non-Executive director in the upcoming year to redress this balance, with the Chairman continuing to exercise a casting vote in the unlikely event of deadlock. The Directors have also indicated their intention to ensure that candidates who can offer enhanced diversity, including gender or ethnic background, will be actively encouraged in an open and transparent process. The Board recognises the special position and role of the Chairman under the Code and has approved the formal division of responsibilities between the Chairman and Chief Executive Officer. The Chairman is responsible for the leadership of the Board and ensuring its effectiveness, and the Chief Executive Officer manages the Group and has the prime role, with the assistance of the Board, of developing and implementing business strategy. One of the roles of the Non-Executive Directors under the leadership of the Chairman is to undertake detailed examination and discussion of the strategies proposed by the Executive Directors, so as to ensure that decisions are in the best long term interests of shareholders and take proper account of the interests of the Group’s other stakeholders. The Chairman ensures that meetings of Non-Executive Directors without the Executive Directors are held. 34 CORPORATE GOVERNANCE REPORT (continued) How the Board operates The Board meets regularly through the year and is provided with appropriate strategic, operational, and financial information prior to each meeting with monthly reports to enable it to monitor the performance of the Group. Directors are required to devote such time and effort to their duties as is required to secure their proper discharge and, for Non-Executive Directors, this typically entails one or two days of meetings per month as well as reading and preparation time. At Board meetings the Chairman ensures that all Directors are able to make an effective contribution and every Director is encouraged to participate and provide their perspective and opinions. The Chairman always seeks to achieve unanimous decisions of the Board following due discussion of agenda items. All Directors have direct access to the advice and services of the Company Secretary who is responsible for ensuring that Board procedures are followed and are allowed to take independent professional advice if necessary, at the Company’s expense. The Board has a formal schedule of matters referred to it for decision. This list includes appropriate strategic, financial, organisational and compliance issues, including the approval of high level announcements, circulars, the report and accounts and certain strategic and management issues. Examples of such items include but are not limited to: • • • • • • • the approval of interim and annual results; the approval of the annual budget; approval of acquisitions or disposals; approval of major items of capital expenditure; the approval of significant contracts; approval of changes to corporate or capital structure; and, financial issues, including changes in accounting policy, the approval of dividends, bank facilities and guarantees. Committees of the Board Executive Committee The Executive Committee consists of the Executive Directors under the chairmanship of Mr G S Marsh and is responsible for the development of strategy, annual budgets and operating plans linked to the management and control of the day-to- day operations of the Group. The Executive Committee is also responsible for monitoring key commercial opportunities and relationships, day to day stakeholder engagement and for ensuring that the Board policies are carried out on a Group-wide basis. Nominations Committee The Nominations Committee is formed when required as a sub-committee of the Board. The Nominations committee was not required during the current financial year, but will lead the process of appointing an additional Non-Executive director in the coming year. The members of the Committee would be Mr G Marsh, Mr P Magowan, Mr N Rogers and Mr P Haining. The Nominations committee will take responsibility for identifying the skills, experience, personal qualities and capabilities required for the next stage in the company’s development, linked to the company’s strategy. 35 CORPORATE GOVERNANCE REPORT (continued) Audit Committee The Audit Committee consists of the Non-Executive Directors; Mr P Haining, Mr P Magowan and Mr N Rogers. The Committee meets at least twice a year under the Chairmanship of Mr P Haining, who the Board has evaluated to have recent relevant financial experience. The Chairman of the Audit Committee is not deemed independent by virtue of his length of service and that he has previously held an Executive position. However, given that the Board considers that Mr P Haining fulfils the role with independence of character and judgement, the Board has concluded that it is appropriate to retain the financial experience and knowledge of the business possessed by Mr P Haining in his role as Chairman of the Audit Committee for the time being. If there is a candidate identified during the process to appoint an additional Non-Executive director who has the necessary skills and experience, then they may also be offered the opportunity to Chair the Audit Committee following an appropriate handover period. The Audit Committee has specific written terms of reference which deal with its authority and responsibilities and these are available for inspection from the Company Secretary. Its duties include monitoring internal controls throughout the Group, approving the Group’s accounting policies, and reviewing the Group’s interim results and full year financial statements before submission to the full Board. The Audit Committee also reviews and approves the scope and content of the Group’s annual risk assessment programme and the annual audit and monitors the independence of the external auditors. The Audit Committee acts to ensure that the financial performance of the Group is properly recorded and monitored, in fulfilling their role they meet annually with the auditors and review the reports from the auditors relating to accounts and internal control systems. The Group does not have an independent Internal Audit function, as it is not considered appropriate given the scale of the Group’s operations, however the Group operates internal peer reviews, with a scope of evaluating and testing the Group’s financial control procedures, to standardise processes around best practice. Any significant issues are reported to the Chairman of the Audit Committee and shared with the external auditors as appropriate. The Group CFO and the external auditors attend meetings of the Audit Committee by invitation. The Committee also holds separate meetings with the external auditors, as appropriate. Remuneration Committee The Remuneration Committee consists of Mr P Magowan, Mr N Rogers and Mr P Haining. The Committee meets at least twice a year under the Chairmanship of Mr P Magowan. The Chief Executive Officer and Group CFO have attended some of the meetings of the Remuneration Committee by invitation to respond to questions raised by the Committee, but they are excluded from any matter concerning the details of their own remuneration. The Remuneration Committee has specific terms of reference which deal with its authority and duties and these are available for inspection from the Company Secretary. The purpose of the committee is to review the performance of the full time Executive Directors and to set the scale and structure of their remuneration and the basis of their service agreements with due regard to the interests of the shareholders. In fulfilling this responsibility, the Remuneration Committee is responsible for setting salaries, incentives and other benefit arrangements of Executive Directors and overseeing the Group’s employee share schemes. Members of the Remuneration Committee do not participate in decisions concerning their own remuneration. Further details are provided in the remuneration report on pages 46 to 58. 36 CORPORATE GOVERNANCE REPORT (continued) Attendance at meetings Number of meetings in 2021/22 Attendance Executive Mr G Marsh Mr J Macmichael Mr M Richards Mr P James Non-executive Mr N Rogers Mr P Haining Mr P Magowan Board Nominations Committee Audit Committee Remuneration Committee 000 9 9 9 9 9 9 9 9 0 3 2 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 3 3 3 3 n/a n/a n/a n/a 2 2 2 Board performance evaluation The Chief Executive reviews the performance of the Executive Directors on a periodic basis and reports to the Remuneration Committee. The performance of the Directors, the Chairman and of the Board are monitored on an ongoing basis. Annually the Remuneration Committee evaluates performance as part of the review of remuneration and discretionary bonus awards. The Board completes an internal annual Board performance evaluation led by the Chairman. The appraisal covers: composition; processes; behaviours; and activities and aims to develop the Board and the individuals on the Board, promoting Board effectiveness and the implementation of Group strategy. The current year has seen very positive progress against its strategy, with the trading performance ahead of the Board’s expectations. Shareholder relations The Board regards regular communications with shareholders as one of its key responsibilities. During 2021/22, the Chief Executive Officer and Group CFO met with institutional investors on a regular basis to discuss the Group’s performance, the shareholder’s views, and to ensure that the strategies and objectives of the Group are well understood. In addition, the Chairman engaged with the company’s advisors and a select group of shareholders to discuss matters of Corporate Governance. The Chief Executive Officer keeps the Board fully informed of any significant matters discussed with shareholders and of shareholders’ views. In addition, the Board receives copies of the analysts’ reports which the Company is made aware of. The Non-Executive Directors, having considered the Code, are of the view that this approach to shareholder communication remains appropriate for the Group. However, should shareholders have concerns which they feel cannot be resolved through normal shareholder meetings, the Chairman, and the Senior Independent Directors may be contacted through the Company Secretary. 37 CORPORATE GOVERNANCE REPORT (continued) Shareholder relations cont’ Interim and full year-end shareholder roadshows are held by the Executive Directors together with on-line investor meetings on the “Investor Meet Company” platform (www.investormeetcompany.com). Traditionally the Company arranged investor site visits typically twice a year subject to sufficient demand. These events enable shareholders and potential shareholders to understand first-hand the business, visit the operations and meet the wider team. Furthermore, shareholders attending the AGM are invited to ask the Directors questions about the business. Other than the Group’s routine engagement with investors on topics of strategy, governance and performance, the other specific matter discussed with key shareholders included changes to the Board and the Director remuneration policy. The Company also maintains the Group’s website, which provides details of the Group’s business including its strategy, technologies, operations, and products. The Group website has a separate investor relations section which provides the Group’s news flow, share price information, and financial reports including the annual and interim reports. Hard copies of these financial reports are also available by request. The website can be found at: www.solidstateplc.com. In accordance with the recommendations of the Code, the Company will advise shareholders attending the AGM of the number of proxy votes lodged in respect of each resolution, analysed between ‘For’, ‘Against’, ‘at the Chairman’s discretion’ and ‘abstentions’. These are advised after the resolutions have been dealt with on a show of hands, providing that a poll has not been called for or required. Significant Shareholders Shareholders over 3%* Schroders Seguro Nominees Limited Mrs B Marsh Charles Stanley & Co BGF Investment Management Limited Canaccord Genuity Group Inc Mr G Comben Mrs J Comben Liontrust Asset Management Mr G Marsh % holding 9.84% 6.97% 6.44% 6.11% 5.89% 4.57% 4.27% 4.27% 4.23% 3.29% *Significant shareholders that the Board has been notified of as of 12 May 2022. The Solid State PLC website is kept updated for notified changes during the year. Audit and Accountability The Code requires that Directors review the effectiveness of the Group’s system of internal controls on a continuing basis. The scope of the review covers all key controls including financial, operational and compliance controls as well as risk management. The Board has put in place a framework of internal controls to manage the risks faced by the Group and the Audit Committee has responsibility to review, monitor and make policy recommendations to the Board upon all such matters. The Directors acknowledge their responsibility for the Group’s system of internal control. The Board, through the Audit Committee, keeps this system under continuous review and formally considers its content and its effectiveness on a bi- annual basis. In completing their review of the effectiveness of the Group’s system of internal controls the Audit Committee has taken account of any material developments up to the date of the signing of the financial statements. In addition, recognition is given to the external audit findings, which help to inform the Committee’s views of areas of increased risk. 38 CORPORATE GOVERNANCE REPORT (continued) Audit and Accountability – cont’ The system of internal control comprises those controls established to provide assurance that the assets of the Group are safeguarded against unauthorised use or disposal and to ensure the maintenance of proper accounting records and the reliability of financial information used within the business or for publication. Any system of internal control can only provide reasonable, but not absolute, assurance against material misstatement or loss, as it is designed to manage rather than to eliminate the risk of failing to achieve the business objectives of the Group. The Directors acknowledge their responsibility for preparing the Annual Report and Accounts. The Audit Committee reviews the Group’s reporting processes with the aim of ensuring that the financial reporting, when taken as a whole, is fair, balanced, and understandable, and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. Risk Management The Board reviews and approves an Annual Budget and Business Plan prior to the start of each financial year. This includes reviewing the key strategic, operational, and financial objectives for the year, together with a detailed financial budget. The Executive Committee is accountable to the Board for delivery of the Annual Business Plan. To provide a framework for the delivery of the Group’s strategy and plans, the Executive Committee has developed an organisational structure with clear roles and responsibilities and clear lines of reporting. The Executives report performance against the plan on a monthly basis, which includes detailed analysis of budgetary variances and updated financial projections. Each Executive Director is responsible for identifying and managing the risks relating to their respective areas of responsibility, including the risks relating to strategy, the Annual Business Plan and day-to-day business. In addition to day- to-day risk management the Executive Directors formally assess the major business risks and evaluate their potential impact on the Group. These risks and the reporting of the risk assessment is included in the strategic report on pages 12 to 16. Internal Control In respect of internal controls, the Directors are continually reviewing the effectiveness of the systems of internal controls. The key elements of which, having regard to the size of the Group, are that the Board meets regularly and takes the decisions on all material matters. The organisational structure ensures that responsibilities are defined, authority only delegated where appropriate and that the regular management accounts are presented to the Board wherein the financial performance of the Group is analysed. Further details over the internal controls are set out in the Audit Committee report on page 41 to 45. The Directors acknowledge that they are responsible for the system of internal control, which is established in order to safeguard the assets, maintain proper accounting records and ensure that financial information used within the business or published is reliable. Any such system of control can, however, only provide reasonable, not absolute assurance against material misstatement or loss. Going Concern In assessing the going concern position of the Group for the Consolidated Financial Statements for the year ended 31 March 2022, the Directors have considered the Group’s cash flows, liquidity and business activities. At 31 March 2022, the Group had cash balances of £2.9m, a drawn term revolving credit facility (RCF) of £1.5m and £6.0m of undrawn RCF. Given the announcement of the expected acquisition of Custom Power post year end additional term loan facilities of £13.0m have been made available by Lloyds bank. In assessing going concern, the board have considered both that the transaction goes ahead and alternatively that it does not proceed, however the board expectation is that the transaction will proceed following the meeting on the 29 July 2022. The bank facilities are subject to financial covenants requiring the business to be EBITDA positive therefore this facility is available to fund investment in working capital, capital investment or acquisition activities. Should the business face such a significant downturn that it was loss making the facility would not be available to be drawn to fund additional losses without a covenant waiver of amendment. As a result, in evaluating a stressed model the Board have only included the RCF in the headroom to the extent it would be available within the covenants. 39 CORPORATE GOVERNANCE REPORT (continued) Going Concern – Cont’ Based on the Group’s forecasts, the Directors have adopted the going concern basis in preparing the Financial Statements. The Directors have made this assessment after consideration of the Group’s cash flows and related assumptions and in accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting 2014, the April 2016 guidance on Going concern basis of accounting and reporting on solvency and liquidity risks and the various guidance issued in 2020 all published by the UK Financial Reporting Council to provide support to Directors and Board in making the assessment of going concern. Additional disclosures in respect of the Directors’ assessment and modelling to support the conclusions below are set out on pages 76 and 77 of the basis of preparation. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months, therefore it is appropriate to adopt a going concern basis for the preparation of the Financial Statements. Accordingly, these financial statements do not include any adjustments to the carrying amount or classification of assets and liabilities that would result if the Group and Company were unable to continue as a going concern. Long term viability statement The Directors have assessed the viability of the Group considering the Group’s current position and the potential impact of the principal and emerging risks documented above that would threaten its business model, future performance, solvency, or liquidity. As set out in the Going Concern assessment above, the Directors have a reasonable expectation that the Group has adequate resources to continue in operation for the next 12 months and that the Company will be able to continue in operation and meet its liabilities as they fall due. The Directors have determined that a two year period to 31 March 2024 is an appropriate period over which to assess its viability statement. This is based on the significant amount of change that can arise over two years in the electronic and optoelectronics market; the Group’s business; and, in the macro-economic environment. This has been validated by the impact that electronic component shortages have had on the Group’s business, the electronics industry across the World. The Board carried out a robust assessment of the principal risks facing the Group, including those that would threaten its growth drivers, future performance, solvency, or liquidity. As noted above the Board has also performed specific stress testing on the impact of the component shortages might have on future performance. The impact of component shortages is affecting many of the principal risks detailed above and as such is the most significant factor impacting near and mid-term future financial performance. Although the Company’s response to the component shortages continues to be management’s key focus at this time, the Directors consider the mid and longer term opportunity in the UK Systems and Components businesses will remain very strong. The outputs from these reviews were then used to perform liquidity analysis on the strategic plan, the downside sensitivity reviews that were based on principal risks, which concluded the business is viable even under down side stress testing. The expectation over the strength of the market is supported by the significant structural technological drivers including: Connectivity, 5G, Sensing AI , Big data, and Green tech supporting net zero targets, where the electronic and opto-electronic component & manufactured solutions the Group provides are expected to be critical elements of these enhancements. This alignment with the Group’s strategy and core capabilities means that the Board consider that the Group will be very well placed to take advantage of these macro-opportunities once the adverse impact of the component shortages is overcome. G S Marsh Chief Executive Officer 27 July 2022 40 AUDIT COMMITTEE REPORT The Audit Committee is chaired by Mr P Haining FCA, a Chartered Accountant. He is considered by the Board and Audit Committee to have the necessary current relevant financial knowledge, qualifications, and experience for this role. In accordance with the QCA guidance the Board has reviewed and evaluated Mr P Haining’s performance as a Non-Executive Director and confirm that he remains independent in terms of both his character, his judgement and based on how he conducts himself as a Non-Executive Director and chair of the Audit Committee. Therefore, given the knowledge, experience and skills of Mr P Haining the Board consider that he remains the most appropriate member of the Board to Chair the Audit Committee. Primary responsibilities of the audit committee: • Reviewing the effectiveness of the Group’s procedures for the identification, assessment and reporting of risk, financial reporting processes and internal control policies. • Managing the relationship with the auditors to ensure that the external audit is effective, objective, independent and of a high quality. Furthermore, the Audit Committee ensures that the scope of the audit, the auditors’ terms of engagement, and fees are reasonable and appropriate. Considering whether there is a need for an internal audit function and make a recommendation to the Board as to what is appropriate for the Board to gain assurance over the financial processes, procedures, controls and reporting of the Group. • • Reviewing significant financial reporting issues, accounting policies, and judgements and estimates adopted by management and monitoring the integrity of the Group’s financial statements independently of the Executive Directors and external auditors. • Advising the Board on whether the Committee believes the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and Company’s performance, business model and strategy. Activities during the year: The Audit Committee met three times during the year. The meetings were also attended by the Group CFO, Group FC, and representatives of the Group’s external auditors by invitation. At meetings attended by the external auditors, time is allowed for the Audit Committee to discuss issues with the external auditors without the Group CFO or Group FC being present. As part of the Audit Committee’s review process, the Chairman of the Audit Committee and the Group CFO normally visit each of the Group’s major business units across the year to review and challenge the local management on their draft financial results however given the continuing impact of the COVID-19 Pandemic this year this has been conducted through a combination of face-to-face meetings and remotely via MS Teams. The Chairman reports his observations from these reviews to the Audit Committee and the Board as part of the process for approving of the Annual Report and Accounts. The Committee operates under formal terms of reference, and these are reviewed annually. An annual rolling agenda is used to ensure that all matters within the Audit Committee’s Terms of Reference during the year are appropriately covered. The Committee considers that it has discharged its responsibilities as set out in its terms of reference to the extent appropriate during the year. Financial reporting The Audit Committee reviewed the appropriateness of the Group’s interim and full year financial statements, including evaluating the significant financial reporting judgments made by management to ensure that they were appropriate, considering the reports from management and ensuring that the external auditors concurred with management and the committee’s conclusions. The main areas of focus considered by the Committee during 2021/22 were as follows: 41 AUDIT COMMITTEE REPORT (continued) The presentation of the financial statements, including the presentation of adjusted performance measures. Following review of reports from management the Committee concurred that the presentation of the adjusted performance measures is appropriate, balanced and enables the users of the accounts to understand the underlying and on-going performance of the business. Going concern The Committee assessed the appropriateness of the going concern assumption. In doing this the committee reviewed the resources available to the Group, taking account of the Group’s trading and cash flow forecast together with available funding headroom in these very uncertain trading times because of the impact of component shortages, COVID-19 and inflation. The committee also considered two scenarios one where the acquisition of Custom Power completed and alternatively where it did not complete. Based on this information as disclosed on pages 39, 40, 76 and 77 in the basis of preparation the committee concluded that the Going Concern principle was appropriate. In finalising the accounts, the committee noted that the external auditors accepted management and the committee’s conclusions. Review for the potential impairment of goodwill and other intangible assets. The Committee reviewed and challenged the key assumptions, judgements, and sensitivities in the report from management. The Committee concurred that the expected future cash flows of the Group support the carrying value of goodwill and other intangible assets, and that there were no triggering events which suggested any potential impairment of goodwill and other intangible assets. Review of Acquisition accounting. Following review of reports from management and discussion with the CFO, which set out the updated assessment of the fair value of deferred contingent consideration, the Committee concurred with the judgements within the acquisition accounting, and that the treatment was in accordance with IFRS3. The audit committee reviewed the post balance sheet events disclosures associated with the planned acquisition of Custom Power which is subject to a general meeting on the 29 July 2022 and concluded the disclosures were appropriate. Accounting for R&D tax credits. Following review of reports from management and correspondence with the companies’ R&D tax advisors, setting out the level of the R&D claim, the level of the R&D tax credit which is deferred and amortised to match to capitalised development programmes, the Committee concurred that the R&D tax credit accounting was appropriate. Review of judgemental areas, and specifically the level of accounting provisions. Following review of reports from management the two areas of more significant judgment are provisions for credit defaults based on the expected loss rate in accordance with IFRS 9, and provisions for obsolete inventories. This is an area where there was extensive discussion, challenge and review between the auditors, management, and the audit committee. The committee recognised that the potential for working capital exposures have historically seen one off significant write offs, however the recent current year write offs pleasingly have been low. The Committee concurred in light of the significant increases in working capital investment and the reduction in the provision as a percentage of the invested working capital combined with the fact the provisioning policy had been applied consistently that the level of provisions remains appropriate. Annual report At the request of the Board the Committee considered whether the 2021/22 annual report was fair, balanced, and understandable and whether it provided the relevant information for stakeholders to assess the Group’s performance, business model and strategy. Having taken account of the other information provided to the Board throughout the year, the Committee was satisfied that, taken as a whole, the annual report was fair, balanced, and understandable. The Committee was satisfied that based on its review, challenge and debate of the draft financial statements and the key accounting items, that the assumptions made, the judgements applied, and the accounting & disclosures were appropriate. The Committee reviewed and recommended the approval of the narrative reporting statements on corporate governance, internal control and risk management in the annual report and the half year and trading statements. 