Error in port widths or dimensions. Invalid dimension has been specified for input port 1

I have an issue with my Simulink model which is:

Upon running, this model works as expected, giving the right outputs.

However upon simplifying to this model I get an error:

Error in port widths or dimensions. Input port 1 of 'withobserver/State-Space1' has 2 elements.  
This port does not accept the dimensions (or orientation) specified by the input signal.

All matrices were left untouched. Why does this happen? Any suggestions would be appreciated.