Vulcan Industries Plc - Audited Results

14 October 2022

Vulcan Industries plc

(“Vulcan” or the “Company”)

Audited Results

Vulcan Industries plc (AQSE: VULC) is pleased to announce its audited results for the year ended 31 March 2022.

Trading in the Company’s shares will resume on Monday 17 October which is the first business day following the publication of this announcement.

The full audited financial statements will be uploaded to the Company website. A further announcement will be made when the financial statements are sent to shareholders together with a notice of the Annual General Meeting.

Principal activity

The Company was established to develop a precision engineering group of companies, manufacturing and fabricating products for a global client base. The acquisition strategy is based on establishing targets that represent opportunities for synergies, helping to streamline existing operations and contributing to centralised purchasing, supply chain and operational savings as well as broadening product offerings and extending to new markets.

Review of business and future developments

On the 1 June 2020, the share capital of the Company was admitted to trading on the Aquis Stock Exchange Growth Market (“AQSE”). This enables the Company to raise additional equity to fund its growth and acquisition strategy. Since admission, the focus has been to restructure the existing businesses to recover from the financial impact of COVID-19 and lay the foundations to develop the Group going forward. The initial step in this process was the acquisition on 24 March 2022 of the entire share capital of Aftech Limited (“Aftech”) (note 12). Aftech brings additional complementary areas of fabrication skills and product offering.

COVID-19 has had a significant impact on the financial performance of the Group since admission. The results for the year ended 31 March 2021, the first period since admission, reflected the challenging market conditions and the impact of various lock downs. Whilst demand picked up in the second quarter of the year ended 31 March 2022, the continued operating losses placed significant strains on working capital. In particular, M&G Olympic Products Limited (“MGO”) which, like many smaller suppliers to the major construction companies, struggled to balance the cash flow fluctuations across multiple large projects. This placed strain on both its processes and its workforce and it was a continued demand on Group cash resources. In order to stem continued cash outflows, MGO was disposed of on 30 March 2022.

Consequently, the results for MGO are disclosed as discontinued activities and the comparatives for the prior year have been restated accordingly. The financial results for the Group for the year ending 31 March 2022, show an increase in continuing revenue of £2,927,000 (2021: £2,327,000) and a fall in the continuing loss before interest, tax, depreciation, amortization and impairments to £1,221,000 (2021: £1,605,000). After continuing depreciation and amortization of £396,000 (2021: £256,000), impairment charges of £2,040,000 (2021: £150,000) continuing finance costs of £490,000 (2021: £551,000) and a tax credit of £68,000 (2021: £nil), the Group is reporting a loss after taxation on continuing activities of £4,078,000 (2021: £2,562,000). The disposal of MGO generated a profit on discontinued activities of £391,000 after reporting a loss before tax to the date of disposal of £262,000 (2021: £861,000). The reported loss after tax for the Group is £3,687,000 (2021: £3,423,000).

At 31 March 2022, the Group balance sheet shows net liabilities of £3,155,000 (2021: £2,559,000). Since the year end to the date of this report, the Company has issued new equity of £323,000 before expenses.

The auditors have made reference to going concern in their audit report by way of a material uncertainty. Their opinion is not modified in respect of this matter.

The audit opinion was qualified. The qualification was related to certain of the group’s subsidiaries that were disposed of and where the auditors were unable to obtain sufficient appropriate audit evidence on the following areas:

·       -  the discontinued operations in the Consolidated Statement of Comprehensive Income relating to M&G Olympic Products Limited;

·       -  the cut off for the revenue of IVI Metallics Limited: the sales cut off sample for which the auditors did not receive information was £89,000, including post year end sales of £59,000

·       -  The auditors were appointed subsequent to the year end and were not able to observe the counting of the physical inventory and were unable to verify by alternative means the inventory quantities held at the year end.

In accordance with Rule 4.3 of the AQSE Growth Market Access Rulebook, the Company will announce management statements within one month of the quarter end for each quarter until an audit report is published without modification.  Accordingly, the Company will release the following quarterly reports:

·       A report for the two quarters ended 30 June 2022 and 30 September 2022 by 30 October 2022

·       A report for the quarter ending 30 December 2022 by 31 January 2023

·       A report for the quarter ending 31 March 2023 by 30 April 2023

Outlook

Since the year end, the Group has continued to lay the foundations for its future development by disposing of the loss making legacy businesses of IVI Metallics Limited (“IVI”) and Orca Doors Limited (“Orca”). These disposals are expected to have a significant benefit to the Group balance sheet in the first half of the current year. On 14 October 2022, the Company announced that it had entered into binding Heads of Terms, subject to documentation, to acquire the entire share capital of Peregrine X limited (“Peregrine”). This acquisition will enable the Group to focus on building a profitable trading business over the coming years.