42 AUDIT COMMITTEE REPORT (continued) External auditors The Audit Committee has developed a formal Auditor Independence Policy. In accordance with this policy, the Committee oversees the relationship with the external auditors and monitors all services provided by them and all fees payable to them. This is to ensure that potential conflicts of interest are considered, and that an independent, objective and professional relationship is maintained. Following the completion of last year’s audit by RSM UK Audit LLP a comprehensive debrief was completed to ensure that the value from the audit was maximised for all stakeholders. The output of the debrief formed part of the audit planning and scoping process to ensure continuous improvement. The Audit Committee also monitors the effectiveness of the annual audit. In advance of the financial year end, the Committee receives a detailed audit plan from the auditors which identifies the auditors’ assessment of the key risks and their intended areas of focus. This is agreed with the Committee to ensure that the scope and coverage of audit work is appropriate. Based on the scope of work the committee ensure that the proposed fees are fair and reasonable and represent value for the services provided. As in prior years the provision of external audit and tax compliance are separated where practical. As such tax advice is provided by Bevan Buckland LLP and The Kings Mill Practice. In addition, Solid State PLC’s management also provide the Committee with feedback on their view of the quality and effectiveness of the audit. This feedback is considered in conjunction with the Committee’s own review of the auditor’s performance in delivering an effective, objective, independent and a high-quality audit. Based on the prior year audit and the review completed of this year’s services delivered in respect of the 2021/22 audit of Solid State PLC, both management and the audit committee were satisfied that there had been appropriate focus and challenge on the primary areas of audit risk and they assessed the quality of the audit process as good. Non-audit services The Committee also regularly reviews the nature, extent, objectivity, and cost of non-audit services provided by the external auditors. Under this policy, the award to the Group’s auditors of audit related services, tax consulting services or other non-audit related services in excess of £10,000 must first be approved by the Audit Committee. The policy also sets out guidelines for the recruitment of employees or former employees of the external auditor. In addition, the Group’s auditors are required to make a formal report to the Audit Committee annually on the safeguards that are in place to maintain their independence and the internal safeguards in place to ensure their objectivity. In the current year it was flagged that taxation services have been provided by RSM to a non-significant subsidiary of the Group in the United States due to a legacy relationship prior to acquisition. The fees are not considered significant in the context of the Group fee. 43 AUDIT COMMITTEE REPORT (continued) Non-audit services The nature of the services provided by the auditors and the amounts paid to them are as detailed below: RSM UK audit LLP (Group auditors) Fees payable to company’s auditors for the audit of the parent company accounts and consolidated financial statements Fees payable to company’s auditor and its associates for other services: • Other assurance services • Taxation services * • Services relating to corporate finance transactions • Other non-audit services Total fees payable to the Group auditors 31 March 22 £’000 31 March 21 £’000 120 123 - 6 - - - - 48 3 _______ _______ 126 174 _______ _______ * Legacy service for acquired entity and RSM LLP (USA) have resigned as tax advisors. The audit scope for the year ended 31 March 2022 relates to the audit of the Consolidated Group Accounts and that of the parent company. In addition to the Dormant non trading companies several of the UK trading subsidiaries have adopted the exemption from the requirements to file audited financial statements by virtue of section 479A of the Companies Act 2006. In adopting the exemption Solid State PLC has provided a statutory guarantee to these subsidiaries in accordance with section 479C of the Companies Act 2006 (see note 14). Internal Audit The Board asks the Audit Committee to review annually the requirement for an internal audit function, having regard to the size of the Group, the costs of such a function versus the likely benefit and the sufficiency of the assurance to validate the functioning of the system of internal control, given the operational and financial circumstances facing the Group. Based on the review of the management reporting and external audit assurances over controls and financial reporting, the Audit committee considers there was no requirement for an internal audit function at this time. As part of the Group Chief Financial Officer’s review processes the divisional Managing Directors and the site Financial Controllers are obliged to positively confirm that the agreed procedures are in place and are being adhered to, with specific reference to key controls such as bank and control account reconciliations. It has been reviewed by the Committee and they remain satisfied with the arrangements. No significant failings or weaknesses were identified by the internal management review and sign off process, but several minor improvements were identified and implemented. The capacity within financial resources was reviewed post the two acquisitions last year and expanded as required. The Committee also considers the discharge of the Board’s responsibilities in the areas of corporate governance, financial reporting, and internal control, including the internal management of risk, as identified in the FRC’s revised guidance on Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. Risk management activities are dealt with in more detail in the Strategic Report on pages 12 to 16. 44 AUDIT COMMITTEE REPORT (continued) Internal control The Audit Committee reviews the effectiveness of the Group’s system of internal controls and risk management activities bi-annually as part of the half year end and full year public reporting. The key procedures that the Directors have established with a view to providing effective internal control include the following: a clearly defined organisational structure and delegated limits of authority; • • Group policies and procedures in respect of financial reporting and control, contract approval, project appraisal, human resources, quality control, health and safety, information security and corporate governance and compliance; the preparation of annual budgets and regular forecasts which are approved by the Board; the monitoring of performance against budget and forecasts and the reporting of any variances in a timely manner to the Board; regular review and self-assessment of the risks to which the Group is exposed, taking steps to monitor and mitigate these wherever possible; • • • • where appropriate, taking out insurance cover; and, • approval by the Audit Committee of audit plans and, on behalf of the Board, receipt of reports on the Group’s accounting and financial reporting practices and its internal controls together with reports from the external auditors as part of their normal audit work. P Haining FCA Audit Committee Chairman 27 July 2022 45 REMUNERATION COMMITTEE REPORT On behalf of the Board, I am pleased to present our Directors’ Remuneration Report (the “Report”) for the year ended 31 March 2022. The Remuneration Committee is committed to structuring the remuneration packages of Executive Directors and senior management that are competitive and enable the Group to attract, retain and motivate talented people that can develop and execute the Group’s strategy. To promote the long-term success of the Company, the Executive Directors incentive benefits are performance based and earned only subject to the satisfaction of performance conditions. These performance conditions are aligned with the interests of the shareholders. In determining the remuneration packages for the Executive Directors for the forthcoming financial year, the Committee took into account the following factors: • • • • The Group’s overall performance and strategy - in particular, the Committee noted the strong organic growth in profitability, value enhancing acquisitions, and record trading of Solid-State PLC for the year ended 31 March 2022; Current and emerging market practice; Best practice expectations of institutional investors; and The competitiveness of the Company’s remuneration – the Committee looked both at other companies in the AIM and Small Cap index as well as a set of comparators that have similar complexities to Solid State PLC. All decisions made by the Committee have been made under the Group Remuneration Policy. Basic salary increases for the forthcoming year have been determined by reference to a peer Group of UK listed technology companies, an understanding of the general rate of salary inflation and a desire to ensure a competitive level of pay. Accordingly, increases have been determined as follows: • • • Group Chief Executive Group Chief Financial Officer Divisional Managing Directors – 7.5% – 6.1% – 6.1% In addition to basic pay, the Committee determined that an annual bonus pool should be set aside based upon a reasonable share of the excess of any profits earned over the market expectation at the beginning of each year. This will be set such that: • • • No bonus accrues until the company meets or exceeds expectation (after bonus cost); The cost of the scheme would not normally exceed one third of the excess profits; and, Aggregate allocations from the pool (set at the discretion of the Committee at the end of each year) would not normally exceed 60% of aggregate basic salaries. 46 REMUNERATION COMMITTEE REPORT (continued) Business performance and resulting remuneration outcomes for the year ending 31 March 2022 It has been another record year for the Company and for Shareholders as discussed in the Strategic Report. Solid State PLC has continued to deliver strong results for Shareholders. Trading for the year ended 31 March 2022 was strong across both divisions and the Group has delivered full-year adjusted earnings which are 19% ahead of the market expectations from July 2021. Considering this performance, the Committee decided to allocate a discretionary annual bonus pool for the Executive Directors which in total was equivalent to 60% of the Executive Group’s total basic salary. This reflects the view of the Committee that the current year performance has been exceptionally strong in challenging times. Further details of bonus and LTIP awards can be found on pages 50 and 51 of this report. Share Option incentives The Committee also recognise the benefits of implementing a long-term reward for the executive through an LTIP. This is intended to encourage retention and motivation of executive Directors and other key members of the management team through building an equity investment in the company aligned to the generation of long-term shareholder value. During the previous financial year new share option plans; a HMRC approved Company Share Option Plan (“CSOP”) and an unapproved Long Term Incentive Plan (“LTIP”) offering opportunities to build meaningful equity stakes in the Company for approximately 12 – 15 key employees, including the executive Directors, were implemented. The first award made to the senior leadership team followed the ratification at the AGM. These plans operate in a manner consistent with relevant Investment Association’s guidelines, including, for example, a limit to dilution as a consequence of aggregate awards of 10% over a ten-year period. Awards under these plans are typically expected to be made annually following the AGM and another award is planned for later this year. Other key activities in the year ending 31 March 2022 During the year under review, the Committee held two formal meetings. As well as the implementation of the remuneration policy, the Committee also carried out the following activities: • Reviewed and approved the Executive Directors’ performance against financial and non-financial objectives for the year ended 31 March 2022 and determined the bonuses payable; • Determined salary increases for Executive Directors for the year ending 31 March 2023; • Approved the LTIP Awards to be made in the year ending 31 March 2023 and their performance conditions; • Reviewed and approved the annual bonus structure for Executive Directors for the year ending 31 March 2022; • Awarded the second grant of 36,750 shares under the HMRC approved CSOP plan to senior staff; • Awarded the second grant of 42,800 shares under the new LTIP plan to the executives. Further detail on the above can be found in the Annual Report on Remuneration. During 2022/23, the Committee will continue to review the reward arrangements appropriate to Executive Directors. The Annual Report on Remuneration explains how our policy has been implemented during the year and, along with this letter, will be subject to an advisory vote at our AGM (resolution 2). We hope that you will support this resolution. P Magowan Remuneration Committee Chairman 27 July 2022 47 REMUNERATION COMMITTEE REPORT (continued) Single page remuneration summary Corporate performance for the year Executive Director Total Remuneration 48 REMUNERATION COMMITTEE REPORT (continued) Remuneration report This report is prepared to address the reporting requirements of the QCA code which the company has adopted in accordance with AIM rule 26. Remuneration Committee The Company’s remuneration policy is the responsibility of the Remuneration Committee (the ‘Rem Co’), which was established in 2017. The terms of reference of the Rem Co are outlined on the Group website:www.solidstateplc.com. The members of the Committee are: Mr P Magowan (Chairman); Mr N Rogers and, Mr P Haining. The Rem Co, which is required to meet at least twice a year, met 2 times during the year ended 31 March 2022. The Chief Executive Officer and certain executives may be invited to attend meetings of the Committee to assist it with its deliberations, but no executive is present when his or her own remuneration is discussed. Refreshed remuneration policy In reviewing the remuneration policy, the committee has refreshed the policy as set out below. Opportunity Performance metrics Any percentage increases will ordinarily be in line with those across the wider workforce. However, salary increases may be higher in exceptional circumstances, such as the need to retain a critical executive, or an increase in the scope of the executive’s role (including promotion to a more senior role) and/or in the size of the Group. Insurance cover based on market rates. N/A N/A N/A Up to 4% of base salary in addition to an employee contribution of 5%. Remuneration element and link to strategy Operation Base Salary – To attract and retain quality executives which provides a competitive total package Salaries are reviewed annually and normally fixed for 12 months, effective from 1 April. The Committee considers: Benefits To help retain employees and remain competitive in the marketplace. Pension To facilitate long-term savings provisions. • Role, competence and performance; • Average change in broader workforce pay; and, • Group salary budgets. Salaries will be benchmarked against companies of a comparable size and complexity which operate, in similar sectors. Directors, along with other senior UK executives, receive an electric or hybrid company car or car allowance, life assurance, and family medical insurance. (note BIK are expected to drop as executives transition to electric or hybrid vehicles which attract lower BIK.) The Company operates a defined contribution pension scheme. Contributions are benchmarked periodically against companies of a comparable size and complexity which operate in similar sectors. Executive Directors may take a cash allowance in lieu of pension contributions. 49 REMUNERATION COMMITTEE REPORT (continued) Remuneration element and link to strategy Operation Opportunity Performance metrics Annual bonus The principal long-term measure of Shareholder interests is Total Shareholder Return. The Committee considers that this will be enhanced through the setting and attainment of various short- term targets, which are within the control of the Executive Directors. These are incentivised through the bonus plan which rewards the achievement of annual financial and strategic business targets. Up to 100% of salary payable for significant over- achievement of financial and non- financial bonus objectives. The bonus will pay 0% at minimum threshold, and 60% at excepted maximum. In exceptional circumstances, the Committee has discretion to declare additional bonus up to a maximum of 100%. Targets (financial and non- financial) are determined and reviewed by the Committee annually and are selected to be relevant for the year in question. Actual bonus payable is determined by the Committee after the financial year-end, based on performance against these targets. Financial objectives are updated to reflect acquisitions, disposals and currency movements during the year. Bonus payments are delivered in cash or shares. Clawback (of any bonus paid) may be applied during employment or for 1 year post- termination in the event of gross misconduct, material financial misstatement, error in calculation of outcomes or in any other circumstance that the Remuneration Committee considers appropriate. Performance is assessed on an annual basis against financial and personal / strategic objectives set at the start of each year. Financial measures will be weighted appropriately each year according to business priorities, and will represent no less than 70% of the annual bonus. Performance vs. targeted levels will be measured at budgeted FX rates. Financial measures may include (but are not limited to) PBT and Adj. FD EPS. Non-financial measures may include strategic measures directly linked to the Company’s priorities. Personal/strategic objectives will represent no more than 30% of the bonus and will be set annually to capture expected individual contributions to Solid State PLCs strategic plan. The personal element shall not pay out unless financial performance is at least at Threshold. The Remuneration Committee has discretion to adjust formulaic bonus outcomes to ensure fairness for shareholders and participants, to ensure pay aligns underlying company performance, and to avoid unintended outcomes. These adjustments can be either upwards (within plan limits) or downwards (including down to zero). The Remuneration Committee may consider measures outside of the bonus framework to ensure there is no reward for failure. 50 REMUNERATION COMMITTEE REPORT (continued) Remuneration element and link to strategy Company Share Option Plan (“CSOP”) To motivate senior staff and executives to deliver shareholder value over the longer term. Long Term Incentive Plan (“LTIP”) To motivate executives to deliver shareholder value over the longer term. Operation Opportunity Performance metrics Awards of up to the applicable HMRC approved limits Performance metrics reflect strategic goals and milestones. The exercise of the award is dependent upon the individual’s continued employment for a three-year period from the date of grant, subject to the good and bad leaver provisions within the Plan rules and the satisfaction by the Company of certain performance conditions over the three-year vesting period. The performance conditions are based on Group financial performance, which may include (but not be limited to) Group earnings or returns over the performance period. The Company’s share schemes are funded through a combination of shares purchased in the market and newly issued shares, as appropriate. Up to 125% of salary. Performance metrics reflect strategic goals and milestones. The exercise of the award is dependent upon the individual’s continued employment for a three-year period from the date of grant, subject to the good and bad leaver provisions within the Plan rules and the satisfaction by the Company of certain performance conditions over the three-year vesting period. The performance conditions are based on Group financial performance, which may include (but not be limited to) Group earnings or returns over the performance period. The Company’s share schemes are funded through a combination of shares purchased in the market and newly issued shares, as appropriate. Awards of conditional shares through market price options are typically granted annually, with vesting dependent on the achievement of performance conditions over the following three years. Dividend equivalents will be paid on vested awards. These awards will be made under an HMRC approved company share option plan (CSOP) to Senior staff and Executive Directors, Malus and clawback applies to vested and unvested CSOP awards in the event of material misstatement of information or misconduct. The Company monitors the number of shares issued under the schemes and their impact on dilution limits. The Company is committed to remaining within the Investment Association’s 10% dilution limit. Awards of conditional shares through nil-cost options are typically granted annually, with vesting dependent on the achievement of performance conditions over the following three years. Vested awards are subject to a two-year holding period, in aggregate a five-year period from award to exercise. Dividend equivalents will be paid on vested awards. These awards will be made under an unapproved share option plan (USOP) to Executive Directors, Malus and clawback applies to vested and unvested LTIP awards in the event of material misstatement of information or misconduct. The Company monitors the number of shares issued under the schemes and their impact on dilution limits. The Company is committed to remaining within the Investment Association’s 10% dilution limit. 51 REMUNERATION COMMITTEE REPORT (continued) Details of the policy on fees paid to the Company’s Non-Executive Directors are set out in the table below: Remuneration element and link to strategy Operation Opportunity Fees to attract and retain Non- Executive Directors of the highest calibre with broad commercial and other experience relevant to the Company. The fees paid to the Non Executive Directors are determined by the Board (excluding the Non-Executive Directors or group of Non Executive Directors whose remuneration is being discussed). Fee levels are benchmarked against similar roles at comparable companies. Time commitment and responsibility are considered when reviewing fee levels. Fee levels are reviewed annually, with any adjustments effective 1 April in the year following review. It is expected that increases to Non-Executive Director fee levels will normally be in line with salaried employees over the life of this policy. However, in the event that there is a material misalignment with market, or a material change in the time commitment required to fulfil a Non- Executive Director role, the Board has the power to make an appropriate adjustment to the fee level. Performance metrics N/A Notes to the remuneration policy and performance conditions and target setting Each year, the Committee will determine the weightings, performance metrics and targets as well as timing of grants and payments for the annual bonus, CSOP and LTIP plans within the approved remuneration policy and relevant plan rules. The Committee evaluates a number of factors which assist in reaching their conclusions and view. These include, but are not limited to, the strategic priorities for the Company over the mid/long term, Shareholder feedback, the risk profile of the business and the macroeconomic climate. The Annual Bonus Scheme is measured against a balance of profitability, and the delivery of key strategic areas of importance for the business. The profitability metrics used include adjusted profit before tax and /or adjusted fully diluted EPS. The CSOP and LTIP are assessed against a performance measure identified as the most relevant to driving sustainable bottom line business performance, as well as providing value for Shareholders. This measure is currently considered to be real growth in adjusted fully diluted EPS. Targets are set against the annual and long-term plans, taking into account analysts’ forecasts, the Company’s strategic plans, prior year performance, estimated vesting levels and the affordability of pay arrangements. Targets are set to provide an appropriate balance of risk and reward to ensure that, while being motivational for participants, maximum payments are only made for exceptional performance. In exceptional circumstances, the Committee has the discretion to adjust and/or set different targets and performance conditions for annual bonus and long-term incentive plans, provided the new conditions are no tougher or easier than the original conditions. This includes events where conditions are unable to fulfil their original intended purpose. Awards may also be adjusted in certain circumstances (e.g. for a rights issue, a corporate restructuring or for special dividends). Any discretion exercised by the Committee in the adjustment of performance conditions will be fully explained to Shareholders in the relevant report. If the discretion is material and upwards, the Committee will consult with major Shareholders in advance. No such discretion was exercised during FY21/22. The Committee can also grant additional LTIP awards to participants in return for their bearing the Company’s liability to employer’s National Insurance arising on the exercise of such grants made to them above. The additional award ensures that the participants are in a neutral position on an after-tax basis, assuming no change in tax rates. All historical awards that have been granted before the date this policy came into effect and remain outstanding (including those detailed on page 58 of this report) remain eligible to vest based on their original award terms. 