THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

IQE plc

("IQE" or the "Group")

Unaudited Preliminary Results for the Full Year ended 31 December 2022

Cardiff, UK

17 May 2023

Resilient performance and strategic progress against a challenging industry backdrop

IQE plc (AIM:  IQE, "IQE" or the "Group"), a leading supplier of compound semiconductor wafer products and advanced material solutions to the global semiconductor industry, today provides unaudited preliminary results in relation to the full year ended 31 December 2022.

FY 2022 Financial highlights

Note: FY22 financials are unaudited

1. Reported figures include a £62.7m non-cash goodwill impairment

2. Adjustments include impairment of intangible assets, restructuring costs, CEO recruitment costs and share-based payment charges.

3. Capex stated is Property, Plant and Equipment cash capex.

4. Adjusted net debt is calculated as cash less borrowings but excluding lease liabilities and fair value gains/losses on derivative instruments.

Group revenue for FY 2022 was up 9% to £167.5m (FY 2021: £154.1m). On a constant currency basis, Group revenue was £151.2m (FY 2021: £154.1m).

Wireless revenue of £76.0m (FY 2021: £83.2m) was down 9% year-on-year on a reported basis and down 18% on a constant currency basis. This decrease reflects a decline in wireless GaAs epiwafer sales and the impact of the closure of the Group's manufacturing facility in Singapore focused on the manufacture and sale of legacy pHEMT epiwafers. The reduction in wireless GaAs epiwafer sales in particular has been impacted by softness in the broader smartphone handset market which has led to increased inventory levels throughout the manufacturing supply chain. This has continued to adversely affect demand for wireless GaAs epiwafers in H1 2023.

Photonics revenue of £88.7m (FY 2021: £68.1m) was up 30% year-on-year on a reported basis and up 18% on a constant currency basis. This increase reflects the continued strength of demand for VCSELs used in 3D sensing. The Group has benefitted from increased customer diversification following the announcement of a new multi-year strategic agreement with a global consumer electronics leader in early Q4 2022, and higher other Photonics product sales driven by a combination of factors including the re-phasing of certain aerospace and security orders.

CMOS++ revenue of £2.8m (FY 2021: £2.8m) was flat year-on-year and down 9% on a constant currency basis.

Group adjusted EBITDA of £23.4m (FY 2021: £18.7m). Adjusted EBITDA margin of 14% (FY 2021: 12%) as costs were controlled in line with the Group's efficiency objectives.

Reported operating loss of £73.0m (FY 2021: (£20.0m)) primarily due to the non-cash impairment of goodwill of £62.7m (see below), with an adjusted operating loss of £3.6m (FY 2021: £6.5m).

Reported net cashflow from operations of £8.9m (FY 2021: £18.9m) reflecting cash generated through the Group's resilient trading performance offset by adverse working capital movements and the cash impact of adjusted non-operational items.

Adjusted net debt position (excluding lease liabilities) of £15.2m as at 31 December 2022 (FY 2021: net debt of £5.8m).

Capital expenditure of £9.4m on PP&E (FY 2021: £15.1m) to support future growth opportunities. The Group continues to invest in research and development with capitalised technology development of £3.8m (FY 2021: £3.0m).

Impairment of goodwill of £62.7m (FY 2021: £nil) is a non-cash impairment principally relating to the Group's wireless operating segment where reductions in sales volumes, predominantly linked to lower levels of smartphone-related demand and continuing softness in 5G infrastructure, is forecast to result in lower levels of capacity use and profitability in this segment. The impairment results from the near-term softness in forecasts for wireless products as a result of the industry-wide semiconductor downturn driven by inventory build-up throughout the supply chain.

Operational highlights

·    Positive progress on the implementation of the Group's growth strategy set out at its November 2022 Capital Markets Day

·    Technological innovations supporting IQE's diversification into high-growth markets including power electronic and microLED display products

o  Development of world's first commercially available 200 mm (8") VCSEL wafer opens significant opportunities with new foundry partnerships

o  Advanced display technology expanded with continued development of microLED based on GaN (Blue & Green) & GaAs (Red)

o  Ongoing capex focused on investment in Gallium Nitride ("GaN") manufacturing capacity to further strengthen power electronic and advanced display capabilities

·    Continued strengthening of operational processes laying foundations for future growth

o  Launch of new manufacturing management software in South Wales ahead of global roll-out will deliver consistent and scalable improvements to operational performance

o  Building commercial engine, including global sales and customer excellence functions

·    Positive commercial progress made in line with our growth strategy

o  Long-term and strategic agreements signed with several customers, across existing and new product segments

o  Active pipeline of deals for development and mass production of epiwafers for power electronics

·    Global site optimisation programme continued in line with strategy

o  Singapore site closed in June 2022 and Pennsylvania site on track to be closed by 2024

·    Established the IQE Innovation Centre at the Cardiff, South Wales site

Current Trading and Outlook

·    Current trading is affected by the temporary semiconductor industry downturn, with reduced customer forecasts, orders and associated revenue

·    H1 2023 revenue expected to be in the range of £50-56m

·    Net debt as at 31 March 2023 was c.£24.0m (net debt is defined as cash less borrowings but excluding lease liabilities and fair value gains/losses on derivative instruments)

·    FY23 revenue in line with management expectations set out in March 2023 which include a return to year-on-year growth during the second half of 2023 

·    Diversification into high-growth markets of power and display, targeting GaN growth opportunities in FY 2024 and beyond

·    The Company expects PP&E capex related to essential maintenance and health & safety items and existing commitments to be approximately £7.4m in FY 2023. In addition, the diversification strategy will lead to investment in GaN manufacturing capacity of approximately £8.3m.

