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XperiWhere innovation starts Annual Report and Financial Statements 2021 I Q E p l c A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 2 1 s t r a t s n o i t a v o n n i e r e h W Page 8 What sets us apart At the core of technology Innovation starts at IQE. We create solutions that help our customers advance the world. www.iqep.com IQE plc Annual Report and Financial Statements 2021 Page 4 Our value chain Essential technology partner Page 14 Americo Lemos Meet IQE’s new CEO s t h g i l h g H i £154m Revenue £13m EBITDA £19m Adjusted EBITDA £15m Capital expenditure costs £(20)m Operating loss £(6)m Adjusted operating loss £(6)m Net debt The nature and description of annual performance measures are included in Note 5 on Page 114. Contents Strategic Report 1 Highlights 2 At a glance 4 Our value chain 6 Our global advantage 8 What sets us apart 10 Chairman’s Statement 12 2021 review 14 CEO’s Statement 16 Our business model 18 Our strategy 20 Market overview 22 Technology roadmap 24 Responsible business 38 Stakeholder engagement 40 Risk management 45 Viability statement 46 Financial review Corporate Governance 48 Board of Directors 50 Chairman’s Governance Overview 52 2021 Board Activities 54 Audit and Risk Committee Report 58 Nominations Committee Report 60 Remuneration Committee Report 66 Directors’ Remuneration Report 74 Directors’ Report 76 Statement of Directors’ responsibilities Financial Statements 77 Auditor’s Report 86 Financial Statements 145 Glossary 147 Investor information 1 Strategic ReportWhere innovation starts l e c n a g a t A Leading innovation from within Who we are IQE is the leading supplier of compound semiconductor wafer products and advanced material solutions to the global semiconductor industry. IQE is essential to technology growth markets, as the only compound semiconductor epitaxy foundry with a global footprint and proven ability to manufacture at scale. Our strategy Our delivery To deliver the best advanced semiconductor materials solutions to our customers through technology leadership, value engineering and production excellence; to provide our employees with a safe, stimulating and rewarding work environment; to partner with our suppliers to form mutually beneficial relationships; and to provide all our stakeholders with a highly rewarding investment. Read more on page on page 18 In order to rise to the challenges demanded by our customers and markets, IQE has established a strong leadership position through the creation of the broadest portfolio of materials IP in the industry. We have developed a reputation for excellence and reliability through technology leadership and proven mass market delivery. Our close collaboration with our customers ensures that our processes are highly integrated and embedded within our supply chains. For a terminology guide please see our glossary on page 145 Our key products Wireless Photonics Substrates Our Wireless business offers the industry’s broadest range of RF epitaxial wafer products that enable wireless connectivity, including in consumer mobile handsets, connected devices, 5G network infrastructure, WiFi 6, Bluetooth and satellite communications. Our wireless products include GaAs, GaN, and InP-based technologies, as well as Si and Ge-based epitaxial wafer structures. Read our Wireless review on page 13 IQE’s Photonics epitaxial wafer products can be found in consumer, commercial and industrial applications. Our key Photonics products include Vertical Cavity Surface Emitting Lasers (VCSELs) which are a key 3D sensing technology enabling facial recognition, gesture control, LiDAR and other advanced sensing applications, InP laser and detector wafers which power today’s high speed, 5G telecommunication and datacommunication fibre-optic networks, GaN and GaAs for multicolour uLED displays, and an industry leading range of GaSb and InP materials which enable high definition infrared imaging and sensing in security, health monitoring and environmental applications. Read our Photonics review on page 13 Compound semiconductor substrates are the base material from which all Photonics and Wireless devices are fabricated through epitaxy processes. We are industry pioneers in substrate technology and offer an unrivalled range of materials and product forms. Our GaAs, InP, GaSb, InSb and InAs product range allows us to serve a broad and diverse range of device types and end markets, and positions IQE at the forefront of new product technologies which are made possible only by the substrate materials we provide. Read IQE in the value chain on page 4 2 IQE plc Annual Report and Financial Statements 2021 Our international reach Europe • Cardiff • Newport • Milton Keynes North America Asia • Massachusetts • North Carolina • Pennsylvania • Washington • Taiwan • Singapore We are focused on consolidating our operations into strategic sites for business optimisation. Following the closure of our Singapore site in 2022, IQE will transfer the expertise, IP and assets from Singapore to our North Carolina and Taiwan sites. In 2021 we invested in eight new or refurbished tools in Taiwan to support future growth. Our business Wireless 54% Photonics 44% CMOS ++ 2% Read more on page 12 Read more on page 13 Europe 41% Americas 35% Asia 24% Read more on page 24 Gallium Arsenide (GaAs) 80% Gallium Nitride (GaN) 20% VCSEL 40% Infrared 35% Other 25% Read more on page 13 Europe 9% Americas 65% Asia 26% Read more on page 113 Continents of operation 3 We are the only global epitaxy player who can manufacture at scale. 3 Revenue by segmentationWireless segmentationPhotonics segmentationNumber of employees685We have a highly-skilled workforce across three continents.Revenue by geographyEmployees by locationStrategic ReportWhere innovation starts i semiconductor supply chain n IQE is a critical supplier in the compound a h c e u a v r u O Our manufacturing process Where innovation starts What is epitaxy Epitaxy Process Substrate l 2 1 IQE manufactures compound semiconductor wafers or “epiwafers” using epitaxy. IQE designs its epitaxy processes to produce best-in-class materials that enable today’s technology products. Epitaxy is the technically challenging process of depositing high quality, crystalline layers on a substrate. By specifically choosing the composition and sequence of the layers in epitaxial growth, the optical and electrical properties of the epiwafer are able to be tuned. We grow our wafer layers in a specific atomic order depending on the desired performance qualities of the wafer, as requested by our customers. An epiwafer can include hundreds of individual layers, each of which may be as thin as two or three atoms. Our epiwafers are then processed by our customers to produce the “chips” that are found in virtually all of today’s technology devices. Substrates are the base materials from which all Photonics and Wireless devices are fabricated. A substrate is used as the platform upon which we grow our epiwafers and is made out of a variety of materials depending on its intended use. We either manufacture or purchase a substrate, depending on customer requirements. To make our epiwafers we deposit up to 400 layers of compound semiconductor material onto a substrate using one of our highly specialised reactors. This is an incredibly difficult process and requires high specification cleanrooms, sophisticated production tools and high levels of intellectual property. It starts with a substrate Reactor Compound semiconductor substrate Our IP IQE’s intellectual property and know- how is rooted in over thirty years’ experience in the design of advanced epitaxial processes for epiwafer manufacturing. We have unparalleled knowledge of the materials and processes required to create atomic structures which deliver a wide range of electronic and optoelectronic properties. The quality and yields we achieve for our customers are unrivalled and it is our strong IP that truly sets us apart. Read more about our IP portfolio on page 32 Layers deposited onto wafer 4 IQE plc Annual Report and Financial Statements 2021 Chip makers Device manufacturers Enabling technology 3 4 5 We sell our epiwafers down the supply chain to chip makers, who process our wafers to fabricate devices that are subsequently diced into chips. One wafer can produce ten of thousands of chips, depending on the wafer size and application. Chips are ultimately packaged into modules or devices that are integrated into end systems by device OEMs, who sell into various end markets. The end-market products we enable are at the forefront of technological advancement. IQE’s epiwafers will be at the core of powering future mega trends. Chip Wafer • Smart mobile devices • Communications infrastructure • Automotive • Aerospace & Security 5 Strategic ReportWhere innovation starts e g a t n a v d a Compound semiconductors are everywhere Compound semiconductors underpin a vast range of today’s technology products. Their ability to operate at high frequencies, withstand high temperatures, and emit and detect light, make them an essential choice across key end markets. l l a b o g r u O Connect Power At the core of our daily lives Display Sense 6 IQE plc Annual Report and Financial Statements 2021 IQE is a key strategic asset in the global technology supply chain We are the world’s only outsourced compound semiconductor epitaxy foundry with a global footprint and proven ability to manufacture at scale. Consumer mobile Communications Infrastructure & Data Centre Automotive Aerospace & Security Energy, Industry & Environment Mobile handsets • Front end modules • 3D Sensing • Facial Recognition • Time of Flight • World facing applications • High resolution displays Wearables • Healthcare monitors • Augmented and virtual reality Wireless connectivity • Base station infrastructure • 4G, 5G, 6G • mmWave, mMIMO • WiFi 6 High-speed, long-haul optical networks Data centre optical links for cloud applications Drive train • Efficient power switching LiDAR • High power, long wavelength emitters • Highly sensitive detectors µLED displays Radar & satellite communications systems Thermal imaging Defence systems Lasers for cutting Sensing for smart factories HV switches for grid applications UV sterilisation Environmental sensing For more information see iqep.com/products/ 7 Strategic ReportWhere innovation starts leader operating at the forefront of technology t We are the global epitaxy r a p a s u s t e s t a h W IQE is the leading manufacturer of compound semiconductor wafers – a market set to expand due to large-scale technology trends. We operate at the forefront of technology Read our value chain on page 4 With over thirty years’ of experience and a deep commitment to research and development, our technologies are world-class. We are constantly innovating and supplementing our core capabilities with new products and systems. As a materials solutions provider, IQE is embedded within supply chains for a broad range of technology products. We work closely with our immediate customers, the chip-makers, and their customers, the original equipment manufacturers, to develop solutions with their required performance and quality characteristics. Macro trends will drive demand for IQE’s advanced materials Read our market overview on page 20 The proliferation of the latest communications standards, including 5G and WiFi 6, is revolutionising connectivity. IQE’s technology is at the heart of this transformation, with products essential to both handset/device and communications infrastructure. Connected devices are becoming ever more present in our lives and as connectivity transforms into true high-speed, high- capacity and low-latency networks, the possibilities for device connection, automation, machine learning, augmented reality and the metaverse increase. IQE’s material solutions will power a multitude of advanced applications from sensors to wearables and displays. IQE’s global manufacturing footprint is a strategic differentiator Read about our international reach on page 3 IQE innovates and manufactures on three continents. Our state-of-the-art facilities utilise the broadest range of technology platforms in our markets. Our extensive customer qualifications mean we are deeply embedded within our customers’ supply chains and we offer resilience in supply security and production flexibility through these multi-site qualifications. Our unique international reach also means we are well-positioned to serve a broad customer base and adapt to changes in global technology markets, as well as enabling us to access global talent pools. 8 IQE plc Annual Report and Financial Statements 2021 5G and WiFi 6 are revolutionising connectivity. IoT and the Metaverse will leverage this connectivity to revolutionise the way we live and work. As these trends develop, demand for the unique performance characteristics of compound semiconductors will expand significantly.” Tim Pullen Chief Financial Officer We have an unrivalled IP product portfolio Read about our Intellectual Property on page 32 Our people are experts Read about Our People on page 24 Our Intellectual Property (IP) portfolio encompasses a wide range of products born out of three decades of experience. We generate IP in each of our manufacturing facilities around the world, contributing to our broad market access. Our IP portfolio covers patented technologies, material systems and processes, as well as know-how and experience which is kept confidential. Our ability to provide our customers with multiple IP-protected material solutions enables them to bring world-leading products to market. From our highly-experienced Board and executive management team, to our technical and operational staff, the skill and experience of our people sets us apart. IQE is a home for the best and brightest talent in the world of advanced materials and the breadth and depth of the expertise of our workforce is unmatched. We nurture our talented people through both training and extensive on-the-job development, and working for IQE provides an exciting and stimulating global career path for people with a diverse range of skills. IQE is uniquely placed in a growing market Read our Business Model on page 16 IQE is the world’s leading scaled epitaxy provider with a host of competitive differentiators. We deliver world-leading quality, service, products and value. IQE produces the best quality and highest yielding wafers which in-turn generates superior unit economics for our customers. We aim to be the first choice supplier for all of our customers and as the markets for our technologies expand, our strategy will ensure we remain number one. 9 Strategic ReportWhere innovation starts t Industry leaders n e m e t a t s positioned for the future s ’ n a m r i a h C Dear shareholder, It is a great privilege to be able share my thoughts on 2021 with you, a year which was clearly challenging for many of us. For IQE, it was one in which we faced a number of headwinds but nonetheless made some significant progress. Most notably, at the end of 2020 we announced we were looking to appoint a new CEO to take over from Dr Drew Nelson after his three decades with the business. Working with the Board, I oversaw a rigorous international search process to secure the ideal candidate to lead the business into its next stage. We were delighted with the volume and calibre of candidates and their enthusiasm to be a part of IQE. Despite a number of hurdles, we were extremely pleased to announce Americo Lemos as the successful candidate in November, and, while the duration of the search was lengthened due to Covid travel restrictions and the senior- level nature of the appointment, I am confident that we have found the right fit. Americo is a highly respected industry expert with significant knowledge and experience of the sector; from chip design to fabless to foundry and in many of the world’s leading global technology companies. In addition to his industry expertise, he has cultivated powerful relationships and networks that will be pivotal in the evolution of IQE over the next few years and further cementing its position in the compound semiconductor ecosystem. This year has been unlike any other, with me stepping in as Executive Chairman of IQE from September 2021 until January 2022, when Americo joined the business. This gave me a chance to engage more closely with the business, and in particular our people, and I continue to be amazed by their strength and resilience in what was a difficult year for We believe that the future is built on compound semiconductors, and that new materials, such as those developed by IQE, are a necessity needed to solve the physical limitations of silicon semiconductors”. 10 IQE plc Annual Report and Financial Statements 2021 many coping with the ongoing global pandemic. IQE was fortunate not to have its operations significantly disrupted by Covid during the period, and this is in no small part due to the tireless efforts of our colleagues. I would like to take this opportunity to thank our Covid Committee, and all our colleagues, for helping us to navigate through these challenging times whilst keeping our sites safe. Amidst this unprecedented and challenging macro environment, we saw supply constraints within the broader semiconductor industry and a softening of demand within smart phone supply chains. Additionally, 5G MIMO-based infrastructure deployments, mostly notably in China, were weak all year, resulting in reduced GaN sales for our Wireless business. There was, however, solid demand for our Wireless GaAs product throughout the year, and this resulted in high use of our facilities in our Taiwan site. This demand will be supported by our investment in eight new and refurbished tools at the Taiwan site to support further growth in 2022. Our Photonics business benefited from continued demand for VCSELs for 3D Sensing throughout 2021, however, we saw a 17% decline overall in revenues year-on-year. This occurred due to smaller chip sizes being required for facial recognition technology, and the rephrasing of some defence and security orders into 2022, resulting in a temporary decline in our Infrared business 2021. This reduction was partially offset by additional customer qualifications and growth in the optical communications markets, as well as growing customer interest in our next generation long-wavelength VCSEL technology. These market conditions, coupled with a significant foreign exchange headwind, resulted in an 13% reduction in revenues year-on-year. Whilst extremely disappointing, we believe GaN remains an essential material for 5G infrastructure and demand is expected to recover over the multi-year deployment cycle. IQE remains essential to technology growth markets in many exciting end markets, as we are the only compound semiconductor epitaxy foundry with a global footprint. We achieved several key product milestones throughout the year, and we continued to make good operational progress during 2021. In September we announced the closure of the Group’s Singapore site as part of the Group’s consolidation strategy. It follows our previous announcement regarding the closure of our Pennsylvania site and will enable us to consolidate our operations into strategic sites and transfer expertise, IP and assets to Taiwan and North Carolina; improving production efficiency and margins in the medium to long-term. To further support efficiency improvements, we entered into a multi-year strategic IT transformation agreement with Critical Manufacturing to support the Company’s future growth through a Manufacturing Execution System (MES). We also entered into key strategic partnership agreements during 2021. In October we announced a long-term strategic collaboration with GlobalFoundries® to develop gallium nitride on silicon (GaN on Si), a technology vital for mobile and wireless infrastructure applications. In addition, we also agreed a multi-year partnership agreement in Asia. Whilst we are contractually obliged to keep the details confidential, we are very excited about this partnership, and we look forward to continuing to further our ambition to work more closely with our customers. Board matters 2021 has seen us make a number of changes to IQE’s Board. We were pleased to welcome Victoria Hull, who was appointed as a Non-Executive Director and Remuneration Committee Chair, and an appointee to the Audit & Risk and Nominations Committee following Sir David Grant’s retirement from the Board. I would also like to thank Sir David for his commitment to IQE and the Board during his tenure, particularly as Remuneration Committee Chair. Victoria is a great addition to the Board and possesses strong experience gained across a variety of sectors including technology as well as corporate finance, which is already proving invaluable. During the year, Dr Drew Nelson transitioned from his previous role as CEO to a Non-Executive Director with the title of President. I would once again like to thank him for his dedication to the business. Through his vision and drive, IQE has established a solid platform with strong market positions and global leadership in compound semiconductors. We look forward to continuing to benefit from his industry expertise. During the period, a Board-level Environmental, Social and Governance Committee was formed in order to develop and monitor the execution of IQE’s ESG strategy, as well as to oversee the communication of the company’s ESG activities with all stakeholders. This is a critical step in IQE’s ESG journey, and reflects our commitment to continuous improvement and implementing best practice across the business. Looking ahead We believe that the future is built on compound semiconductors, and that new materials, such as those developed by IQE, are a necessity needed to solve the physical limitations of silicon semiconductors. Structural technology trends, such as the Metaverse, will drive IQE’s future growth and the demand for sensing & display solutions. Additionally, many emerging technological trends, such as AI, the convergence of information technology and biotechnology in applications such as wearables, along with the move to electric and autonomous vehicles, will rely on the capabilities of compound semiconductors. This is why we are so confident of the opportunities that lie ahead. We will look to capitalise on our market leading position under Americo’s new leadership, with a renewed focus on close alignment with our customers, including through strategic partnerships. From these strong foundations, Americo will set out his strategy for the future direction of the business this year and I look forward to embarking on IQE’s next phase of growth alongside him and our strengthened Board. Phil Smith Chairman 29 March 2022 11 Strategic ReportWhere innovation starts w Performance highlights e i v e r We recognise our success relies upon not only our financial performance, but achieving our operational and social goals. 