52 REMUNERATION COMMITTEE REPORT (continued) Recruitment (and appointment) policy The remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s approved remuneration policy in force at the time of appointment. The same approach would be adopted where a Director is promoted to the Board from within the Group. Element Base salary Pension Benefits Annual Bonus Recruitment Policy The base salaries of new appointees will be determined by reference to relevant market data, experience and skills of the individual, internal relativities, and current basic salary. Where new appointees have initial basic salaries set below market, any shortfall may be managed with phased increases over multiple years subject to the individual’s development in the role. New appointees will receive pension contributions or an equivalent cash supplement in line with existing policy. New appointees will be eligible to receive benefits which may include (but are not limited to) those outlined in the policy table. The structure described in the policy table will apply to new appointees with the relevant maximum being pro-rated to reflect the proportion of employment over the year. Targets for the personal element will be tailored to each executive. LTIP New appointees will be granted awards under the LTIP on the same terms as other executives, as described in the policy table. In addition, a new recruit may be awarded up to 125% of salary in performance shares, which would be subject to the same performance measures and rules in force for the LTIPs at the time of appointment. Compensation for forfeited remuneration The approach in respect of compensation for forfeited remuneration in respect of a previous employer will be considered on a case-by-case basis taking into account all relevant factors, such as performance achieved or likely to be achieved, the proportion of the performance period remaining and the form of the award. The Committee retains the ability to make use of the relevant guidance to facilitate the “buyout”. Any “buy-out” awards would have a fair value no higher than the remuneration forfeited. Notice period and payment for loss of office It is the Company’s policy that Executive Directors should have service contracts incorporating a notice period of one year. However, it may be necessary occasionally to offer shorter or longer initial notice periods to new Directors. Under the terms of their service contracts, any termination payments are not pre-determined but are determined in accordance with the Director’s contractual rights, taking account of the circumstances and the Director’s duty to mitigate loss. The Company’s objective is to manage its exposure to the risk of a potential termination payment. Non-Executive Directors have letters of appointment for a term of one year whereupon they are normally renewed, but generally for no more than nine years in aggregate. Non-Executive Directors are not eligible for payment on termination, other than payment to the end of their contracts. 53 REMUNERATION COMMITTEE REPORT (continued) Service contracts and letters of appointment The Executive Directors have entered into service agreements which can be terminated by either party by providing the required notice period set out in their respective service contracts. The Chairman and Non-Executive Directors have entered into letters of appointment for an initial fixed period up to the first AGM where in accordance the company’s policy on re-election they are re-elected annually by the shareholders at the AGM. The appointment can be terminated on six months’ notice by either party. N Rogers G S Marsh P O James M T Richards J L Macmichael P Haining P Magowan Non-Executive Chairman Group Chief Executive Group Chief Financial Officer Systems MD Components MD Non-Executive Director Non-Executive Director External appointments Date of contract / letter of appointment 19/06/2019 19/06/1996 18/11/2016 06/04/2016 26/05/2010 31/10/2017 17/11/2020 Contractual notice period 6 months by either party 12 months by either party 12 months by either party 12 months by either party 12 months by either party 6 months by either party 6 months by either party With the approval of the Board in each case, and subject to the overriding requirements of the Group, Executive Directors may accept external appointments as Non-Executive Directors of other companies and retain any fees received. During the year ended 31 March 2022, the Executive Directors did not hold any Non-Executive Directorships with other companies other than Mr P O James who on a voluntary basis is a Non-Executive Director for the British Waterski Federation Limited and is a Director of Bradley Drive Management Company Ltd. LTIP and Bonus leaver provisions Reason for leaving Annual bonus Resignation Good leaver / Change of control LTIP Resignation Good leaver / Change of control Calculation of vesting / payment No annual bonus payable Cash bonuses will typically be paid to the extent that performance objectives have been met. Any resulting bonus will typically be prorated for time worked. The Remuneration Committee retains discretion to vary this treatment in individual circumstances. Outstanding awards would normally lapse however the committee has the discretion to approve vesting based on a pro-rata time apportionment and assessment of achievement of performance conditions. The Committee determines whether and to what extent outstanding awards vest based on the extent to which performance conditions have been achieved. The Remuneration Committee retains discretion to vary this treatment in individual circumstances. The determination of vesting will be made as soon as reasonably practical following the end of the performance period or such earlier date as the Remuneration Committee may agree (within 12 months in the event of death). In the event of change of control, the following 3 years’ awards will vest on a pro-rata time apportionment and assessment of achievement of performance conditions as a minimum. Any award above this level will be at the committee’s discretion. For the initial awards under the LTIP there are transitional provisions applicable. In the event of a change of control, awards may alternatively be exchanged for new equivalent awards in the acquirer by mutual agreement where appropriate. A Good leaver is defined as a participant ceasing to be employed by the Group by reason of death, disability, ill health, retirement, or any other reason that the Committee determines in its absolute discretion. 54 REMUNERATION COMMITTEE REPORT (continued) Consideration of employment conditions elsewhere in the Group The remuneration policy, which has been implemented for the current Executive Directors, is more weighted towards performance-related pay than for other employees. The reason for this is to establish a clear link between remuneration received by the Executive Directors and the creation of Shareholder value. As mentioned on page 46 of this Annual Report and Accounts, when setting the policy, the Committee takes account of pay and employment conditions elsewhere in the Group but has not used any remuneration comparison measures between the Executive Directors and other employees. Consideration of Shareholder views The Committee’s policy is to receive updates on the views of Shareholders and their representative bodies on best practice and take these into account. It seeks the views of key Shareholders on matters of remuneration in which it believes they would be interested. Adoption of the refined policy for 2022/23 In addition to reviewing and refining the policy to adopt last year to move towards best practice, the committee has reviewed the Executive remuneration for the coming year. The results of this review have been set out in this report. (i) Executive remuneration During the period, the Committee decided it was appropriate to commence an external review of Executive salaries and performance bonuses. To aid this the Committee have engaged with an external employment benefits consultant to independently review remuneration against appropriate benchmarking. The impact of the review of salaries and bonuses was as follows: 1 April 2020 to 31 March 2021 1 April 2021 to 31 March 2022 From 1 April 2022 1 April 2020 to 31 March 2021 1 April 2021 to 31 March 2022 G S Marsh P O James J L Macmichael M T Richards Bonus (£’000) 111 87 96 96 ______ Directors’ remuneration for the year ended 31 March 2022 is set out on page 57 of this document. Salary pa (£’000) 200 165 165 165 ______ Salary pa (£’000) 185 145 160 160 ______ Salary pa (£’000) 215 175 175 175 Bonus (£’000) 105 105 105 105 ______ (ii) Chairman and Non-Executive Director remuneration The Chairman and the Non-Executive Directors received fee sets out in the table below. The fixed fee covers preparation for and attendance at meetings of the full Board and committees thereof. Should there be any services provided in relation to “special projects” that may arise there may be an appropriate incremental fee agreed for these services. The Executive Directors are responsible for setting the level of Non-Executive remuneration. The Non-Executive Directors are also reimbursed for all reasonable expenses incurred in attending meetings. The Non-Executive Directors are not eligible to participate in the Company’s performance related bonus plan or long term incentive plans. Full terms and conditions for each of the Non-Executive Directors are available at the Company’s registered office and will be available upon request at the AGM for 15 minutes prior to the meeting and during the meeting. N Rogers* P Haining P J Magowan** 1 April 2020 to 31 March 2021 Total Fees pa (£’000) 42 25 7 ______ 1 April 2021 to 31 March 2022 Total Fees pa (£’000) 62 25 30 ______ From 1 April 2022 Total Fees pa (£’000) 66 26 32 *Mr N Rogers was appointed on 17 November 2020 as Chairman and his annual fee of £62,000 was charged pro-rata in 20/21, prior to his appointment as Chairman Nigel’s annual Non-Executive fees were £30,000. **Mr P Magowan was appointed on 1 January 2021 as such his annual fee of £30,000 was charged pro-rata in 20/21. 55 REMUNERATION COMMITTEE REPORT (continued) (iii) Equity-based incentive schemes for 2022 The Committee strongly believes that equity-based incentive schemes increase the focus of employees in improving Group performance, whilst at the same time providing a strong incentive for retaining and attracting individuals of a high calibre. Enterprise Management incentive scheme (“EMI”) The Solid State plc EMI) comprising conditional (performance-related) share awards (technically structured as nominal cost options pursuant to which participants must pay 0.1p per share on the exercise of their awards). The last grant was made in June 2017. There were 48,000 EMI options awarded to each Director in June 2017. These options vest in three equal tranches based on performance conditions in respect of each year ending 31 March 2018, 31 March 2019, and 31 March 2020. The 2017 EMI awards are subject to two performance conditions. Firstly, the executive must remain in post at the vesting date, secondly the options fully vest based on exceeding the Board approved budget by 25%. Vesting commences for performance in excess of the Board approved budget with the options vesting pro-rata on a straight-line basis up to 25% above the Board approved budget where the awards fully vest. The market value at the date of grant was £4.23. Awards that do not vest as a result of not meeting the performance criteria in any particular year lapse. Company Share Option Plan (“CSOP”) For 2022, normal CSOP awards of up to the HMRC tax approved levels of £30,000 may be made to senior staff and Executive Directors, as outlined in the Policy Table. For all participants, awards will vest after three years in accordance with the performance conditions applicable to each grant. The performance conditions will be determined and set by the Remuneration Committee in accordance with the remuneration policy. No award will vest below Threshold performance, and vesting will increase on a straight-line basis between Threshold, Target and Stretch. Long Term Incentive Plan (“LTIP”) For 2022, normal LTIP awards of up to 125% of salary may be made to Executive Directors, as outlined in the Policy Table. For all participants, awards will vest after three years in accordance with the performance conditions applicable to each grant. The performance conditions will be determined and set by the Remuneration Committee in accordance with the remuneration policy. No award will vest below Threshold performance, and vesting will increase on a straight-line basis between Threshold, Target and Stretch. For the year ahead the Remuneration Committee intends to make a share option award in the range of 45% to 75% of salary which will be granted subsequent to the AGM when the shareholders will participate in an advisory vote at the forthcoming AGM (resolution 2). The Remuneration Committee intend to make annual awards in accordance with the Policy principles following the AGM where they have had the results of the shareholders advisory vote. 56 REMUNERATION COMMITTEE REPORT (continued) Remuneration for 31 March 2022 (audited) The value of all elements of remuneration received by each Director in the year was as follows: 31 March 2022 G S Marsh P O James J L Macmichael M T Richards N Rogers P Haining P J Magowan Total Salary/ Fees £’000 200 165 165 165 62 12 30 ______ 799 ______ Consultant fees £’000 - - - - - 13 - ______ 13 ______ EMI share bonus* £’000 - - - - - - - ______ - ______ Cash Bonus ** £’000 105 105 105 105 - - - ______ 420 ______ Benefits in kind £’000 6 23 25 4 - - - ______ 58 ______ Pension Cont’n £’000 4 7 1 7 - - - ______ 19 ______ Single figure Total £’000 315 300 296 281 62 25 30 ______ 1,309 ______ * There were no LTIP or EMI shares granted which were due to vest in the period. ** All Bonuses including the Director bonuses have been accrued, however payment was deferred until the end of Q1 when the results had been finalised though not yet formally signed off. 31 March 2021 G S Marsh P O James J L Macmichael M T Richards N Rogers* P Haining P J Magowan** Consultant Fees £’000 - - - - - 13 - ______ 13 ______ *Mr N Rogers was appointed on 17 November 2020 as Chairman and his annual fee of £62,000 has been charged pro-rata. Cash Bonus **** £’000 111 87 96 96 - - - ______ 390 ______ EMI share bonus*** £’000 - - - - - - - ______ - ______ Benefits in kind £’000 31 23 34 3 - - - ______ 91 ______ Salary/ Fees £’000 185 145 160 160 42 12 7 ______ 711 ______ Pension Cont’n £’000 3 5 3 6 - 1 - ______ 18 ______ Total Single figure total £’000 330 260 293 265 42 26 7 ______ 1,223 ______ **Mr P Magowan was appointed on 1 January 2021 as such his annual fee of £30,000 has been charged pro-rata. *** There were no LTIP or EMI shares granted which were due to vest in the period. **** All Bonuses including the Director bonuses have been accrued however payment was deferred until the end of Q1 when the audited results had been signed off. The principal benefits in kind relate to the provision of company cars, fuel, and private healthcare. Of the current year share-based payments charge £144k (2021: £77k) relates to the Directors. In addition to the above consultancy fees, additional fees totalling £31k (2021: £25k) arose during the year in respect of accountancy services and out of pocket expenses provided by The Kings Mill Practice, a firm of which Mr P Haining is the proprietor. A balance of £9k (2021: £9k) was due to The Kings Mill Practice at 31 March 2022. 57 REMUNERATION COMMITTEE REPORT (continued) The Directors’ interest in the issued ordinary share capital of the Company at today’s date, at 31 March 2022 and 31 March 2021 or date of appointment if later, were as follows: 27 July 22 31 March 22 31 March 21 G S Marsh M T Richards P O James J L Macmichael N Rogers P Haining P J Magowan 280,892 10,376 3,205 122,491 4,400 54,627 4,000 280,892 10,376 3,205 122,491 4,400 54,627 4,000 280,906 10,375 3,204 122,430 4,400 54,564 4,000 Long Term Incentive Plan and Enterprise Management Incentive scheme (‘EMI’) Details of the options over the Company’s shares granted under the LTIP and Enterprise Management Incentives Scheme are as follows: Options held at 31.03.21 26,700 42,700 42,700 26,700 Granted 10,700 Exercised - Lapsed 10,700 10,700 10,700 - - - - - - - Options held at 31.03.22 37,400 Exercise Price 0.1p – 5p Date of grant 29.10.21 April 2018 to April 2031 Exercise period 53,400 0.1p – 5p 29.10.21 April 2018 to April 2031 53,400 0.1p – 5p 29.10.21 April 2018 to April 2031 37,400 0.1p – 5p 29.10.21 April 2018 to April 2031 G S Marsh P O James M T Richards J L Macmichael During the year to 31 March 2022, the Board Granted an award of 10,700 shares to each of the Executive Directors which, subject to the performance criteria, will be eligible to vest in 2024. No options were exercised in the year. The market price of the shares on 31 March 2022 was £11.75 (2021: £8.30), with a quoted range during the year of £8.30 to £14.05 (2021: £3.51 to £9.00). Options held at 31.03.20 16,000 32,000 32,000 32,000 Granted 10,700 Exercised - Lapsed 10,700 10,700 10,700 - - 16,000 - - - - Options held at 31.03.21 26,700 Exercise price 0.1p – 5p Date of grant 28.10.20 April 2018 to April 2030 Exercise period 42,700 0.1p – 5p 28.10.20 April 2018 to April 2030 42,700 0.1p – 5p 28.10.20 April 2018 to April 2030 26,700 0.1p – 5p 28.10.20 April 2018 to April 2030 G S Marsh P O James M T Richards J L Macmichael During the year to 31 March 2021, the Board Granted an award of 10,700 shares to each of the Executive Directors which, subject to the performance criteria, will be eligible to vest in 2023. Mr J L Macmichael exercised 16,000 share options with an exercise price of 0.01p on the 2 July 2020 and sold an equivalent 16,000 shares which he already held on the 1 July 2020 at a price of £5.20 resulting in net proceeds and a gain of £83,200. P J Magowan Remuneration Committee Chairman 27 July 2022 58 DIRECTORS’ REPORT The Directors submit their report together with the audited financial statements of the Group in respect of the year ended 31 March 2022. Principal Activities, Review of the Business and Future Developments The principal activities of the Group during the year continued to be those of the manufacturing of electronic equipment and the value added supplier of electronic components and materials. The key performance indicators recognised by management are set out in the KPI section of the strategic report (page 20). An overall review of the Group’s trading performance and future developments is given in the Chairman’s Statement and Strategic Report. Other than as reported in the corporate and social responsibility section of this report the Group does not comment on environmental matters. Directors The Directors of the Company during the year were: N F Rogers G S Marsh P O James, BSc FCA J L Macmichael M T Richards P Haining, FCA P Magowan Details of the interests of Directors in the shares of the Company and Directors’ service contracts are stated in the Remuneration Committee Report on pages 46 to 58. Corporate Governance The Board confirms that the Group has had regard, throughout the accounting period, with the provisions set out in the Quoted Companies Alliance (QCA) Code and the UK Corporate Governance Code which was issued by the Financial Reporting Council in April 2016. Details of how the Group has adopted the QCA Code and corporate governance principles are set out in the corporate governance report on pages 27 to 40. Internal Control Details of how the Board has implemented its internal control framework and processes are set out in the corporate governance report on pages 27 to 40. Board of Directors The structure and operation of the Board of Directors is set out in the corporate governance report on pages 27 to 40. Principal risks and uncertainties Details of the principal risks and uncertainties of the Group are set out in the strategic report on pages 12 to 16. Financial Instruments Details of the use of financial instruments by the Group are contained in note 21 of the financial statements. Purchase of Own Shares At the year end the Company had in place authority to purchase up to 15% of the issued ordinary shares under authority given by a resolution at the Annual General Meeting on 8 September 2021. This authority expires on 8 March 2023. During the year the company repurchased 7,000 shares with a nominal value of £350 at market value of £80k into treasury shares which get used for the all-employee share scheme. Dividends Details of the dividends are disclosed in note 9 and in the Chairman’s Statement on page 5. Post balance sheet events Details of post balance sheet events are included on pages 3, 4, 15, 76 and 77 and note 32. 59 DIRECTORS’ REPORT (continued) Research and Development During the year the Group has continued to invest in research and development in partnership with some of its customers to develop technical electronic solutions to address the demand of our customers in their core markets of electronic communications, mobile battery power and rugged and industrial computing. During the year we invested in excess of £2.0m (2021: £1.5m) in research and development. The Company continues to claim R&D tax credits where eligible. Share options award On 6 October 2021 and 29 October 2021, the company granted options to the Senior Leadership team and the Executive Directors under the Company’s CSOP and LTIP respectively, further details are provided in the remuneration report on pages 46 to 58 and note 28. Employee engagement and Consultation The Group places considerable value on the involvement of its employees and continues to keep them informed on matters affecting them as employees and on the various factors impacting the performance of the Group. This is achieved through formal and informal meetings, Divisional business reviews “Town Hall” all hands briefings and Division and Group newsletter updates. Employees are encouraged to be involved in the Group’s performance by participation in long term incentive plans or share option schemes for the senior team and the all-employee share scheme. The Executive Directors regularly engage with and visit the Group’s sites and the Board meetings are also rotated across the various UK locations. Further details set out in the compliance with section 172 and within the corporate governance report on pages 27 to 40. Disabled persons The Group gives fair consideration to applications for employment made by disabled persons, bearing in mind the particular aptitudes and abilities of the applicant concerned. In the event of employees becoming disabled, every effort will be made to ensure that their employment with the Group continues and that appropriate training and/or reasonable adjustments are arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should provide consistent opportunities to that of other employees. Further details are set out in the corporate governance report on pages 27 to 40. Insurance The Group has in place appropriate Directors’ and Officers’ indemnity insurance for all Group companies. Business relationships Further details are set out in the corporate governance report on pages 27 to 40. Going Concern Further details are set out in the corporate governance report on pages 27 to 40. Renewal of authority to purchase the Company’s shares Last year, a resolution was passed at the Annual General Meeting to give the Company the authority to purchase its own Ordinary shares on the Stock Exchange. This authority would expire after a period of eighteen months from the passing of the resolution. In order to avoid this authority expiring during the next year and the need to call an extraordinary general meeting to renew the authority, a resolution to renew the authority is set out in the notice of the Annual General Meeting at the end of this document. Under the terms of the resolution to be proposed at the Annual General Meeting, the maximum number of shares which may be purchased is 15% of the issued Ordinary share capital of the Company. The minimum price payable by the Company for its Ordinary shares will be 5p and the maximum price will be determined by reference to current market prices. The authority will automatically expire after a period of eighteen months from the passing of the resolution unless renewed. It is not the Directors’ current intention to exercise the power to purchase the Company’s Ordinary shares, but they believe that under certain circumstances it would be in the Company’s best interests to do so. Your Directors consider that the resolutions to be proposed at the meeting are in the best interests of the Company and its shareholders. They unanimously recommend that all Ordinary shareholders vote in favour of the resolution at the Annual General Meeting as they intend to do in respect of their beneficial holdings. 60 DIRECTORS’ REPORT (continued) Nigel Rogers (dob: April 1961), Non-Executive Director (appointed 01 July 2019) Nigel qualified as a Chartered Accountant in 1983 with PwC. He became Group Finance Director of Stadium Group plc in 1996, before progressing to Group Chief Executive Officer in 2001. He joined 600 Group plc as Group Chief Executive Officer in 2012 and led the turnaround of the AIM-quoted global machine tool business, increasing strategic focus on the growth of its laser marking business until leaving in April 2015 to begin a plural career. Nigel is also Chairman of Transense Technologies plc and Chairman of Surgical Innovations Group plc. Gary Marsh, (dob: April 1966), Chief Executive Officer Gary joined the Company in 1986 having gained an HND in Business and Finance Studies. He has held various positions within the Group including that of Operations Director of Solid State Supplies prior to his appointment as its Managing Director in 1997. In addition to this role, Gary was appointed Group Managing Director in 2002 following the acquisition of Steatite. In 2011 following the acquisition of Rugged Systems he was appointed as Group Chief Executive Officer. Peter James, (dob: June 1979), Director Peter qualified as a Chartered Accountant with PricewaterhouseCoopers LLP (PwC) in 2003. He was appointed to the Board of Solid State PLC in February 2017. Before joining Solid State PLC, Peter was Group Financial Controller at IQE plc where he was a key member of the senior leadership team successfully completing two significant transactions, funded through an equity fund raising and a global refinancing. Subsequently he led the integration project, aligning the enlarged Group with its customer markets serviced by manufacturing sites, delivering efficiency and material savings. At PwC Peter gained a wide range of experience in Audit and Financial Due Diligence advising a broad range of companies in a variety of sectors, including multinational main market and AIM listed companies. In addition, on a voluntary basis Peter is a Non-Executive Director for the British Water Ski and Wakeboard Federation Limited providing independent financial oversight as Chair of the Audit and Finance Committee. John Macmichael, (dob: April 1961), Director John is an electronics and communications graduate whose career has encompassed design and development through applications engineering, sales, sales management and general business management. John has gained extensive management experience of multiple sales channels with distributors and OEMs both here in the UK and worldwide through his international sales management role whilst living in the USA. Formerly managing Director of Breckenridge Technologies Limited, John joined Solid State Supplies Limited in 2006 before being appointed managing Director in April 2011. He presently runs the Components Division on behalf of Solid State PLC. Matthew Richards, (dob: October 1963), Director Matthew was appointed as Managing Director of Steatite Limited in April 2016. Matthew comes to the Board with 30 years of experience in the defence electronics industry. He has a track record of success in both private and public companies, most recently as Senior Vice President and Managing Director at API Technologies Corp running operations in the UK, Canada and USA, specialising in RF and Security solutions with a focus on high reliability and harsh environment applications. Prior to that, Matthew held business development and sales leadership roles with the L3 Corporation. He has extensive experience dealing with the Government customers at home and abroad having travelled extensively in Europe, the Middle East and Asia. Matthew started his career installing and commissioning terrestrial and satellite antennas systems for broadcast and military users before moving into sales in the early 1980s. Pete Magowan, (dob August 1967), Senior Independent Non-Executive Director (appointed Jan 2021). Pete holds a Bachelor of Science degree in Electrical and Electronic Engineering from the University of Manchester Institute of Science and Technology and a Diploma in Marketing from the University of Bristol Business School. Pete started his career in marketing with STMicroelectronics before becoming an early employee and main Board member of ARM Holdings plc. Pete then went on to become a General Partner at Alta Berkeley Ventures and an Executive at Fidelity International. Pete is also a Non Executive director of Filtronics plc. Peter Haining FCA, (dob: September 1956), Non-Executive Director and Company Secretary Peter Haining qualified as a chartered accountant in 1980 and later worked at Binder Hamlyn. He left Binder Hamlyn in 1992, together with three colleagues, to establish The Kings Mill Partnership. 