Proposed fundraise and banking facilities

The Company has announced today a placing to raise up to £30 million ("the Placing") and a Rex retail offer of up to £3 million (together with the Placing, the "Fundraising") in order to ensure that the Company can continue to invest to execute on its strategy, meet its near-term liquidity requirements and deliver a sustainable balance sheet position going forward. IQE is prioritising investment in GaN capacity as part of its long-term growth strategy, underpinning the diversification into the power electronics and microLED display segments.

The Group has entered into an agreement with its lending bank, HSBC, to extend the term of its $35m RCF to May 2026, conditional on the completion of the Placing. The facility was due to expire in April 2024. The Company has also agreed revised leverage and interest cover covenants, with quarterly testing from 31 December 2023.

If the Placing were not to proceed, the Company would receive less preferential terms from HSBC with the likelihood that further Bank support or alternative sources of capital will be required to increase liquidity in the course of 2023 in order to ensure both sufficient headroom and covenant compliance.

The full terms and conditions of the placing are set out in the Fundraising announcement and can be found on our website at https://www.iqep.com/investors/capital-raise-2023/.  

Americo Lemos, CEO of IQE, commented:

"IQE delivered a solid full year performance and improved margins in 2022 despite a challenging industry backdrop. Our strategic and long-term customer engagement model was validated by the announcement of several key partnership agreements during the year, and has resulted in a healthy new business pipeline. We remain confident in the strategy we announced at our Capital Markets Day and are focused on diversifying into high-growth markets such as power electronics and microLED displays. The Fundraising we have announced today will enable us to continue to invest in GaN technologies for these applications, while providing us with the fiscal headroom to navigate the current cyclical downturn."

Results Presentation

IQE will present its FY 2022 Results via webcast and conference call at 9:00am BST on Thursday 18 May 2023. If you would like to view this webcast, please register by using the below link and follow the instructions:         

https://brrmedia.news/IQE_FY22

This Announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014, as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 (as amended). This announcement is issued on behalf of IQE by Tim Pullen, CFO.

Contacts:

IQE plc

+44 (0) 29 2083 9400

Americo Lemos

Tim Pullen

Amy Barlow

Peel Hunt (Nomad and Joint Broker)

+44 (0) 20 7418 8900

Paul Gillam

Richard Chambers

James Smith

Numis (Joint Broker)

+44 (0) 20 7260 1000

Simon Willis

Hugo Rubinstein

Iqra Amin

Headland Consultancy (Financial PR)
+ 44 (0) 20 38054822

Andy Rivett-Carnac: +44 (0) 7968 997 365

Chloe Francklin: +44 (0)78 3497 4624

ABOUT IQE

https://www.iqep.com/

IQE is the leading global supplier of advanced compound semiconductor wafers and materials solutions that enable a diverse range of applications across:

·    Smart Connected Devices

·    Communications Infrastructure

·    Automotive and Industrial

·    Aerospace and Security

As a scaled global epitaxy wafer manufacturer, IQE is uniquely positioned in this market which has high barriers to entry. IQE supplies the global market and is enabling customers to innovate at chip and OEM level. By leveraging the Group's intellectual property portfolio including know-how and patents, it produces epitaxy wafers of superior quality, yield and unit economics.

IQE is headquartered in Cardiff UK, with employees across eight manufacturing locations in the UK, US and Taiwan, and is listed on the AIM Stock Exchange in London.

Financial Review

The Group reports financial performance in accordance with International accounting standards in conformity with UK adopted international accounting standards ('UK adopted IFRS') and provides disclosure of additional alternative non IFRS GAAP performance measures to provide further understanding of financial performance. Details of the alternative performance measures used by the Group, including a reconciliation to reported UK adopted IFRS GAAP performance measures, are set out in note 4.

Current outlook

The Group's trading in 2022 was impacted by the broader semiconductor industry downturn, in particular increasing softness in smartphone-related demand and weakness in 5G infrastructure demand in the latter part of the year. Group revenue of £167.5m (2021: £154.1m) has increased 9% benefiting from a foreign exchange tailwind of 10.6%. The Group has reported an operating loss of £73.0m (2021: £20.0m) which includes a non-cash impairment charge of £62.7m related to the write-down of goodwill resulting from a change in forecasts related to the current semiconductor downturn and the associated market softness impacting the Group.