1 2 0 2 Financial highlights Revenue: £154m Adjusted EBITDA*: £19m 155 156 140 178 154 37 26 16 30 19 Non-financial highlights Gender diversity (Group level) Male 84% Female 16% 17 18 19 20 21 17 18 19 20 21 Read more on page 24 Net debt: £(6)m Capital expenditure cashflows: £15m Safety course completions 46 21 (16) 2 (6) 11 30 32 5 15 3,564 4,163 17 18 19 20 21 17 18 19 20 21 Adjusted operating profit/ (loss)*: £(6)m Operating profit/ (loss): £(20)m 27 16 (5) 5 (6) 17 9 (19) (6) (2) 20 21 Read more on page 32 Total GHG emissions (tCO2e) 32,726 23,772 17 18 19 20 21 17 18 19 20 21 Adjusted diluted EPS (£p)*: (2.41p) EPS (£p): (3.87p) 3.38 1.38 (2.46) 0.29 (2.41) 1.98 0.12 (4.51) (0.41) (3.87) 20 21 Read more on page 34 * The nature and description of annual performance measures are included in Note 5 on page 114. The nature of adjusted diluted EPS is referenced in Note 12 on page 120. 17 18 19 20 21 17 18 19 20 21 12 IQE plc Annual Report and Financial Statements 2021 Business review Wireless Photonics CMOS++ In 2021 IQE’s Wireless business saw strong growth in GaAs driven by 5G handset penetration and WiFi 6. 5G handset market share is significantly higher than 4G share at a comparable point in their respective rollout cycles. WiFi 6 & 6E volumes grew in the first half of 2021, with some slowdown due to semiconductor component shortages in the later part of the year. The overall trend in WiFi connectivity remains extremely favourable for compound semiconductors, with WiFi 6 & 6E having already extended the upper frequency range to 6GHz and the forthcoming WiFi 7 standard poised to further extend the upper frequency to 7.25 GHz. Enabled by GaAs-based power amplifiers, this allows compound semiconductors to capture significantly more market share than for previous WiFi generations. The demand for mobile products was countered by slowdowns in Asian 5G infrastructure deployments, which resulted in Wireless revenues declining by 12% year-on-year. Despite this, the fundamental advantages of GaN remain compelling for massive MIMO deployments and with the vast majority of the world’s population still not covered by a 5G wireless network, much more lies ahead in the infrastructure deployment cycle Dr Wayne Johnson Executive Vice President, Sales & Business Development “The importance of compound semiconductor materials to key wireless applications has never been greater. Evolution of wireless standards, driven by the insatiable demand for increased bandwidth and low latency, has driven these applications even further toward the compelling value proposition of IQE’s GaAs and GaN wafer products.” Compound Materials on Silicon (CMOS++) is an IQE business focused upon combining the advanced properties of compound semiconductors with those of Silicon, resulting in products featuring the performance advantages of compound semiconductors integrated seamlessly with leading edge CMOS technology. IQE’s CMOS++ products are all focused on scaling to larger wafer diameters (200 and 300 mm). This allows IQE to engage with specialty Silicon foundries who are beginning to enter the compound semi space. 2021 saw strong activity in the integration of compound semiconductors on silicon, with revenues up 28% year-on-year. In addition to Si photonics, IQE is active in GaN on Si technology development for RF and display (LED) applications. IQE has also created unique VCSEL technology on 200 mm Germanium substrates which provides clear line of sight to ultimately scaling to 300 mm Silicon. IQE’s CMOS++ strategy is part of a larger thrust to scale compound semiconductors to larger wafer diameters. IQE’s Photonics business delivered a robust year defined by growth across a number of key market verticals, despite a 17% decline in revenues overall. Current generation VCSEL revenues were lower year-on-year due to smaller chip sizes being required for facial recognition technology. This reduction was partially offset by additional customer qualifications and growth in optical communications markets and growing customer interest in our patented long-wavelength VCSEL technology, which is being used to develop the next generation of higher performance mobile and automotive sensing technologies. Additionally, growth in our data communications business serving hyperscale datacentre markets accelerated during the year, driven by IQE VCSEL technology adoption in new energy efficient, high-bandwidth big data platforms. Our Infrared business saw a temporary decline in 2021 following record year in 2020, due to the re-phasing of certain defence and security orders into 2022. Building on a record set of results in 2020 for our ‘Night Vision’ materials, IQE entered a contracted three-year production ramp for GaSb based electro-optic sensor materials, while our InP business in optical communications markets performed very strongly with growth driven by the global rollout of 5G networks. Dr Mark Furlong Executive Vice President, Produc t Management Dr Rodney Pelzel Chief Tec hnology Officer “IQE continues to be the technology leader for the integration of compound semiconductors on Silicon and Germanium. This leadership makes IQE the partner of choice for new market entrants, being Silicon foundries.” “2021 saw our Photonics business capitalise on many new growth opportunities in megatrend markets, powered by IQE compound semiconductor technologies. Customer partnerships in aerospace and security as well as new opportunities in healthcare sensing and microLED displays will be transformative to our future Photonics revenue growth as market adoption accelerates.” 13 Strategic ReportWhere innovation starts t n e m e t a t s s ’ O E C IQE welcomes Americo Lemos as CEO Americo joined IQE in January 2022 as Chief Executive Officer, bringing with him a wealth of experience from across a broad spectrum of global technology companies. He is a highly respected industry expert with significant knowledge gained in various executive positions throughout the semiconductor value chain. Most recently he was at GlobalFoundries as Senior Vice President of Business Development for Asia Pacific and China Country President. Prior to this, he was Senior Vice President at Qualcomm, responsible for its data centre business. Before joining Qualcomm, Americo was Vice President of Platform Engineering at Intel, responsible for strategic ventures with Chinese semiconductor companies. With over 25 years of experience, he possesses a strong mix of commercial expertise, longstanding customer relationships and specific market knowledge. As a proven leader, Americo understands the importance of building connections with both customers and team. Americo’s appointment is an exciting new phase for IQE in its journey of compound semiconductor market leadership. We warmly welcome Americo and we look forward to sharing his journey over the years to come, as we work to provide advanced technology solutions to shape the future and enable a new digital age. I am extremely excited by the opportunities that lie ahead for IQE, and the critical role we play in the semiconductor ecosystem. Recent events such as the global pandemic have demonstrated the criticality of electronics and semiconductors in our everyday lives, and with its global footprint IQE is strategically positioned in the compound semiconductor value chain to fuel the next wave of innovation.” 14 IQE plc Annual Report and Financial Statements 2021 602 PPI Executive Leadership team Q: What attracted you to IQE? A: I am extremely excited by the opportunities that lie ahead for IQE, and the critical role we play in the semiconductor ecosystem. Recent event such as the global pandemic have demonstrated the centrality of electronics and semiconductors to our everyday lives, and with its global footprint IQE is uniquely positioned in the compound semiconductor value chain to fuel the next wave of innovation. I am honoured to be taking the helm of this esteemed global business at such an exciting time for our industry. Q: How do you plan on using your significant international industry experience? A: I have over 25 years’ experience in the industry and have had the chance to work for some of the greatest technology companies in the world. I joined IQE having spent a number of years working across the semiconductor space, with experience ranging from systems to chip design and involvement in semiconductor foundries, most recently as GlobalFoundries’ Senior Vice President of Business Development for Asia Pacific and China Country President. This international outlook, experience in delivering growth in Asian markets and knowledge of our customer base will all play an essential role as we shape the strategy and vision for the business. Q: How have you found relocating to the UK? A: I am married with two grown up sons and we have recently been living in California, so this is a big change. Our family has been lucky enough to have had the opportunity to travel significantly and live in different places around the world, and we always relish the opportunity to experience different cultures. My wife and I are very excited and looking forward to discovering all the wonderful things the UK has to offer. Q: What have you learnt in your early conversations with colleagues and customers? A: I am thoroughly impressed with the dedication and knowledge of my new colleagues at all levels of IQE. They are world-class and have all given me a very warm welcome. In particular, I must recognise our stellar Executive Leadership Team who, alongside me, will provide strategic and operational leadership to the business. It is important that we have a strong team with the right breadth and depth of skills with a laser focus on our people, culture, processes, and strategies. The ELT is empowered to make efficient and effective decisions to drive business and operational performance. Q: What are your plans for the business? A: My core objectives are to restore growth at IQE and to build a strong technology roadmap, as well as a diversified customer base to capture the opportunities presented by upcoming megatrends in the industry. I have been encouraged by conversations with our valued customers who are keen to further entrench their close commercial relationships with IQE. This will be a focus for me in the coming months. My immediate priority will be about putting in place a structure to enable us to scale the business and set us up for success. I look forward to updating the market on my vision for the strategic direction of the business in due course. Q: What difference will shareholders and other stakeholders see? A: I recognise that the business has faced challenges, but I am confident that with a clear strategic direction and focus on executing our business plan we can deliver a strong platform for growth and long-term sustainable returns for our shareholders into the future. From a customer perspective, we must shift to become a global customer-centric organisation underpinned by strong commercial and strategic partnerships with a deep understanding of their needs. I believe IQE has a bright future – we are uniquely placed in a growing global market and I look forward to realising all of the opportunities that lie ahead. Americo Lemos Chief Executive Officer 29 March 2022 15 Strategic ReportWhere innovation starts l e d o m s s e n i s u b r u O What makes our model work How we create value Long-standing partnerships with customers IQE is a materials solutions provider, enabling advanced technologies throughout major global supply chains. We work with customers across the value chain. Highly skilled and experienced people IQE attracts and develops the top talent in the compound semiconductor industry, and is therefore able to offer a wealth of technical expertise across our product portfolio. Breadth of intellectual property portfolio With an extensive patent portfolio and significant process IP, utilising MOCVD, MBE and CVD platforms, IQE has an enviable and protected position within diverse technology markets. Widely recognised technology leadership As a materials specialist with a commitment to innovation, IQE is at the forefront of new technology and has a track record of enabling major technological product trends, from R&D to mass production. Global manufacturing footprint Headquartered in the UK and with manufacturing operations in three major continents, IQE has broad market access, close customer proximity and global manufacturing flexibility and resilience. Superior quality is a core competence With a reputation for manufacturing products of the highest quality, IQE’s wafers drive superior yields and unit economics for our chip customers. Research & development New products A programme of innovation that drives leading edge technologies, working in partnership with the world’s major technological supply chains. Developing leading edge products with superior performance and quality characteristics, enabling the technologies of today and tomorrow. Underpinned by: Our culture & values Our strategic goals IQE’s strength lies in the expertise and diversity of our workforce and we recognise that teamwork and collaboration are at the heart of the Company. We strive for a culture of integrity, accountability, excellence, valuing people and teamwork. By investing in the future of compound semiconductors and scaling up the business for growth, IQE is targeting expanding margins and cashflows. Integral to this is the development and mass production of advanced materials that are key to the macro trends such as the proliferation of 5G communications, WiFi 6 connectivity, the Internet of Things, Augmented Reality and the Metaverse. Expanding margins and cash generation 16 IQE plc Annual Report and Financial Statements 2021 Manufacturing capacity Customer qualification Mass production Investment in our large- scale mass production foundries has created the scale for us to capitalise on the expanding compound semiconductor market. Exacting quality standards, world-leading IP and process know how enables broad product qualification with major international customers. As volumes increase within an expanding industry, superior economies of scale and operating leverage can be achieved. Sound governance & risk management As a global operator with a 30-year heritage, IQE has an enviable record of operating safely, compliantly and with continuity of operations. The semiconductor industry is dynamic and fast paced however oversight from our Board ensures the strategy and execution of our business incorporates best practice and proactive risk management. Responsible business operations The health and safety of our people, the environment and the communities in which we operate are of paramount importance. We view our global supply chain as an extension of our business and for this reason we are committed to operating responsibly. Expanding margins and cash generation The values we share Customers Innovative new product offerings to enhance the competitive advantages of our customers £3m Technology-related development expenditure Employees We are committed to promoting an environment and culture that provides agile and life-long learning 2,719 Hours of learning completed 2021 Investors We continue to reinvest in growth and innovation, positioning the Group for a multi-year growth cycle £15m Capital expenditure investment in 2021 Communities We seek to contribute to the economic, social and environmental sustainability of our local communities through a range of initiatives 1 day Annual paid employee volunteering leave entitlement Environment We ensure that our activities and manufacturing operations are conducted in a way that minimises our impact on the environment 23,772 tCO2e Total GHG emissions 17 Strategic ReportWhere innovation starts y g e t a r t s r u O Our strategic progress IQE operates in a market with high barriers to entry, where our deep expertise, process know- how and intellectual property portfolio provide a significant competitive advantage. Our Wireless strategy IQE is the number one manufacturer of GaAs wafers for handset power amplifiers, having grown through organic and inorganic strategies. As the front-end module of mobile handsets incorporates greater integration over time, and as 5G technologies proliferate, compound semiconductor content will increase in these devices. IQE’s GaAs wafers are integral to both 5G handsets and WiFi 6 routers, both of which experienced significant sales growth in 2021. IQE’s GaN wafers are found in 5G base stations, in particular Massive MIMO. Whilst deployments of these slowed in 2021, a significant future infrastructure build is anticipated. Our Photonics strategy IQE is the market leader in VCSEL wafers used for 3D sensing, being the only outsourced epiwafer manufacturer globally to have scaled and sustained mass production of this product. IQE’s heritage in laser technologies and past investments in R&D have generated this position within a broad portfolio which includes InP lasers for datacoms and Sb lasers for aerospace and security applications. Sensing technologies are set to proliferate in many future devices and use cases, with anticipated growth in the Internet of Things, augmented reality and the Metaverse. Investing in the future of compound semis Scaling up the business for growth Expanding margins and cashflows 18 IQE plc Annual Report and Financial Statements 2021 Strategic goalLeveraging and expanding our IP portfolioDeveloping new productsTargeting new market entryInnovation in integration and miniaturisationStrategic goalExpand Group capacityQualify customers in strategic marketsEnhance management controls, systems and processes to enable mass productionStrategic goalSuperior unit economics from improved yields and economies of scaleCustomer and market diversification Developing relationships as a materials solutions provider Progress in 2021 Future objectives Expansion of VCSEL portfolio with turnkey IQVCSEL™ Building our universal roadmap product line Achievement of key power and reliability milestones for its IQDN-VCSEL™ technology for advanced sensing applications at longer wavelengths on 150 mm GaAs substrates Scaling of IQE’s VCSEL on Ge technology (IQGeVCSEL) to 200 mm Focussing our development programmes on market driven solutions. Longer term developments such as cREO® and PQC are being de-prioritised in the short term Expanding IP Portfolio – eight new grants and five patents registered in 2021 for compound semiconductors at scale. IQE’s materials underpin connectivity, advanced sensing and power applications, enabling the key macro trends of 5G, Big Data and IoT, advanced health care, the Metaverse and autonomous drive vehicles Developing next-generation Wireless products for 5G communications (including mmwave) and 5G handsets (including front end module integration) Page 32 Intellectual Property Read our IP update Progress in 2021 Future objectives Capital expenditure of £15.1m focussed on deployment of additional tools to meet demand for IQE’s Wireless products in Asia The project to close IQE’s Pennsylvania US site by 2024 and consolidate the Group’s US MBE development and production at the North Carolina US site is on track Business systems and process transformation programme on track to provide a consistent, agile and scalable platform for business growth Several key appointments made to strengthen the management team Ongoing global footprint optimisation to maximise participation in global markets, create superior economies of scale and maximise production scalability Completion and benefits realisation from the business systems and process transformation programme Progress in 2021 Future objectives Closure of IQE’s Singapore site by mid-2022, realising c.