61 DIRECTORS’ REPORT (continued) Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report, Strategic Report, the Directors’ Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. The Directors have elected under company law and are required by the AIM Rules of the London Stock Exchange to prepare the Group financial statements in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006 and have elected under company law to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The group financial statements are required by law and UK adopted international accounting standards in conformity with the requirements of the Companies Act 2006 to present fairly the financial position and performance of the group. The Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of the profit or loss of the Group for that period. In preparing each of the Group and parent company financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; • • make judgements and estimates that are reasonable and prudent; • for the Group financial statements, state whether they have been prepared in accordance with UK adopted international accounting standards in conformity with the requirements of the Companies Act 2006; for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company to enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In addition, the Directors are responsible the maintenance and integrity of the corporate and financial information included in the Solid State plc website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditors Each of the persons who are Directors at the time when this Directors’ Report is approved has confirmed that: • • so far as that Director is aware, there is no relevant audit information of which the parent company’s auditors are unaware, and that Director has taken all steps that ought to have been taken as a Director in order to be aware of any information needed by the auditors in connection with preparing their report and to establish that the parent company’s auditors are aware of that information. A resolution to re-appoint RSM UK Audit LLP as auditors will be proposed at the next annual general meeting. By order of the Board P Haining FCA Secretary 27 July 2022 Registered Office: 2 Ravensbank Business Park, Hedera Road, Redditch, B98 9EY 62 REPORT OF THE INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF SOLID STATE PLC Opinion We have audited the financial statements of Solid State plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 March 2022 which comprise the Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity, Consolidated Statement of Financial Position, Consolidated Statement of Cash Flows, Company Statement of Financial Position, Company Statement of Changes in Equity and notes to the financial statements, including significant accounting policies. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and UK-adopted International Accounting Standards. 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 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (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 31 March 2022 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with UK adopted International Accounting Standards; 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. Summary of our audit approach Key audit matters Group • Revenue recognition • Inventory valuation and provisioning Parent Company • No key audit matters Materiality Group • Overall materiality: £450,000 (2021: £375,000) • Performance materiality: £337,000 (2021: 281,000) Parent Company • Overall materiality: £331,000 (2021: £321,000) • Performance materiality: £248,000 (2021: 240,000) Scope Our audit procedures covered 80% of revenue, 90% of total assets and 86% of profit before tax. 63 REPORT OF THE INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF SOLID STATE PLC (continued) Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the group financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on the overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the group financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined the matters described below to be the key audit matters to be communicated in our report. Group key audit matters Revenue recognition Key audit matter description the matter in How was addressed the audit The risk – revenue recognition Refer to accounting policies and critical accounting judgements in notes 1 and 2 to the group financial statements and note 3. The group’s revenue comprises sales of electronic equipment to its customers after deductions for discounts and anticipated returns. There are also certain contracts where retentions have been received or where obligations are satisfied in stages. Revenue underpins the key measures of performance of the group. There is a risk that revenue could be misstated through: • • • inappropriate application of the group’s revenue recognition policies; recognition of revenue in the wrong period; or inaccurate estimates for returns. Our response We assessed whether revenue was recognised in line with the Group’s revenue recognition policies and IFRS 15. Our procedures included a combination of controls, data analytics and substantive testing. We selected a sample of items to check that revenue was recognised on shipment and that the cut- off of revenue transactions around the year end was appropriate. We critically assessed the revenue recognition for specific contracts where revenue is recognised over the course of the agreement and resulted in deferred income, including agreement of specific contractual terms. We evaluated the provision for returns by assessment of the level and nature of post year end credit notes. A selection of transactions posted to nominal ledger codes outside of the normal revenue cycle were identified using a data analytic tool and investigated. 64 REPORT OF THE INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF SOLID STATE PLC (continued) Group key audit matters Inventory valuation and provisioning Key audit matter description The risk – inventory valuation and provisioning Refer to accounting policies and critical accounting judgements in notes 1, 2 and 15. How the matter was addressed in the audit The group holds a combination of finished goods and goods for re-sale, together with work in progress. Finished goods and goods for re-sale comprise a range of bought-in and manufactured specialist electronic equipment. Work in progress is substantially the material cost of assemblies and manufactured products at varying stages of completion at the year end. The valuation of inventory, which by its nature is specialist, involves judgement relating to the potential obsolescence of inventory including net realisable value (NRV). The group has in place a policy for addressing this risk and recognises provisions accordingly. Our Response We attended and undertook physical inventory counts at key locations across the group, validating that inventory held was accurately recorded and was in good physical condition. We assessed the estimation techniques used and the appropriateness for the nature of inventory and the sector. We then tested the year-end inventory provisioning calculations prepared by management, including their arithmetical integrity. We challenged management on their key assumptions and obtained justifications from management on the assumptions adopted within the provisioning calculations and assessed any specific areas where a provision was considered necessary. We performed testing to ensure that the valuation of inventory was stated at the lower of cost or NRV by comparing the sales value of the products to their actual cost Parent company key audit matters We have determined that there are no key audit matters to communicate in our report. Our application of materiality When establishing our overall audit strategy, we set certain thresholds which help us to determine the nature, timing and extent of our audit procedures. When evaluating whether the effects of misstatements, both individually and on the financial statements as a whole, could reasonably influence the economic decisions of the users we take into account the qualitative nature and the size of the misstatements. Based on our professional judgement, we determined materiality as follows: Group Parent company Overall materiality £450,000 (2021: £375,000) £331,000 (2021: £321,000) Basis for determining overall materiality 6.5% of adjusted profit before tax 5% of net assets Rationale for benchmark applied Adjusted result before tax chosen as the Group is profit oriented Net assets chosen as the parent is a holding company Performance materiality £337,000 (2021: £281,000) £248,000 (2021: £240,000) Basis for determining performance materiality Reporting of misstatements to the Audit Committee 75% of overall materiality 75% of overall materiality in excess of Misstatements £22,500 and misstatements below that threshold that, in our view, warranted reporting on qualitative grounds. in excess of Misstatements £16,500 and misstatements below that threshold that, in our view, warranted reporting on qualitative grounds. 65 REPORT OF THE INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF SOLID STATE PLC (continued) An overview of the scope of our audit The group consists of 11 components, located in the United Kingdom, USA and Ireland. The coverage achieved by our audit procedures was: Full scope audit Specific audit procedures Total Number of components 4 1 5 Revenue Total assets Profit before tax 80% -% 80% 86% 4% 90% 86% -% 86% Analytical procedures at group level were performed for the remaining 6 components. Specific audit procedures were performed in respect of 1 component relating to existence and valuation of inventory where inventory was considered material to the group. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the group’s and parent company’s ability to continue to adopt the going concern basis of accounting included: • • • • • obtaining and reviewing the cash flow forecasts prepared by management checking the mathematical accuracy of the cash flow forecasts reviewing the cash flow forecasts in light of our understanding of the business and current wider economic conditions and challenging the key assumptions within the forecasts considering management’s sensitivities and stressed forecasts, including the mitigating actions which could be taken considering the impact of the post balance sheet events and impact on forecasts for the alternative scenarios of the proposed acquisition being completed or otherwise In forming our assessment of going concern we have noted the profitable and cash generative position of the existing group, the strength of the balance sheet and the existing funding arrangements. We have also considered the alternative forecasts which include the anticipated funding arrangements to support the proposed acquisition. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group’s or the parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. 66 REPORT OF THE INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF SOLID STATE PLC (continued) Other information The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinions on other matters prescribed by the Companies Act 2006 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 by exception In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report. 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 As explained more fully in the directors’ responsibilities statement set out on page 62, 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. 67 REPORT OF THE INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF SOLID STATE PLC (continued) The extent to which the audit was considered capable of detecting irregularities, including fraud Irregularities are instances of non-compliance with laws and regulations. The objectives of our audit are to obtain sufficient appropriate audit evidence regarding compliance with laws and regulations that have a direct effect on the determination of material amounts and disclosures in the financial statements, to perform audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements, and to respond appropriately to identified or suspected non-compliance with laws and regulations identified during the audit. In relation to fraud, the objectives of our audit are to identify and assess the risk of material misstatement of the financial statements due to fraud, to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud through designing and implementing appropriate responses and to respond appropriately to fraud or suspected fraud identified during the audit. However, it is the primary responsibility of management, with the oversight of those charged with governance, to ensure that the entity’s operations are conducted in accordance with the provisions of laws and regulations and for the prevention and detection of fraud. In identifying and assessing risks of material misstatement in respect of irregularities, including fraud, the group audit engagement team: • • • obtained an understanding of the nature of the industry and sector, including the legal and regulatory frameworks that the group and parent company operate in and how the group and parent company are complying with the legal and regulatory frameworks; inquired of management, and those charged with governance, about their own identification and assessment of the risks of irregularities, including any known actual, suspected or alleged instances of fraud; discussed matters about non-compliance with laws and regulations and how fraud might occur including assessment of how and where the financial statements may be susceptible to fraud. The most significant laws and regulations were determined as follows: Legislation / Regulation IFRS, FRS102 and Companies Act 2006 Tax compliance regulations Export Control and International Traffic in Arms (ITAR) Health and safety legislation Additional audit procedures performed by the audit engagement team included: Review of the financial statement disclosures and testing to supporting documentation; Completion of disclosure checklists to identify areas of non-compliance. Inspection of advice received from external tax advisors Audit of the calculation of the research and development tax allowances to ensure suitably supported and in line with legislation. ISAs limit the required audit procedures to identify non-compliance with these laws and regulations to inquiry of management and where appropriate, those charged with governance (as noted above) and inspection of legal and regulatory correspondence, if any. ISAs limit the required audit procedures to identify non-compliance with these laws and regulations to inquiry of management and where appropriate, those charged with governance (as noted above) and inspection of legal and regulatory correspondence, if any. 68 REPORT OF THE INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF SOLID STATE PLC (continued) The areas that we identified as being susceptible to material misstatement due to fraud were: Risk Revenue recognition Management override of controls Audit procedures performed by the audit engagement team: See key audit matters above. Testing the appropriateness of journal entries and other adjustments; Assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and Evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: http://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. Ian Wall (Senior Statutory Auditor) For and on behalf of RSM UK Audit LLP, Statutory Auditor Chartered Accountants St Philips Point Temple Row Birmingham B2 5AF 27 July 2022 69 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 March 2022 Revenue Cost of sales Gross profit Sales, general and administration expenses Operating profit Finance expense Profit before taxation Tax expense Adjusted profit after taxation Adjustments to profit Profit after taxation Profit attributable to equity holders of the parent Other comprehensive income Adjusted total comprehensive income Adjustments to total comprehensive income Total comprehensive income for the year Earnings per share Basic EPS from profit for the year Diluted EPS from profit for the year Notes 3, 30 4 6 7 31 7 31 8 8 2022 £’000 84,997 (57,470) _______ 27,527 (23,801) _______ 3,726 (226) _______ 3,500 (977) _______ 6,158 (3,635) 2,523 _______ 2,523 _______ 261 _______ 6,158 (3,374) 2,784 _______ 2022 29.5p 28.9p 2021 £’000 66,281 (46,362) _______ 19,919 (15,634) _______ 4,285 (85) _______ 4,200 (247) _______ 4,733 (780) 3,953 _______ 3,953 _______ - _______ 4,733 (780) 3,953 _______ 2021 46.4p 45.7p Adjusted EPS measures are reported in note 8 to the accounts. All results presented for the current and comparative period are generated from continuing operations. The notes on pages 76 to 118 form part of these financial statements. 70 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 March 2022 Share Capital £’000 428 Share Premium Reserve £’000 3,625 Foreign Exchange Reserve £’000 6 Capital Redemption Reserve £’000 5 Retained Earnings £’000 21,508 Shares held in Treasury £’000 (70) Total Equity £’000 25,502 2,784 27 295 - - - - - 2,784 - 295 - - - - - - - - - - - - - - - - - 27 - - - - - - - - - - - - (80) (80) (93) 93 - (1,453) - (1,453) Balance at 31 March 2021 Total comprehensive income for the year ended 31 March 2022 Foreign exchange Share based payment credit Transactions with owners in their capacity as owners Purchase of treasury shares Transfer of treasury shares to AESP Dividends Rounding - ______ - _______ - _______ - _______ 1 _______ - ______ 1 ______ Balance at 31 March 2022 428 ______ 3,625 _______ 33 _______ 5 _______ 23,042 _______ (57) ______ 27,076 ______ The notes on pages 76 to 118 form part of these financial statements. 71 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 March 2022 Share Capital £’000 427 Share Premium Reserve £’000 3,626 Foreign Exchange Reserve £’000 (7) Capital Redemption Reserve £’000 5 Retained Earnings £’000 18,521 Shares held in Treasury £’000 (43) Total Equity £’000 22,529 3,953 13 171 - - - - - 3,953 - 171 - - - - - - - - - - - - - - - - - 13 - - - - - - - - - - - - (95) (95) (68) 68 - (1,069) - (1,069) Balance at 31 March 2020 Total comprehensive income for the year ended 31 March 2021 Foreign exchange Share based payment credit Transactions with owners in their capacity as owners Purchase of treasury shares Transfer of treasury shares to AESP Dividends Shares issued 1 ______ (1) _______ - _______ - _______ - _______ - ______ - ______ Balance at 31 March 2021 428 ______ 3,625 _______ 6 _______ 5 _______ 21,508 _______ (70) ______ 25,502 ______ The notes on pages 76 to 118 form part of these financial statements. 72 CONSOLIDATED STATEMENT OF FINANCIAL POSITION at 31 March 2022 Company Number: 00771335 Notes £’000 £’000 £’000 £’000 2022 2021 ASSETS NON-CURRENT ASSETS Property, plant and equipment Right of use lease assets Intangible assets Deferred tax asset TOTAL NON-CURRENT ASSETS CURRENT ASSETS Inventories Trade and other receivables Deferred tax asset Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade and other payables Contract liabilities Current borrowings Corporation tax liabilities Right of use lease liabilities TOTAL CURRENT LIABILITIES NON CURRENT LIABILITIES Non current borrowings Right of use lease liabilities Provisions Deferred tax liability Deferred consideration on acquisitions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS 10 11 12 23 15 16 23 22 17 18 19,21,22 20 19,21,22 20 24 23 22 3,414 1,983 15,831 539 __________ 17,598 17,978 - 4,983 ____________, 21,113 3,461 2,059 531 758 ___________ 1,500 1,326 694 1,832 1,976 ___________ 2,981 2,476 16,557 - __________ 21,767 22,014 31,953 ___________ 53,967 ___________ 40,559 ___________ 62,326 ___________ 10,629 14,222 188 6,914 ____________ 11,890 2,299 - 801 741 ___________ 27,922 15,731 3,750 1,802 741 1,491 4,950 ___________ 7,328 ____________ 35,250 ____________ 27,076 ____________ 428 3,625 5 33 23,042 (57) ____________ 27,076 ____________ 12,734 ____________ 28,465 ____________ 25,502 ____________ 428 3,625 5 6 21,508 (70) ____________ 25,502 ____________ CAPITAL AND RESERVES ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT Share capital Share premium reserve Capital redemption reserve Foreign exchange reserve Retained earnings Shares held in treasury 25 26 26 26 26 26, 27 TOTAL EQUITY The financial statements were approved by the Board of Directors and authorised for issue on 27 July 2022 and were signed on its behalf by: G S Marsh, Director P O James, Director The notes on pages 76 to 118 form part of these financial statements. 73 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 March 2022 OPERATING ACTIVITIES Profit before taxation Adjustments for: Property Plant and equipment depreciation Right of use asset depreciation Amortisation Loss/(profit) on disposal of property, plant and equipment Share based payment expense Finance costs Recognition of increase in deferred contingent consideration Profit from operations before changes in working capital and provisions (Increase)/decrease in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Decrease in provisions Cash generated from operations Income taxes paid Net cash inflow from operating activities INVESTING ACTIVITIES Purchase of property, plant and equipment Capitalised own costs and purchase of intangible assets Proceeds of sales from property, plant and equipment Payments for acquisition of subsidiaries net of cash acquired Net cash outflow from investing activities FINANCING ACTIVITIES Repurchase of ordinary shares into treasury Borrowings drawn Borrowings repaid Principal payment obligations for right of use assets Interest paid Dividend paid to equity shareholders Net cash (outflow)/inflow from financing activities (Decrease)/increase in cash and cash equivalents 22 2022 2021 Notes £’000 £’000 £’000 £’000 3,500 4,200 729 763 1,327 3 295 226 1,651 _______ 8,494 614 497 978 (22) 171 85 - _______ 6,523 (6,922) (3,679) 8,140 (47) _______ 1,852 1,925 (3,363) (7) _______ (2,508) _______ 5,986 407 _______ 6,930 (941) _______ (432) _______ (941) _______ 5,045 (432) _______ 6,498 22 22 22 6 (1,178) (601) 81 (2,572) _______ (80) - (2,250) (871) (127) (1,453) _______ (356) (302) 77 (4,119) _______ (4,270) (4,700) (95) 3,750 (333) (575) (37) (1,069) _______ (4,781) _______ (4,006) _______ 1,641 _______ 3,439 _______ The notes on pages 76 to 118 form part of these financial statements. 74 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 March 2022 (continued) Translational foreign exchange on opening cash Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2022 £’000 16 (4,006) 6,914 _______ 2,924 _______ There were no significant non-cash transactions. Cash and cash equivalents comprise: Cash available on demand Overdraft facility Net cash and cash equivalents 2022 £’000 5,045 (2,121) _______ 2,924 _______ 2021 £’000 (42) 3,439 3,517 _______ 6,914 _______ 2021 £’000 6,914 - _______ 6,914 _______ The notes on pages 76 to 118 form part of these financial statements. 75 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES Solid State PLC (“the Company”) is a public company incorporated, domiciled and registered in England and Wales in the United Kingdom. The registered number is 00771335 and the registered address is: 2 Ravensbank Business Park, Hedera Road, Redditch, B98 9EY. Basis of preparation The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented. These financial statements have been prepared in accordance with UK adopted International Accounting Standards in conformity with the requirements of the Companies Act 2006 (“IFRS”). The Group financial statements are presented in pounds sterling which is the functional and presentational currency of the Group and all values are rounded to the nearest thousand (£’000) except when otherwise indicated. Going concern In assessing the going concern position of the Group for the Consolidated Financial Statements for the year ended 31 March 2022, the Directors have considered the Group’s cash flows, liquidity and business activities. At 31 March 2022, the Group had net cash at banks of £2.9m, an undrawn revolving credit facility (RCF) of £6.0m and a drawn RFF of £1.5m. Based on the Group’s forecasts, the Directors have adopted the going concern basis in preparing the Financial Statements. The Directors have made this assessment after consideration of the Group’s cash flows and related assumptions and in accordance with the Guidance published by the UK Financial Reporting Council (Risk Management, Internal Control and Related Financial and Business Reporting 2014, the April 2016 guidance on Going concern basis of accounting and reporting on solvency and liquidity risks and the various guidance issued in 2020). This guidance provides support to Directors and Board in making the assessment of going concern. In preparing the going concern assessment the Directors considered the principal risks and uncertainties that the business faced which have been disclosed on pages 12 to 16. Four areas have been identified as potentially more significant: direct supply chain disruption limiting our ability to supply; indirect supply chain disruption delaying customer programmes and demand; rising inflation and a further COVID-19 outbreak causing operational disruption. The Board concluded that the three areas of risk which remained the most uncertain were the direct and indirect supply chain disruption risks in addition to inflation. The Directors have given careful consideration to the potential impact of on-going global electronic component shortages and rising inflation on the cashflows and liquidity of the Group over the next 12 month period. Customer demand has remained solid and in the last financial year we have seen customers significantly extending order cover to help to manage the Global electronics supply chain issues. The most significant impact on the Group’s future performance is the continued and worsening uncertainty arising from the extending electronic component lead times. Management have taken all possible actions to minimise and mitigate the potential impact of this shortage, however the impact is expected to continue throughout 2022/23 and potentially into 2023/24. While the actions do not mitigate the risk fully it still positions the Group to manage the impact as effectively as possible as demonstrated historically over the last two trading years. 