Current trading is affected by the temporary semiconductor industry downturn, with reduced customer forecasts, orders and associated revenue. First half revenue is expected to be in the range of £50m-£56m. Net debt as at 31 March 2023 was c.£24m (net debt is defined as cash less borrowings but excluding lease liabilities and fair value gains/losses on derivative instruments). Full year revenue for FY23 is expected to include a return to year-on-year growth during the second half.  The Group is targeting diversification into the high-growth markets of power and advanced display by investing in the expansion of its GaN capacity. The Company expects PP&E capex related to essential maintenance and health & safety items and existing commitments to be approximately £7.4m in FY23. In addition, the diversification strategy will lead to investment in GaN of approximately £8.3m.

Steps have been taken by the Directors to strengthen the balance sheet of the business in the short-term, including the renewal of the Group's £28.7m ($35.0m) multi-currency revolving credit facility provided by HSBC Bank plc and the announced £30m equity fundraise. These steps, combined with a number of post-year end cost rationalisation and cash preservation actions that have been implemented by the Directors will provide the necessary liquidity for the Group to navigate the current semiconductor market downturn, provide sufficient headroom to protect against the recovery occurring later than forecast, and allow the Group to continue investing in its growth and diversification strategy.

Review of the year

Group revenue of £167.5m (2021: £154.1m) has increased 9%, benefiting from a foreign exchange tailwind of 10.6% on a reported basis where increases in Photonics revenues have offset declines in Wireless revenues.

The Group's Photonics business segment represents the largest proportion of the Group's revenue, accounting for 52.9% (2021: 44.2%) of total wafer sales with Wireless representing 45.4% (2021: 54.0%) and CMOSS++ representing 1.7% (2021: 1.8%).

Photonics wafer revenues increased 30% to £88.7m (2021: £68.1m). The increase in Photonics wafer revenues reflects the continued strength in demand for VCSELs used in 3D sensing, including the impact of increased customer diversification following the Group's announcement of a new multi-year strategic agreement with a global consumer electronics leader in early Q4 2022, and as a result of higher other photonic product sales linked to a combination of factors including the re-phasing of certain defence and security orders associated with large programmes and strong demand for the Group's substrate related products. 

Wireless wafer revenues decreased 9% to £76.0m (2021: £83.2m). The decrease in wireless wafer revenues reflects a decline in wireless GaAs epiwafer sales, continued softness in 5G infrastructure, and the impact of the closure of the Group's manufacturing facility in Singapore that focused on the manufacture and sale of legacy pHEMT epiwafers. The reduction in wireless GaAs epiwafer sales in particular has been impacted by softness in the broader smartphone handset market which has led to increased inventory levels throughout the manufacturing supply chain. This has continued to adversely affect demand for wireless GaAs epiwafers in H1 2023.

Statutory gross profit increased from £17.6m to £26.4m. The increase in gross profit reflects a combination of a favourable shift in sales mix with a higher proportion of the group's revenue derived from higher margin photonics products and the impact of a favourable foreign exchange tailwind which has helped to increase gross profit margin percentage to 15.8% (2021: 11.5%). Adjusted gross profit, which excludes the charge for share based payments, increased from £18.7m to £26.5m with an increase in gross margin from 12.2% to 15.8%.

Selling, general and administrative ('SG&A') expenses have increased 2.9% in the year from £30.3m to £31.2m, excluding the separately disclosed impairment loss on intangible assets of £66.2m (2021: £7.4m) and the impairment loss of £2.3m (2021: £0.03m credit) related to a small number of customer specific receivables. Adjusted SG&A expenses, which exclude adjustments for share based payments, restructuring costs, Chief Executive Officer recruitment costs and asset impairments have increased from £25.3m to £26.8m (5.7%), reflecting a combination of inflationary pressure, certain employee-related investment and increases in certain legal and professional costs.

As part of the Group's global footprint optimisation plan restructuring costs totalling £4.2m (2021: £3.7m) have been incurred relating to costs associated with the announced closure of the Group's manufacturing facility in Pennsylvania, USA and the closure of the Group's manufacturing facility in Singapore. Within the restructuring costs are £3.0m (2021: £3.0m) relating to a combination of site decommissioning, asset write-downs and employee related costs in Singapore and £1.2m (2021: £0.7m) relating to employee related and asset decommissioning costs associated with the closure of the Pennsylvania, USA site.

Chief Executive Officer recruitment costs of £0.2m (2021: £0.7m) include share award and cash costs associated with the new Chief Executive Officer's starting bonus and the partial release of accrued prior period external Chief Executive Officer recruitment fees that were linked to first year annual bonus awards. Chief Executive Officer recruitment costs in 2021 included settlement costs and legal fees of £0.3m associated with the transition of the former Chief Executive Officer to a non-executive role and external recruitment fees of £0.4m.

Impairment of goodwill of £62.7m (2021: £nil) principally relates to the Group's wireless operating segment where reductions in sales volumes, primarily linked to lower levels of smartphone-related demand and continuing weakness in 5G infrastructure is forecast to result in lower levels of capacity utilisation and operating segment profitability. The non-cash impairment results from the near-term softness in forecasts for wireless products as a result of the industry-wide semiconductor downturn which, has in turn, resulted from geopolitical shifts, the lingering effects of the pandemic in which inventory levels built up in the industry and increasing inflationary pressure.