£4.8m Continuous improvement in per annum of cash savings Long-term strategic collaboration agreement signed with GlobalFoundries® to develop vital GaN on Si technologies for mobile and wireless infrastructure applications Multi-year strategic partnership signed with a major semiconductor foundry to develop epiwafers for 5G small cells yield management, operational optimisation and customer responsiveness will ensure IQE is best placed to target profitable growth Due to high operational gearing, margins and cashflows expand with higher volumes Page 28 Key appointments Read about our 2021 Talent Acquisition Page 22 Technology Roadmap See our development pathways 19 Strategic ReportWhere innovation starts w e i v r e v o t e k r a M The marketplace The compound semiconductor marketplace is set to expand with the proliferation of 5G and a new age of connectivity. The advanced properties of compound semiconductors are increasingly used to enable devices to operate at high power, high frequency or to emit and detect light, overcoming the limitations of silicon semiconductors. IQE is at the forefront of enabling new technology trends which will shape the way we live over the coming years. Future trends The future will be enabled by compound semiconductors. Their unique properties are required in order to overcome fundamental limitations of silicon, the mainstay semiconductor material. The integration of compound semiconductors with leading edge CMOS technology enables a multitude of advanced applications. Key future technology trends will shape our markets and revolutionise the world as we know it and drive end demand for our products. What we’re focused on While IQE’s products have many end-market applications and increasing future use cases. in 2021 we were primarily focussed on enabling these key technologies: 3D and Advanced Sensing Applications Facial recognition ‘World facing’ cameras enabling Augmented and virtual reality Structured light and Time of Flight (ToF) solutions Long-wavelength VCSELs In-cabin automotive and LiDAR Environmental and healthcare monitoring Proximity sensing 5G Network Infrastructure and Data Connectivity Global roll out of base stations and small cells GaN on SiC Next generation lasers for fibre optics (10G & 25G DFBs APDs and PINs InP technologies to enable high-speed (>25G), high-performance backhaul optical networks WiFi 6 & 6E 5G Handsets Front end module integration 5G switches and filters Displays 20 IQE plc Annual Report and Financial Statements 2021 Data centres and The Edge Technology applications across all markets require huge amounts of data to be transmitted quickly and accurately. The data “superhighway” is reliant on both high data- rate wireless and wired technology, both of which are dependent on IQE’s materials. On the wireless side, IQE’s GaN solutions are a key enabler. For optical networks and data centres, IQE’s DFB and APD solutions are necessary for high speed interconnects and transceivers. Compound semiconductors: Essential for innovation S t r a t e g i c R e p o r t Healthcare wearables Advanced healthcare is an emerging market that will drive significant demand for compound semiconductors. A key trend is the adoption of wearable health care monitors that are being deployed in devices such as smart watches. In their current form, wearables allow users to monitor personal health and exercise data such as blood pressure, oxygen saturation and Electrocardiogram readings. Future applications will provide non-invasive monitoring of blood bio-markers using lasers and photodetectors in the form of miniaturised, wearable spectrometers. Possible applications include the measurement of key blood constituent concentrations for markers such as glucose, lactose and alcohol. In addition, this technology offers unique possibilities for virus and disease detection. Ultimately, the entire family of compound semiconductor materials will be required to enable comprehensive wearable technology. IQE is the only compound semiconductor materials company that is able to manufacture the full product suite at scale. As such, we anticipate the increased functionality required by advanced wearable devices will drive the demand for IQE’s products, and we are excited to be a key enabler for next generation healthcare. Next Generation Automotive Autonomous electric vehicles are the future of the automotive industry. The realisation of self-driving vehicles relies on IQE’s products. Advanced driver assistance systems (ADAS) use LiDAR (Light Detection & Ranging) that will be enabled by IQE’s VCSEL and APD technology. Ultimately, it is desirable to use longer wavelength VCSELs for eye safety at street level. IQE is the leader in developing this next generation LiDAR enabler. Vehicle electrification also requires highly efficient power electronics that are underpinned by IQE’s GaN technology. Finally, autonomous vehicles will require ultra-reliable high-speed data connections. Again, IQE’s materials are the foundation that make this possible. Metaverse The Metaverse is a 3D immersive experience that allows an individual to interact with a virtual environment, relying on advanced sensing and display technology that are dependent on compound semiconductors. IQE has a well-established pedigree for developing, scaling and manufacturing complex materials solutions that it will leverage to provide the materials that underpin the metaverse. IQE’s advanced VCSEL and InP technology will be front and centre as this market develops, and IQE is developing µLED materials that will be critical to high-resolution displays needed to make the Metaverse a reality. Integration with CMOS++ As noted, the future depends on the integration of compound semiconductors with silicon in order to combine the performance advantages of both. Effective integration will see compound semiconductors move to larger wafer diameters (8-inch and 12-inch) in order to match the wafer sizes used by today’s silicon industry and to leverage the maturity of automation that exists for 8-inch and 12-inch toolsets. Moving to larger wafer diameters will unlock new relationships with new partners that will ultimately result in business growth for IQE. Proliferation of 5G 5G and connected devices are self-reinforcing macro trends that will transform the way we live over the coming years, and IQE’s technologies are critical for 5G handsets and infrastructure. In addition to higher speeds, 5G enables low latency, massive scaling in machine-to-machine connections and network slicing. The rollout of 5G has begun at a varied pace, however the world continues to embrace and deploy 5G technologies, and we anticipate this being a multi-year, mega-replacement cycle. Over time, the improved connectivity associated with 5G will allow the full potential of the Internet of Things to be realised. Read our Technology Roadmap on page 22 21 Where innovation starts Technology roadmap IQE has a focused roadmap which lays out our future technology development goals. Through the combination of cutting edge innovation and the widest product portfolio in the industry, IQE is where innovation starts. s p e t s t x e n r u O Short Term Medium Term Long Term 5G Handsets Continued 5G handset penetration 200mm Transition IoT mMIMO RF energy 5G Handsets High efficiency power amplifiers Integrated PA & switch 5G Infrastructure mMIMO Macro cells Power and low- noise amplifiers WiFi 6/6E Power Amplifiers for routers 5G Handsets Pathway to integration of CS on Silicon Front end module integration 5G NR mmWave Densification of networks with small cells Power Electronics High efficiency power switching Smart grids 22 IQE plc Annual Report and Financial Statements 2021 Wireless Photonics Short Term Medium Term Long Term 3D Sensing Content Gain World-facing camera (ToF / Lidar) DToF (WFC) for Android market 3D BOLED Sensing Beneath Screen (Below OLED) 3D Sensing Automotive Sensing/LiDAR Development of long-wavelength laser technology for autonomous vehicles Advanced Sensing Sb & P based detectors and emitters for advanced infrared sensing applications Aerospace and security applications Connectivity InP for high speed datacom and telecom networks VCSELs for short length datacoms Critical enabler for 5G applications Advance sensing for healthcare Non-invasive clinical-grade measurement of health bio-markers 8-inch VCSEL Patented material system High volume manufacturing platform Displays Emissive display: Micro & Mini LED – power efficiency, contrast and resolution Display for wearables GaAs/GaN based Micro LED display technologies for augmented reality applications 23 Strategic ReportWhere innovation starts s s e n i s u b e b i s n o p s e R l Our People IQE’s strength lies in the expertise and diversity of our workforce. “ IQE understands that its continued growth and success will be built not only on operational results, but also from ensuring we have strength from diversity and clarity of purpose, strong leadership, teamwork and alignment to our vision.“ Clare Farmer Chief People Officer A central part of our DEI commitment is our desire to demonstrate inclusive leadership and represent the diversity of our organisation and the communities where we live and work. Heading into 2022, we continue to invest in developing our company culture with our Executive and Senior Leadership Teams beginning their own learning and cultural awareness programs so they can inspire a culture of belonging from within IQE, and ultimately drive greater representation at the highest levels. We are sourcing Diversity Partners across the Group who have a shared interest in DEI education and advocacy. We recognise that gender diversity remains an ongoing issue within our industry, however we are committed to improving our gender balance. Our percentage of female employees remained at 16% in 2021 and 2020, reaffirming our need to redress this balance. Due to a reporting error our 2020 Annual Report incorrectly reported a gender diversity split at Group level of 74% male and 26% female. In 2021 33% of senior leadership vacancies were filled by women, which was unchanged from the previous year. Our female representation on the Board increased to 29% with the appointment of Non- Executive Director Victoria Hull in July. We support our Talent Acquisition Team to increase inclusion during the hiring process, and have aimed to attract, develop and retain STEM talent and secure more BAME joiners. We aim to achieve this through our Employee Value Proposition (EVP), raising our employer brand and greater engagement with younger generations through social media channels. Diversity, Equity and Inclusion (DEI) IQE is made up of different races, genders, ethnicities, backgrounds, religions and beliefs across the globe. IQE is committed to providing equal opportunity, fair treatment and inclusion for all, without regard to race, gender, age, religion, ethnicity, identity, sexuality, disability, genetic disposition, neurodiversity, veteran status, perspective, experience or any other aspect which makes an individual unique. Following Americo's arrival we are revisiting our company values to make sure we are cultivating a work environment where different perspectives, inclusive relationships and diverse networks can unlock unlimited potential for all. Female 29% Male 71% Gender Diversity - Board level Female 16% Male 84% Gender Diversity - Group level 22 female hires 82 male hires Gender diversity – Group level recruitment 24 IQE plc Annual Report and Financial Statements 2021 Diversity, Equity and Inclusion – Attraction & Selection In 2021 our Talent acquisition team attended DEI workshops to raise awareness of unconscious bias during the selection process. Practical steps taken to improve hiring practices include job advertisements being adapted to highlight flexible working arrangements and the removal of biased language to encourage a wider candidate pool, as well as interview panel formations being reviewed to further encourage inclusion. We have also sought new networks with diverse advertising job boards to appeal to and encourage sought after candidates. An example of this is our partnership with ‘Women Rock’, a recruitment network celebrating women in technology. In 2021 33% of senior leadership vacancies were filled by women. IQE understands that when everyone feels valued, appreciated and free to bring their full, authentic selves to work, they can then be more creative, innovative and successful. Through our culture transformation, IQE continues to invest in its evolving journey of effective and sustainable DEI transformation. Employee wellbeing IQE is focusing on the physical and mental health of our employees, particularly after the pressures brought about over the last two years by the global pandemic. We routinely promote wellbeing support available through our employee benefits platforms and undertake benefits sessions with our brokers to ensure our leaders, people managers and employees are connected. January is Benefits Months and in 2021 we focussed on communicating our employee benefits across the Group, with an emphasis on what we offer and how to access and effectively utilise personal benefits. IQE continuously reviews the make up to ensure our plans are attractive and market competitive to our employees and, where possible, their families. We were pleased to see an increase in benefit participation in 2021. We have ten qualified Metal Health First Aiders at IQE with other employees awaiting requested training to increase support across the Group. We have a forum which aids planning for international and national events to proactively work towards breaking down the stigma of seeking mental health assistance. We recognise Mental Health Awareness Week with a range of communications and support, including an engaging series of videos across our global organisation showing how each of us were coping during lockdowns. Our Employee Assistance Programmes (EAP) offer 24/7 support and include bereavement assistance, counselling, legal and financial support. Early intervention assistance is provided through external specialists and employee wellness plans; mitigating absence and aiding returns to work. Across our global sites we actively encourage our wellness rooms, which offer employees a designated private, quiet and relaxing space when they need a break time for religious practices and maternal necessities. 25 Where innovation startsStrategic Report s s e n i s u b e b i s n o p s e R l Our People continued Communication and engagement In 2021 we engaged with Best Companies, a leading employee engagement specialist who deliver powerful data and insights to help positive change within the workplace. We undertook our first formal employee engagement survey titled ‘b-Heard’, and were delighted to receive an 86% respondent rate. We achieved ‘One to Watch’ status which represents ‘Good’ levels of workplace engagement as well as uncovering 3, 2- and 1-Star businesses amongst our Group. This was a fantastic result for our first year. The b-Heard feedback encouraged us to create action plans to improve. These were driven bottom up, reflecting what our employees believe we do well, where they believe we could close engagement gaps whilst also sharing pockets of great practice. We are very proud of our One to Watch status which we will seek to retain and improve upon. We have a strong desire to achieve a star for the Group overall. Procurement of Workplace in 2020, an internally- focused connectivity platform developed by Facebook, Inc. has enabled the continued use of groups, instant messaging and a news feed to encourage employee communication. At the time of writing, we have 394 users and 33 dedicated groups; a 20% increase in users since 2020. Our leaders and employees alike utilise the functionality to talk, share and generally engage with each other virtually. This has been a resounding success for our business and allows us maintain an all-important social connection whilst working remotely. Since its launch in August 2020, we have seen over 1,749 posts created generating 4,699 comments and 22,975 reactions. Workplace also enables us to tailor messages and internal communications which bring light relief, essential to our mental and physical health and wellbeing. Across the Group, leadership teams engage with employees through monthly communications sessions as well as site-based General Manager lunches and breakfast meetings which enable employees and leaders to meet, raise issues, offer ideas and forge strong relationships. 