76 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Given the post year end announcement of the intention to acquire Custom Power is subject to shareholder approval on the 29 July 2022, albeit the directors expect to receive shareholder support for the transaction, they have considered the going concern position of the Group under both scenarios, being the deal is rejected or approved. The Directors have prepared revised “stressed” forecasts taking account of the results to date, current expected demand, and mitigating actions which could be taken, together with an assessment of the liquidity headroom against the cash and bank facilities. This includes the additional £13m term loan facilities provided by Lloyds bank to facilitate the acquisition of Custom Power and the equity fund raise (subject to shareholder approval). The Board’s evaluation of going concern was based on a minimum equity raise of £15m, therefore the additional shareholder support which has been announced post year end, with the equity fund raise expected to be in the region of £28.4m (subject to the take up of the open offer) significantly increases the funding headroom. The bank facilities are subject to financial covenants requiring the business to be EBITDA positive therefore this facility is available to fund investment in working capital, capital investment or acquisition activities. Should the business face such a significant downturn that it was loss making the facility would not be available to be drawn to fund additional losses without a covenant waiver or amendment. Therefore, in evaluating a stressed forecast model the Board only included the RCF in the headroom to the extent it is available within the covenants. This financial modelling is based on applying various sensitivity scenarios to a base case to 30 September 2023 which has been prepared based on an extension of the budget for FY22/23. In the period since the year end the rolling 12 month order intake remains strong, maintaining a book to bill ratio of 1.38, and reflects a continued improvement in order cover which does help to manage extending component lead times. In preparing a severe downside scenario with no overhead mitigation, it assumes a shortfall in Group revenue of ~13% over 12 months period and a 2% margin erosion with limited cost mitigation. This results in EBITDA reducing by ~48% compared to the Board’s base case expectations. Even with this level of Group EBITDA reductions, when combined with the mitigating actions that are within the Group’s control, the Directors currently believe the Group would retain a reasonable cash surplus, comply with covenants and thus maintaining sufficient liquidity to meet its liabilities as they fall due. In considering the assessment of the Group’s going concern position the Directors have also identified that the Group could look to both the Group’s bankers and or the equity markets if additional liquidity were required. Albeit none of the sensitivities indicate that the Group would require additional sources of liquidity. In the post balance sheet period, the Group has continued to build up the inventory level to ensure customer demand can be met. In addition, the £4.6m short term deferred consideration on acquisitions was settled in Q1, partially utilising the RCF. The Group continues to focus on obtaining advanced customer deposits to manage the working capital investment required to secure long lead time / short supply components. The Directors have concluded that the potential impact of the electronic component shortages and rising inflation as described above does not represent a material uncertainty over the Group and Company’s ability to continue as a going concern. Nevertheless, it is acknowledged that there are potentially material variations in the forecasted level of financial performance for the coming year. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months, therefore it is appropriate to adopt a going concern basis for the preparation of the Financial Statements. Accordingly, these financial statements do not include any adjustments to the carrying amount or classification of assets and liabilities that would result if the Group and Company were unable to continue as a going concern. 77 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Changes in accounting policy and disclosures New standards, amendments and interpretations adopted in the year. The following new standards, amendments and interpretations have been adopted by the Group for the first time for the financial year beginning on the 1 April 2021: • Amendments to references to the Conceptual framework in IFRS Standards. • Amendments to IFRS 9, IAS 39, IFRS 7: – Interest rate benchmark reform. The adoption of these standards and amendments has not had a material impact on the financial statements. New standards, amendments and interpretations to published standards issued but not yet effective and not early adopted A number of new standards, amendments and interpretations to existing standards have been published that will be mandatory for the Group’s accounting periods beginning on or after 1 April 2022 or later periods and which the Group has decided not to adopt early are listed below. The Group intends to adopt these standards when they become effective. • Amendments to IAS 1 and IFRS Practice Statement 2, regarding the classification of liabilities and disclosure of accounting policies, effective for annual reporting periods beginning on or after 1 January 2023. • Amendments to IAS 8 regarding the definition of accounting estimates, effective for annual reporting periods beginning on or after 1 January 2023. • Amendments to IAS 12 regarding deferred tax on leases and decommissioning obligations, effective for annual reporting periods beginning on or after 1 January 2023. • Amendments to IAS 16 regarding deductions from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use, effective for annual reporting periods beginning on or after 1 January 2022. • Amendments to IAS 37 regarding the costs to include when assessing whether a contract is onerous, effective for annual reporting periods beginning on or after 1 January 2022. • Amendments to references to the Conceptual framework in IFRS Standards. The Directors anticipate that none of the new standards, amendments to standards and interpretations will have a significant effect on the financial statements of the Group. Principle of consolidation The consolidated financial statements incorporate the financial results and position of the Parent and its subsidiaries. Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of financial position respectively. 78 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Business combinations The purchase method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. Acquisition-related costs are expensed as incurred. The consideration transferred for the acquisition of a subsidiary comprises the: fair values of the assets transferred; liabilities incurred to the former owners of the acquired business; equity interests issued by the Group; fair value of any asset or liability resulting from a contingent consideration arrangement; and fair value of any pre-existing equity interest in the subsidiary. Identifiable assets acquired, and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non- controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non- controlling interest’s proportionate share of the acquired entity’s net identifiable assets. The excess of the: consideration transferred; amount of any non-controlling interest in the acquired entity; and acquisition-date fair value of any previous equity interest in the acquired entity, over the fair value of the net identifiable assets acquired, is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognised in profit or loss. Impairment of non-financial assets Non financial assets that have an indefinite useful life (e.g. Goodwill) or other intangible assets which are not ready to use and therefore not subject to amortisation (e.g. ongoing incomplete R&D programmes) are reviewed at least annually for impairment. Impairment tests on goodwill are undertaken annually on 31 March, and on other non-financial assets whenever events or changes in circumstances indicate that their carrying value may not be reasonable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Impairment charges are included in sales, general and administration expenses in the consolidated statement of comprehensive income, except to the extent that they reverse gains previously recognised in the consolidated statement of recognised income and expense. An impairment loss recognised for goodwill is not reversed. 79 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Intangible Assets a) Goodwill Goodwill arising on an acquisition is recognised as an asset and initially measured at cost, being the excess of the fair value of the consideration over the fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is not amortised. However, it is reviewed for potential impairment at least annually or more frequently if events or circumstances indicate a potential impairment. For the purpose of impairment testing, goodwill is allocated to each of the Cash Generating Units to which is relates. Any impairment identified is charged directly to consolidated statement of comprehensive income. Subsequent reversals of impairment losses for goodwill are not recognised. b) Development costs Expenditure incurred that is directly attributable to the development of new or substantially improved products or processes is recognised as an intangible asset when the following criteria are met: • • • • • • the product or process is intended for use or sale; the development is technically feasible to complete; there is an ability to use or sell the product or process; it can be demonstrated how the product or process will generate probable future economic benefits; there are adequate technical, financial and other resources to complete the development; and the development expenditure can be reliably measured. Directly attributable costs refers to the materials consumed; the directly attributable labour; and the incremental overheads incurred in the development activity. General operating costs, administration costs and selling costs do not form part of directly attributable costs. All research and other development costs are expensed as incurred. Capitalised development costs are amortised on a straight line basis over the period, during which the economic benefits are expected to be received, which typically range between 1 and 5 years. Amortisation expense is included within sales, general and administration expenses in the statement of comprehensive income. The estimated remaining useful lives of development costs are reviewed at least on an annual basis. Amortisation commences once the project is completed and revenues are being generated. The carrying value of capitalised development costs is reviewed for potential impairment at least annually, or more frequently if events or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the consolidated statement of comprehensive income. c) Software Externally acquired software assets are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives. Cost includes all directly attributable costs of acquisition. In addition, directly attributable costs incurred in the development of bespoke software for the Group’s own use are capitalised. The useful economic life over which the software is being amortised has been assessed to be 3 to 5 years. The carrying value of capitalised software costs is reviewed for potential impairment at least annually, or more frequently if events or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the consolidated statement of comprehensive income. The costs of maintaining internally developed software, and annual licence fees to utilise third party software, are expensed as incurred. 80 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Intangible Assets (continued) d) Other intangibles Other intangible assets are those which arise on business combinations in accordance with IFRS 3 revised. These intangible assets form part of the identifiable net assets of an acquired business and are recognised at their fair value and amortised on a systematic basis over their useful economic life which is typically 5 to 10 years. This includes customer relationships, the fair value of which has been evaluated using the multi period excess earnings method “MEEM”. The MEEM model valuation was cross checked to the cost of product development and customer qualification to which the relationships relate. Capitalised acquisition intangibles are amortised on a straight line basis over the period, during which the economic benefits are expected to be received, which typically range between 5 and 10 years. Amortisation expense is included within sales, general and administration expenses in the statement of comprehensive income. The carrying value of other intangible assets is reviewed for potential impairment at least annually, or more frequently if events or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the consolidated statement of comprehensive income. Property, plant and equipment Property, plant and equipment is stated at historical cost or deemed cost where IFRS 1 exemptions have been applied, less accumulated depreciation and any recognised impairment losses. Costs include the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use including any qualifying finance expenses. Depreciation is provided on all items of property, plant and equipment to write off the carrying value of items over their expected useful economic lives. It is applied at the following rates: • Short leasehold property improvements- straight line over minimum life of lease • Fittings and equipment- 25% per annum on a reducing balance basis or a straight line basis over 3 to 5 years with an appropriate residual value as considered most appropriate • Computers- between 20% and 33.3% per annum on a straight-line basis • Motor vehicles- 25% per annum on a reducing balance basis The residual values and useful lives of the assets are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if its carrying amount is greater than its estimated net realisable value. Gains and losses on disposal are determined by comparing proceeds with carrying amounts. These are included in the consolidated statement of comprehensive income. Leases IFRS 16 “Leases” addresses the definition of a lease, the recognition and measurement of leases and establishes the principles for the reporting useful information to users of the financial statements about the leasing activities of both lessees and lessors. The Group has applied judgement to determine the lease term for some lease contracts in which as lessee there includes a renewal option. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which affects the amount of lease liabilities and right-of-use assets recognised. The lease liability reflects the present value of the future rental payments and interest, discounted using either the effective interest rate or the incremental borrowing rate of the entity. Payments associated with short-term leases and leases of low value assets are recognised on a straight-line basis over the lease term as an expense within the income statement. 81 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Right-of-use assets The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are related to the property leases, plant and machinery and motor vehicles and are depreciated on a straight-line basis over the lease term. Right of use lease liabilities At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include lease payments less any lease incentives receivable. In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term or a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments). Inventories Inventories are stated at the lower of cost and net realisable value. Cost is based on either average purchase cost or the cost of purchase on a first in, first out basis which is the most appropriate for the category of inventory. Work in progress and finished goods include labour and attributable overheads. Net realisable value is based on estimated selling price less any additional costs to completion and disposal. Financial Instruments Classification and measurement of financial instruments under IFRS9 classifies financial assets as either held at amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss, dependent on the business model and cash flow characteristics of the financial instrument. Financial assets and financial liabilities are recognised when the company becomes party to the contractual provisions of the instrument. Trade and other receivables Trade receivables are initially measured at their transaction price. Other receivables are initially recognised at fair value plus transaction costs. Receivables are held to collect the contractual cash flows which are solely payments of principal and interest. Therefore, these receivables are subsequently measured at amortised cost using the effective interest rate method. The effect of discounting on these financial instruments is not considered to be material. Cash and cash equivalents Cash and cash equivalents include cash at bank and in hand and highly liquid interest-bearing securities with maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. 82 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Impairment of financial assets IFRS 9 requires an expected credit loss (‘ECL’) model which broadens the information that an entity is required to consider when determining its expectations of impairment. Under this new model, expectations of future events must be taken into account and this will result in the earlier recognition of potential impairments. An impairment loss is recognised for the expected credit losses on financial assets when there is an increased probability that the counterparty will be unable to settle an instrument’s contractual cash flows on the contractual due dates, a reduction in the amounts expected to be recovered, or both. The probability of default and expected amounts recoverable are assessed using reasonable and supportable past and forward-looking information that is available without undue cost or effort. The expected credit loss is a probability-weighted amount determined from a range of outcomes and takes into account the time value of money. Impairment of trade receivables For trade receivables, expected credit losses are measured by applying an expected loss rate to the gross carrying amount. The expected loss rate comprises the risk of a default occurring and the expected cash flows on default based on the aging of the receivable. The risk of a default occurring always takes into consideration all possible default events over the expected life of those receivables (“the lifetime expected credit losses”). Different provision rates and periods are used based on groupings of historic credit loss experience by product type, customer type and location. Impairment of other receivables The measurement of ‘performing’, ‘underperforming’ or ‘non-performing’ based on the company’s assessment of increases in the credit risk of the financial asset since its initial recognition and any events that have occurred before the year-end which have a detrimental impact on cash flows. losses depends on whether the financial asset impairment is The financial asset moves from ‘performing’ to ‘underperforming’ when the increase in credit risk since initial recognition becomes significant. In assessing whether credit risk has increased significantly, the company compares the risk of default at the year- end with the risk of a default when the investment was originally recognised using reasonable and supportable past and forward-looking information that is available without undue cost. The risk of a default occurring takes into consideration default events that are possible within 12 months of the year-end (“the 12-month expected credit losses”) for ‘performing’ financial assets, and all possible default events over the expected life of those receivables (“the lifetime expected credit losses”) for ‘underperforming’ financial assets. Impairment losses and any subsequent reversals of impairment losses are adjusted against the carrying amount of the receivable and are recognised in profit or loss. Financial Liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities. Financial liabilities are classified as either: • • Financial liabilities at amortised cost; or Financial liabilities as at fair value through profit or loss (FVTPL). All financial liabilities are measured at amortised cost and include: Trade and other payables Contract liabilities • • • Borrowings • Lease liabilities 83 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. They are initially recognised at fair value net of direct transaction costs and subsequently held at amortised cost. Contract liabilities Contract liabilities comprise payments in advance of revenue recognition and revenue deferred due to contract performance obligation not being completed. They are classified as current liabilities if the contract performance obligations payment are due to be completed within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as noncurrent liabilities. Contract liabilities are recognised initially at fair value, and subsequently stated at amortised cost. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred and subsequently stated at amortised cost. Borrowing costs are expensed using the effective interest method. Equity instruments and Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Treasury Shares Where any Group company purchases the Parent Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. These shares are held in a separate negative reserve in the capital section of the consolidated statement of financial position. Any dividends payable in relation to these shares are cancelled. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders. Dividends Equity dividends are recognised when they become legally payable. Interim dividends are recognised when paid. Final dividends are recognised when approved by the shareholders at an annual general meeting. Adjusted performance metrics and non-recurring charges / credits Nonrecurring charges / credits are disclosed separately in the financial statements where it is necessary to do so to provide further understanding of the financial performance of the Group. Transactions are classified as non- recurring where they relate to an event that falls outside of the ordinary activities of the business and where individually or in aggregate, they have a material impact on the financial statements. In presenting our adjusted performance metrics we also exclude the non-cash charges/credits that relates to acquisition accounting and share based payments and the associated tax effect of these items. 84 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Foreign currency Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which it operates are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are retranslated at the rates ruling at the balance sheet date. Exchange differences arising are recognised in the statement of comprehensive income. Revenue The Group manufactures and distributes a range of electronic equipment. Revenue comprises sales to external customers after discounts, excluding value added taxes. The Group’s performance obligations with respect to physical goods is to deliver a finished product to a customer. Revenue is recognised when control of the products has transferred, being when the products are delivered to the customer, the customer has full control over the products supplied, and there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery occurs when the products have been shipped to the specific location, the risks of obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Group has objective evidence that all criteria for acceptance have been satisfied. Where performance obligations have not be satisfied at the reporting date any advanced payments are recognised as contract liabilities. For goods that are subject to bill and hold arrangements this means: • • the goods are complete and ready for collection; the goods are separately identified from the Group’s other stock and are not used to fulfil any other orders; • and the customer has specifically requested that the goods be held pending collection. Normal payment terms apply to the bill and hold arrangements. Revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. No element of financing is deemed present as the sales are made with a credit term of 30 to 90 days, which is consistent with market practice. The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust any of the transaction prices for the time value of money. The Group’s obligation to provide a refund for faulty products under the standard warranty terms is recognised as a returns provision. A receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Directors, who are responsible for allocating resources and assessing performance of the operating segments. A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. The Executive Directors assess the performance of the operating segments based on the measures of revenue, Profit Before Taxation (PBT) and Profit After Taxation (PAT). Central overheads are not allocated to the business segments. 85 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Government Grants Income received from government grants is recognised as ‘Other Income’ within operating profit in the Statement of Comprehensive Income in the same period as the staff costs to which the income relates. Government grant income is only recognised once there is reasonable assurance both that the Group will comply with any conditions and that the grant will be received. The Group utilised the UK Government‘s Coronavirus Job Retention Scheme, ‘furlough scheme’, during the COVID-19 pandemic. Pensions The pension schemes operated by the Group are defined contribution schemes. The pension cost charge represents the contributions payable by the Group. Current and deferred taxation Income tax on the profit or loss for the year comprises current and deferred tax. Taxable profit differs from accounting profit because it excludes certain items of income and expense that are recognised in the financial statements but are treated differently for tax purposes. Current tax is the amount of tax expected to be payable or receivable on the taxable profit or loss for the current period. This amount is then amended for any adjustments in respect of prior periods. Current tax is calculated using tax rates that have been written into law (‘enacted’) or irrevocably announced/committed by the respective Government (‘substantively enacted’) at the period-end date. Current tax receivable (assets) and payable (liabilities) are offset only when there is a legal right to settle them net and the entity intends to do so. This is generally true when the taxes are levied by the same tax authority. Because of the differences between accounting and taxable profits and losses reported in each period, temporary differences arise on the amount certain assets and liabilities are carried at for accounting purposes and their respective tax values. Deferred tax is the amount of tax payable or recoverable on these temporary differences. Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs from its tax base, except for differences arising on: • • • the initial recognition of goodwill the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit: and investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable the difference will not reverse in the foreseeable future. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the differences can be utilised. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered). Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities, and the deferred tax assets and liabilities relate to taxes levied by the same tax authority. 86 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES (continued) Share based payment Where share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated statement of comprehensive income over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each statement of financial position date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated statement of comprehensive income over the remaining vesting period. 