Impairment of intangibles of £3.4m (2021: £7.4m) relates to the impairment of distributed feedback laser technology development costs where the Group has taken the decision to discontinue the development and commercialisation of the technology. The impairment in 2021 related to the write-down in value of the Group's cREO™ filter technology development cost and patent assets totalling £4.7m and the impairment of Photonic quasi crystal technology-related development costs and patent assets totalling £2.7m.

A reported operating loss of £73.0m has been incurred (2021: £20.0m), primarily due to the non-cash impairment of goodwill of £62.7m. Reflecting the adjustments noted above, an adjusted operating loss of £3.6m in 2022 compares to an adjusted operating loss of £6.5m in 2021. The reduction in the loss principally reflects the positive impact of a favourable shift in sales mix and a foreign exchange tailwind at a gross profit level partially offset by increases in SG&A expenses. The segmental analysis in note 3 reflects the adjusted operating margins for the primary segments (before central corporate support costs). Photonics-adjusted operating margins increased from 2.6% in 2021 to 12.6% in 2022 reflecting a combination of improved capacity utilisation and favourable customer and product mix. Wireless-adjusted operating margins declined from 8.8% in 2021 to 6.2% in 2022, primarily reflecting reductions in volume and the associated under-utilisation of certain manufacturing capacity.  The Group is targeting a reduction in under-utilised capacity through the closure of both the Singapore manufacturing site (completed in mid-2022) and the Pennsylvania site (due to be completed by 2024).

Finance costs of £2.4m (2021: £2.2m) reflect £1.1m (2021: £0.9m) of bank and other interest costs and the interest expense on lease liabilities of £1.3m (2021: £1.3m). Bank and other interest costs principally relate to the Group's HSBC Bank plc revolving credit and asset finance facilities with the increase in interest cost reflecting a combination of an increase in net debt and an increase in the interest rate as both the Bank of England Base Rate and the Sterling Overnight Index Average ('SONIA') interest rate benchmarks have increased during the year.

The tax credit of £0.9m (2021: £8.8m charge) consists of a current tax charge of £0.1m (2021: £1.1m) primarily relating to taxable profits generated by the Group's Taiwanese operations and a deferred tax credit of £1.0m (2021: £7.7m charge). Deferred tax asset recognition has been restricted in the UK to £nil to reflect future forecast profitability, an assessment that includes the impact of market softness in trading forecasts as a result of the industry-wide semiconductor downturn and the impact of the Group's consolidation and investment in central and functional roles, whilst US deferred tax asset recognition has been restricted to £nil to reflect lower future forecast profitability arising from a combination of market softness, the Group's consolidation of its US manufacturing operations and the continued shift in the balance of future forecast manufacturing and hence profits from the Group's US operations to its UK and Asian operations. The effective tax rate of 1.1% (2021: 13.3%) applicable to the tax credit of £0.8m (2021: £1.8m) on adjusted items is less than the UK statutory tax rate of 19%, primarily due to the non-recognition of deferred tax assets for current year UK, US and Singapore trading losses which include the adjusted Chief Executive Officer recruitment, Singapore and Pennsylvania site closure costs and intangible asset impairments.

The increase in the loss for the year to £74.5m (2021: £31.0m) reflects a combination of the underlying trading performance noted above and the impact of adjusted non-cash and other non-operational items, which at an adjusted level, has reduced the loss to £5.9m (2021: £19.3m).

Basic and diluted loss per share has increased from a loss per share of 3.87p to a loss per share of 9.27p in the current year with adjusted basic and diluted loss per share of 0.74p (2021: 2.41p), reflecting the Group's loss at a statutory and adjusted profit level.

Cash generated from operations decreased in the year to £8.9m (2021: £18.9m), reflecting the Group's favourable trading performance offset by adverse working capital and the cash impact of adjusted non-operational items. The Group has continued to invest in growing capacity to meet demand with capital expenditure of £9.4m (2021: £15.1m) principally focused in Taiwan and Massachusetts to support future growth opportunities, intangible asset expenditure of £4.7m (2021: £0.3m) focused on a combination of intellectual property and the Group's multi-year strategic IT transformation programme and investment in targeted capitalised technology development of £3.8m (2021: £3.0m).

The decrease in cash generated from operations, combined with investing activity cash costs of £10.7m (2021: £18.3m) and repayment of lease liabilities of £4.9m (2021: £3.7m), net of net proceeds from bank borrowings of £9.6m (2021: £6.1m repayment), have combined to maintain the Group's cash position of £11.6m (2021: £10.8m), but increase net debt (excluding lease liabilities and derivative financial instruments) from £5.8m to £15.2m as at 31 December 2022.  

Since the year end, the Group has experienced a deepening of the market softness that has impacted 2022, resulting in an increase in the Group's net debt position prior to the ongoing steps that are being taken to strengthen the balance sheet of the Group. The proposed £30m equity fundraise and completed refinancing of the Group's £28.7m ($35m) multi-currency revolving credit facility provided by HSBC Bank plc provide the necessary liquidity for the business to continue to operate and invest in its growth and diversification strategy.