26 IQE plc Annual Report and Financial Statements 2021 Diversity, Equity and Inclusion – Attraction & Selection We are committed to promoting an environment and culture that provides for agile and life-long learning with the following aims: 2,719 hours of learning completed in 2021 (2020: 2,492 hours) • Transform how we train our people, embracing digital training methods and agile learning • Ensure our engineering and technical employees have defined training pathways and we can demonstrate visibility around training execution and evaluation • Shape the culture whilst embracing technology to simplify and create access for all to learn in an agile work environment • Align our Learning Management System with our Quality Management System to ensure the effective management of competence. Performance Management “Performance Hub” was implemented in early 2020 to simplify and standardise the performance cycle within IQE. Performance Hub provides employees and managers a platform to record one- to-ones, share transparent and honest feedback, performance reviews and utilise the Personal Development Plan functionality to further support personal and career development. This has been supported by user friendly guidance notes and videos crafted with inexperienced people managers and new joiners in mind. In 2021 we introduced a calibration stage to our Performance Management cycle; promoting fairness and parity of performance and behavioural ratings whilst identifying emerging and high performing talent essential for effective succession planning and organisational bench strength. This risk management mitigates single points of failure and retention risks through proactively upskilling others and defining individual career pathways through ‘Career on a Page’. Empowering and supporting our talent IQE attracts the best and brightest global talent and we work hard to offer an unbeatable experience, recruiting, retaining and developing the best talent in our sector. We are continuing to use our Competence Management System which encompasses a formal learning and Assessment Process and various training and development forms, plans and logs. Training processes are now communicated within departments and formalised via our document control systems. Through the use of Personal Development Plans we have effectively identified, sourced and facilitated learning and development activities, supported, where possible, by government funding. This includes supporting professional development through formal qualifications, as well as enhancing on-the-job knowledge and skills. In 2021 314 of our employees participated in Personal Development Plans. The b-Heard survey indicated a need to support the development of the leadership teams. In partnership with Results Exploration Group and The Engagement Coach, IQE started management with a focus on engagement, emotional intelligence, and teamwork. The survey supported our focus to develop our people and we continue to do so as we strive to create engagement opportunities. The Vault Whilst the global pandemic continued to impact our ability to offer face-to-face learning, we continued to improve our online course offerings through our Learning Management System ‘The Vault’. We have been working with our global teams to create bespoke content tailored to our colleagues. Recently this has included a series of Risk and Governance courses, and Quality, Health and Safety Modules are being re-worked to raise awareness and mitigate risk. Early Careers IQE is deeply invested in supporting apprenticeships and fostering early careers. In 2021 we reviewed the current early-career programme and reaffirmed its value to the business, with a focus on supporting apprenticeships, graduates and PhD sponsorship. We have established relationships with several colleges and universities to attract, develop and retain the next generation of IQE. 2021 saw us attend our first virtual careers fair which was a resounding success, securing hires and candidates excited about the possibilities working with IQE. 27 Where innovation startsStrategic Report l s Talent Acquisition s e n i s u b e b i s n o p s e R I joined IQE as Group Head of Marketing in September based in the UK. I’m excited and proud to have joined the IQE family to lead our marketing efforts. I was inspired to join IQE because of its heritage, ambitions and the opportunity that lies ahead for the business. It is an exciting time to be a part of IQE as we are uniquely positioned to capitalise on the opportunities within the industry and support the development of technologies such as 5G. I am beyond excited to be working in an industry that is at the centre of everyone’s daily lives. We have a great story to tell and I cannot wait to communicate what we do.” Steven Curwood Group Head of Marketing Elena Carabeau Quality Intern When I first started my internship at IQE North Carolina in the summer of 2021, I wasn’t sure what to expect. I’m an English major and a lifelong humanities student, and I didn’t know if I could really help that much at a technology company - especially one that produced a product I’d never heard of in a way I didn’t quite understand. But I’ve been blown away by all I know now. I’ve learned an incredible amount, whether by touring the cleanrooms and facilities, getting briefed on projects and IQE’s environmental health and safety protocols, getting to help operate the emergency generators, or just by reading through documents. I’m able to reflect on how grateful I am for this opportunity and what a wonderful experience it was working in the Quality department at IQE.” Shariq Enver Technical Sales Manager Debra Bailey Shift Manufacturing Manager I was delighted to join IQE as a Technical Sales Manager, working out of the Wafer Technology site in Milton Keynes. Sales is my passion and it is exciting to be working for a company that operates right at the cutting edge of science and technology. Having graduated with a degree in Materials Science, I decided to make the move from a commercial role where I thoroughly enjoyed negotiating and closing contracts, whilst expanding our customer base and developing new business. I look forward to doing the same here at IQE with our exceptional range of products.” When I first started my role with IQE I was quite apprehensive. Although I have a background in engineering, and several years’ experience within manufacturing, I mainly worked in the automotive sector and I did not know what to expect working for a technology company. I am really pleased I took the opportunity to join IQE, and am really enjoying learning about the processes and the equipment. I also find growing wafers fascinating, and something which I knew nothing about before starting my role here. Although it has been challenging at times, and a lot of information to take in, everyone has been really supportive and patient, and I am starting to understand what impact our products have on current, and future technology markets.” If you are interested in learning more about how IQE can support your career, please get in touch at TalentAcquisitionTeam@iqep.com. 28 IQE plc Annual Report and Financial Statements 2021 Communities and Social Review Making IQE a better place to work is one of our key focuses and the b-Heard survey identified that we need to more widely promote our charitable and community work. Our ‘Giving Something Back’ Committee was formed to do just that and encourage wider engagement. The purpose of the Committee is to facilitate IQE’s charitable and community engagement, and it is focused on a global approach to giving, but with local execution. The GSB Committee will be instrumental in taking feedback from our employees and driving initiatives and action on this topic. Each site has a budget for which will be administered through a site champion. Employees can request funds on behalf of an organisation directly via their site champions, who will liaise with the site General Manager for approval. Each employee is also eligible for one full or two half days of paid Giving Something Back time to be used for undertaking a volunteering activity. This way IQE’s support can reach where it is needed most. Throughout 2021 IQE staff participated in wide variety of activities in their local communities. These included but were definitely not limited to the following: Taiwan Blood Donation In October our Taiwan site hosted its first on site blood drive. It was very successful, with 32 participants donating. Our employees in Taiwan hope to continue with this initiative, and IQE is offering incentives and ongoing support to those who wish to donate blood again. Sponsorship of Newport Grass Roots Cricket Club For the last three years IQE has been proud sponsors of Newport Grassroots Cricket. We look forward to continuing to support all of Newport’s young cricketers! IQE Wafer Tech donation to MK ACT Pennsylvania ‘Out of the Darkness’ walk At IQE’s Wafer Technology site our staff participated in a holiday gift collection for MK ACT, a charity providing safe emergency accommodation in Milton Keynes for people and their children escaping domestic violence. The organisation was thrilled with the amount of gifts collected for the holiday season. Our staff in Pennsylvania participated in the American Foundation for Suicide Prevention's “Out of the Darkness” Walk held in Allentown in October. Funds were raised by staff to aid in suicide prevention education and survivor outreach programs. 29 Where innovation startsStrategic Report s s e n i s u b e b i s n o p s e R l Supply Chain IQE is committed to acting professionally, fairly and with integrity in all our business dealings and relationships. “ We view our supply chain as an extension of our business and it is therefore critical that IQE's ethical standards are upheld by our partners. We have strong relationships with our strategic supply partners and recognise that our success relies on sharing capabilities and investing for growth alongside them.“ David Bishop Head of Global Supply Chain Our ‘One IQE Management’ philosophy reflects our core values and our ongoing commitment to doing business in a responsible manner. Expectations from our suppliers serve as an extension of these principles and a shared commitment to responsible sourcing practices. Now more than ever, our suppliers are key partners and continue to play a critical role in helping us achieve our vision and goals. Just as IQE leaders and employees are working daily to be ethical, passionate, accountable, efficient, transparent and always learning, we expect our supplier partners to do the same. 2021 Supply Chain Review From the grounding of the Ever Given container ship blocking the Suez Canal for six days, to rising COVID-19 cases driving labour shortages, to extreme weather events, there have been plenty of challenges for global supply chains in 2021. Despite all of this, we are pleased to report that once again in 2021, IQE did not experience any significant disruption at any of our global sites. Over the past year IQE has continued with its focus on strengthening our strategic partnerships with key vendors, driving our supply chains to become more integrated at both a global and local scale. We have also been focused on minimising the impact of escalating costs driven primarily by raw material commodity pricing, transport costs, energy prices and inflation. As a result of our focus on strengthening our strategic partnerships and taking the opportunity to renew some of our contract commitments early and ahead of price rises, we have been able to minimise the impact of pricing pressures on IQE’s business. 2021 has been a demanding year for IQE’s supply chain but our continued focus on strengthening our supplier relationships and sourcing strategies has successfully limited any disruption. Read more at iqep.com/responsibility/supply-chain/ 30 IQE plc Annual Report and Financial Statements 2021 Human Rights and Anti-Slavery Statement IQE 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. IQE has a zero-tolerance approach to modern slavery and is committed to acting ethically and with integrity in all of 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 Modern Slavery Act addresses the role of businesses in preventing modern slavery within their organisation and in their supply chains. IQE has developed and implemented policies to comply with the requirements of the UK’s Modern Slavery Act and our Anti-Slavery Statement can be found at iqep.com. Read more at iqep.com/responsibility Anti-bribery and corruption IQE maintains a zero-tolerance approach against bribery and corruption. We have an established anti-bribery and corruption policy, which includes guidance on the giving and receiving of gifts and hospitality. A Gifts and Hospitality Register is also maintained to ensure transparency. Our anti- bribery and corruption policy applies throughout the Group and was updated in 2020 and is supported by appropriate training which was updated in 2021. Whistleblowing IQE offers staff a confidential reporting mechanism, overseen by the Group’s General Counsel & Company Secretary, which enables employees to raise concerns of malpractice, non- compliance or unethical conduct. The options for raising concerns are widely communicated to employees and are clearly set out in our Whistleblowing Policy. Confidentiality Maintaining confidentiality is engrained in our culture. Our policy and practice ensure that all staff fully understand what constitutes confidential information and restrict internal access on a need to know basis. Information relating to third parties is not disclosed without the third parties’ written consent. 31 Where innovation startsStrategic Report Intellectual Property “ IP, particularly our know how and patents, is fundamental to our business. Understanding the alignment of our IP to our technologies and our customers’ product offerings allows us to articulate and leverage the value more effectively.” Victoria Yeomans Senior Patent Attorney s s e n i s u b e b i s n o p s e R l IQE’s technology is underpinned by our intellectual property (IP) portfolio. We have c.250 granted patents, with 2021 yielding eight new grants and five new patent applications. We have more in the pipeline, along with a variety of registered trademarks. Our patents cover all of our technology development areas directed to our customers’ products in mobile communications, IoT, data networks, augmented and virtual reality, automotive, healthcare and beyond. Our process know how, the secrets of our trade which have been gained through more than thirty years in the field, enhances this work and is closely protected by IQE. With rigorous internal processes to identify and review inventions in our technology development teams, we are able to harvest inventions efficiently and to make strategic decisions over those that we protect by patent and those we protect by trade secrets and confidentiality. Training of our staff ensures that everyone understands the value of our IP in our technology and products. Sensing 16% Energy 39% Connectivity 45% IP portfolio per market application 32 IQE plc Annual Report and Financial Statements 2021 Approach to Environment, Health & Safety “ Nothing is more important than protecting our people, our contractors and the communities in which we operate. We strive for strong levels of engagement with our employees so that collectively we can drive a proactive culture and a world- class HSE performance.” Scott McKinnon Health, Safety and Environment Director During 2021, IQE increased its already considerable focus on the Environment, Health & Safety in order to drive the necessary improvements required to support our future ambitions. A clear strategy for EHS improvements has been formulated and was formally approved by the IQE Board. During 2021 our EHS strategy focused on ensuring we have solid foundations in place as we continue to evolve our systems and processes in the coming years to achieve world class Health, Safety and Environmental performance. What does world class performance mean to IQE? Achieving world class Health, Safety & Environmental Performance means the development of an accountable culture where everyone working at IQE understands their own responsibility, while keeping their colleagues accountable for their behaviours. This approach will be led from top management and feed down through every level of our organisation. A culture of respectful, positive challenge will be engendered and we will strive to ensure our systems and processes are robust, proportionate, understood and maintained in operation. A proactive reporting culture will exist, routine monitoring will be in place to ensure compliance is maintained and continuous improvement activities will be identified and implemented. How will this be achieved? A clear road map has been set out with focus areas defined year-on-year. The first two years are focused on baselining our current position, implementing strong foundations and putting clear structures in place. Years three and four see the strong foundations set and are focused on evolution and continuous improvement. This strategy focuses on six key areas which all have associated actions as part of the road map to drive improvement year on year: • Visible leadership – increasing the visibility and engagement of leadership to help develop a positive culture; • Governance – implementing robust governance processes for HSE; • Compliance assurance – implementing robust compliance assurance processes; • Competence – deploying a framework for demonstrable competence at all organisational levels; • Learning organisation – deploying a framework to support sharing and learning from events and best practices across the organisation; and • Continuous improvement – actively seeking out best practices internally and externally to drive continuous improvement across HSE. We will also regularly review our existing processes to identify opportunities for improvement. Active Communication and Engagement – Zero is PossibleActive Communication and Engagement – Zero is Possible Active communication and engagement at all levels in the organisation is vital to achieving our vision. In order to support this, a campaign has been devised which will run in two parts sequentially. The ‘Zero is Possible’ campaign has been launched and will focus firstly on keeping EHS topics at the forefront of our people’s minds. Through targeted campaigns we will work to build mindsets within the organisational teams that EHS improvement is within reach. This will be followed by the ‘Zero Together’ campaign which will focus on personal and collective ownership. By achieving this ownership, we can strive to achieve our goal of zero Occupational Safety, Environmental, Process Safety, Fire or Security incidents and also zero work related ill health. These campaigns will create the baseline for the EHS vision within the organisation and will focus on the key topics of engagement, reporting and sharing and learning. The campaigns will run in alignment with key elements of our year-on- year delivery plan, awareness campaigns and education programmes. Zero is Possible is our roadmap to achieving zero injuries, safety events, environmental events, breaches, and any work related ill health. 33 Where innovation startsStrategic Report s s e n i s u b e b i s n o p s e R l Environmental performance IQE is actively engaged in developing technologies that support a sustainable world. Approach to Environmental Protection As an organisation we are committed to minimising our environmental impact and have a robust environmental management system in place to ensure compliance with regulations and to encourage waste reduction. During 2021 significant steps were taken to support these commitments. IQE’s Environmental Policy clearly provides a framework for ensuring key environmental considerations are captured throughout our business and in our key decision-making processes. At IQE, we recognise that acting responsibly is not just good for the world, but actively contributes to the success of our business. IQE encourages all employees to reduce their impact on the environment, including through reducing waste, recycling, restricting unnecessary travel, saving water and reducing energy usage. We are focused on implementing best practice measures to minimise our environmental impact, and working with our supply chain to do the same. Environmental Management System IQE’s Environmental Management System (EMS) is designed to the ISO 14001:2015 standard. This give us a robust framework to enable us to meet Environmental Policy commitments and requirements for environmental compliance. All of IQE’s operating facilities are third-party certified to meet the ISO 14001:2015 standard. Waste, Water, Soil and Air Management As a global organisation, IQE’s sites operate in jurisdictions with diverse environmental legislation. However, our core systems and processes ensure that the approach adopted across the organisation is consistent at all of our global sites. Each site operates continuous improvement programmes to reduce waste and to recycle and re-use wherever practicable. IQE also closely monitors the consumption of electricity, gas and water at all facilities, and looks for opportunities to improve energy efficiencies for new facilities, existing facilities, and facility expansions. A number of projects have been undertaken during 2021 to support this, including the installation of two new cooling systems in the UK and US to support the recycling of water and replace older, less efficient equipment. During the year we have been working to ensure we understand the environmental operating parameters of our sites and that all measures are in place to ensure compliance. We recruited a new Group HSE Manager in the USA and felt it was a good time to baseline our position. To do this we engaged a specialist external organisation to review our environmental compliance across our US sites, and it is pleasing to report that they identified no major non-conformances. This baselining identified many best practices and it has allowed us to evolve our systems where required and to share many learnings across the wider IQE team. During 2021 we placed significant focus on reporting of EHS near misses and opportunities for improvement across the organisation. These “free lessons” allow us to identify and act on any concerns before we actually have an incident or breach. It was pleasing that the number of environmental near misses/opportunities for improvement increased significantly during the year as a result of this promotion. The number of actual realised incidents also dropped from seven to two. Reclaiming our scrap wafers In 2021 we carried out a review of a number of our waste streams, successfully identifying a route for complete reclaiming of our scrap wafers. During our manufacturing process we naturally generate wafers which are not suitable to send to the end customer and in our UK and Asian facilities these wafers have historically been sent away as scrap. Recently we partnered with a company who can reclaim all of the raw materials from our wafers for which we receive a fee, and these materials are able to be wholly reused in our supply chain. Across IQE globally this project has now diverted eight metric tonnes of waste. 