87 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group’s accounting policies. This note provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be wrong. Acquisition accounting In accounting for the Active Silicon acquisition in accordance with IFRS 3 the key judgement relates to the fair value of the deferred contingent consideration at the balance sheet date. The 25 month deferred contingent consideration was originally recognised in the comparative period at a total of £1.45m based the budgeted and forecast profit after tax expectations. The Active Silicon acquisition outperformed the current year budget expectation by 220% after achieving all-time record company revenues and resulting profits for the financial year. The shift from initial assumptions was driven by customer demand and order placement not only recovering post COVID-19 but achieving unprecedented levels, despite component shortages. Subsequent to year end, a cash payment of £1.13m was settled in relation to the first 13 month tranche of deferred consideration. Based on the Active Silicon open orderbook, the performance to date in Q1 and management expectations for the full 2023 financial year, the total carrying value of the deferred contingent consideration has been increased by £1.65m to £3.1m. The key assumption for 2023 is the expected revenue based on existing and expected customer orders. Should the post-tax profit metric be 10% higher than assumed, the deferred contingent consideration will also increase by 10%. The increase has been expensed to the income statement and treated as a non-recurring adjustment to profit (as per Note 31). The revised deferred consideration balance is considered prudent and reasonable by the Directors based on forecasts calculated on the information currently available. This is a judgemental estimate based on performance and key market changes, including component shortages and macro-economic factors, may result a difference between the estimation and final payment. Expected credit losses In accordance with IFRS 9 the Group is required to assess the expected credit loss occurring over the life of its trade receivables. As a result of the continued component shortages and rising inflation across the globe the Directors expect that the risk of credit default continues to be higher than historical norms. However, the COVID- 19 business disruption risk has reduced. As a result, the Directors have made a judgemental assessment of the potential credit losses in the current business environment. In these financial statements the Directors have provided full disclosures of the provisions for credit default in note 21. The calculation of the provision based on the Directors judgemental assessment of expected credit loss reflects no change to the overall figure from 2021 of £0.65m. Recognition criteria for capitalisation of development expenditure The Group capitalises R&D in accordance with IAS 38. There is judgement in respect of when R&D projects meet the requirement for capitalisation, which internal costs are directly attributable and therefore appropriate to capitalise and when the development programme is complete, and capitalisation should cease. Amounts capitalised include the total cost of any external products or services and labour costs directly attributable to the development programme. Management judgement is involved in determining the appropriate internal costs to capitalise and the amounts involved. If there is any uncertainty in terms of the technical feasibility, ability to sell the product or any other risk that means the programme does not meet the requirements of the standard the R&D costs are expensed within the consolidated statement of comprehensive income. 88 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS – (Continued) Estimated useful life of research and development and intangible assets arising on acquisitions The periods of amortisation adopted to write down capitalised product and process development requires estimates to be made in respect of the useful economic lives of the intangible assets to determine an appropriate amortisation rate. Capitalised development costs are amortised over the period during which economic benefits are expected to be received which is typically 1 – 5 years. Intangible assets arising on acquisitions are amortised straight line over the period during which economic benefits are expected to be received which is typically 5 – 10 years. The amortisation charge for capitalised development costs in the current year is £250k; if the lives were reduced by one year across all the projects which are being amortised the charge would increase by circa £100k. The amortisation charge for intangible assets arising on acquisitions in the 2021 comparative year is £772k; if the lives were reduced by one year the charge would increase by £129k. Estimation of level of R&D expenditure which is eligible for R&D tax credits under the SME and large company scheme. Uncertainties exist in relation to the interpretation of complex tax legislation, changes in tax laws and the amount and timing of future taxable income. This could necessitate future adjustments to taxable income and expense already recorded. At the year-end date, tax liabilities and assets reflect management’s judgements in respect of the application of the tax regulations, in particular the R&D tax. In assessing our year-end corporation tax liability, we have made a provisional assessment as to the likely amount of development expenditure that will be eligible under each of the HMRCs large company and SME R&D tax credit schemes as the detailed tax computations have not been completed. Our judgement at year end assumed that the level of eligible spend was comparable with prior years. At 31 March 2022 there are net current and deferred tax provisions totalling approximately £1.8m (2021: £2.1m). Due to the uncertainties noted above, it is possible that the Group’s initial estimates are different to the final position adopted when the tax computation is finalised, resulting in a different tax payable or recoverable from the amounts provided. Provisions for slow moving or obsolete inventories Inventories are carried at the lower of cost and net realisable value (NRV). NRV is reviewed in detail on an on- going basis and provision for obsolete inventory is made based on several factors including age of inventories, the risk of technical obsolescence, the risk that customers default on customised product and the expected future usage. This estimate is considered highly judgemental given the deliberate investment in inventory during the financial year to mitigate the challenge presented by market component shortages. An element of working capital risk can be mitigated with receiving advance customer deposits, however there remains a risk of default and order cancellation. Differences between such estimates and actual market conditions may have a material impact on the amount of the carrying value of inventories and may result in adjustments to cost of sales. See note 15 for details of the inventory provisions and the amounts written off to the consolidated statement of comprehensive income in the year. 89 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 3. REVENUE The Group derives revenue from the transfer of goods at a point in time in the following major product lines and geographical regions: United Kingdom Rest of Europe Asia North America Rest of World Total revenue Computing products Communications products Power products Opto electronic and electronic components and modules Total revenue See further segmental disclosures in note 30. 2022 £’000 53,030 15,726 6,542 9,175 524 _______ 84,997 _______ 2022 £’000 16,103 7,745 8,681 52,468 _______ 84,997 _______ 2021 £’000 46,301 7,349 3,342 9,148 141 _______ 66,281 _______ 2021 £’000 10,643 5,678 10,978 38,982 _______ 66,281 _______ 90 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 4. PROFIT FROM OPERATIONS This has been arrived at after charging/(crediting): Staff costs excluding share based payments (see note 5) Share based payment expenses Depreciation of property, plant and equipment Depreciation of right of use asset Amortisation of intangible assets Loss/(profit) on disposal of property, plant and equipment Auditors’ remuneration: Audit fees Other assurance fees Non audit fees: Corporate finance services Other advisory services 2022 £’000 16,562 295 729 763 1,327 3 120 - 2021 £’000 11,656 171 614 497 978 (26) 123 - Research and development costs (includes relevant staff costs) Foreign exchange (credit)/expense Stock write downs/(backs) Acquisition of subsidiaries legal and due diligence * Other Income from government grants ** 48 3 1,664 564 (5) 194 (297) _______ * 2022 relates to the post year end planned acquisition of Custom Power. 2021 includes the £48k corporate finance fees from the Group auditors as disclosed and £155k from other professional services firms. - 6 2,044 (33) 59 533 (2) _______ ** Furlough scheme in 2021 The foreign exchange differences have been treated as an adjustment to cost of sales rather than as an overhead as they arise from sales income and cost of sales expenditures. Details of transactions with businesses associated with the Directors are included within the Remuneration Committee report on pages 46 to 58. 91 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 5. STAFF COSTS Staff costs for all employees during the year, including the Executive Directors, were as follows: Wages and salaries Social security costs Pension costs Share based payment charges Total staff costs 2022 £’000 13,985 1,377 1,200 295 _______ 16,857 _______ 2021 £’000 9,751 1,012 893 171 _______ 11,827 _______ Wages and salaries include termination costs of £56k (2021: £69k). The average monthly number of employees during the year, including the Executive Directors, was as follows: Selling and distribution Manufacturing and assembly Management and administration 2022 Number 134 110 59 _______ 303 _______ 2021 Number 112 103 30 _______ 245 _______ In the previous year a formalised senior management team was formed and included with the Company Share Option Plan. As the Group continues to grow, we continue to invest in and develop the senior leadership team which are considered to be key management. This senior management team, which includes executive Directors. The key management team and their total compensation, including employers NI, totals £3,857k (2021: £2,981k). 6. FINANCE EXPENSE Bank borrowings Interest on lease liabilities Total finance expense 2022 £’000 127 99 ______ 226 ______ 2021 £’000 37 48 ______ 85 ______ 92 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 7. TAX EXPENSE Analysis of total tax expense Total tax charge Current tax expense Group corporation tax on profits for the year Adjustment in respect of prior periods Deferred tax expense/(credit) charged to income statement Total tax charge to income statement Deferred tax (credit)/expense charged to other comprehensive income 2022 £’000 2021 £’000 716 _______ 247 _______ 716 ______ 247 ______ 735 (8) _______ 727 250 ______ 977 610 (182) _______ 428 (181) ______ 247 (261) ______ - ______ Total tax charge to comprehensive income 247 ______ The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the UK applied to profits for the year are as follows: 716 ______ Profit before tax Expected tax charge based on the standard rate of corporation tax in the UK of 19% (2021: 19%) Effect of: Expenses not deductible for tax purposes Difference between depreciation/amortisation for the year and capital allowances Tax relief on exercise of share options exercised Enhanced relief on research and development expenditure Overseas tax rate differences Deferred tax asset recognised Change in rate in respect of deferred tax recognition Adjustments in respect of prior years Foreign exchange Total tax charge 2022 £’000 3,500 _______ 2021 £’000 4,200 _______ 665 798 443 (60) - (483) 8 (226) 343 (9) 35 _______ 20 (3) (11) (366) 3 (10) - (182) (2) _______ 716 _______ 247 _______ The UK corporation tax rate is 19% (effective from 1 April 2017). Amendments were substantively enacted on 24 May 2021, so the rate of UK corporation tax will rise to 25% from 1 April 2023. The deferred tax liabilities on 31 March 2022 have been calculated based on this revised 25% rate. This change was not substantively enacted at the March 2021 balance sheet date and the deferred tax comparatives were calculated at the existing 19% rate. 93 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 7. TAX EXPENSE (continued) R&D tax credits The Group recognised a credit of £10k (2021: £10k) within operating profit in relation to claims made under the Research and Development expenditure credit scheme (RDEC). There were also claims made under the SME scheme which are recognised within the tax expense. 8. EARNINGS PER SHARE The earnings per share is based on the following: Adjusted earnings post tax Reported earnings post tax Weighted average number of shares Diluted number of shares Reported EPS Basic EPS from profit for the year Diluted EPS from profit for the year Adjusted EPS Adjusted Basic EPS from profit for the year Adjusted Diluted EPS from profit for the year 2022 £’000 6,158 2,523 2021 £’000 4,733 3,953 8,551,455 8,728,268 8,524,883 8,650,237 29.5p 28.9p 72.0p 70.6p 46.4p 45.7p 55.5p 54.7p Earnings per ordinary share has been calculated using the weighted average number of shares in issue during the year. The weighted average number of equity shares in issue was 8,551,455 (2021: 8,524,883) net of the treasury shares disclosed in note 27. The diluted earnings per share is based on 8,728,268 (2021: 8,650,237) ordinary shares which allow for the exercise of all dilutive potential ordinary shares. The adjustments to profit made in calculating the adjusted earnings are set out in note 31. 9. DIVIDENDS Prior year final dividend paid of 10.75p per share (2021: 7.25p) Current year interim dividend paid of 6.25p per share (2021: 5.25p) Cancelled dividends on shares held in treasury Final dividend proposed for the year 13.25p per share (2021: 10.75p) 2022 £’000 920 535 (2) _______ 1,453 _______ 1,134 _______ 2021 £’000 620 450 (1) _______ 1,069 _______ 919 _______ The proposed final dividend has not been accrued for as the dividend will be approved by the shareholders at the annual general meeting. 94 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 10. PROPERTY, PLANT AND EQUIPMENT Year ended 31 March 2022 Cost 1 April 2021 Additions Disposals Foreign Exchange 31 March 2022 Depreciation and impairment 1 April 2021 Charge for the year On disposals Foreign Exchange 31 March 2022 Net book value 31 March 2022 Year ended 31 March 2021 Cost 1 April 2020 Acquisitions Additions Disposals Foreign Exchange 31 March 2021 Depreciation and impairment 1 April 2020 Charge for the year On disposals Foreign Exchange 31 March 2021 Net book value 31 March 2021 Land and Buildings £’000 446 - - 20 _______ 466 _______ - - - - _______ - _______ 466 _______ Land and Buildings £’000 - 446 - - - _______ 446 _______ - - - - _______ - _______ 446 _______ Short leasehold property improvements £’000 1,951 121 (98) 2 _______ 1,976 _______ 896 189 (98) - _______ 987 _______ 989 _______ Short leasehold property improvements £’000 1,518 31 402 - - _______ 1,951 _______ 727 169 - - _______ 896 _______ 1,055 _______ Fittings, equipment and computers £’000 3,570 755 (158) 2 _______ 4,169 _______ 2,397 437 (160) 1 _______ 2,675 _______ 1,494 _______ Fittings, equipment and computers £’000 3,142 126 303 - (1) _______ 3,570 _______ 2,054 345 - (2) _______ 2,397 _______ 1,173 _______ Motor vehicles £’000 678 302 (207) - _______ 773 _______ 371 103 (166) - _______ 308 _______ 465 _______ Motor vehicles £’000 847 - 51 (220) - _______ 678 _______ 440 100 (169) - _______ 371 _______ 307 _______ Total £’000 6,645 1,178 (463) 24 _______ 7,384 _______ 3,664 729 (424) 1 _______ 3,970 _______ 3,414 _______ Total £’000 5,507 603 756 (220) (1) _______ 6,645 _______ 3,221 614 (169) (2) _______ 3,664 _______ 2,981 _______ There are capital commitments of £303k (2021: £371k) at the balance sheet date. 95 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 11. RIGHT OF USE ASSETS Year ended 31 March 2022 Cost 1 April 2021 Additions Disposals 31 March 2022 Depreciation 1 April 2021 Charge for the year Disposals 31 March 2022 Net book value 31 March 2022 Land and buildings £’000 Motor vehicles/ other £’000 3,604 285 (69) _______ 3,820 _______ 1,263 701 (27) _______ 1,937 _______ 1,883 _______ 188 28 (3) _______ 213 _______ 53 62 (2) _______ 113 _______ 100 _______ Year ended 31 March 2021 Land and buildings £’000 Motor vehicles/ other £’000 Cost 1 April 2020 Additions Acquisition additions Disposals 31 March 2021 Depreciation 1 April 2020 Charge for the year Disposals 31 March 2021 Net book value 31 March 2021 1,894 1,124 726 (140) _______ 3,604 _______ 944 459 (140) _______ 1,263 _______ 2,341 _______ 120 72 - (4) _______ 188 _______ 15 38 - _______ 53 _______ 135 _______ The total depreciation expense of £763k (2021: £497k) has been charged to operating expenses. 96 Total £’000 3,792 313 (72) _______ 4,033 _______ 1,316 763 (29) _______ 2,050 _______ 1,983 _______ Total £’000 2,014 1,196 726 (144) _______ 3,792 _______ 959 497 (140) _______ 1,316 _______ 2,476 _______ NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 12. INTANGIBLE ASSETS Year ended 31 March 2022 Cost 1 April 2021 Additions Acquisitions (note 31) 31 March 2022 Amortisation 1 April 2021 Charge for the year 31 March 2022 Net book value 31 March 2022 Development Costs £’000 Computer Software £’000 Goodwill on Consolidation £’000 Acquisition Intangible Assets £’000 1,433 350 - _______ 1,783 _______ 1,333 250 _______ 1,583 _______ 200 _______ 473 251 - _______ 724 _______ 350 49 _______ 399 _______ 325 _______ 9,898 - - _______ 9,898 _______ - - _______ - _______ 9,898 _______ 8,781 - - _______ 8,781 _______ 2,345 1,028 _______ 3,373 _______ 5,408 _______ Total £’000 20,585 601 - _______ 21,186 _______ 4,028 1,327 _______ 5,355 _______ 15,831 _______ The cost of acquisition intangible assets comprises the estimated net present value of customer relationships identified on acquisitions. The development costs relate to the cost of developing new products and technology to enable the company to extend its operations into new growth areas. Any assets developed that are no longer deemed to meet the recognition criteria of development costs have been written down. Year ended 31 March 2022 - Acquisition intangible assets Systems Division commercial relationships Components Division commercial relationships Total Cost £’000 2,075 6,706 _______ 8,781 _______ Net book value £’000 1,205 4,203 _______ 5,408 _______ A decision was taken to accelerate the amortisation of intangible assets related to the 2013 acquisition of ‘2001’ commercial relationships within the Components division from 10 years to 7 years based on a reassessment of the UEL of that asset in the year ended 31 March 2021. This was an additional charge of £264k to comprehensive income in 2021 and took the net book value to nil. 97 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 12. INTANGIBLE ASSETS (continued) Year ended 31 March 2021 Development Costs £’000 Computer Software £’000 Goodwill on Consolidation £’000 Acquisition Intangible Assets £’000 Cost 1 April 2020 Additions Acquisitions 31 March 2021 Amortisation 1 April 2020 Charge for the year 31 March 2021 Net book value 31 March 2021 1,183 250 - _______ 1,433 _______ 1,083 250 _______ 1,333 _______ 100 _______ 402 52 19 _______ 473 _______ 302 48 _______ 350 _______ 123 _______ 6,300 - 3,598 _______ 9,898 _______ - - _______ - _______ 9,898 _______ 3,378 - 5,403 _______ 8,781 _______ 1,665 680 _______ 2,345 _______ 6,436 _______ Total £’000 11,263 302 9,020 _______ 20,585 _______ 3,050 978 _______ 4,028 _______ 16,557 _______ The cost of acquisition intangible assets comprises the estimated net present value of customer relationships identified on acquisitions. The development costs relate to the cost of developing new products and technology to enable the company to extend its operations into new growth areas. Any assets developed that are no longer deemed to meet the recognition criteria of development costs have been written down. Year ended 31 March 2021 - Acquisition intangible assets Systems Division commercial relationships Components division commercial relationships Total Cost £’000 2,075 6,706 _______ 8,781 _______ Net book value £’000 1,426 5,010 _______ 6,436 _______ 98 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 13. GOODWILL AND IMPAIRMENT Details of the carrying amount of goodwill allocated to cash generating units (CGUs) are as follows: Goodwill carrying amount Systems Division Components division Total 2022 £’000 3,946 5,952 _______ 9,898 _______ 2021 £’000 3,946 5,952 _______ 9,898 _______ The recoverable amounts of all the above CGUs have been determined from a review of the current and anticipated performance of these units. In preparing the projection, a pre tax discount rate of 10% (2021: 10%) has been used based on the Group’s estimated weighted average cost of capital. A future growth and terminal growth rate of 2.5% (2021: 2.5%) has been assumed beyond the first year, for which the projection is based on the budget approved by the Board of Directors. It has been assumed investment in capital equipment will equate to depreciation over this period. The recoverable amount exceeds the carrying amount for the Group by £94,447k (2021: £64,382k). The headroom within the Systems Division is significant at £53,765k (2021: £43,250k), with the more sensitive CGU the Components division with headroom of £47,318k (2021: £25,636k). If the following changes were made to the above key assumptions in respect of each division, the carrying amount would still exceed the recoverable amount for both divisions. Discount rate: Increase from 10% to 20% Growth rate: Reduction from 2.5% to nil% 14. SUBSIDIARIES The subsidiaries of Solid State PLC included in these consolidated financial statements are as follows: Subsidiary undertakings Nature of business Proportion of voting rights and Ordinary share capital held Solid State Supplies Limited Steatite Limited Pacer Technologies Limited Pacer Components Limited* Pacer LLC* Willow Technologies Limited American Electronic Components, Inc.* Active Silicon Limited Active Silicon, Inc.* Solid State Supplies Electronics Limited Custom Power Limited Creasefield Limited Q-Par Angus Limited Ginsbury Electronics Limited Wordsworth Technology Kent Limited Creasefield Crewkerne Limited UK UK UK UK USA UK USA UK USA Ireland UK UK UK UK UK UK *Indirect holdings. All other holdings are direct. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Supply of electronic components. Supply of electronic components and manufacture of electronic equipment. Non trading entity Supply of opto-electronic components. Supply of opto-electronic components. Supply of opto-electronic components. Supply of opto-electronic components. Digital image design and manufacturing. Manufacturing sales facility Sales office Non trading entity Non trading entity Non trading entity Non trading entity Non trading entity Non trading entity The non-trading entities are exempt from filing audited accounts with the registrar under section 479a of the Companies Act 2006. 99 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 14. SUBSIDIARIES (continued) Aside from the operations in the USA and Ireland identified above, the country of operation and of incorporation is England and Wales, with the same registered office as Solid State PLC. The registered offices for operations in the US and Ireland are listed below. Subsidiary undertaking Registered Office Pacer USA LLC American Electronic Components, Inc. Active Silicon, Inc. Solid State Supplies Electronics Limited 3rd Floor Ulysses House, 23/24 Foley Street, Dublin 1, Dublin D01 W2T2, Ireland 661 Maplewood Drive, Suite 10, Jupiter, FL 33458, USA 1101 Lafayette Street, Elkhart, Indiana, 46516, USA 479 Jumpers Hole Road, Suite 301, Severna Park, MD 21146, USA As set out in the audit committee report, the UK trading subsidiaries are exempt from the requirements to have an audit and file audited financial statements by virtue of section 479A of the Companies Act 2006. In adopting the exemption Solid State PLC has provided a statutory guarantee to these subsidiaries in accordance with section 479C of the Companies Act 2006. Subsequent to year end, eTech Developments Limited was incorporated in the UK with Solid State Plc owning 75% of the ordinary shares and voting rights in the Company. 15. INVENTORIES Finished goods and goods for resale Work in progress Total inventories 2022 £’000 15,333 2,265 _______ 17,598 _______ 2021 £’000 9,056 1,573 _______ 10,629 _______ The Directors are of the opinion that the replacement value of inventories is not materially different to the carrying value stated above. These carrying values are stated net of provisions of £3,694k (2021: £3,271k). An impairment loss of £610k (2021: £418k loss) was recognised in cost of sales during the year against inventory due to slow moving and obsolete items. Inventory recognised in cost of sales during the year as an expense was £57,812k (2021: £43,061k). 16. TRADE AND OTHER RECEIVABLES Trade receivables Other receivables Prepayments 2022 £’000 14,948 126 2,904 _______ 17,978 _______ 2021 £’000 11,683 157 2,382 _______ 14,222 _______ An impairment credit against trade receivables of £13k (2021: Loss of £608k) was recognised within operating costs during the year. 100 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 17. TRADE AND OTHER PAYABLES (CURRENT) Trade payables Other taxes and social security taxes Other payables Accruals Deferred consideration on acquisitions 18. CONTRACT LIABILITIES Contract liabilities 2022 £’000 8,083 2,607 89 5,709 4,625 _______ 21,113 _______ 2021 £’000 4,192 1,301 88 3,737 2,572 _______ 11,890 _______ 2022 £’000 2021 £’000 3,461 _______ 2,299 _______ The contract liabilities identified above relate to unsatisfied performance obligations resulting from proforma and advanced customer payments where we have not recognised the revenue and provisions for product returned for rework. All these contract liabilities are expected to be recognised in the subsequent financial year. Revenue recognised within the year includes £1,980k (2021: £2,161k) which was included within contract liabilities in the prior year. 19. BANK BORROWINGS AND FACILITIES Current borrowings Bank borrowings – overdraft facility Non-current borrowings Bank borrowings Total borrowings Within one year Between one and two years Between two and five years Total borrowings 101 2022 £’000 2,059 2021 £’000 - 1,500 _______ 3,750 _______ 3,559 _______ 3,750 _______ 2022 £’000 2021 £’000 2,059 1,500 - _______ - 3,750 - _______ 3,559 _______ 3,750 _______ NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 19. BANK BORROWINGS AND FACILITIES (continued) The bank facilities are secured by a fixed and floating charge over the assets of the Company and the Group. At the balance sheet date, the Group had the following facilities: • Revolving credit facility of £7.5m (2021: £7.5m) of which £1.50m (2021: £3.75m) was drawn at the balance sheet date. This facility was committed until November 2022 and was renewed in March 2022 to a November 2023 commitment date. In addition, the Group has a multi-currency overdraft facility of £3.0m (2021: £1.0m) which was utilised for USD of £2.1m at year end (2021: Nil). • The multi-currency overdraft facility is in place to provide flexibility in financing short-term multi-currency working capital requirements. This facility is available to utilise as long as the overall balance netted across all accounts in the bank nets to an overall position of £Nil or higher. The Group’s banking facilities are subject to three financial covenants, being: leverage; debt service; and a tangible net worth covenant. These covenants were met at all measurement points throughout the period. 