Equity shareholder funds total £175.1m (2021: £234.6m) with the movement from 2021 primarily reflecting the loss for the year and foreign exchange differences arising on the retranslation of net investments in overseas subsidiaries.

Financial Statements

Financial summary

*   The adjusted performance measures for 2022 and 2021 are reconciled in note 4.

**  Free cash flow is defined as net cash outflow of £0.1m (2021: £14.1m outflow) before cash flows from financing activities of £4.7m (2021: outflow of £11.2m) and net interest paid of £2.2m (2021: £2.2m).

*** Adjusted net (debt)/cash is defined as cash less borrowings but excluding lease liabilities and fair value gains/losses on derivative instruments.

****      Adjusted EPS measures exclude the impact of certain non-cash charges, non-operational items and significant infrequent items that would distort period on period comparability (see note 5).

Consolidated income statement for the year ended 31 December 2022

Adjusted basic and diluted loss per share are presented in note 5.

All items included in the loss for the year relate to continuing operations.

Consolidated statement of comprehensive income for the year ended 31 December 2022

*   Items that may subsequently be reclassified to profit or loss.

Items in the statement above are disclosed net of tax.

Consolidated balance sheet as at 31 December 2022

Consolidated statement of changes in equity for the year ended 31 December 2022

Other reserves relate to share based payments.

Consolidated cash flow statement for the year ended 31 December 2022

Notes to the financial statements for the year ended 31 December 2022

1. General information

IQE plc ('the company') and its subsidiaries (together 'the Group') develop, manufacture and sell advanced semiconductor materials. The Group has manufacturing facilities in Europe, United States of America and Asia and sells to customers located globally.  

IQE plc is a public limited company incorporated in the United Kingdom under the Companies Act 2006. The Company is domiciled in the United Kingdom and is quoted on the Alternative Investment Market (AIM). The address of the Company's registered office is Pascal Close, St Mellons, Cardiff, CF3 0LW.

2. Significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented.

2.1 Basis of preparation

The financial statements have been prepared and approved by the directors in accordance with international accounting standards in conformity with UK adopted international accounting standards ("UK adopted IFRS"). The financial statements have been prepared under the historical cost convention except where fair value measurement is required by IFRS.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies.

2.2 Going concern

The financial statements are prepared on a going concern basis as the Directors believe that the Group has a strong strategy, exciting future opportunities and are taking the necessary steps to capitalise the Group with sufficient liquidity to navigate the current temporary semiconductor industry downturn. Without taking these steps, a material uncertainty exists around the going concern status of operations in the current semiconductor market downturn, related to the low level of liquidity headroom and bank covenant compliance in base case financial forecasts and the uncertainty over timing of the anticipated market recovery. The Group is currently experiencing weaker customer demand and a reduction in customer orders and forecasts as a result of the industry downturn.

The Directors consider that the current industry and economic outlook presents a temporary but significant challenge to sales volumes in the first half of 2023. The Group's trading in Q1 2023 has experienced a deepening of the market softness that impacted the latter part of 2022 as weaker customer demand, orders and forecasts are expected to result in a year-on-year decline in revenue of approximately £30.0m in H1 2023 prior to an anticipated improvement in market dynamics and customer demand in H2 2023.

The Directors have taken steps, and plan to take further steps to strengthen the balance sheet of the Group in order to mitigate the material uncertainty and associated financial impact of the current semiconductor market downturn.

Actions taken since the year-end:

•         The implementation of cost cutting actions, including staff redundancies, operational efficiencies and reductions in areas of discretionary expenditure which are under the control of the Directors.

•         Deferral of capital expenditure under the control of the Directors.

The steps taken to capitalise the Group with sufficient liquidity are as follows.

1. Refinancing of the Group's £28.7m ($35.0) multi-currency revolving credit facility provided by HSBC Bank plc on 17 May 2023. The tenor of the facility has been extended to 1 May 2026 in the event of a successful equity fund raise of greater than £25.0m on or before 23rd May 2023. Quarterly leverage and interest cover covenant tests will apply to the facility, commencing at December 2023.

2. The Group is launching an equity fundraise via an accelerated bookbuild process, immediately upon the announcement of these unaudited preliminary financial statements. The Group is planning to raise £30.0m via the Placing in order to ensure that the Company can continue to invest to execute on its strategy, meet its near-term liquidity requirements and deliver a sustainable balance sheet position going forward.

In the event that less than £25.0m of equity is raised, the tenor of the facility will be to 1 May 2025 and the new facility will be subject to a minimum monthly liquidity requirement of a £3.0m cash holding, with quarterly leverage and interest cover covenant tests commencing at June 2023. In this scenario, the Group would work with the relationship lending bank to navigate forecast covenant breaches.