The notes to the financial statements on pages 20 to 46  form an integral part of these financial statements.

1.                               General information

Vulcan Industries PLC is incorporated in England and Wales as a public company with registered number 11640409.

These financial statements are extracted from the audited financial statements which have been posted on the Company’s web site and do not constitute statutory accounts.

These financial statements are presented in Sterling and are rounded to the nearest £’000. which is also the currency of the primary economic environment in which the Company and Group operate (their functional currency).

2.                               Significant accounting policies

Going concern

The Group has prepared forecasts covering the period of 12 months from the date of approval of these financial statements. These forecasts are based on assumptions such as forecast volumes, selling prices and budgeted cost reductions. They further take into account working capital requirements and currently available borrowing facilities.

These forecasts show that the Group is projected, in the short term, to continue to experience net cash outflows rather than inflows and is contingent on securing additional funding either through additional loan facilities or through raising cash through capital transactions to remain a going concern.

The Group’s focus is on continued improvements to operational performance of the acquisitions made to date with an emphasis on volume growth to increase gross margins and synergies resulting in cost reductions. On 1 June 2021 the Company was admitted to trading on the AQSE Growth Market. This has already facilitated the ability of the Company to raise new equity, with £4,750,000 raised before expenses from admission to the date of this report.

As set out in notes 10, the Group is currently funded by a combination of short and long-term borrowing facilities. At 31 March 2022 the loans of £2,329,000 fall due for repayment between April and July 2022. Since the year end their term has been extended to April 2023 to September 2023.. The factoring facilities, of which £448,000 (2021: £321,000) was fully drawn at 31 March 2022, may be withdrawn with 3 to 6 months’ notice. As set out in Note 14, on 30 August 2022, the Company has received a demand under a cross guarantee of the outstanding principal of the CBIL originally drawn down by IVI. The Company is in negotiations to restructure this loan.

Based on the above, whilst there are no contractual guarantees, the directors are confident that the existing financing will remain available to the Group and as demonstrated by equity raised since the period end that additional sources of finance will be available. The directors, with the operating initiatives already in place and funding options available are confident that the Group will achieve its cash flow forecasts. Therefore, the directors have prepared the financial statements on a going concern basis.

Nonetheless, the forecasts show that the Group requires further funding to meet its commitments as they fall due and in addition to this the Group is reliant on maintaining its existing borrowings. These conditions and events indicate the existence of material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern and the Group may therefore be unable to realise their assets and discharge their liabilities in the ordinary course of business. These financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.

The auditors have made reference to going concern by way of a material uncertainty within their audit report.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up for the period ended 31 March 2021.

Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, the results of subsidiaries acquired or disposed of during the period are included in profit or loss from the date the Company gains control until the date when the Company ceases to control the subsidiary.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with the Group’s accounting policies.

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Group are eliminated on consolidation.

Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interest issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. At the acquisition date, the identifiable assets (both tangible and intangible) acquired and the liabilities assumed are recognised at their fair value at the acquisition date, except that deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 12 and IAS 19 respectively.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. In the case of asset acquisition, it is the excess of the sum of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

Goodwill

Goodwill is initially recognised and measured as set out above.

Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (or groups of cash-generating units) expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

On disposal of a cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable for goods and services provided in the normal course of business, net of discounts, value added taxes and other sales related taxes.

Performance obligations and timing of revenue recognition:

All of the Group’s revenue is derived from selling goods with revenue recognised at a point in time when control of the goods has transferred to the customer. This is generally when the goods are collected or delivered to the customer, or in the case of fabrication project work, when the project has been accepted by the customer. There is limited judgement needed in identifying the point control passes: once physical delivery of the products to the agreed location has occurred, the Group no longer has physical possession, usually it will have a present right to payment. Consideration is received in accordance with agreed terms of sale.

Determining the contract price:

The Group’s revenue is derived from:

a)      sale of goods with fixed price lists and therefore the amount of revenue to be earned from each transaction is determined by reference to those fixed prices; or

b)       individual identifiable contracts, where the price is defined

Allocating amounts to performance obligations:

For most sales, there is a fixed unit price for each product sold. Therefore, there is no judgement involved in allocating the price to each unit ordered.

There are no long-term or service contracts in place. Sales commissions are expensed as incurred. No practical expedients are used.

Government grants

Government grants are recognised in profit or loss on a systematic basis over the periods in which the Group recognises as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets (including property, plant and equipment) are recognised as deferred income in the consolidated statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised in profit or loss in the period in which they become receivable. Furlough claims under the Job Retention Scheme, have been disclosed as other income and not netted against the related salary expense.