34 IQE plc Annual Report and Financial Statements 2021 GHG Emissions Summary Total Greenhouse Gases (GHG) sources and emissions (metric tonnes co2equivalent (tco2e)) Stationary Sources Hydroflurocarbons (HFCs) Purchased Electricity Total emissions: Water Usage Summary Total Water Use (cubic metres) Municipal Supply Recycled Water Purchased Water Total water use: Waste Generation Summary Total Waste Generated (tonnes) Landfill (Non-Hazardous) Recycled Hazardous Energy Total waste generated: Energy consumption summary 2021 3,689 0 20,084 23,772 2021 120,613 3,428 1,309 125,350 2021 121 1,341 353 13 1,828 2021 Environmental Performance Type Environmental Incidents (Reportable) Environmental Incidents (Not Reportable) 2020 1 7 2021 0 2 Near Miss Reports/Opportunities for Improvement 8 (0.8 average per site) 25 (2.5 average per site) Climate Change and Emission Reduction IQE recognises that Climate Change is a key challenge facing the world, and consequently we all have a responsibility to work to address it. During 2021 IQE engaged with an external organisation to independently verify our GHG emissions data. Through the Achilles Carbon Reduce programme, powered by Toitū Envirocare, the UK’s only Accredited Greenhouse Gas Certification Scheme, we are being assisted to measure, manage and report our carbon footprint and drive business efficiency through carbon reduction. We received an internationally recognised ISO 14064-1 accreditation showing our review has been successfully completed and our data has been verified. This will now inform our future GHG emission reductions activity. We saw a significant reduction in GHG emissions in 2021. This is likely resultant from a focus on renewable energy at our global sites, reducing GHG emissions from the generation of electricity. Additionally, this is the first time our GHG emissions data has been independently verified and certified to an ISO 14064-1 standard and so it is likely to be more accurate than previous years. We also emitted 0 hydrofluorocarbons this year resulting from our capture systems. Wafer Technology, IQE's site in Milton Keynes, sent no waste to landfill in 2021. 2022 Focus During 2022, equipped with our verified GHG inventory data, site specific plans will be evolved to focus on any areas of concern. This will include a review of all F-gas emissions alternatives to higher risk substances. Additionally, an Environmental, Social and Governance (“ESG”) Board Committee was formed to assist with the development and monitoring of IQE’s ESG strategy, as well overseeing the communication of the company’s ESG activities with all stakeholders. This high level of oversight ensures IQE’s Board is fully aware of environmental happenings within the business. IQE's Milton Keynes site sent no waste to landfill in 2021. (kWh) Gas (kWh) Electricity (kWh) Transport fuels (kWh) Energy consumption used to calculate emissions (kWh) 2021 19,484,146 59,514,203 233,746 79,232,095 35 Where innovation startsStrategic Report s s e n i s u b e b i s n o p s e R l Health and Safety Performance Effective health and safety management is critical to the success of our business. Near Miss/Opportunity For Improvement (H&S) Year by Year 2019 160 2020 136 2021 452 2022 Target 813* (16 average per site) (13 average per site) (45 average per site) (90 average per site**) * Including environmental reports ** number of sites reducing from 10 to 9 We work hard to maintain and evolve our robust workplace safety programs and systems for controlling risk. The health and safety of our staff, contractor partners and visitors to our facilities, along with the environmental impact on the communities in which we operate, are our number one priority. As previously mentioned, significant focus was placed on the identification and reporting of near misses and opportunities for improvement across our organisation. Engagement with this has been significant with reports received from all organisational levels, and a number of these reports have been considered as being worthy of awarding the employees “Spot Awards” as recognition of their importance. Audit In order to ensure the highest hazard elements of the businesses are being robustly managed, a new audit programme was launched during 2021 which focussed on one topic per month that could be considered amongst our highest hazard areas. This has been an excellent tool for promotion of cross site sharing and learning. 36 IQE plc Annual Report and Financial Statements 2021 2021 Health and Performance IQE facilities report incidents, events and near misses on a weekly basis. All incidents are investigated to an appropriate level in order that we can learn from events and minimise the risk of repeat events. During the year “Incident on a Page” documents were developed for cascade of information around the Group. These are discussed at senior level on a quarterly basis and four sharing and learning sessions occur across the company per year to discuss these events. Type Lost Time Injury All Injuries 2021 6 21 (including 6 LTIs) In 2021 there we 21 injuries across IQE’s operational sites, of which six of these resulted in work time being lost by the employee who was injured. All of these incidents were thoroughly investigated and actions taken to minimise the potential for re- occurrence, and all injured employees subsequently returned to work. In 2021 there were 4,163 safety course completions across our global sites, an increase from 3,564 in 2020. 2022 Focus Health & Safety Management System and ISO 45001 A key focus during 2021 was building the processes required to achieve the ISO 45001 Occupational Health and Safety accreditation across our operational sites. In Taiwan, ISO 45001 has already been achieved and the sites in Newport and Cardiff (IQE Europe) have undertaken the Stage 1 audit, with Stage 2 scheduled in the first half of 2022. Other IQE sites will begin the process in 2022, with the aim to attain certification early in 2023. Process Safety Process safety is a critical initiative for 2022. This work began during 2021 and will become embedded in the coming year. Process safety is a disciplined framework for managing the integrity of operating systems and processes that handle hazardous substances. Process safety events are high potential, low frequency as opposed to occupational safety events which tend to be more regular and less severe in outcome. The results of process safety failures can be catastrophic. Other key activities Many other activities are being undertaken to improve our systems and processes during in 2022, with an additional focus being placed on Health and Wellbeing, and given the ongoing situation with COVID-19, we feel it is even more important to support employees who we may not see in person month to month. 2021 Performance Lost time injury Total injuries Total events (incidents, justified alarms, LOC) Near miss reports 6 21 94 476 37 Where innovation startsStrategic Report t n e m e g a g n E r e d o h e k a t S l Engagement with our stakeholders allows us to grow and execute our strategy. Our impact on, and engagement with, our key stakeholder groups is considered within the implementation of our strategy, which is overseen by the Executive Management Board and supported by the Board of Directors. We consider the impact we have on our stakeholders, as well as what our stakeholders consider important, when developing our plans for continued success. We have set out below our key groups of stakeholders, the issues and factors relevant to those stakeholders and how we have engaged with those stakeholders. How the Board has engaged with shareholders, the workforce and other stakeholders Stakeholder Customers Employees Stakeholder description Material issues We provide the best advanced semiconductor materials solutions to our customers, supported by new product offerings and personalised customer support. We have a wide and diverse range of both corporate and academic customers across many different industries and end applications. Our product solutions support our customers to address some of the world’s most pressing technological advancements. • Consistently high quality products • High standard of business conduct • Product development support • Fair pricing • Excellent ongoing customer support Our employees are fundamental to our business success. We continually invest in our people, developing the capabilities that we will need to succeed over the longer term. We are committed to being the company where the best in our sector want to work and strive to offer opportunities that will attract, motivate and retain talented employees, enabling them to give their best. • Opportunities for personal development and career progression • Trust and encouragement to contribute to the business’ success • Consideration of their health and wellbeing • Working as part of an inclusive and diverse culture Investors and Shareholders We place considerable importance on the maintenance of regular and open dialogue with our shareholders. Our goal is to deliver our investors and shareholders with returns through profitable and sustainable growth with the efficient use of capital. • Current and future financial performance • Maximising opportunities for growth • Environmental, social and governance issues Partners and Suppliers We recognise the value of our partners and suppliers. Our supplier chain plays a vital role in supporting our business growth and efficiency. To meet the expectations of our customers, we develop strong working relationships with our suppliers and look for our suppliers to provide added value. • Forecasting visibility • Product quality • Fair pricing • Long-term partnerships Society We believe that our technology and products will benefit and advance society. We work hard to ensure that we have a positive impact on all those around us. • Local investment • Opportunities for local investment • Impact on local and wider environment 38 IQE plc Annual Report and Financial Statements 2021 Stakeholder Engagement Engaging with our stakeholders and acting in a way that promotes the long-term success of the Group, while taking into account the impacts of our business decisions on our stakeholders, is central to our strategic thinking and our statutory duty in accordance with Section 172(1) of the Companies Act 2006. This constitutes our Section 172 Statement as required under the Companies (Miscellaneous Reporting) Regulations 2018. The Board of Directors consider, both individually and collectively, that they have acted in a way that they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, having regard to the matters set out in Section 172 (a) to (f), in the decisions taken during the year. Recognising 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 stakeholders, the Board continuously reviews which relationships support the generation and preservation of value in the Company. These relationships include those with our customers, employees, investors and shareholders, partners and suppliers and society. As a Board, our intention is to behave responsibly and ethically at all times, in line with our Company values, and to ensure that our management teams operate the business in a responsible manner and to the highest standards of business conduct and good governance. As we act in a way which reflects our values, we will contribute to the long-term success of the Company and continue to develop our reputation as a responsible and successful Company that delivers stakeholder value. Further information as to how the Board has had regard to the Section 172 factors: Section 172 Factor Key Examples Consequences of any decision in the long term • Consideration of how IQE generates long term value in the through development of our Business Model and Strategy Interests of employees • Participation in Diversity, Equity and Inclusion planning for the business • Promotion of employee wellbeing initiatives and benefits awareness • Participation in Town Halls and employee forums Page Page 16 Page 24 Fostering business relationships with suppliers, customers and others • Building strong relationships with customers and suppliers within the Group’s supply chain, Page 30 which is essential for achieving the Group’s long-term strategic goals. Impact of operations on the community and the environment • Consideration of Environmental, Social and Governance improvement strategies Page 33 • Review of environmental performance, ISO 14001 Environmental management system and emission reduction initiatives Maintaining high standard of business conduct • Promotion of responsible business operations, with a focus on the Group’s Anti-bribery and Corruption, Confidentiality and Whistleblowing policies, and Anti-Slavery Statement Acting fairly between members of the Company • Shareholder engagement • Investor information and the Annual General Meeting Page 31 Pages 38 39 Section 172(1) StatementWhere innovation startsStrategic Report t n e m e g a n a M k s i R Our approach and appetite for risk periodically report to the Audit & Risk Committee on the Group’s principal risks and the mitigating actions being taken to address those risks. The Group Risk Committee is responsible for the maintenance and regular updating of a risk register which articulates the Group’s principal risks and the actions being taken to address those risks. The risk register is in a standardised format and includes the likelihood of a risk materialising, and an assessment of that risk both before and after the Group’s mitigation activities. We recognise risk as an inherent part of our business operations and we approach risk with the same deliberate, strategic consideration as other aspects of the business. The effective management of risk contributes significantly to the successful delivery of the Group’s strategic plans and objectives. The Group Risk Committee monitors the risk environment, in particular those identified as principal risks, on a regular basis while the Board is responsible for the overall stewardship of risk management and internal control. The Group Risk Committee considers risks using a top-down and bottom-up approach, with the Committee members obtaining input from around the business, which together with the oversight and support from the Audit & Risk Committee and the Board, creates an effective system for monitoring, planning and developing a Group-wide approach and culture to risk. The Group Risk Committee will Board Reports to Audit & Risk Committee Works with Group Risk Committee Risk Reviews • Regular reviews of Groups principal risks Risk Assurance • Specialist functions setting policies and performing reviews Risk Register • Group risk register maintained and reviewed by Group Risk Committee • Sites, BU’s & support functions provide specific risk registers for review. Bottom-up reviews Operating sites, Business units, Support Functions , R&D 40 IQE plc Annual Report and Financial Statements 2021 The Group continues to develop its risk management framework towards a ‘Three Lines of Defence’ model. The Group is focussed on establishing the necessary processes and internal expertise for the first and second lines of defence and will thereafter look to establish an internal audit function. In 2021 the Group continued to improve its first and second lines of defence through the recruitment of experienced subject matter experts and the development of its internal controls, policies and processes. A c c o u n t a b i l i t y Three lines of defence model 1 2 3 Risk & Risk appetite First line of Defence Second line of Defence Third line of Defence Oversight Principal risks and uncertainties The table below sets out the Group’s principal risks and describes the likelihood, potential impact and the Group’s mitigation measures for those risks. We have also identified the direction of change from 2020. Principal risk and why it is relevant: Risk likelihood and Trend: Potential impact: Medium Key Mitigation: • Strong internal controls, including technical and engineering control Potential impact: High Major health and safety incident and/or major accident to the environment (MATTE). IQE operates in a highly controlled and regulated environment due to the nature of the materials used in its manufacturing processes. Low Loss of key people. IQE’s people are fundamental to its success and IQE has a number of individuals in key roles. measures • Continuous improvement of health, safety and environment management systems • Continuous auditing and monitoring of production systems and equipment and close down of audit actions • Only trained and competent persons permitted to work with potentially harmful materials • ISO 14001 for all operational sites Effect: Harm to IQE’s people or the environment, reputational damage, regulatory investigation and/or legal proceedings, fines and penalties. Key Mitigation: • Competitive reward schemes including comprehensive benefits and Potential impact: High an all-employee share option scheme • Employee communication and engagement strategy • Talent development and retention plans • Succession management • Corporate processes and infrastructure Cybersecurity including risks from malware, malicious actions, accident and other unauthorised access. Infringement or loss of IQE’s intellectual property rights. IQE’s intellectual property rights are a core element of its competitive offering. Medium Key Mitigation: • Investment in people, processes and technology • Third party vulnerability assessments, testing and close down of actions • Staff training and IT policies regarding use of IT and systems Medium Key Mitigation: • Patent strategy • Proactive and rigorous defence of IQE’s rights • Appropriate contractual confidentiality obligations and controls around the sharing of sensitive information • Internal controls to protect IQE’s confidential information Key: Increased risk Decreased risk No change to risk New risk Effect: Quality issues, production issues, technology development delays, wage inflation. Potential impact: Medium Effect: Operational disruption, loss of intellectual property, loss of data. Potential impact: High Effect: Degradation of IQE’s competitive advantage, loss of market opportunity, significant legal fees. 41 Where innovation startsStrategic Report Risk likelihood and Trend: Principal risk and why it is relevant: t Our approach and appetite for risk n e m e g a n a M k s i R Breach of legal and regulatory requirements. IQE operates on a global scale and must ensure compliance with laws and regulations wherever we do business. compliance with our legal obligations – particularly around, health, safety and environment, taxation, export controls and anti-bribery and corruption laws Key Mitigation: • Global monitoring of commercial arrangements and • Monitoring and reporting of legal and regulatory • Global policies and procedures to ensure issues to the Audit & Risk Committee • Global whistleblowing policy agreements Medium Potential impact: High Effect: Harm to IQE’s people or the environment, reputational damage, regulatory investigation and/or legal proceedings, fines and penalties. Potential impact: Medium Key Mitigation: • Continued development of products and Potential impact: High Effect: Loss of market opportunity leading to reduction in revenues and profit. Potential impact: High Effect: Loss of market share, price erosion, reduced sales volume and profitability. Potential impact: High Effect: Risk of loss of market share, product volume and reduced sales and profitability. Changes in international export controls laws which impacts on IQE’s ability to serve global markets. High Increasing competition or erosion of market opportunity from changing geo-political environment and new market entrants attracted by high growth potential. technologies which can be supplied to a number of different geographical markets in compliance with export control laws • Diversification of customers and products • Use of production equipment which is subject to lesser export control restrictions • Monitoring of changes in export control laws Key Mitigation: • Ensure that IQE’s products remain world-leading through investment in opportunities identified in product roadmap • Proactive customer engagement including direct engagement with end-customers • Diversification through new markets, new products and new customers • Pursuing long-term commitments from IQE’s customers High level of customer concentration with the majority of IQE’s revenues derived from a small number of key customers. Medium Key Mitigation: • Customer diversification to reduce extent of reliance on key customers • Product diversification with existing and new customers • Market diversification through new global markets and new product opportunities • Strategy as a materials specialist, enabling supply across the market Key: Increased risk Decreased risk No change to risk New risk 42 IQE plc Annual Report and Financial Statements 2021 Medium Key Mitigation: • Capital structure strategy Principal risk and why it is relevant: Risk likelihood and Trend: Insufficient cashflow generation to underpin any capital investment that might be needed to exploit business opportunities. New products fail to deliver expected revenue and profitability. Medium • Capital investment strategy including management of credit facilities • Long term business planning to determine investment priorities and phasing of investments • Cashflow forecasting and working capital management Key Mitigation: • Engaging with customers early in the product development lifecycle to align new product and technology development with customer requirements • Qualifying new products with customers and investment in capacity to support customer qualification and R&D • Maintaining a clear product roadmap which ensures that IQE remains at the forefront of new technology Disruption or inflation in global supply chains Medium Key Mitigation: • Long term agreements with critical suppliers • Qualifying multiple suppliers • Capacity and stock planning • Forward buying of utility contracts Key: Increased risk Decreased risk No change to risk New risk Potential impact: Potential impact: High Effect: Inability to exploit opportunities and grow resulting in lower revenue and profitability. Potential impact: High Effect: Lower than expected revenue and profit growth, reduced ability to invest. Potential impact: Medium Effect: Impacts on production resulting in lower revenue and profitability. Increased cost of production. 