In the year to 31 December 2022, reported revenue growth of 9% was recorded, although the Group has reported an operating loss of £73.0m for the year (2021: £20.0m loss). This includes a non-cash impairment charge of £62.7m related to the write-down of goodwill, which results from a change in forecasts related to the current semiconductor industry downturn. The Group increased its net debt position (excluding lease liabilities and fair value gains/losses on derivative instruments) to £15.2m (2021: £5.8m). At 31 December 2022 the Group had undrawn committed funding of £12.4m ($15.0m) available under the terms of its credit facilities.

In assessing the going concern basis of preparation the Directors have reviewed financial projections to 31 December 2024 ('the going concern assessment period'), containing both a 'base case' and a 'severe but plausible downside case'.  The going concern assessment period extends beyond the minimum required 12-month period from the date of approval of the financial statements to protect against the recovery in the semiconductor market occurring later than forecast by the Directors.

Base Case

The base case is the Group's Q1 2023 Board approved 2023 and 2024 forecasts. The base case incorporates the impact of current market softness, weak customer demand and post year end actions, including the refinancing of the Group's bank facilities, taken by the Directors but does not include the mitigating impact of the £30.0m equity fund raise planned by the Directors.

The base case was prepared with the following key assumptions:    

·      Revenue for 2023 in line with current analyst consensus, with a forecast return to year-on-year growth in 2024  

·      Direct wafer product margins consistent with 2022

·      Labour inflation in 2024 in line with labour market norms

·      Cost inflation in operating and administrative costs in line with the current inflationary environment

·      Mitigating cost actions, resulting in a reduction in total overheads by c.7% year-on-year in 2023, despite inflationary pressures in some cost categories

·      c.£15.0m of capital expenditure in 2023 and 2024 reflecting a combination of essential maintenance capital expenditure and investment in Gallium Nitride (GaN) related manufacturing capacity, enabling diversification into the high-growth power electronics and advanced display (uLED) markets

In the base case the Group is forecast to maintain low levels of funding headroom throughout the going concern assessment period with liquidity of £5.8m at the end of 2023 and £9.0m at the end of 2024. Liquidity during periods of 2024 is forecast to be very limited and assumes that the existing facilities remain available. The Group is forecast to breach its leverage, interest cover and minimum monthly liquidity covenants in one or more periods in 2023 and breach its minimum monthly liquidity covenant in more than one period in 2024. Net debt (excluding lease liabilities and fair value gains/losses on derivatives) is forecast to increase to a maximum of £30.7m in Q4 2023 before declining to £27.1m at the end of 2023 and £19.7m at the end of 2024.

Severe but plausible downside case

The severe but plausible downside case was prepared using the following key assumptions:

·      Revenue is assumed at 15% down on the base case for 2023 and 14% down on the base case for 2024

·      In line with the revenue reduction in both years, there is a reflective reduction in variable operating costs for 2023 and 2024 along with additional incremental cost savings that include idling of tools, labour savings, reductions in research and development expenditure and reductions in certain non-manufacturing related discretionary expenditure that can be controlled by the Directors

·      Deferral of certain capital expenditure in 2023 and 2024 that can be controlled by the Directors

The severe but plausible downside case would leave the Group with insufficient liquidity from Q3 2023 with additional liquidity of at least £19,313,000 required in the going concern assessment period assuming that the existing facilities remain available. In the severe but plausible downside case the group is forecast to breach its leverage, interest cover and minimum monthly liquidity covenants in one or more periods in 2023 and 2024. Net debt (excluding lease liabilities and fair value gains/losses on derivatives) is forecast to increase to a maximum of £40.2m in 2023 and £48.0m in 2024.

Having reviewed the base case and severe but plausible downside case the Directors of the Group have concluded that additional equity funding, in combination with the completed refinancing of the Group's £28.7m ($35.0m) multi-currency revolving credit bank facility, is required from the Group's shareholders in order to avoid insufficient liquidity and covenant breaches during the going concern assessment period. The Directors plan to raise £30.0m through an equity fund raise to provide the necessary liquidity to continue trading during the current semiconductor market downturn, provide sufficient headroom to protect against the recovery occurring later than forecast and provide sufficient headroom for the Group to operate in compliance with its banking covenants. The Directors acknowledge that there can be no certainty that the additional funding will be available, however, they have no reason to believe that shareholders will not continue to remain supportive at the date of approval of these financial statements.

In the event of a successful fundraise of £30.0m, the Group is forecasting to maintain covenant compliance and have positive liquidity throughout the 2023 and 2024 going concern assessment period, in both base case and severe but plausible downside scenarios.

The Directors have concluded that the uncertainty of the equity raise launched on 17 May 2023 indicates the existence of a material uncertainty that may cast significant doubt on the group's ability to continue as a going concern and, therefore, that the group may be unable to realise its assets and discharge its liabilities in the normal course of business. The Directors are confident that shareholders will remain supportive and that sufficient funds will be received through the equity raise and therefore have a reasonable expectation that the Group has adequate resources to continue in operational existence for the going concern assessment period. 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 were unable to continue as a going concern.

2.3 Changes in accounting policy and disclosures

a) New standards, amendments and interpretations.