Leases

The Group as a lessee

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the lessee uses its incremental borrowing rate.

The lease liability is presented as a separate line in the consolidated statement of financial position.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

•               The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

•               The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).

•               A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification.

The Group did not make any such adjustments during the period presented.

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

The right-of-use assets are presented as a separate line in the consolidated statement of financial position.

The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the ‘Property, Plant and Equipment’ policy.

Property, plant and equipment

Plant, machinery, fixtures and fittings are stated at cost less accumulated depreciation and accumulated impairment loss.

Depreciation is recognised so as to write off the cost or valuation of assets less their residual values over their useful lives, using the straight-line method or reducing balance methods, on the following bases:

The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

Right-of-use assets are depreciated over the shorter period of the lease term and the useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset.

Impairment of property, plant and equipment and intangible assets excluding goodwill

At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease and to the extent that the impairment loss is greater than the related revaluation surplus, the excess impairment loss is recognised in profit or loss.

Trade and other receivables

Trade receivables are accounted for at amortised cost. Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate expected credit loss allowances for estimated recoverable amounts as the interest that would be recognised from discounting future cash payments over the short payment period is not considered to be material. Other receivables are accounted for at amortised cost and are stated at their nominal value as reduced by appropriate expected credit loss allowances.

Borrowings

Borrowings are included as financial liabilities on the Group balance sheet at the amounts drawn on the particular facilities net of the unamortised cost of financing. Interest payable on those facilities is expensed as finance cost in the period to which it relates.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.

3.                               Critical accounting judgements and key sources of estimation uncertainty

In applying the Group’s accounting policies, which are described in note 3, the directors are required to make judgements (other than those involving estimations) that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Identified intangible assets

Identified intangible assets arising on acquisition are disclosed in note 14 and comprise; marketing related assets such as brands and domain names; customer related assets such as customer relationships, lists and existing order books. Their existence is established in a post-acquisition review which also estimates their value and the period over which they are amortised;

Carrying value of goodwill, other intangible assets and property plant and equipment

Impairment reviews for non-current assets are carried out at each balance sheet date in accordance with IAS 36, Impairment of assets. Reported losses in the subsidiary companies, were considered to be indications of impairment and a formal impairment review was undertaken.  The review uses a discounted cash flow model to estimate the net present value of each cash generating unit. Management consider each operating subsidiary to be a separately identifiable cash generating unit.

The impairment reviews are sensitive to various assumptions, including the expected sales forecasts, cost assumptions, capital requirements, and discount rates among others. The forecasts of future cash flows for each subsidiary were derived from the operational plans in place. Real prices were assumed to remain constant at current levels.

Details of the reviews are set out in note 9.

Receivables

In applying IFRS 9 the directors make a judgement in assessing the Group’s exposure to credit risk. The Group has recognised a loss allowance of 100 per cent against all receivables over 120 days past due where historical experience has indicated that these receivables are generally not recoverable. The allowance for expected credit losses follows an internal assessment of customer credit worthiness and an estimate as to the timing of settlement. In addition, the directors have assessed the recoverability of other receivables on a case by case basis.

Discontinued activities

The Group disposed of M & G Olympic Products Limited (“MGO”) on 30 March 2022. The profit on disposal is disclosed in note 7. The trading loss and net assets of MGO have been derived from the accounting records at the date of disposal.  However, the auditors have not been able to gain access to the documentary evidence and therefore have brought this limitation in scope to the attention of members in their audit report. Any misstatement of income, expenditure, assets or liabilities will effect neither the profit on disposal of discontinued activities disclosed on the income statement nor the Net Liabilities of the Group at 31 March 2022.

The Group took the decision to dispose of IVI and Orca after the year end. Consequently, IVI and Orca are included within continuing activities for the year ended 31 March 2022. However, provision has been made at 31 March 2022 for impairments in Goodwill and Identified intangible assets (notes 5 and 9).

4.              Other gains and losses

5.              Impairment charge

6.              Finance costs

7.              Discontinued activities

On 30 March 2022, the Company disposed of M&G Olympic Products Limited.

The comparatives in the Consolidated Statement of Comprehensive Income and Consolidated Statement of Cash Flows and several notes have been restated to separate continuing and discontinued operations.

8.              Earnings per share

9.              Goodwill and other intangible assets

Goodwill arising on acquisition comprises the expected synergies to be realised form the benefits of being a member of a group rather than stand-alone company. These include shared services, economies from pooled procurement, leveraging skillsets across the group and other intangible assets, such as the workforce knowledge, experience and competences across the group that cannot be recognised separately as intangible assets.