43 Where innovation startsStrategic Report Principal risk and why it is relevant: Risk likelihood and Trend: Potential impact: Medium Key Mitigation: • Solution due diligence and vendor partnering Potential impact: Medium t n e m e g a n a M k s i R Transformation of IT systems, including Manufacturing Execution System, causes disruption to IQE’s business Insufficient liquidity or cash funding available to meet obligations as they fall due. Low Effect: Business disruption or escalating costs resulting in lower revenue and/or profitability. Potential impact: High Effect: Going concern risk and reputational damage. • Senior stakeholder ownership, programme reporting and structured programme governance • Extensive planning on business change requirements and time commitments from SMEs Key Mitigation: • The Group prepares regular financial forecasts to evaluate its funding and liquidity requirements for the foreseeable future. These forecasts are reviewed and approved by the Board. Based on these forecasts, appropriate funding and liquidity solutions are put in place in order to ensure that appropriate cash liquidity and funding headroom is maintained to meet financial obligations as they fall due. • On 30 December 2021 the Group refinanced its £25,900,000 ($35,000,000) multi-currency revolving credit facility from HSBC Bank plc. The facility term is for a 14 month period to 30 April 2023 and includes an option that requires HSBC Bank plc consent to extend for a further 12-month period to 30 April 2024. The Group has complied with all covenants associated with the facility which remained undrawn at 31 December 2021. • On 29 August 2019, the Group agreed a £30,000,000 five-year Asset Finance Loan facility from HSBC Bank plc of which £25,000,000 has been drawn. The Group has complied with all covenants associated with the facility with a balance of £16,595,000 remaining outstanding at 31 December 2021. • The Group’s net debt (excluding lease liabilities) position of £5,804,000 remains low in the context of total available facilities of £55,900,000 and the Group’s financial forecasts, in conjunction with the level of assessed covenant headroom on committed bank facilities show that the Group has adequate cash resources to continue operating and to meet its liabilities as they fall due for the assessed period to 31 December 2023. Russia & Ukraine conflict IQE does not have any current business in either Russia or Ukraine and an assessment of our supply chains has determined that this conflict is unlikely to have a direct impact on IQE. Key areas of focus for 2022 • Assessment of IQE’s readiness for an internal audit function • Existing and emerging risks that may impact on IQE’s ability to grow • Continue to evolve the group risk register and risk management processes, overseen by the Group Risk Committee Coronavirus The Coronavirus pandemic continued for much of 2021 and caused significant disruption to global markets, global supply chains and had wide-reaching macroeconomic impact. At the onset of the pandemic, IQE implemented a Business Continuity Committee to guide the Group’s response to Coronavirus. The Business Continuity Committee continues to monitor risk indicators and external guidance and formulates policies and actions in response to the situation as it evolves. As with 2020, factors related to the Coronavirus situation did not materially affect production at any of IQE’s sites or materially affect orders for IQE’s products from our customers. As lockdown restrictions ease worldwide through 2022, we will continue to take appropriate measures to protect our people and their safety remains our primary objective. 44 IQE plc Annual Report and Financial Statements 2021 Long term viability As required by provision 31 of the UK Corporate Governance Code 2018, the Board has assessed the prospects of the Company over a three-year period, considering the Group’s current financial position, business strategy and the results of it performing a robust assessment of emerging and principal risks (see pages 40 to 44). The Board believes that a three-year period is an appropriate time frame for assessing the Group’s longer-term viability. This period is covered by the Group’s strategic planning horizon and considers the nature of the Group’s principal risks. The Board believes that a three-year period reflects a period of time over which information and forecasts concerning demand for the development, qualification and production of compound semiconductor wafers, is considered reasonably reliable. In making this assessment, the Directors have taken account of the Group’s current funding arrangements and ability to raise new finance in most market conditions if required. The Board’s key criteria for considering the Group’s viability is the maintenance of a net cash position or the ability to operate within agreed debt arrangements, demonstrating that the Group would be able to meet its liabilities as they fall due. As at 31 December 2021, the Group has a net debt position, excluding lease liabilities of £5.8m and committed bank facilities of £55.9m. In making this assessment, the Directors have considered the continuing growth in market demand for compound semiconductors, driven by the macro trends of 5G and connected devices, and are confident that the overall market and number of end use applications for compound semiconductors will continue to grow over the medium to long term. To ensure IQE continues to be well positioned to exploit this growing market, both in the short and longer-term, IQE has developed a clearly defined technology and product roadmap that is supported by a combination of strategic consolidation of the Group’s manufacturing sites, capital investment in manufacturing capacity and investment in next generation compound semiconductor research and development. The recently announced closure of Group’s Pennsylvania (US) and Singapore facilities, with the resultant consolidation of molecular beam epitaxy capacity into the Group’s North Carolina (US) site will deliver improved production efficiency and margins in the medium to long term whilst recent capital investment in manufacturing capacity at the Group’s sites in Newport (UK), Massachusetts (US) and Hsinchu (Taiwan) provides capacity for growth that is aligned with the Group’s technology and product roadmap. Stress tests and scenario analyses to determine the Group’s viability have been performed as part of the assessment. In performing those tests, the Group considered a number of scenarios linked to changes in forecast levels of growth within the Wireless and Photonics operating segments, changes to capital and technology research and development investment plans and the associated impact on, and availability of any required funding to support the Group’s viability over its strategic three-year planning period. The Board confirms that it has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period to 31 December 2024. Going concern In accordance with provision 30 of the UK Corporate Governance Code 2018, the Board considers it appropriate to adopt the going concern basis of accounting in preparing the financial statements. Fair, balanced and understandable The Board considers the Annual Report and Financial Statements, 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. 45 Where innovation startsStrategic Report w The Group reports financial performance in conformity e i v e r 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 IFRS GAAP performance measures are set out in note 5 to the financial statements. l a i c n a n i F The Group has experienced strong year on year growth in demand for wireless GaAs wafers (~20%) used in 5G handset power amplifiers and Wifi 6 routers in 2021. This is part of a multi-year replacement cycle driven by a macro technological trend. This has been offset by a reduction in demand for wireless GaN wafers (~50%) for 5G infrastructure due to a slowdown in massive MIMO deployments, particularly in Asia, when compared to 2020 and a reduction in VCSEL 3D sensing revenues (~20%). In combination with foreign exchange headwinds on a reported basis, this has resulted in a reduction in revenue of ~13.4% to £154,096,000 (2020: £178,016,000) which is equivalent to ~£165,000,000 at constant currency, which represents a ~7.3% underlying year- on-year reduction. The Group’s Wireless business segment represents the largest proportion of the Group’s revenue accounting for 54.0% (2020: 52.9%) of total wafer sales with Photonics representing 44.2% (2020: 45.9%) and CMOSS++ representing 1.8% (2020: 1.2%). Wireless wafer revenues decreased 11.6% (5.5% at constant currency) to £83,217,000 (2020: £94,193,000). The decrease in wireless wafer revenues reflects a significant decline in wireless GaN epi-wafer sales that has only partially been offset by increased sales of wireless GaAs epi-wafers for 5G and WiFi 6. Demand for wireless GaN epi-wafers has been weak due to end-market dynamics, including significantly lower levels of massive MIMO base station deployments in Asia and the slow rate of deployments in Western markets. GaN epi-wafers remain an essential material for 5G infrastructure and demand is expected to recover over the multi-year deployment cycle. Demand for wireless GaAs epi-wafers has continued to grow in 2021 despite some softening of demand in Q4, driven by 5G penetration of the smartphone handset market and WiFi 6, a dynamic which has resulted in high utilisation of manufacturing capacity at the Group’s Taiwan facility, where the Group has invested in eight new and refurbished tools which are currently being commissioned to support further growth in wireless GaAs epi-wafer demand in 2022 and beyond. Photonics wafer revenues decreased 16.6% (10.4% at constant currency) to £68,067,000 (2020: £81,627,000). The decrease in photonics wafer revenues reflects lower demand for VCSEL’s used in 3D sensing which has primarily arisen from a combination of chip design changes and softening in smartphone supply chains towards the end of 2021 and as a result of lower other photonic product sales linked to a combination of factors including the re-phasing of certain defence and security orders associated with large programmes into 2022 and the slower introduction of sales of certain new products. Statutory gross profit decreased from £33,150,000 to £17,644,000. The decrease in gross profit reflects a combination of lower trading volumes and a reduction in overall gross profit margin percentage to 11.5% (2020: 18.6%) as the Group has experienced a reduction in utilisation of manufacturing capacity at some of its sites, in the current 46 IQE plc Annual Report and Financial Statements 2021 year. Adjusted gross profit, which excludes the charge for share based payments, decreased from £33,327,000 to £18,771,000 with a decline in gross margin from 18.7% to 12.2%. Selling, general and administrative (‘SG&A’) expenses increased from £34,697,000 to £37,699,000. Adjusted SG&A, which excludes adjustments for share based payments, restructuring costs, Chief Executive Officer recruitment costs and certain non-current asset impairments decreased from £27,759,000 to £25,302,000. Decreases in adjusted SG&A primarily reflect certain employee related cost savings and reductions in certain other areas of corporate expenditure that have been required commensurate with the decline in current year revenue. As part of the Group’s global footprint optimisation plan restructuring costs totalling £3,681,000 (2020: £162,000) have been incurred relating to costs associated with the announced closures of the Group’s manufacturing facilities in Singapore and Pennsylvania, USA. Within the restructuring costs are £3,020,000 (2020: £nil) relating to a combination of site decommissioning and employee related costs in Singapore and £661,000 (2020: £162,000) relating to employee related costs in Pennsylvania, USA. These site closures are part of the Group’s global footprint optimisation plan. Chief Executive Officer recruitment costs of £741,000 (2020: £nil) include settlement costs and legal fees of £318,000 associated with the transition of the former Chief Executive Officer to a non-executive role and external recruitment fees of £423,000. Impairment of intangibles of £7,411,000 (2020: £6,537,000) relates to the write-down in value of the Group’s cREO™ filter technology development cost and patent assets totalling £4,693,000 (2020: £nil) and the impairment of Photonic quasi crystal technology related development costs and patent assets totalling £2,718,000 (2020: £nil) where the Group has taken the decision to pause development related activities given the current lack of visibility over the timeline to commercialisation of each of the technologies. A reported operating loss of £19,978,000 has been incurred (2020: Loss of £5,517,000). Reflecting the adjustments noted above, an adjusted operating loss of £6,454,000 in 2021 compares to an adjusted operating profit of £5,386,000 in 2020 with the loss in 2021 principally reflecting the impact of the decline in year-on-year revenue. The segmental analysis in note 4 reflects the adjusted operating margins for the primary segments (before central corporate support costs). Wireless adjusted operating margins and photonics operating margins declined from 12.1% and 11.1% in 2020 to 8.8% and 2.6% in 2021, primarily reflecting reductions in volume and the associated under- utilisation of certain manufacturing capacity. Finance costs have remained broadly consistent year-on- year at £2,213,000 (2020: £2,165,000) and reflect £905,000 (2020: £949,000) of bank and other interest costs primarily related to the Group’s HSBC Bank plc asset finance facility and the interest expense on lease liabilities of £1,308,000 (2020: £1,216,000). The tax charge of £8,811,000 (2020: £1,001,000 credit) consists of a current tax charge of £1,124,000 (2020: £1,132,000) primarily relating to taxable profits generated by the Group’s Taiwanese operations and a deferred tax charge of £7,687,000 (2020: £2,133,000 credit) which principally reflects the partial reversal and de-recognition of previously recognised UK and US tax losses. Deferred tax asset recognition has been restricted in the UK to reflect future forecast profitability, an assessment that includes the impact of the Group’s consolidation and investment in central and functional roles in the UK whilst US deferred tax asset recognition has been restricted in the US to reflect lower future forecast profitability arising from a combination of 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 operation. The effective tax rate of 13.3% (2020: 21.4%) applicable to the tax charge of £1,803,000 (2020: £1,520,000) 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 and Singapore and Pennsylvania site closure costs. The increase in the loss for the year to £31,002,000 (2020: £2,893,000) reflects a combination of the decline in revenue in the wireless and photonics business segments, reduced profitability within both segments as the Group has experienced an increase in under-utilisation of manufacturing capacity and the impact of adjusted non-cash and other non- operational items which at an adjusted level, has reduced the loss to £19,281,000 (2020: £2,702,000 profit). Basic and diluted loss per share has increased from a loss per share of 0.41p to a loss per share of 3.87p in the current year with adjusted basic loss per share of 2.41p (2020: 0.29p earnings) and adjusted diluted loss per share of 2.41p (2020: 0.29p earnings) reflecting the Group’s loss at a statutory and adjusted profit level. Cash generated from operations decreased in the year to £18,883,000 (2020: £35,457,000) reflecting the Group’s reduced trading performance partially offset by strong management of working capital. The Group has continued to invest in growing capacity to meet demand with capital expenditure of £15,051,000 (2020: £4,993,000) principally focused in Taiwan to support future forecast growth in wireless GaAs epi-wafer demand, intangible asset expenditure of £345,000 (2020: £731,000) 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 £2,994,000 (2020: £4,678,000). The decrease in cash generated from operations, combined with investing activity cash costs of £18,305.000 (2020: £10,402,000), repayment of bank borrowings of £6,145,000 (2020: £7,030,000), repayment of lease liabilities (including interest) of £5,013,000 (2020: £3,764,000) and payment of the final cash costs of £1,792,000 (2020: £1,363,000) associated with the prior period acquisition of the minority interest in the Group’s Taiwanese subsidiary, IQE Taiwan ROC have combined to reduce the Group’s cash balances from £24,663,000 in 2020 to £10,791,000 in 2021 resulting in a full year net debt position of £5,804,000 (excluding lease liabilities) compared to a net funds position of £1,923,000 (excluding lease liabilities) in 2020. Equity shareholder funds total £234,621,000 (2020: £260,435,000) with the movement from 2020 primarily reflecting the loss for the year, the impact of finalisation of the prior year acquisition of the Taiwanese minority interest and foreign exchange differences arising on the retranslation of net investments in overseas subsidiaries. Tim Pullen Chief Financial Officer 29 March 2022 47 Where innovation startsStrategic Report Board of Directors Strong governance and leadership Dr Drew Nelson OBE, BSc, PhD, FREng (67) President and Non-Executive Director Dr Drew Nelson has over 30 years experience in the semiconductor industry in a variety of research and managerial positions. Following a PhD in Semiconductor Physics, he joined BT Research Laboratories in 1981, leading the group responsible for the development of advanced optoelectronic devices for optical fibre communications. He subsequently managed the technology transfer from BT to Agilent for mass production. He co-founded EPI in 1988 (which became IQE in 1999) and was appointed Chief Executive Officer of IQE plc in April 1999 until January 2022. Dr Nelson has held several Non-Executive Directorship roles, and served on several Government and Industry bodies. He received an OBE in 2001 for services to the electronics industry. He is currently a member of the High Level Group appointed by the EC to oversee the implementation of Key Enabling Technologies (KETs) throughout Europe. Phil Smith CBE, FREng, FIET (64) Chairman Americo Lemos (54) Chief Executive Officer Tim Pullen BA, ACA (44) Chief Financial Officer Tim Pullen joined IQE as the Chief Financial Officer in February 2019. Prior to this, Mr Pullen was the Chief Financial Official of Arm Limited, a global semiconductor and software design company owned by Softbank Group. Before joining Arm, he was Finance Director at O2 / Telefonica UK, where he held a variety of senior financial positions including responsibility for Technology Operations, B2B and Digital segments and Finance Operations. In connection with his time at O2, Mr. Pullen also held roles as a Non- Executive Director of Tesco Mobile, O2’s joint venture with Tesco Mobile, and was a Director of Cornerstone Telecommunications Infrastructure Limited, O2’s network sharing joint venture with Vodafone. Tim has also worked in a number of technology and services businesses, including Serco, Fujitsu and Dell. Mr