20. RIGHT OF USE LEASE LIABILITIES Current right of use lease liabilities Non-current right of use lease liabilities Total right of use lease liabilities Within one year Between one and two years Between two and five years Total right of use lease liabilities 2022 £’000 758 1,326 _______ 2,084 _______ 2022 £’000 758 650 676 _______ 2,084 _______ 2021 £’000 741 1,802 _______ 2,543 _______ 2021 £’000 741 654 1,148 _______ 2,543 _______ 102 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 21. FINANCIAL INSTRUMENTS The Group’s overall risk management programme seeks to minimise potential adverse effects on the Group’s financial performance. The Group’s financial instruments comprise cash and cash equivalents and various items such as trade payables and receivables that arise directly from its operations. The carrying value of all financial instruments equal their fair values. The Group is exposed through its operations to the following risks: • • • • Credit risk Foreign currency risk Liquidity risk Cash flow interest rate risk In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group’s objectives, policies and processes for managing those risks. Further quantitative information in respect of these risks is presented throughout these financial statements. There have been no substantive changes in the Group’s exposure to financial instrument risks and consequently the objectives, policies and processes are unchanged from the previous period. The Board has overall responsibility for the determination of the Group’s risk management policies. The objective of the Board is to set policies that seek to reduce the risk as far as possible without unduly affecting the Group’s competitiveness and effectiveness. Further details of these policies are set out below. Credit risk The Group is exposed to credit risk primarily on its trade receivables, which are spread over a range of customers and countries, a factor that helps to dilute the concentration of the risk. It is Group policy, implemented locally, to assess the credit risk of each new customer before entering binding contracts. Each customer account is then reviewed on an ongoing basis (at least once a year) based on available information and payment history. The maximum exposure to credit risk is represented by the carrying value of receivables as shown in note 16 and in the statement of financial position. The amount of the exposure shown in note 16 is stated net of provisions for doubtful debts. The credit risk on liquid funds is low as the funds are held at a bank with a high credit rating assigned by international credit rating agencies. Foreign currency risk Foreign exchange transaction risk arises when individual Group operations enter into transactions denominated in a currency other than their functional currency. The general policy for the Group is to sell to customers in the same currency that goods are purchased in, reducing the transactional risk. Where transactions are not matched, excess foreign currency amounts generated from trading are converted back to sterling and required foreign currency amounts are converted from sterling. Forward currency contracts are not used speculatively and are considered where the Group has a demand for foreign currency that it can reliably forecast. The Group overdraft facility is available on an individual currency basis as well as an overall basis. Liquidity risk The Group operates a Group overdraft facility common to all its trading companies (with the exception of the 2021 acquisitions). This facility has a right of offset, so individual accounts in an overdraft position can be netted from cash held in other accounts in the same bank to a maximum position of £Nil in total. The Group has approximately a three month visibility in its trading and runs a rolling 6 month cash flow forecast. If any part of the Group identifies a shortfall in its future cash position the Group has sufficient facilities that it can direct funds to the location where they are required. If this situation is forecast to continue remedial action is taken. 103 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 21. FINANCIAL INSTRUMENTS (continued) Cash flow interest rate risk External Group borrowings are approved centrally. The Board accepts that this neither protects the Group entirely from the risk of paying rates in excess of current market rates nor eliminates fully the cash flow risk associated with interest payments. It considers, however, that by ensuring approval of borrowings is made by the Board the risk of borrowing at excessive interest rates is reduced. The Board considers that the rates being paid are in line with the most competitive rates it is possible for the Group to achieve. Credit risk The carrying amount of financial assets represents the maximum credit exposure. The Group maintains its cash reserves at a reputable bank. The maximum exposure to credit risk at the reporting date was: Loans and Receivables Current financial assets Trade and other receivables Cash and cash equivalents 2022 £’000 2021 £’000 15,074 2,924 _______ 17,998 _______ 11,840 6,914 _______ 18,754 _______ The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: Carrying value UK Non UK 2022 £’000 8,471 6,477 _______ 14,948 _______ 2021 £’000 7,700 3,983 _______ 11,683 _______ The Group policy is to make a provision against those debts that are overdue, unless there are grounds for believing that all or some of the debts will be collected. During the year, the value of provisions made in respect of bad and doubtful debts was a charge of £193k (2021: £618k) which represented 0.1% (2021: 1.0%) of revenue. This provision is included within the sales, general and administration expenses in the Consolidated Statement of Comprehensive Income. 104 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 21. FINANCIAL INSTRUMENTS (continued) Trade receivables ageing by geographical segment Geographical area Total £’000 Current £’000 2022 UK Non UK Total UK Non UK Total provisions Total IFRS 9 UK expected loss rate Non UK expected loss rate 8,860 6,737 _______ 15,597 (389) (260) _______ (649) _______ 14,948 _______ 4.4% 3.9% _______ 8,273 6,122 _______ 14,395 (322) (136) _______ (458) _______ 13,937 _______ 3.9% 2.2% _______ Geographical area Total £’000 Current £’000 2021 UK Non UK Total UK Non UK Total provisions Total IFRS 9 UK expected loss rate Non UK expected loss rate 8,175 4,168 _______ 12,343 (496) (164) _______ (660) _______ 11,683 _______ 6.1% 3.9% _______ 8,008 3,907 _______ 11,915 (401) (100) _______ (501) _______ 11,414 _______ 5.0% 2.6% _______ 105 30 days past due £’000 418 412 _______ 830 (21) (24) _______ (45) _______ 785 _______ 5.0% 5.8% _______ 30 days past due £’000 112 216 _______ 328 (50) (22) _______ (72) _______ 256 _______ 44.6% 10.2% _______ 60 days past due £’000 128 116 _______ 244 (11) (23) _______ (34) _______ 210 _______ 8.6% 19.8% _______ 60 days past due £’000 15 5 _______ 20 (10) (2) _______ (12) _______ 8 _______ 66.7% 40.0% _______ 90 days past due £’000 41 87 _______ 128 (35) (77) _______ (112) _______ 16 _______ 85.4% 88.5% _______ 90 days past due £’000 40 40 _______ 80 (35) (40) _______ (75) _______ 5 _______ 87.5% 100.0% _______ NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 21. FINANCIAL INSTRUMENTS (continued) The Group records provision for impairment losses on its trade receivables separately from gross receivables. The movements on this allowance account during the year are summarised below: Opening balance Acquisition of subsidiaries (Decrease)/ Increase in provisions Written off against provisions Foreign exchange Closing balance 2022 £’000 658 - (14) 4 1 _______ 649 _______ 2021 £’000 496 19 618 (474) (1) _______ 658 _______ The main factor used in assessing the expected impairment losses of trade receivables is the age of the balances and the circumstances of the individual customer. As shown in the earlier table, at 31 March 2022 trade receivables of £1,011k which were past their due date were not impaired (2021: £269k). Liquidity risk The following are maturities of financial liabilities, including estimated contracted interest payments. Carrying Amount Contractual cash flow 12 months or less 1 – 2 Years 2 – 5 Years 5+ Years 2022 Trade and other payables Borrowings Right of use lease liabilities Provisions Deferred consideration on acquisition 2021 Trade and other payables Borrowings Right of use lease liabilities Provisions Deferred consideration on acquisition 16,488 3,559 2,084 694 6,601 16,488 3,559 2,215 694 6,601 16,488 2,059 781 - 4,625 - 1,500 690 150 1,976 - - 744 544 - - - - - - _______ _______ _______ _______ _______ _______ 29,426 _______ 29,557 _______ 23,953 _______ 4,316 _______ 1,288 _______ - _______ 9,318 3,750 2,543 741 7,522 9,318 3,750 2,736 741 7,522 9,318 - 763 71 2,572 - 3,750 694 20 4,250 - - 1,279 650 700 - - - - - _______ _______ _______ _______ _______ _______ 23,874 _______ 24,067 _______ 12,724 _______ 8,714 _______ 2,629 _______ - _______ 106 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 21. FINANCIAL INSTRUMENTS (continued) Movement in deferred consideration on acquisitions 2022 £’000 2021 £’000 2022 £’000 2021 £’000 2022 £’000 2021 £’000 Opening balance Increase/recognition Settlement Closing balance Foreign currency risk Willow Active Total 5,089 - (1,589) _______ 3,500 _______ - 5,089 - _______ 5,089 _______ 2,433 1,651 (983) _______ 3,101 _______ - 2,433 - _______ 2,433 _______ 7,522 1,651 (2,572) _______ 6,601 _______ - 7,522 - _______ 7,522 _______ The Group’s main foreign currency risk is the short-term risk associated with accounts receivable and payable denominated in currencies that are not the subsidiaries’ functional currency. The risk arises on the difference in the exchange rate between the time invoices are raised/received and the time invoices are settled/paid. For sales denominated in foreign currencies the Group will try, as far as practical, to ensure that the purchases associated with the sale will be in the same currency. As a result of advanced purchasing of components, there is a timing difference on USD, where the Group overdraft has been utilised as required. All monetary assets and liabilities of the Group were denominated in sterling except for the following items, which are included in the financial statements at the sterling value based on the exchange rate ruling at the statement of financial position date. The following tables show the Group net assets/(liabilities) exposed to US dollar and Euro exchange rate risk:: USD Trade receivables Cash and cash equivalents Trade payables EUR Trade receivables Cash and cash equivalents Trade payables 2022 £’000 8,786 (1,308) (4,005) _______ 3,473 _______ 2022 £’000 287 272 (175) _______ 2021 £’000 5,727 3,121 (930) _______ 7,918 _______ 2021 £’000 337 942 (115) _______ 1,164 _______ The Group is exposed to currency risk because it undertakes trading transactions in US dollars and Euros (and immaterial transactions in other currencies). The Directors do not generally consider it necessary to enter into derivative financial instruments to manage the exchange risk arising from its operations, but from time to time when the Directors consider foreign currencies are weak and it is known that there will be a requirement to purchase those currencies, forward arrangements are entered into. There were no forward purchase agreements in place at 31 March 2022 (2021: £nil) with £nil net exposure (2021: £nil). 384 _______ The effect of a strengthening of 10% in the rate of exchange in the currencies against sterling at the statement of financial position date would have resulted in an estimated net increase in pre-tax profit for the year and an increase in net assets of approximately £428k (2021: £1,009k) and the effect of a weakening of 10% in the rate of exchange in the currencies against sterling at the statement of financial position date would have resulted in an estimated net decrease in pre-tax profit for the year and a decrease in net assets of approximately £351k (2021: £826k). 107 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 21. FINANCIAL INSTRUMENTS (continued) Interest rate risk The Group finances its business through a Revolving credit facility. During the year the Group utilised this facility at a floating rate of interest. The Group’s banking facilities with Lloyds Bank Plc incurs interest at the rate of 2.55% over LIBOR. The Group is affected by changes in the UK interest rate. As the loans are all based on variable interest rates the fair value of the Group’s borrowings is not materially different to the book value. In terms of sensitivity, if the ruling base rate had been 1% higher throughout the year the level of interest payable would have been £82k (2021: £41k) higher and if 1% lower throughout the year the level of interest payable would have been lower by the same amount. Capital risk management The Group defines total capital as equity in the consolidated statement of financial position plus net debt or less net funds plus deferred consideration. Total capital at 31 March 2022 was £32,251k (2021: £29,860k). The Group defines net (cash)/leverage as net (cash)/debt plus deferred consideration which totals £5,177k (2021: £4,358k). In calculating net (cash)/debt the Group has excluded the right of use lease liabilities of £2,084k (2021: £2,543k) from its definition and calculation. In managing its capital, the Group’s main objectives when managing capital are to safeguard the Group’s ability to continue as a going concern to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. Consistent with others in the industry, the Group monitors capital based on the gearing ratio. This ratio is calculated as leverage divided by total capital. At 31 March 2022 the gearing ratio was 16.0% (2021: 14.6%). The Group seeks to maintain a gearing ratio that balances risks and returns at an acceptable level and also to maintain sufficient funding to enable the Group to meet its working capital and strategic investment need in the light of changes in economic conditions and the characteristic of the underlying assets. In making decisions to adjust its capital structure to achieve these aims the Group considers not only its short- term position but also its long term operational and strategic objectives and sets the amount of capital in proportion to risk. The Group’s gearing ratio at 31 March 2022 is shown below: Cash and cash equivalents Borrowings / bank overdrafts Deferred Consideration Net (cash)/leverage Share capital Share premium account Retained earnings Capital redemption reserve Foreign exchange reserve Shares held in treasury Equity Gearing ratio (net leverage / (equity + net leverage)/cash)) 108 2022 £’000 (4,983) 3,559 6,601 _______ 5,177 _______ 428 3,625 23,042 5 33 (57) _______ 27,076 _______ 16.0% _______ 2021 £’000 (6,914) 3,750 7,522 _______ 4,358 _______ 428 3,625 21,508 5 6 (70) _______ 25,502 _______ 14.6% _______ NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 22. NET DEBT Year ended 31 March 2022 (£’000) Bank borrowing due within one year Bank borrowing due after one year Total borrowings Deferred consideration on acquisition of subsidiaries within one year Deferred consideration on acquisition of subsidiaries after one year Cash and cash equivalents (Net debt) / net cash At 1 April 2021 - (3,750) _______ (3,750) (2,572) (4,950) 6,914 _______ (4,358) _______ (Decrease)/ increase in cash in the year Decrease/ (Increase) in borrowings in the year Repayment of borrowings in the year Payment of deferred consideration on acquisitions Net movement resulting from cashflows (Net debt) / Net cash at 1 April Net movement resulting from cashflows Contingent consideration recognised in year – short term (note 17) Contingent consideration recognised in year – long term Other non-cash movements Net debt at 31 March Other non- cash movement At 31 March 2022 - - _______ - (4,625) - (1,500) _______ (1,500) (4,625) Cash flow - 2,250 _______ 2,250 2,572 - 2,974 (1,976) (4,006) _______ 816 _______ 16 _______ (1,635) _______ 2022 £’000 (4,006) - 2,250 2,572 _______ 816 _______ 2022 £’000 (4,358) 816 - (1,651) 16 _______ (5,177) _______ 2,924 _______ (5,177) _______ 2021 £’000 3,439 (3,750) 333 - _______ 22 _______ 2021 £’000 3,184 22 (2,572) (4,950) (42) _______ (4,358) _______ Although the Group’s banking facilities allow a right of offset between cash balances held at the bank with overdraft balances at the same bank, the overdraft balances have been presented as gross on the Statement of Financial Position rather than net in accordance with the Interpretations Committee March 2016 Agenda decision on IAS 32 interpretation of cash-pooling arrangements. 109 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 23. DEFERRED TAX The Group’s deferred tax positions arise primarily on share-based payments, accelerated capital allowances, capitalised development costs and intangible assets arising on acquisition of subsidiaries: At 1 April Deferred tax arising on acquisition of subsidiaries Credit for the year Effect of changes to foreign exchange rates Deferred tax adjustment in respect of prior periods Effect of tax rate change Net deferred tax at 31 March Deferred tax (liabilities)/assets in relation to: Accelerated capital allowances on property plant and equipment Short term timing differences on intangible assets Share based payments Short term timing differences Losses carried forward Net deferred tax at 31 March Deferred tax assets Deferred tax liabilities Net deferred tax at 31 March The movements in respect of deferred tax in the year were as follows: Accelerated capital allowances Share based Payments Short term timing differences on intangible assets 2022 £’000 (1,303) - 348 5 - (343) _______ (1,293) _______ (504) (1,437) 415 98 135 _______ (1,293) _______ 539 (1,832) _______ (1,293) _______ 2021 £’000 (421) (1,061) 181 (2) - - _______ (1,303) _______ (331) (1,266) 96 95 103 _______ (1,303) _______ 188 (1,491) _______ (1,303) _______ Short term timing differences Losses carried forward Total At 1 April Change in tax rate Recognised in statement of comprehensive income Recognised in other comprehensive income At 31 March (331) (83) (90) (1,266) (344) 173 95 38 21 96 13 (11) 103 32 - (1,303) (344) 93 - - 261 - - 261 _______ (504) _______ _______ (1,437) _______ _______ 415 _______ _______ 98 _______ _______ 135 _______ _______ (1,293) _______ 110 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 23. DEFERRED TAX (continued) The UK corporation tax rate is 19% (effective from 1 April 2017) which was substantively enacted on 17 March 2020. The comparative deferred tax liabilities at 31 March 2021 were calculated based on this rate. As substantively enacted on 24 May 2021, the UK corporation tax rate will increase to 25% with effect from 1 April 2023. The impact of re-calculating the deferred tax at the 25% rate is recognised in comprehensive income. The amount of the net reversal of deferred tax expected to occur next year is approximately £231k (2021: £191k) relating to the timing differences identified above. The deferred tax asset of £261k (2021: £84k) in respect of the future tax deduction that would be available based on the share price at the balance sheet date compared to the share price at the date of grant of the options and share bonus, which is used to calculate the share based payments charge, was recognised in the year. This deferred tax asset has been credited to other comprehensive income (“OCI”) and treated as an adjustment to profit. The share price post year end when the shares are exercised may be lower than at the balance sheet date, therefore this deferred tax asset is considered judgemental as it may not be fully recoverable. In addition, there is an unrecognised deferred tax asset in relation to capital losses carried forward. The capital losses carried forward are approximately £275k. The associated deferred tax asset of approximately £69k has not been recognised due to the uncertainty over the recoverability combined with the fact it is immaterial. The deferred tax asset has been reclassified as long-term in the current year; the comparative was retained in current as it was not material. 24. PROVISIONS At 1 April Dilapidations acquired on acquisitions at FV Provisions utilised during the year Recognition of dilapidation asset (Released)/charged to statement of comprehensive income Provisions at 31 March 2022 £’000 741 - (18) - (29) _______ 694 _______ 2021 £’000 304 43 (7) 400 - _______ 741 _______ The Group has provided for property related provisions which include obligations in respect of exited legacy premises and dilapidations provisions it expects to exit within the next 5 years. Based on using a risk-free discount rate of 2.5% the Group has assessed the impact of discounting to be immaterial and has not therefore discounted the provisions. 25. SHARE CAPITAL Allotted issued and fully paid 8,564,878 (2021: 8,564,878) ordinary shares of 5p 2022 £’000 2021 £’000 428 _______ 428 _______ The ordinary shares carry no right to fixed income, the holders are entitled to receive dividends as declared and are entitled to one vote per share at shareholder meetings. Details of options granted are set out in the Remuneration Committee Report on pages 46 to 58. At 31 March 2022 the number of shares covered by option agreements amounted to 248,100 (2021: 79,550). At the balance sheet date there were 96,000 (2021: 96,000) share options which had vested and remained unexercised. No options were exercised in the current year (2021: Nil). 111 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 26. RESERVES Full details of movements in reserves are set out in the consolidated statement of changes in equity on page 71. The following describes the nature and purpose of each reserve within owners’ equity. Reserve Share premium Capital redemption Retained earnings Shares held in treasury Foreign exchange Description and Purpose Amount subscribed for share capital in excess of nominal value. Amounts transferred from share capital on redemption of issued shares. Cumulative net gains and losses recognised in the consolidated statement of comprehensive income. Shares held by the Group for future staff share plan awards. Foreign exchange translation differences arising from the translation of the financial statements of foreign operations . 27. TREASURY SHARES At 31 March 2022 the Group held 6,946 (2021: 11,374) shares in treasury with a cost of £57k (2021: £70k). No shares have been cancelled. At 1 April Purchase of shares into treasury Transfer of shares to the All Employee Share Plan (AESP) At 31 March 2022 shares 11,374 7,000 (11,428) _______ 6,946 _______ 2021 Shares 7,374 15,000 (11,000) _______ 11,374 _______ 28. SHARE BASED PAYMENT The total amount charged to the income statement in 2022 in respect of share-based payments was £295,000 (2021: £171,000). The company operates two long term share incentive schemes set out below: Long term incentive plan (LTIP): Normal LTIP awards of up to 125% of salary may be made to Executive Directors and Senior management, as outlined in the Policy Table of the remuneration report on page 53. For all participants, awards will vest after three years in accordance with the performance conditions applicable to each grant. Options are granted with a contractual life of ten years and with a fixed exercise price of 5p equal to the par value of the shares or as otherwise disclosed in the remuneration report. The performance conditions will be determined and set by the Remuneration Committee in accordance with the remuneration policy. No award will vest below Threshold performance, and vesting will increase on a straight- line basis between threshold, target and stretch. 112 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 28. SHARE BASED PAYMENT (continued) On the 29 October 2021 42,800 (2021: 42,800) share options were granted to the Executive Directors under the LTIP. Principal assumptions Weighted average share price at grant date in pence Weighted average exercise price in pence Weighted average vesting period (years) Option life (years) Weighted average expected life (years) Weighted average expected volatility factor Weighted average risk free rate Dividend yield 2022 1,085 5 3 10 3 47% 1.50% 2.5% 2021 580 5 3 10 3 50% 0.75% 2.5% The expected volatility factor is based on historical share price volatility over the three years immediately preceding the grant of the option. The expected life is the average expected period to exercise. The risk-free rate of return is the yield of zero-coupon UK government bonds of a term consistent with the assumed option life. Non-market performance conditions are incorporated into the calculation of fair value by estimating the proportion of share options that will vest and be exercised based on a combination of historical trends and future expected trading performance. These are reassessed at the end of each period for each tranche of unvested options. Company Share Option Plan (CSOP): CSOP awards of up to the HMRC tax approved levels of £30,000 may be made to senior staff and Executive Directors, as outlined in the Policy Table of the remuneration report on page 53. For all participants, awards will vest after three years in accordance with the performance conditions applicable to each grant. Options are granted with a contractual life of ten years and with a fixed exercise price equal to the market value of the shares under option at the date of grant or as otherwise disclosed in the remuneration report The performance conditions will be determined and set by the Remuneration Committee in accordance with the remuneration policy. No award will vest below Threshold performance, and vesting will increase on a straight- line basis between threshold, target and stretch. On the 06 October 2021 36,750 (2021: 36,750) share options were granted to the senior management under CSOP. Principal assumptions Weighted average share price at grant date in pence Weighted average exercise price in pence Weighted average vesting period (years) Option life (years) Weighted average expected life (years) Weighted average expected volatility factor Weighted average risk free rate Dividend yield 2022 1,050 1,050 3 10 3 46% 1.50% 2.5% 2021 587 592 3 10 3 50% 0.75% 2.5% 113 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 28. SHARE BASED PAYMENT (continued) Movement in share options during the year In addition to the current CSOP and LTIP there are bought forward executive EMI options which have vested which remain unexercised at the balance sheet date. At 1 April Granted Exercised Cancelled / lapsed At 31 March 2022 Number of options 2022 average exercise price in pence 2021 Number of options 2021 average exercise price in pence 175,550 79,550 - (7,000) _______ 248,100 _______ 125 488 - (707) _______ 225 _______ 112,000 79,550 16,000 - _______ 175,000 _______ 0.1 276 0.1 - _______ 125 _______ No options were exercised in the year and the weighted average share price at the date share options were exercised in 2021 was 544p. As at 31 March 2022, the total number of long-term incentive awards and share options held by employees was 248,100 (2021: 175,550) as follows: Option price pence/share 0.1p 5p – 592p 5p – 1050p At 31 March Option period ending 31 March 2027 31 March 2030 31 March 2031 2022 Number of options 96,000 74,300 77,800 _______ 248,100 _______ 2021 Number of options 96,000 79,550 - _______ 175,550 _______ No share options have vested in the period (2021: Nil). All Employee Share plan (AESP) AESP awards of up to the HMRC tax approved levels to all UK employees. These awards vest tax free from the AESP after at least three years but not more than five years from the date of grant subject to continued employment. On the 7 March 2022 12,250 (2021: 10,900) share options were awarded to the employees under the AESP. The share price at the date of award was 960p (2021: 680p). As the awards are effectively £nil cost awards, the fair value is determined to equal to the share price at the date of grant under the Black Scholes model. This resulted in a share based payments charge of £118k (2021: £74k) as part of the total share based payments charge. 29. CAPITAL COMMITMENTS At 31 March 2022 there were capital commitments of £303k (2021: £371k). 114 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 30. SEGMENT INFORMATION The Group’s primary reporting format for segment information is business segments which reflect the management reporting structure in the Group. The Components Division comprises Solid State Supplies Ltd, Pacer LLC, Pacer Components Ltd, Willow Technologies Limited and American Electronic Components, Inc.. The Systems Division includes Steatite Ltd, Active Silicon Limited and Active Silicon Inc.. Year ended 31 March 2022 External revenue Profit before tax Taxation Profit after taxation Consolidated statement of financial position Assets Liabilities Net assets Other Capital expenditure: Tangible fixed assets Tangible fixed assets - acquisitions Intangible assets Intangible assets – acquisitions Right of use assets Right of use assets – acquisitions Depreciation - PPE Depreciation – right of use assets Amortisation Share based payments Interest Components division £’000 52,480 ______ 3,627 (903) ______ 2,724 Systems division £’000 32,517 ______ 2,270 (297) ______ 1,973 Head office £’000 - ______ (2,397) 223 ______ (2,174) Total Group £’000 84,997 ______ 3,500 (977) ______ 2,523 24,616 (11,587) ______ 21,665 (14,253) ______ 16,045 (9,410) ______ 62,326 (35,250) ______ 13,029 7,412 6,635 27,076 524 - 268 - 216 - 331 264 20 - 48 ______ 654 - 333 - 97 - 398 499 279 - 61 _____ - - - - - - - 1,028 295 117 ______ 1,178 - 601 - 313 - 729 763 1,327 295 226 ______ No individual customer contributed more than 10% of the Group’s revenue in the financial year ended 31 March 2022 or the prior year. 115 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 30. SEGMENT INFORMATION (continued) Year ended 31 March 2021 External revenue Profit before tax Taxation Profit after taxation Consolidated statement of financial position Assets Liabilities Net assets Other Capital expenditure: Tangible fixed assets Tangible fixed assets - acquisitions Intangible assets Intangible assets – acquisitions Right of use assets Right of use assets – acquisitions Depreciation - PPE Depreciation – right of use assets Amortisation Share based payments Interest Components division £’000 38,982 ______ 2,011 (337) ______ 1,674 22,631 (8,804) ______ 13,827 413 504 45 3 315 27 379 207 19 - 35 ______ Systems division £’000 27,299 ______ 4,353 (310) ______ 4,043 14,852 (7,680) ______ 7,172 343 99 257 19 881 699 235 290 279 - 14 _____ Head office £’000 - ______ (2,164) 400 ______ (1,764) Total Group £’000 66,281 ______ 4,200 (247) ______ 3,953 16,484 (11,981) ______ 4,503 53,967 (28,465) ______ 25,502 - - - 8,998 - - - - 680 171 36 ______ 756 603 302 9,020 1,196 726 614 497 978 171 85 ______ External revenue by location of customer Total assets by location of assets Net capital expenditure by location of assets 2022 £’000 2021 £’000 2022 £’000 2021 £’000 2022 £’000 2021 £’000 United Kingdom Rest of Europe Asia North America Other 53,030 15,726 6,542 9,175 524 _______ 46,301 7,349 3,342 9,148 141 _______ 59,023 1 - 3,302 - _______ 49,616 1 - 4,151 - _______ 1,723 - - 56 - _______ 1,058 - - - - _______ 84,997 _______ 66,281 _______ 62,326 _______ 53,768 _______ 1,779 _______ 1,058 _______ Capital expenditure excludes acquisitions of assets as per note 10 and 12 in 2021. 