Identified intangible assets arising on acquisition comprise; marketing related assets such as brands and domain names; customer related assets such as customer relationships, lists and existing order books. These are amortised, depending upon the nature of the asset and the business acquired over 1 to 10 years on a straight-line basis.

The Group tests goodwill and identified intangible assets annually for impairment, or more frequently if there are indications that they might be impaired. Continues losses incurred by the subsidiaries, were considered to be indications of impairment and an impairment review was undertaken.

The Company disposed of its shareholdings in IVI and Orca after the year end.  Accordingly full impairment of goodwill and identifiable intangible assets has been made at 31 March 2022

In reviewing the goodwill and identified intangible assets attributable to the acquisition of RPE, the impairment review base case showed that in the short term there is no significant business attributable to RPE. Accordingly, full provision for impairment of goodwill and identifiable intangible assets has been made at 31 March 2022.

Sensitivity analysis

Discount rate: The Group’s borrowings have a current nominal rate of interest ranging from 5% to 18% per annum. It is intended to refinance the loan at 18% at more reasonable long-term rates. The real rate assumed in these forecasts is estimated to be 10%, a blended rate, taking into account the timing required to arrange the refinancing.

In order for a potential impairment to arise, either to goodwill and identifiable intangible assets arising on acquisition or to non-current assets in the subsidiaries, forecast sales volumes would have to fall by at least 5%. The forecasts did indicate an impairment when a discount rate of 18% was applied of approximately £220,000.

10.           Borrowings

Other loans of £1,854,000 (2021: £1,854,000) are secured by means of a debenture, chattels mortgage and cross guarantee entered into by the Company and each of its subsidiaries. Since the year end the Company extended term and the principal now falls due for repayment between April and July 2023.

Since the year end the term of the convertible note has been extended to 30 September 2023. The lender has the right to convert the outstanding principal into ordinary share of the Company at a price of 1p per share. In the event that the lender does not exercise its conversion rights by 30 September 2023, the loan shall become immediately repayable by the Company.

11.           Share capital

The Company has one class of ordinary share with a nominal value of 0.04p and which carries no right to fixed income.

At completion of the acquisition of Aftech Limited on 24 March 2022 (note 12), the Company did not have sufficient authority to issue all the consideration shares. Once the authority had been received at the Annual General Meeting held on 13 May 2022, the remaining consideration shares were issued on 16 June 2022.

12.           Acquisition of subsidiaries

In the year to 31 March 2022, the Company completed one acquisition:

Aftech Limited

On 24 March 2022, the Group purchased the entire share capital of Ruobrah Five Aftech Limited (“Aftech”) for £1,550,000 which was satisfied by the issue and allotment by the Company of 123,307,433 Shares at an issue price of 1.257p per share. The acquisition has been treated as a business combination. Aftech specialises in all areas of metal fabrication and complements other business within the group. The amounts recognised in respect of the identifiable assets acquired and liabilities assumed in the acquisition is as set out in the table below.

Acquisition costs of £21,000 have been included in other gains and losses in the consolidated statement of profit and loss and comprehensive income. Since the year end, the Company has issued 24,661,487 warrants to the vendor, with an exercise price of 3p and an expiry date of 30 June 2023. They have been valued using the Black Scholes model and the cost is not material so has not been accrued and included in acquisition costs.

13.           Post balance sheet events

Since the year end the Company has issued shares as follows:

On 24 May 2022, the Group loaned £250,000 to a company which it may acquire, £50,000 was subsequently repaid.

On 18 July 2022, the Company disposed of Orca Doors Limited for a nominal consideration. Orca was subsequently placed into a creditors voluntary liquidation on 25^th August 2022. Any eventual proceeds will be paid to the charge holder and reduce the Company’s debt to Ablrate.

On 31 July 2022, the Company disposed of IVI Metallics limited for a nominal consideration.  IVI was subsequently placed into administration on 25^th August 2022 and sold to new owners. Net proceeds after costs will be applied to the Company’s debt with Ablrate.

On 12 October 2022, the Company announced binding heads of terms, subject to documentation, for the acquisition of the entire share capital of Peregrine X Limited.

14.           Contingent liability

The Company has provided a cross guarantee to HSBC Bank in respect of the corona virus business interruption loan (“CBIL”) taken out by IVI. On 30 August 2022, the Company received a formal demand for repayment of the outstanding principal.  The balance outstanding as of the date of this report is £704,000. This may be further reduced by settlements from the liquidator of IVI.  The Company is in the course of negotiations with the bank to restructure this loan