Pullen is a Chartered Accountant and qualified with Ernst & Young. Phil Smith joined the IQE Board in 2016 and took over as Chairman in April 2019 and Executive Chairman from September 2021 to January 2022. Americo Lemos joins IQE from the executive team at GlobalFoundries Inc., a New York headquartered semiconductor designer and manufacturer. Americo Lemos joined IQE in January 2022 from the executive team at GlobalFoundries, one of the world’s leading semiconductor manufacturers. As GF’s Senior Vice President of Business Development for Asia Pacific and China Country President, Americo was responsible for driving the business’s efficiency and growth in these critical markets. Prior to this, he was Senior Vice President at Qualcomm, responsible for its data center business. Before joining Qualcomm, Mr Lemos was Vice President of Platform Engineering at Intel, responsible for strategic ventures with China semiconductor companies from 2009 to 2015. Before Intel, he held leadership roles with Texas Instruments, Quanta Computer in Taiwan and Skyworks. Mr Lemos holds a Master of Sciences, Electronics and Computers degree from École Nationale Supérieure de Sciences Appliquées et de Technologie (ENSSAT) in Lannion, France. Previously he has been appointed Chairman of Cisco for the UK in 2016, after eight years as Cisco’s Chief Executive. He is also the Chairman of Innovate UK and Chairman of the Tech Partnership. Additionally, he sits on the Board of the National Centre for Universities and Business (NCUB). Mr Smith has a thirty-five year track record in the technology industry in leading companies including Philips Electronics and IBM. As Chief Executive and now Chairman of Cisco, he leads around 5,500 people in the UK and Ireland. He created Cisco’s British Innovation Gateway (BIG) programme, as a legacy of London 2012 to spark nationwide ingenuity, ambition and growth through technology entrepreneurship. In September 2014 he was awarded an Honorary Doctorate by Birmingham City University, cited for his outstanding contribution to the IT industry, a “leader among leaders”. In March 2015, Mr Smith was awarded an Honorary Degree of Doctor of Laws by the University of Warwick and in 2016 an Honorary Degree of Doctor of Science by his alma mater, Glasgow University. He was honoured in the 2019 Queen’s Birthday Honours List with the award of Commander of the Order of the British Empire (CBE) for services to Technology, Business and Skills. Committee Membership Committee Membership Committee Membership Committee Membership 48 IQE plc Annual Report and Financial Statements 2021 Audit Committee Member Remuneration Committee Member Nomination Committee Member Environmental, Social & Governance Committee member Chair of Committee Carol Chesney FCA (59) Senior Independent Director Victoria Hull (59) Non-Executive Director Sir Derek Jones KCB (69) Non-Executive Director An experienced Non-Executive Director, Victoria Hull is currently serving Non-Executive Directorship and Remuneration Committee roles for listed technological companies including Alphawave IP Group plc and Network International Holdings plc. Victoria is also the Senior Independent Director for Ultra Electronics Holdings plc. Prior to these appointments, Victoria held an executive directorship at Invensys, now Schneider Electric. Having worked in a variety of global companies at Executive Committee or Board level, her appointment to the Board of IQE brings an extensive understanding of legal, commercial and governance matters. Victoria has a strong background in corporate finance and began her career as a trainee solicitor at Clifford Chance LLP. Carol Chesney joined IQE’s Board in May 2019 and was appointed as a Senior Independent Director in November 2020. Since October 2012 Mrs Chesney has served as a Non-Executive Director and Chair of the Audit Committee of Renishaw plc. In addition, she is a Non-Executive Director and Chair of the Audit Committees of Imagination Technologies, Hunting plc and Biffa plc. Until 2018 Mrs Chesney served as the Company Secretary of Halma plc, a FTSE 100 health, safety and environmental technology group, having also served as the Group’s Financial Controller. During her time at Halma, Mrs Chesney’s role included corporate governance, legal compliance, equity incentives, pensions, internal audit management, taxation, property, health and safety compliance, environmental reporting and anti-bribery and corruption compliance. Mrs Chesney is a Fellow of the Institute of Chartered Accountants in England and Wales, and qualified with Arthur Andersen in the UK. Sir Derek Jones KCB is Chair of Keolis UK, the international transport company; he is also Chair of the Prince’s Trust in Wales. He is also an independent adviser at Cardiff University, where he is an Honorary Fellow and Professor, and a Vice President of Cardiff Business Club. Sir Derek was the Permanent Secretary of the Welsh Government until February 2017. Sir Derek spent the earlier part of his government career in Whitehall, working at HM Treasury and the Department for Trade & Industry, where he headed the Far East Trade Desk. In government in Wales he also served as Director of Finance and Director of Economic Affairs, during which time he was instrumental in securing major inward investment projects, particularly from Japan and the USA. Outside government, Sir Derek was Director of Business & Strategic Partnerships at Cardiff University, responsible for securing long-term collaborations with the private sector. He was made Companion of the Order of the Bath (CB) in 2009 and subsequently Knight Commander (KCB) in 2014, for services to economic and social conditions. Sir Derek is also the Director responsible for employee engagement. Committee Membership Committee Membership Committee Membership 49 Where innovation startsCorporate Governance e c n a n r e v o G e t a r o p r o C Chairman’s Governance Overview Dear Shareholders, I am pleased to introduce IQE’s Governance Report on behalf of the Board. The Board is collectively responsible for IQE’s long-term success and hence committed to conducting business responsibly, maintaining high standards of corporate governance and to aspiring to the highest levels of quality in everything it does. I’m confident the Board’s continued focus on these areas will support IQE’s performance, its position in the market and enable it to grow and embrace its opportunities as they arise. We have recently incorporated the Environment, Social and Governance Committee to develop and monitor IQE’s ESG strategy and to be responsible for communicating our ESG activities with our stakeholders. We look forward to bringing you updates later this year. The Board is committed to driving IQE’s long-term objectives and to overseeing IQE’s operations to ensure competent and prudent management. The approach to governance is set by the Board, charging the Executive Leadership Team with the responsibility to ensure that the approach is effectively implemented across IQE’s global business. It has been my privilege to lead the Board through a number of changes through 2021 which I believe will support the business through the coming important years. The Board and the Executive have rightly been heavily focused during these tough times on the resilience of our people, our business and the way in which we interact with the societies in which we all live and operate. 50 IQE plc Annual Report and Financial Statements 2021 Board changes in 2021 On 22 November 2021 we announced that Americo Lemos had been appointed as IQE’s new Chief Executive Officer, starting on 10 January 2022. Americo succeeds Dr Drew Nelson who completed his transition to his new role as President and Non-Executive Director on 30 October 2021. During Drew’s transition and prior to Americo joining IQE, acted as interim Executive Chair from 7 September 2021 to 9 January 2022. The Board also said farewell to Sir David Grant who retired from the Board and his position as Remuneration Committee Chair on 18 September 2021 having been on the Board since September 2012. David made a huge contribution to IQE over many years and had been an extremely effective member of the Board. Victoria Hull was appointed as a Non-Executive Director on 1 August 2021 and succeeded Sir David as the Remuneration Committee Chair on his retirement. Victoria has a broad range of experience and is already making a strong contribution to the Board and the Remuneration Committee. Sir Derek Jones has been elected as the Board’s director for responsible for employee engagement. Derek will work with the rest of the Board and the Executive Leadership Team in developing the right communication channels for this important responsibility. We also announced the creation of an Environmental, Social and Governance Committee which I am pleased to chair and which will also comprise Derek and Drew as additional members. Derek will report to the ESG Committee on employee engagement matters. During the year, I agreed with the Board that we would carry out an internal evaluation of the Board. I am pleased to confirm that we continue to have a committed, engaged and effective Board that is operating well. I am confident that recent changes to the Board will only improve its effectiveness. More details on the findings from the evaluation are outlined on page 53. We continue to review the Board’s effectiveness and will look to continuously improve the Board’s function as it guides IQE. I encourage all of our shareholders to engage with us ahead of the AGM which will be held on 28 June 2022. Notice of, and details of the arrangements for, the AGM will be provided to shareholders at the usual time and will take account of legislative requirements, external circumstances and the protection of the health and safety of our employees and shareholders. I am confident that the steps we have taken through 2021 will make a strong positive contribution to IQE as we drive to achieve the vision and goals we have set ourselves. I am delighted that Americo has joined IQE as its new Chief Executive Officer and look forward to seeing his positive impact on the business. C o r p o r a t e G o v e r n a n c e Phil Smith Chairman, IQE plc 29 March 2022 51 Where innovation starts Governance structure Shareholders IQE Board Audit & Risk Committee Responsibilities: • Reviewing financial reporting and disclosures • Reviewing audit effectiveness • Assessing internal controls and risk management • Advising on external auditor l D e e g a t i o n Nominations Committee Remuneration Committee ESG Committee Responsibilities: • Review composition of the Board • Succession planning for the Board and senior management • Review developments in corporate governance Responsibilities: • Evaluate performance and effectiveness of Chief Executive Officer and Chief Financial Officer • Review and approve principles of IQE’s LTIP • Maintaining dialogue with IQE’s shareholders on remuneration policy Responsibilities: • Develop and monitor the execution of IQE’s ESG strategy • Oversee the communication of the company’s ESG activities with all stakeholders A c c o u n t a b i l i t y See page 54 See page 58 See page 60 See page 75 Chief Executive Officer Executive Leadership Team Operating Sites Business Units Functions Research & Development Role of the Board Leadership and people The Board is responsible for the overall conduct of IQE’s business and the Directors have responsibilities under both the Company’s Articles of Association and UK company law. The Board delegates day-to-day management of IQE’s to the Chief Executive Officer and the Executive Leadership Team • Concluded the search for a new Chief Executive Officer • Concluded the search for a new Non-Executive Director and Chair of the Remuneration Committee The primary tasks of the Board in 2021 included: Finance Strategy • Reviewed, challenged and approved the Group’s strategy for the period 2022 to 2024 • Regular reviews of key business decisions and their impact on the Group’s strategy Operations • Monitored progress against the 2021 financial plan • Reviewed and approved the financial plan for the period 2022 to 2024 • Monitored, challenged and approve capex and other significant expenditure • Approved the Annual Report, half-year results and interim trading updates • Considered and approved IQE’s going concern and viability statements Governance and ethics • Received operational, including health, safety and environment, updates at • Carried out an internal Board evaluation, discussed the output with the Board each scheduled meeting and agreed areas for improvement • Monitored performance and provided challenge in key areas of operations • Received and reviewed feedback from institutional investors • Reviewed the requirements of the 2018 UK Corporate Governance Code and areas of non-conformity • Regular meetings between the Non-Executive Directors only 52 IQE plc Annual Report and Financial Statements 2021 Board and Committee attendance Number of meetings in 2021 Attendance Executive Dr A W Nelson1 Mr Tim Pullen Non-Executive Mr P Smith Mrs Carol Chesney Sir D Grant2 Sir D Jones Ms V Hull3 Board Audit & Risk Committee Remuneration Committee Nominations Committee 14 14 14 14 14 9 14 7 4 4 4 3 4 2 3 3 3 2 3 1 3 3 3 2 3 1 1 Drew Nelson ceased his position as CEO on 30 October 2021 and subsequently attended meetings in the role of Non-Executive Director. 2 David Grant retired from the Board in September 2021 and attended all eligible meetings prior to this time. 3 Victoria Hull was appointed as a Non-Executive Director in July 2021 and attended all eligible meetings following her appointment. UK Corporate Governance Code compliance IQE complied throughout 2021 with the principles and provisions of the UK Corporate Governance Code 2018 except in the following areas: Provision 5 IQE has a people forum and regular ‘Town Halls’ which senior management use for engagement with the workforce. Sir Derek Jones was appointed as IQE’s first Non-Executive Director responsible for employee engagement on 24 January 2022. Provision 17 IQE does not currently maintain a succession plan for the Company Secretary or all senior management immediately below Board level. IQE will work to develop such plans based on merit and objective criteria. As part of its consideration of developed succession plans, the Nominations Committee will consider the linkage of its diversity objectives with company strategy and the gender balance of those in senior management and their direct reports. Provision 33 The Remuneration Committee has responsibility for determining the policy and setting remuneration for the Executive Directors and the Chairman. It also has responsibility to recommend and monitor the level and structure of remuneration for senior management. However, the Remuneration Committee does not currently determine the policy and set the remuneration for senior management and the Company Secretary as required by the Code. Provision 36 Share options granted to the Executive Directors under IQE’s LTIP are subject to total vesting and holding periods of 3 years. In addition, Executive Directors are subject to a minimum holding requirement equal to 200% of their base salary and will have a post-employment shareholding requirement for 2 years. The minimum holding will be equal to 200% of base salary in the first-year post- employment, reducing to 100% of base salary in the second year. A copy of the 2018 UK Corporate Governance Code is available at frc.org.uk. Diversity Independence The Board considers that, with the exception of Andrew Nelson, all of the Non- Executive Directors are independent in character and judgement and free from any business or other relationship that could materially interfere with exercising that judgment. Andrew Nelson was recently appointed as President and Non- Executive Director following his transition from Chief Executive Officer. The Board is also satisfied that there is no compromise to the independence of, and nothing which would give rise to conflicts of interest for, those directors who serve as directors on other company boards or who hold other external appointments. The Board considers potential for conflicts of interest at every Board meeting and ensures that directors present sufficient information for those to be reviewed. Appointment and time commitment The Chairman and each of the other Non-Executive Directors have letters of appointment. The Chairman’s letter of appointment sets out the time commitment expected of him. The other Non-Executive Directors’ letters of appointment set out a minimum expected time commitment but do no set out a fixed time commitment. The Non-Executive Directors are expected to allocate appropriate time to IQE to perform their duties and to make themselves available for all regular and ad hoc meetings. The Board believes each of the Non-Executive Directors has sufficient time to perform their duties. Board evaluation The Chair and Company Secretary facilitated an internal review of the Board during 2021. The process involved the use of an externally-facilitated platform which gathered feedback on a range of areas including the Board’s composition, processes, behaviours and activities. Feedback was provided on an anonymised basis to encourage open and honest responses. The Chair held a number of open conversations with the Board members on an individual and collective basis to discuss their feedback. Positive feedback was received on the progress the Board was making on areas such as governance structures, Board objectives, quality of conversations and succession. We identified a number of areas for increased attention and will continue to evolve the effectiveness of the Board over the coming year. We have made significant steps in succession plans for key leadership positions and evolved the composition of, and the skills within, the Board. The Board considers that it is well placed to play a broader role in the establishment of a culture for the evolution and next generation of IQE. The Board made important progress in its equality, diversity and inclusion and the recent establishment of the ESG Committee will help guide our journey in those important areas. The Board will be working closely with the new CEO to drive value creation. 53 Where innovation startsCorporate Governance Audit & Risk Committee Chairman’s Introduction t r o p e R e e t t i m m o C k s i R & t i d u A IQE’s Audit & Risk Committee continued its oversight of IQE’s system of internal control ensuring that certain elements of control and reporting evolved in accordance with the business’s evolution and the maturity of operations. We understand the areas where further enhancements are targeted and will ensure these are advanced on a timely basis. The Audit & Risk Committee has developed good foundations over the past few years and I look forward to continuing that development with my colleagues.” 