116 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 31. ADJUSTMENTS TO PROFIT The Group’s results are reported after several imputed non-cash charges and non-recurring items. We have provided additional adjusted performance metrics to aid understanding and provide clarity over the Group’s performance on an on-going cash basis before imputed non-cash accounting charges. This is consistent with how analysts and investors tell us they review our business performance in presenting an adjusted profit metric adjusting for the following items: • Non-cash charges arising from share-based payments and the amortisation of acquisition intangibles. • Non-recurring cash costs relating to the re-organisation of the Systems Division and acquisition costs (including fair value adjustments). • Non-recurring tax credits arising primarily from prior year R&D claims and tax deductions on share options. • The impact of the change in deferred tax rate from 19% to 25% on charges treated as adjustments. • The recognition in OCI of a deferred tax asset relating to the future tax deduction that would be available based on the share price at the balance sheet date compared to the share price at the date of grant of the options and share bonus. Reported gross profit Adjustments to gross profit Adjusted gross profit Reported operated profit Adjustments to operating profit Adjusted operating profit Reported operating margin percentage Operating margin percentage impact of adjustments Adjusted operating margin percentage Reported profit before tax Adjustments to profit before tax Adjusted profit before tax Reported profit after tax Adjustments to profit after tax Adjusted profit after tax Reported total other comprehensive income Adjustments to total other comprehensive income Adjusted total other comprehensive income 117 2022 £’000 27,527 168 _______ 27,695 _______ 3,726 3,674 _______ 7,400 _______ 4.4% 4.3% _______ 8.7% _______ 3,500 3,674 _______ 7,174 _______ 2,523 3,635 _______ 6,158 _______ 2,784 3,374 _______ 6,158 _______ 2021 £’000 19,919 73 _______ 19,992 _______ 4,285 1,187 _______ 5,472 _______ 6.5% 1.8% _______ 8.3% _______ 4,200 1,187 _______ 5,387 _______ 3,953 780 _______ 4,733 _______ 3,953 780 _______ 4,733 _______ NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2022 31. ADJUSTMENTS TO PROFIT (CONTINUED) The split of the adjustments is as follows: Acquisition fair value adjustments within cost of sales Acquisition fair value adjustments, reorganisation and deal costs Increase in deferred consideration on acquisition of Active Silicon Amortisation of acquisition intangibles Share based payments Adjustment to profit before tax Current and deferred taxation effect Deferred tax rate change impact on acquisition intangibles and share based payments Non-recurring tax credits Adjustments to profit after tax Recognition of deferred tax asset in OCI re. share price impact on options Adjustments to total other comprehensive income 2022 £’000 168 533 1,650 1,028 295 _______ 3,674 (327) 288 - _______ 3,635 (261) _______ 3,374 2021 £’000 73 263 - 680 171 _______ 1,187 (226) - (181) _______ 780 - _______ 780 Acquisition fair value adjustments within cost of sales relates to the unwind of the IFRS 3 fair value uplift on stock to selling price less cost to sell in both periods. Acquisition fair value adjustments, reorganisation and deal costs in the current year relate to transaction costs for the acquisition of Custom Power. The costs in the comparative period relate to £195k transaction costs on Willow and Active Silicon and £69k redundancy costs. 32. POST BALANCE SHEET EVENTS Intended Acquisition of Custom Power LLC (“Custom Power”) Post year end the Group announced on 12 July 2022 its intention to raise up to £28.4m of equity to fund the acquisition of Custom Power for up to $45m. New additional term loan debt facilities of £13m and $10m of standby letters of credit have been agreed by Lloyds Bank PLC in support of the transaction. Full details of the acquisition are set out in the announcement on the 12 July 2022 and in the circular issued to shareholders on the 13 July 2022 ahead of the general meeting on the 29 July 2022. The announcement, circular and investor presentation are available on the Group’s website www.solidstateplc.com. Formation of eTech Developments Limited On the 8 June 2022 the Group formed a new entity, eTech Developments Limited, registered Co. number 14159260. eTech Developments Limited is 75% owned by Solid State PLC. This is a new business which is expected to provide engineering consultancy by employing a small engineering team. Once the team are recruited, the team are expected to provide Power engineering services to the Group and external customers on an arm’s length basis. 118 COMPANY STATEMENT OF FINANCIAL POSITION at 31 March 2022 Company Number: 00771335 2022 2021 Notes £’000 £’000 £’000 £’000 FIXED ASSETS Investments Deferred tax asset CURRENT ASSETS Trade and other receivables Deferred tax asset Cash and cash equivalents 4 5 CREDITORS: Amounts falling due within one year 6 NET CURRENT LIABILITIES NON CURRENT LIABILITIES Non current borrowings Deferred consideration on acquisitions NET ASSETS CAPITAL AND RESERVES Called up share capital Share premium account Capital redemption reserve Retained earnings Shares held in treasury SHAREHOLDERS’ FUNDS 7 7 8 9 9 9 10 35,654 415 _______ 1,725 - 276 _______ 2,001 (28,255) _______ 34,003 - _______ 36,069 34,003 3,223 96 16 _______ 3,335 (22,511) _______ (26,254) _______ (19,176) _______ (1,500) (1,976) _______ (3,750) (4,950) _______ (3,476) (8,700) 6,339 _______ 428 3,625 5 2,338 (57) _______ 6,339 _______ 6,127 _______ 428 3,625 5 2,139 (70) _______ 6,127 _______ The company made a profit after tax in the year of £1,189k (2021: £284k) and Other Comprehensive Income of £261k (2021: Nil). Total Comprehensive Income for the period was £1,450k (2021: 284k). The financial statements were approved by the Board of Directors and authorised for issue on 27 July 2022. G S Marsh, Director P O James, Director The notes on pages 121 to 124 form part of these financial statements. 119 COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 March 2022 Share Capital £’000 Share Premium reserve £’000 Capital Redemption Reserve £’000 Retained earnings £’000 Shares Held in Treasury £’000 Share- holders Funds £’000 Balance at 31 March 2021 428 3,625 5 2,139 (70) 6,127 Total comprehensive income for the year ended 31 March 2022 Shares issued Purchase of treasury shares Transfer of treasury shares to AESP Dividends Share based payment credit - - - - - - - - - - - - - - - - - - 1,450 - - - - 1,450 - (80) (80) (93) 93 - (1,453) 295 - - (1,453) 295 _______ _______ _______ _______ _______ _______ Balance at 31 March 2022 428 _______ 3,625 _______ 5 _______ 2,338 _______ (57) _______ 6,339 _______ Share Capital £’000 Share Premium reserve £’000 Capital Redemption Reserve £’000 Retained earnings £’000 Shares Held in Treasury £’000 Share- holders Funds £’000 Balance at 31 March 2020 427 3,626 5 2,821 (43) 6,836 Total comprehensive income for the year ended 31 March 2021 Shares issued Purchase of treasury shares Transfer of treasury shares to AESP Dividends - 1 - - - - (1) - - - - - - - - 284 - - - - 284 - (95) (95) (68) 68 - (1,069) - (1,069) Share based payment credit - _______ - _______ - _______ 171 _______ - _______ 171 _______ Balance at 31 March 2021 428 _______ 3,625 _______ 5 _______ 2,139 _______ (70) _______ 6,127 _______ The notes on pages 121 to 124 form part of these financial statements. 120 NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 March 2022 1. ACCOUNTING POLICIES The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company’s financial statements. Basis of preparation These financial statements have been prepared in accordance with applicable United Kingdom Accounting standards, including Financial Reporting Standard 102 -The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”) and with the Companies Act 2006. The financial statements have been prepared under the historical cost convention. The financial statements are prepared in sterling rounded to the nearest thousand pounds (£’000). The company has taken advantage of the exemption from disclosing the following information in its company only accounts, as permitted by the reduced disclosure regime within FRS 102: • Section 7 ‘Statement of Cash Flows’ – Presentation of a Statement of Cash Flow and related notes and disclosures Profit and loss account Under section 408(4) of the Companies Act 2006 the Company is exempt from the requirement to present its own profit and loss account. The profit for the year ended 31 March 2022 and the profit for the year ended 31 March 2021 are disclosed in the Statement of Changes in Equity. Going concern The going concern basis of accounting has been used in the preparation of these financial statements. The Solid State PLC entity balance sheet reflects £5.6m net current liabilities (excluding group balances) due to the recognition of the short term £4.6m of deferred consideration. The deferred consideration can be settled through the Group’s bank facilities which are committed until Nov 2023 with £6.0m undrawn at the balance sheet date. Dividends totalling £3.24m were received from subsidiary companies in this financial year and subsidiary companies have the reserves available to pay dividends in the next financial year. The Directors have not identified any material uncertainties in this regard. Foreign currencies Foreign currency transactions are translated at the rates ruling when they occurred. Foreign currency monetary assets and liabilities are translated at the rate of exchange ruling at the statement of financial position date. Any differences are taken to the statement of comprehensive income. Investments in subsidiaries Investments in subsidiaries are stated at cost less amounts provided for impairment. When the trade and assets of a subsidiary are consolidated / re-organised the investment is re-allocated based on the cost method where the commercial substance and economic reality is that the Investment carrying value remains intact. The carrying value of the revised investments are evaluated for impairment in accordance with FRS102. Other financial liabilities Other financial liabilities are accounted for on the same basis as in the consolidated accounts. See accounting policy on page 83 as there is no material difference between FRS102 and IFRS. Share based payment Share based payments are accounted for on the same basis as in the consolidated accounts. See accounting policy on page 87 as there is no material difference between FRS102 and IFRS. Treasury Shares Treasury shares are accounted for on the same basis as in the consolidated accounts. See accounting policy on page 84 as there is no material difference between FRS102 and IFRS. 121 NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 March 2022 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group’s accounting policies. This note provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be wrong. The material judgement / estimate impacting the entity accounts are the estimate of the deferred contingent consideration on the acquisition of Active Silicon which is set out in the Group disclosure in Note 2. 2. STAFF COSTS Wages and salaries Social security costs Other pension costs Share based payment charges Total staff costs 2022 £’000 985 130 50 295 _______ 1,460 _______ 2021 £’000 697 118 40 171 _______ 1,026 _______ Staff costs amounted £1,460k (2021: £1,026k) and comprised the share based payment expense of £295k (2021: £171k) and provision for employer’s national insurance on exercise of share options of £45k (2021: £24k). Included within the Company Staff costs are the salary and related costs in respect of Mr G S Marsh, Mr P O James, Mr N F Rogers, Mr P Haining and Mr P Magowan. No other Director’s remuneration was paid by the Company. Details of the Directors whose emoluments were paid by other Group companies are given in the Remuneration Committee Report on pages 46 to 58. The average monthly number of employees during the year, including the Executive Directors, was as follows: Management and administration 3. SHARE BASED PAYMENT See Group share based payments disclosures in note 28 to the Group accounts. 2022 Number 15 _______ 15 _______ 2021 Number 12 _______ 12 _______ 122 NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 March 2022 4. INVESTMENTS Subsidiary undertakings Cost 1 April Additions 31 March Net book value 31 March 2022 £’000 34,003 1,651 _______ 35,654 _______ 2021 £’000 13,255 20,748 _______ 34,003 _______ 35,654 _______ 34,003 _______ The movement in this period relates to the increase in the deferred consideration acquisition cost of the Active Silicon Group as disclosed in Note 2 to the Group accounts. Subsidiary undertakings Net book value of investment in: Steatite limited Solid State Supplies Limited Pacer Technologies Limited Willow Technologies Group Active Silicon Group Total investments at 31 March Subsidiary undertakings See Group subsidiary undertakings disclosures in note 14 to the Group accounts. 5. DEBTORS Amounts owed by Group undertakings Other debtors Prepayments 2022 £’000 5,307 4,201 3,747 13,144 9,255 _______ 35,654 _______ 2022 £’000 1,710 1 14 _______ 1,725 _______ 2021 £’000 5,307 4,201 3,747 13,144 7,604 _______ 34,003 _______ 2021 £’000 3,200 11 12 _______ 3,223 _______ 123  NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 31 March 2022 6. CREDITORS – Amounts falling due within one year Amounts owed to Group undertakings Other taxes and social security costs Trade and other creditors Accruals Deferred consideration on acquisitions 2022 £’000 22,357 149 28 1,096 4,625 _______ 28,255 _______ 2021 £’000 19,144 107 86 602 2,572 _______ 22,511 _______ The Company has guaranteed bank borrowings of all its subsidiary undertakings, the main trading subsidiaries are Solid State Supplies Limited, Steatite Limited, Pacer Components Limited, Willow Technologies Limited and Active Silicon Limited. At the year end the liabilities covered by those guarantees amounted to £nil (2021: £nil). The Company accounts for guarantees provided to Group companies as insurance contracts, recognising a liability only to the extent that it is probable the guarantees will be called upon. The short-term deferred consideration on acquisitions is £3.5m for Willow Technologies Group and £1.1m for Active Silicon Group. All amounts owed to / from Group undertakings are payable / repayable on demand and not interest bearing. 7. CREDITORS – Amounts falling due after more than one year Bank borrowings Deferred consideration on acquisitions 2022 £’000 1,500 1,976 _______ 3,476 _______ 2021 £’000 3,750 4,950 _______ 8,700 _______ The long-term deferred consideration is £1.98m for Active Silicon Group as disclosed in note 2 of the consolidated Group accounts. See note 19 to the Group accounts for borrowings disclosures. 8. SHARE CAPITAL See Group share capital disclosures in note 25 to the Group accounts. 9. RESERVES See Group reserves disclosures in note 26 to the Group accounts. 10. OWN SHARES HELD IN TREASURY See Group treasury shares disclosures in note 27 to the Group accounts. 124 NOTICE OF ANNUAL GENERAL MEETING The annual general meeting is being held at the registered office of the company in the usual way and in accordance with the current Articles of Association. If any shareholders are intending to attend the meeting in person, we would request that they register this intention at least 48 hours in advance of the meeting at (investor.information@solidstateplc.com). Notice is hereby given that the annual general meeting of Solid State PLC will be held at 2 Ravensbank Business Park, Hedera Road Redditch B98 9EY, on 7 September 2022 at 9.30am for the following purposes: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) ORDINARY RESOLUTIONS To receive the accounts for the year ended 31 March 2022, together with the reports of the Directors and auditors thereon. (Resolution 1) To approve the Directors’ Annual Report on Remuneration (this is an advisory vote). (Resolution 2) To declare a final dividend of 13.25p per share. (Resolution 3) To reappoint Mr Nigel F Rogers as a director of the company. (Resolution 4) To reappoint Mr Gary S Marsh as a director of the company. (Resolution 5) To reappoint Mr John L Macmichael as a director of the company. (Resolution 6) To reappoint Mr Peter O James as a director of the company. (Resolution 7) To reappoint Mr Matthew T Richards as a director of the company. (Resolution 8) To reappoint Mr Peter Haining as a director of the company. (Resolution 9) To reappoint Mr Peter J Magowan as a director of the company. (Resolution 10) To reappoint RSM UK Audit LLP as auditors of the Company. (Resolution 11) To authorise the Directors to fix the auditors’ remuneration. (Resolution 12) To pass the following resolution: That the Directors be generally and unconditionally authorised to allot shares in the Company (Relevant Securities): i) comprising equity securities (as defined by section 560 of the Companies Act 2006) up to an aggregate nominal amount of £186,704.85 (which is 33% of the issued share capital) (such amount to be reduced by the nominal amount of any Relevant Securities allotted under paragraph (ii) below) in connection with an offer by way of a rights issue: (a) to holders of ordinary shares in proportion (as nearly as may be practicable) to their respective holdings; and (b) to holders of other equity securities as required by the rights of those securities or as the Directors otherwise consider necessary, but subject to such exclusions or other arrangements as the Board may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates, legal or practical problems in or under the laws of any territory or the requirements of any regulatory body or stock exchange; and 125 NOTICE OF ANNUAL GENERAL MEETING (continued) ii) in any other case, up to an aggregate nominal amount of £113,154.45 (which is 20% of the issued share capital) (such amount to be reduced by the nominal amount of any equity securities allotted under paragraph i) above, provided that this authority shall, unless renewed, varied or revoked by the Company, expire after a period of 18 months from the passing of this resolution or, if earlier, the date of the next annual general meeting of the Company save that the Company may, before such expiry, make offers or agreements which would or might require Relevant Securities to be allotted and the Directors may allot Relevant Securities in pursuance of such offer or agreement notwithstanding that the authority conferred by this resolution has expired. This resolution revokes and replaces all unexercised authorities previously granted to the Directors to allot Relevant Securities but without prejudice to any allotment of shares or grant of rights already made, offered or agreed to be made pursuant to such authorities. (Resolution 13) SPECIAL RESOLUTIONS (14) To pass the following resolution: That the Company is authorised to allot equity securities pursuant to resolution 13 above up to an aggregate nominal amount of £56,577.20, which is 10% of the issued share capital, as if Section 561 of the Companies Act 2006 (existing shareholders – right of pre-emption): i) did not apply to the allotment; or ii) applied to the allotment with such modifications as the Directors may determine provided that this authority shall, unless renewed, varied or revoked by the company, expire after a period of 18 months from the passing of this resolution save that the company may, before such expiry, make offers or agreements which would or might require equity securities to be allotted and the Directors may allot equity securities in pursuance of such offer or agreement not withstanding that the authority conferred by the resolution has expired. (Resolution 14) (15) To pass the following resolution: That the Company is, pursuant to Section 701 of the Companies Act 2006, hereby generally and unconditionally authorised to make market purchases (within the meaning of Section 693 of the Companies Act 2006) of ordinary shares of 5p each in the capital of the Company (“ordinary shares”) provided that:- i) the minimum price which may be paid for the ordinary shares is 5p per ordinary share; ii) the maximum price that may be paid for such shares is, in respect of a share contracted to be purchased on any day, an amount (exclusive of all expenses) equal to 105 per cent of the average middle market quotations of the ordinary shares of the company as derived from the Daily Official List of the London Stock Exchange on the 10 dealing days immediately preceding the day on which the shares are contracted to be purchased; iii) the authority hereby conferred shall expire after a period of 18 months from the passing of this resolution unless such authority is renewed prior to such expiry; iv) the authority hereby conferred is in substitution for any existing authority to purchase ordinary shares under the said Section 701; v) the Company may make a contract to purchase ordinary shares under the authority hereby conferred prior to the expiry of such authority which will be executed wholly or partly after the expiry of such authority and may make a purchase or purchases of ordinary shares in pursuance of any such contract; and vi) the maximum number of ordinary shares hereby authorised to be purchased by the Company does not exceed 15 per cent of the issued ordinary share capital of the Company at the date of the passing of this resolution. (Resolution 15) BY ORDER OF THE BOARD P Haining FCA Secretary 5 August 2022 Registered office: 2 Ravensbank Business Park, Hedera Road, Redditch, B98 9EY 126 NOTICE OF ANNUAL GENERAL MEETING (continued) NOTES: Entitlement to attend and vote 1. Only those members registered on the Company’s register of members at close of business 2 days before the time appointed for the meeting, or if this meeting is adjourned, at close of business on the day two days prior to the adjourned meeting shall be entitled to attend and vote at this meeting. Attending in person 2. If you wish to attend the meeting in person, please bring photographic identification with you to the meeting. Appointment of proxies 3. 4. If you are a member of the Company at the time set out in note 1 above, you are entitled to appoint a proxy to exercise all or any of your rights to attend, speak and vote at the meeting and you should have received a proxy form with this notice of meeting. You can only appoint a proxy using the procedures set out in these notes and the notes to the proxy form. If you are not a member of the Company but you have been nominated by a member of the Company to enjoy information rights, you do not have a right to appoint any proxies under the procedures set out in this “Appointment of proxies” section. 5. A proxy does not need to be a member of the Company but must attend the Meeting to represent you. Details of how to appoint the Chairman of the Meeting or another person as your proxy using the proxy form are set out in the notes to the proxy form. 6. You may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares. You may not appoint more than one proxy to exercise rights attached to any one share. 7. A vote withheld is not a vote in law, which means that the vote will not be counted in the circulation of votes for or against the resolution. If no voting indication is given, your proxy will vote or abstain from voting at his or her discretion. Your proxy will vote (or abstain from voting) as he or she thinks fit in relation to any other matter which is put before the Meeting. Appointment of proxy using hard copy proxy form 8. The notes to the proxy form explain how to direct your proxy how to vote on each resolution or withhold their vote. To appoint a proxy using the proxy form, the form must be completed and signed and sent or delivered to Neville Registrars Limited, Neville House, Steelpark Road, Halesowen, B62 8HD, not later than 48 hours before the time appointed for the Meeting. The completion and return of a form of proxy will not, however, preclude shareholders from attending and voting in person at the Meeting. In the case of a member which is a company, the proxy form must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under which the proxy form is signed (or a duly certified copy of such power of authority) must be included with the proxy form. Appointment of proxy joint members 9. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Company’s register of members in respect of the joint holding (the first-named being the most senior). 127 NOTICE OF ANNUAL GENERAL MEETING (continued) NOTES: Changing proxy instructions 10. To change your proxy instructions simply submit a new proxy appointment using the methods set out above. Note that the cut-off time for receipt of proxy appointments (see above) also apply in relation to amended instructions; and amended proxy appointment received after the relevant cut-off time will be disregarded. Where you have appointed a proxy using the hard-copy proxy form and would like to change the instructions using another hard-copy proxy form, please contact Neville Registrars Limited, Neville House, Steelpark Road, Halesowen, B62 8HD. If you submit more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will take precedence. Termination of proxy appointments 11. In order to revoke a proxy instruction, you will need to inform the Company using one of the following methods: a. By sending a signed hard copy notice clearly stating your intention to revoke your proxy appoint to Neville Registrars Limited, Neville House, Steelpark Road, Halesowen, B62 8HD. b. In the case of a member which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under which the revocation notice is signed (or a duly certified copy of such power of authority) must be included with the revocation notice. In either case, the revocation notice must be received by the Neville Registrars Limited, Neville House, Steelpark Road, Halesowen, B62 8HD, not later than 48 hours before the time appointed for the Meeting. Appointment of a proxy does not preclude you from attending the Meeting and voting in person. If you have appointed a proxy and attend the Meeting in person, your proxy appointment will automatically be terminated. Issued shares and total voting rights 12. As at 5 August 2022 the Company’s issued share capital comprised of 11,322,394 ordinary shares of 5p each which includes 6,946 shares held in treasury. Each ordinary share carries the right to one vote at a general meeting of the Company and, therefore, the total number of voting rights in the Company as at 5 August 2022 is 11,315,448. Documents on display 13. The following documents will be available for inspection at the place of the Annual General Meeting prior to the meeting until the time of the Meeting and for at least 15 minutes prior to the meeting: a. The register of Directors’ interests in the share capital and debentures of the Company; and b. Copies of service agreements under which Directors of the Company are employed c. The full rules of the LTIP d. The full rules of the CSOP e. Copies of the new Articles of Association of Solid State PLC Company No 00771335. 128 129 

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