The following new standards, amendments and interpretations have been adopted by the Group for the first time for the financial year beginning on 1 January 2022:

•         Amendment to IFRS 3 'Business combinations' to update references to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations.

•         Amendments to IAS 16 'Property, plant and equipment' to prohibit the deduction from cost of property, plant and equipment amounts received from selling items produced while preparing the asset for its intended use with any such sales and related cost recognised in profit or loss.

•         Amendments to IAS 37 'Provisions, contingent liabilities and contingent assets' to specify which costs a company includes when assessing whether a contract will be loss making.

•         Annual improvements to IFRSs 2018-2020 cycle to make minor amendments to IFRS 1 'First-time adoption of IFRS', IFRS 9 'Financial Instruments', IAS 41 'Agriculture' and amendments to the illustrative examples accompanying IFRS 16 'Leases'.

The adoption of these standards, amendments and interpretations has not had a material impact on the financial statements of the Group or parent company.

b) New standards, amendments and interpretations issued but not effective and not adopted early

A number of new standards, amendments to standards and interpretations which are set out below are effective for annual periods beginning after 1 January 2023 and have not been applied in preparing these consolidated financial statements:

•         IFRS 17 'Insurance contracts' which establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts and supersedes IFRS 4 'Insurance Contracts'.

•         Amendments to IAS 1 'Presentation of financial statements' on classification of liabilities which is intended to clarify that liabilities are classified as either current or non-current depending upon the rights that exist at the end of the reporting period and amendments to the disclosure of accounting policies which will require disclosure of material rather than significant accounting policies.

•         Amendment to IAS 8 'Accounting policies, changes in accounting estimates and errors' to introduce a new definition for accounting estimates which clarifies that an accounting estimate is a monetary amount in the financial statements that is subject to measurement uncertainty. Amendment to IAS 12 'Income taxes' to clarify the accounting treatment for deferred tax on certain transactions with a narrowing of the scope of the initial recognition exemption so that it does not apply to transactions that give rise to equal and offsetting temporary differences.

The Directors anticipate that at the time of this report none of the new standards, amendments to standards or interpretations are expected to have a material effect on the financial statements of the Group or parent company.

3. Segmental analysis

3.1 Description of segments and principal activities

The Chief Operating Decision Maker is defined as the Executive Leadership Team. The Executive Leadership Team, consisting of the Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Technology Officer, Chief People Officer, Executive VP Global Business Development, Sales, Executive VP Product Management and the Executive VP General Counsel & company secretary, consider the group's performance from a product perspective and have identified three primary reportable segments:

•         Wireless - this part of the business manufactures and sells compound semiconductor material for the wireless market which includes radio frequency devices that enable wireless communications.

•         Photonics - this part of the business manufactures and sells compound semiconductor material for the photonics market which includes applications that either transmit or sense light, both visible and infrared.

•         CMOSS++ - this part of the business manufactures and sells advanced semiconductor materials related to silicon which include the combination of the advanced properties of compound semiconductors with those of lower cost silicon technologies.

The Executive Leadership Team primarily use revenue and a measure of adjusted operating profit to assess the performance of the operating segments. Measures of total assets and liabilities for each reportable segment are not reported to the Executive Leadership Team and therefore have not been disclosed.

3.2 Adjusted Operating Loss

Adjusted operating loss excludes the effects of significant non-cash, non-operational or significant and infrequent items of income and expenditure which may have an impact on the quality of earnings, such as restructuring costs, CEO recruitment costs and impairments where the impairment is the result of an isolated, non-recurring event. Adjusted operating loss also excludes the effects of equity settled share-based payments.

Finance costs are not allocated to segments because treasury and the cash position of the group is managed centrally.

4. Alternative performance measures

The Group's results report certain financial measures before a number of adjusted items that are not defined or recognised under IFRS, including adjusted earnings before interest, tax, depreciation and amortisation, adjusted earnings before interest, tax, depreciation and amortisation margin, adjusted operating loss, adjusted loss before income tax and adjusted losses per share. The Directors believe that the adjusted performance measures provide a useful comparison of business trends and performance, and allow management and other stakeholders to better compare the performance of the Group between the current and prior year, excluding the effects of certain non-cash charges, non-operational items and significant infrequent items that would distort period on period comparability. The Group uses these adjusted performance measures for internal planning, budgeting, reporting and assessment of the performance of the business.

The tables below show the adjustments made to arrive at the adjusted performance measures and the impact on the Group's reported financial performance.

The nature of the adjusted items is as follows:

•         Share-based payments - The charge (2021: charge) relates to share-based payments recorded in accordance with IFRS 2 'Share-based payment' of which £0.1m (2021: £1.1m) has been classified within cost of sales in gross profit and £0.1m (2021: £0.6m) has been classified as selling, general and administrative expenses in operating profit. £nil cash has been defrayed in the year (2021: £0.1m) in respect of employer social security contributions following the exercise of unapproved employee share options.

•         Chief Executive Officer recruitment - Chief Executive Officer recruitment costs include the Chief Executive Officer's starting bonus of £1.0m, of which £0.2m relates to a share-based award and £0.8m relates to a cash award payable over the first three years of employment, costs associated with the transition of the former Chief Executive to a non-executive role and recruitment fees. The charge of £0.2m (2021: £0.7m) includes share award and cash costs associated with the new Chief Executive Officer's starting bonus of £0.4m (2021: £nil), settlement costs and legal fees of £nil (2021: £0.3m) associated with the transition of the former Chief Executive Officer to a non-executive role and a credit of £0.2m (2021: £0.4m fees) relating to external recruitment fees. Cash costs defrayed in the period total £0.7m (2021: £0.2m).

•         Restructuring - The charge of £4.2m (2021: £3.7m) relates to restructuring costs associated with the announced closure of the Group's manufacturing facility in Pennsylvania, USA and the closure of the Group's manufacturing facility in Singapore.

-  Restructuring charges of £1.2m (2021: £0.7m) relate to employee related costs associated with the announced closure of the Group's manufacturing facility in Pennsylvania, USA. The charge was classified as selling, general and administrative expenses within operating loss. Cash costs defrayed in the year total £0.6m (2021: £0.3m).

-  Restructuring charges of £3.0m (2021: £3.0m) consist of employee related costs of £0.2m (2021: £1.5m), site-decommissioning costs of £1.5m (2021: £1.5m), asset write downs of £0.9m (2021: £nil) and asset transfer costs of £0.4m (2021: £nil) relating to the announced closure of the Group's manufacturing facility in Singapore. The charge was classified as selling, general and administrative expenses within operating loss. Cash costs defrayed in the year total £5.1m (2021: £nil).

-  Restructuring profits on disposal of £1.3m (2021: £nil) consist of the sale of assets in Singapore following the cessation of trade in the year and the sale of assets in North Carolina to facilitate the consolidation of the Group's manufacturing operations from Pennsylvania.  Proceeds received in the year total £6.1m (2021: £nil) with a profit on disposal of £1.3m (2021: £nil) classified within 'Profit on disposal of intangible assets and property, plant and equipment'.

•         Impairment of goodwill - The non-cash charge of £62.7m (2021: £nil) relates to impairment costs associated with the Wireless CGU.

•         Impairment of other intangibles - The non-cash charge of £3.4m (2021: £7.4m) relates to the impairment of certain technology development costs and intellectual property patent assets.

-  The non-cash impairment charge of £3.4m relates to the impairment of distributed feedback laser technology development costs where the Group has taken the decision to discontinue the development and commercialisation of the technology.

-  The prior year non-cash impairment charge of £7.4m related to the impairment of cREO™ filter technology development costs and patent assets and the impairment of Photonic quasi crystal technology related development cost where the Group had taken the decision to pause development related activities which have not recommenced in the current period given the lack of visibility over the timeline to commercialisation of each of the technologies.

•         The cash impact of adjusted items in the consolidated cash flow statement represent costs associated with the recruitment of the group's new Chief Executive Officer (£0.7m), onerous contract royalty payments related to the Group's cREO™ technology (£0.4m), payment of employee related costs associated with the announced closure of the Group's site in Pennsylvania (£0.6m) and payment of employee and site related decommissioning costs associated with the closure of the Group's manufacturing facility in Singapore (£5.1m) net of the sale proceeds associated with certain items of plant and equipment sold as part of the closure of the Group's manufacturing facility in Singapore (£6.1m).

Adjusted EBITDA (adjusted earnings before interest, tax, depreciation and amortisation) is calculated as follows:

*Excludes the adjustment 'Restructuring - profit on disposal of PPE' which is separately disclosed as part of the groups adjusted items.

5. Loss per share

Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year.

Diluted loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of shares and the dilutive effect of 'in the money' share options in issue. Share options are classified as 'in the money' if their exercise price is lower than the average share price for the year. As required by IAS 33, this calculation assumes that the proceeds receivable from the exercise of 'in the money' options would be used to purchase shares in the open market in order to reduce the number of new shares that would need to be issued.

The directors also present an adjusted earnings per share measure which eliminates certain adjusted items. The Directors believe that the adjusted earnings per share measure provides a useful comparison of performance and allows management and other stakeholders to better compare the performance of the Group between the current and prior year, excluding the effects of certain non-cash charges, non-operational items and significant infrequent items that would distort period on period comparability. The adjustments are detailed in note 4.

6. Cash generated from operations

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2022 or 2021. The financial information for 2021 is derived from the statutory accounts for 2021 which have been delivered to the registrar of companies. The auditor has reported on the 2021 accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The statutory accounts for 2022 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement, with the exception of the description of going concern in the basis of preparation. In the absence of the successful completion of the proposed equity fundraise launched at the time of this announcement between the date of this announcement and the authorisation of the financial statements, those statutory accounts for 2022 are expected to include reference to a material uncertainty relating to going concern and the auditor's report on those accounts is expected to include reference to a matter to which the auditor draws attention by way of emphasis without qualifying their report in respect of that material uncertainty related to going concern. Those statutory accounts will be delivered to the registrar of companies in due course.