54 IQE plc Annual Report and Financial Statements 2021 The Board considers the maintenance of high standards in its governance and management of the affairs of IQE as fundamental to the discharging of its stewardship responsibilities. Accordingly, both the Board and the Audit & Risk Committee continue to keep under review IQE’s whole system of internal control, which comprises not only financial controls, but also business & operational controls, compliance and risk management. In 2021 the Committee placed additional focus on IQE’s principal and emerging risks, with a continued emphasis on those arising from the global COVID-19 pandemic and the resulting global economic turbulence. The Committee spent a significant amount of time with IQE’s internal finance function and external auditors discussing, assessing and challenging financial reporting and going concern assessments. The Committee continues to assess IQE’s internal controls and monitors the need for an establishment of an internal audit function. The Committee used its structured meeting schedule to ensure that it provides robust challenge in the areas relating to financial reporting, internal controls and risk management, the external auditors and other issues pertinent to IQE. Sir David Grant retired from the Board on 18 September 2021 and retired from the Audit & Risk Committee on the same day. Victoria Hull was appointed to the Board on 1 August 2021 and joined the Audit & Risk Committee at the same time. The Committee reviewed its effectiveness and terms of reference during the year and determined that it continues to perform effectively. Carol Chesney Chair 29 March 2022 Membership Carol Chesney – Chair Derek Jones Victoria Hull Carol Chesney is chair of the Audit & Risk Committee. Carol is a Chartered Accountant and has also held a number of senior finance roles. The Board is satisfied that Carol is the Committee member with recent and relevant financial experience as required by the UK Corporate Governance Code 2018. The Board is also satisfied that the Committee as a whole has a mix of experience and competencies to assess the issues facing the Group within the semiconductor industry. Meetings and attendance The Audit & Risk Committee meets at least quarterly with additional meetings as required. There were four meetings in 2021 and all of the Committee members attended each meeting. The meetings are also regularly attended by the Chairman, Chief Executive Officer, Chief Financial Officer and other senior members of the finance team. IQE’s external auditors attend every quarterly meeting and time is allowed at the end of each meeting for the Audit & Risk Committee to discuss issues with the external auditors without management being present. Role of the committee The Audit & Risk Committee is responsible for monitoring the effectiveness of IQE’s financial reporting, internal controls and risk management systems and processes and the integrity of IQE’s external auditors. Key responsibilities • reviewing the effectiveness of IQE’s financial reporting, internal control policies and procedures for the identification, assessment and reporting of risk • reviewing significant financial reporting issues and judgements • monitoring the integrity of IQE’s financial statements and any formal announcements relating to IQE’s financial performance • keeping the relationship with the external auditors under review, including their terms of engagement, fees and independence • reviewing and monitoring the need to establish a dedicated internal audit function • advising the Board on whether the Committee believes the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess IQE’s performance, business model and strategy • conducting the tender process and making recommendations to the Board, about the appointment, reappointment and removal of the external auditor, and approving the remuneration and terms of engagement of the external auditor • reviewing and monitoring the external auditor’s independence and objectivity • reviewing the effectiveness of the external audit process, taking into consideration relevant UK professional and regulatory requirements • developing and implementing policy on the engagement of the external auditor to supply non-audit services, ensuring there is prior approval of non-audit services, considering the impact this may have on independence, considering the relevant regulations and ethical guidance in this regard, and reporting to the board on any improvement or action required • reporting to the Board on how it has discharged its responsibilities 55 Where innovation startsCorporate Governance Audit & Risk Committee Report continued Activities during 2021 The Committee continues to oversee a range of risk areas that are key to IQE’s long-term success and compliance with applicable laws and regulations. The majority of the Committee’s work derives from a structured programme that is designed to fulfil its responsibilities as out in its terms of reference. The table below summarises the key activities at each meeting during 2021: Agenda item Review financial performance with focus on liquidity and covenant strength Review of financial statements, going concern assumption and compliance with accounting standards Review and recommend for approval year-end and half-year announcements Review of significant reporting issues and material judgments Review of key business risks Consider requirements for internal audit function Consider any material breach of law Review whistleblowing policy and procedures for preventing fraud, bribery and corruption Review of insurance programme, policies and material judgments Review representation letter for full-year and half-year Review effectiveness of Audit & Risk Committee Review of auditor quality and independence Consider audit effectiveness Review accounting and corporate governance developments Committee-only meeting with external auditor March • May • September • December • • • • • • • • • • • • • • • • • • • • • • • • • • • The UK Corporate Governance Code 2018 requires the Directors to prepare the Annual Report and Accounts and to state that they consider them, taken as a whole, to be fair, balanced and understandable and provide the information necessary for shareholders to assess IQE’s position and performance, business model and strategy. The Board requested that the Audit & Risk Committee advise it as to whether the Annual Report and Accounts meet those requirements. This work formed part of the review of the draft financial statements that was undertaken by the Committee in March and September 2021. Through consideration of reports from, and meetings with, management and the external auditors, the Committee has reviewed and determined the following: • judgmental areas and whether revenue recognition and the provisioning policies have been applied consistently and the level of provisions remains appropriate • whether the expected future cash flows of IQE supports the carrying value of goodwill, and whether there are any triggering events which suggest any potential impairment of other intangible assets including the valuation of development intangibles and the capitalisation of development costs • Going concern and the appropriateness of the disclosure contained within the significant accounting polices note relating to the application of the going concern basis of accounting in the financial statements; • Compliance with financial covenants contained within the Group’s committed bank facilities and the associated availability of the Group’s bank facilities; • Goodwill impairment and the growth rates applied in the Wireless and Photonics value in use calculations that support the carrying value of goodwill; • Intangible development cost carrying values and associated markets, end use applications and customer demand for the technologies which support asset carrying values; • Deferred tax asset recognition and the application of the cash flow forecasts used in the Group’s goodwill impairment review as the starting point for the assessment and recognition of deferred tax assets; and • Presentation and disclosure of adjusted profit measures including appropriate clarity of reconciliation between each GAAP and non GAAP measure • whether the presentation of the financial statements, including the presentation of adjusted performance measures, is appropriate and balanced External Auditors Through consideration of reports by independent tax specialists assessing IQE’s tax affairs in the UK, the US, Taiwan and Singapore as appropriate, and consideration of reports by and meetings with management assessing current and deferred tax accounting, the Committee has reviewed and determined whether the provision for tax liabilities, and the current and deferred tax accounting is appropriate. The Committee has reviewed the resources available to IQE, taking account of IQE’s trading and cashflow forecast together with available funding headroom to assess the appropriateness of the going concern assumption. Significant matters relating to the financial statements The Committee performs a review of significant matters that relate to the financial statements. The matters that the Committee considers are significant are set out below. 56 IQE plc Annual Report and Financial Statements 2021 The Audit & Risk Committee has developed an 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. The Committee has revised its policy on the provision of non-audit services by the external auditor in line with the Financial Reporting Council’s Revised Ethical Standard 2019. From 1 January 2021, the Group implemented a policy prohibiting the use of the Group’s auditors for the provision of non-audit services. The nature of the services provided by the external auditors during 2021 and the amounts paid to them are as detailed: KPMG LLP Fees payable to the company’s auditor and its associates for the audit of parent company and consolidated financial statements Fees payable to company’s auditor and its associates for other services: – The audit of company’s subsidiaries – Audit related assurance services – Tax and other advisory services Total KPMG LLP (group auditors) Ernst and Young (auditors of MBE Technology Pte & CSDC) – Subsidiary company’s audit – Tax services Total Ernst and Young (auditors of MBE Technology Pte & CSDC) Total 2021 £’000 335 27 20 – 382 2021 £’000 34 9 43 425 2020 £’000 198 27 20 189 424 2020 £’000 27 9 36 470 The Audit & Risk Committee also monitors the effectiveness of the annual audit. Before the end of the financial year, the Committee receives a detailed audit plan from the auditors that 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. IQE’s management also provide the Committee with feedback on the effectiveness of the audit and the quality of the audit firm and lead audit partner. In addition, the Group’s auditors are required to make a formal report to the Audit & Risk Committee annually on the safeguards that are in place to maintain their independence and the internal safeguards in place to ensure their objectivity. IQE does not have an independent internal audit function, however it does operate internal audit on an ad hoc peer review basis, with a scope of evaluating and testing IQE’s financial control procedures. The Committee considers that this remains appropriate for IQE’s size and geographical spread, but the Committee keeps this under constant review. In completing its review of the effectiveness of IQE’s system of internal controls the Audit & Risk Committee has taken account of any material developments up to the date of the signing of the most recent financial statements. In addition, recognition is given to the external audit findings, which help to inform the Audit & Risk Committee’s views of areas of increased risk. A resolution to reappoint KPMG will be proposed at the forthcoming Annual General Meeting. Risk Management Internal Audit & Controls The Audit & Risk Committee has reviewed the effectiveness of IQE’s system of internal controls and risk management activities bi-annually as part of the half year and full year public reporting. The system of internal control comprises those controls established in order to provide assurance that IQE’s assets 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. The key procedures that IQE has established with a view to providing effective internal control include the following: • a clearly defined organisational structure and limits of authority • corporate policies and procedures for financial reporting and control, project appraisal, human resources, quality control, health and safety, information security and corporate governance • the preparation of annual budgets and regular forecasts which require approval from 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 IQE’s risks, taking steps to monitor and mitigate these wherever possible • where appropriate, taking out insurance cover • approval by the Audit & Risk Committee of audit plans and, on behalf of the Board, receipt of reports on IQE’s accounting and financial reporting practices and its internal controls together with reports from the external auditors as part of their normal audit work This process remained in operation for the year under review and as part of that process, management report any material exceptions to the Audit & Risk Committee. The Group Risk Committee was created in 2020 to identify, review, assess and track IQE’s key risks and mitigating actions. The Group Risk Committee documents its approach through a risk register which is shared and discussed with the Audit & Risk Committee. Key risk management activities performed by IQE are summarised on page 40. The Committee takes an active role in the risk management process that includes a regular review of IQE’s risk register and ‘deep dives’ into specific areas of risk. IQE’s principal risks and uncertainties are set out on pages 41 to 44. While many of the key risks identified recur from year to year, the relative importance evolves over time and may require IQE to refocus its assurance activities. In the year ahead, the Committee will continue to work with the Board, Executive Leadership Team and other senior management to ensure that there is appropriate focus on the most significant risk areas together with the associated plans for mitigating their impact. Anti-bribery and corruption IQE maintains a zero-tolerance approach against corruption. It has an established anti-bribery and corruption policy, which includes guidance on the giving and receiving of gifts and hospitality. This policy applies throughout IQE’s business. A Gifts and Hospitality Register is maintained to ensure transparency. Whistleblowing IQE operates a confidential reporting mechanism, overseen by IQE’s General Counsel & Company Secretary, which enables employees to raise concerns of malpractice, non-compliance or unethical conduct. The options for raising concerns are widely communicated to employees. These channels are clearly set out in IQE’s Whistleblowing Policy. IQE’s reporting policy and procedures provide a framework for protected disclosure. 57 Where innovation startsCorporate Governance t r o p e R e e t t i m m o C s n o i t a n m o N i Nominations Committee Chair’s Introduction Phil Smith became Chair of the Nomination Committee in January 2021 and has overseen a number of changes to IQE’s Board during 2021. The Committee successfully lead the search for a new Chief Executive Officer to succeed Dr Drew Nelson with Americo Lemos joining IQE on 10 January 2022. Given Drew was founder and CEO and such an influential figure in the semiconductor industry, it was vital that we found a replacement who could continue with that influence and credibility in the industry whilst bringing new attributes to take IQE to a new level. We believe we have that with Americo Lemos. The Committee agreed on the desired experiences and leadership credentials required for the new Chief Executive Officer and engaged an external search firm to assist with the search. The external search firm had no other connection with IQE and were an independent provider of services to the Group. The Committee was also successful in its search for a new Non-Executive Director in light of Sir David Grant’s retirement from the Board shortly after the 2021 AGM. Candidates were sought with the technical and professional skills to take on Committee responsibilities, including in particular chairmanship of the Remuneration Committee. We also sought candidates who would enhance strategic discussion in the boardroom. The search led to the appointment of Victoria Hull who joined IQE as a Non-Executive Director and Chair of the Remuneration Committee on 1 August 2021. Victoria brings a real breadth of experience and skills to the Board from a broad range of industries. Additionally, she has some sector and growth experience and hence is a very positive addition to the Board. Phil Smith Committee Chair 29 March 2022 58 IQE plc Annual Report and Financial Statements 2021 Role of the committee Meetings and attendance The Nominations Committee is responsible for leading the process in the selection and appointment of directors and for ensuring plans are in place for an orderly succession of Board and senior management positions. The number of changes to IQE’s Board of Directors through 2021 meant that the Nominations Committee met frequently and often on an ad hoc basis throughout 2021. All members attended each meeting. Key responsibilities Activities during 2021 • review the structure, size and composition (including the skills, knowledge, experience and diversity) of the Board and make recommendations to the Board with regard to any changes • identify, evaluate and recommend candidates for appointment as directors • succession planning for directors and other senior management • review developments in law, regulation and best practice relating to corporate governance and make recommendations to the board on appropriate action The Committee was responsible for leading the search for a new Chief Executive Officer to succeed Dr Drew Nelson and for the appointment of a new Non-Executive Director in light of Sir David Grant’s retirement from the Board. The Committee is pleased to have nominated Americo Lemos as the Group’s new Chief Executive Officer and Victoria Hull as Non-Executive Director and Chair of the Remuneration Committee. The Committee continues to review the skills, experience and diversity on the Board. Membership Phil Smith – Chair Carol Chesney Derek Jones Victoria Hull 59 Where innovation startsCorporate Governance t Remuneration Committee r o Chair’s Introduction p e R n o i t a r e n u m e R ’ s r o t c e r i D 60 IQE plc Annual Report and Financial Statements 2021 On behalf of the Board, I am pleased to present IQE’s Directors’ Remuneration Report for 2021. This is my first report as Chair of the Remuneration Committee since stepping into the role on 18 September 2021. I would like to take this opportunity to thank Sir David Grant for his valuable contribution to IQE and the Remuneration Committee prior to his retirement from the Board in September last year. Reported financial performance in 2021 was significantly impacted by foreign exchange headwinds, caused by the relative strength of Sterling versus the US Dollar, with the majority of IQE’s revenues denominated in US Dollars. IQE also experienced a softening of demand in Q4 2021. As a result, the Group’s full year revenues for 2021 were £154m with an operating loss of £20m, representing a 13% reduction in revenues year-on- year. The Committee will always seek to ensure that the remuneration of IQE’s Executive Directors reflects the underlying performance of the business. The Committee determined that no bonuses would be paid to the Executive Directors for performance in 2021 and that there would be no increases in salary. The LTIP awards granted to the previous Chief Executive Officer and the Chief Financial Officer in 2019 will lapse in their entirety at the end of March 2022 because the applicable performance conditions were not met. I hope that you find the Remuneration Report to be clear in explaining the implementation of our Remuneration Policy in 2021. I value greatly engagement with IQE’s shareholders and other stakeholders and welcome your feedback on this Directors’ Remuneration Report. I hope you will be supportive of the resolution providing an advisory vote on the remuneration report for 2021. I look forward to our AGM in June 2022. Victoria Hull Non-Executive Director and Chair of the Remuneration Committee 29 March 2022 Remuneration at a glance Purpose and link to strategy Key features Planned for 2022 Implementation in 2021 Supports the attraction and retention of the best global talent with capability to deliver IQE’s strategy Salaries take account of external market and internal employee context Reviewed annually Effective 1 January 2022: y r a a S l d n a e c n a w o l l A s t fi e n e b e v ti n e c n i l a u n n A s e v ti n e c n i m r e t - g n o L Provision of market-competitive and cost-effective benefits to support attraction and retention of talent Provision of competitive benefits linked to local market practice Maximum company pension contribution is 10% of salary Incentivises delivery of IQE’s financial and strategic targets. Target opportunity is 50% of salary and maximum is 120% of salary Provides focus on key financial metrics and the individual’s contribution to IQE’s performance Rewards long-term performance in line with IQE’s strategy Provides focus on delivery long term returns to shareholders Performance measures, weightings and stretching targets set annually Paid out in cash after end of the financial year, save that any payout above 100% of salary will be made in the form of share grant Subject to malus and clawback provisions Annual awards under IQE’s LTIP: • CEO 150% of salary • CFO 150% of salary Maximum annual awards of up to 200% of salary in exceptional circumstances, such as recruitment 3-year performance period Performance measures, weightings and stretching targets reviewed annually Subject to malus and clawback provisions l i g n d o h e r a h S Ensures alignment between the interests of Executive Directors and shareholders t n e m e r i u q e r Minimum shareholding requirements: • CEO 200% of salary • CFO 200% of salary New joiners given time to reach threshold and not expected to self-fund • CEO £575,000* • CFO £369,706 (no increase) Average salary increase for wider workforce of around 2% *Americo Lemos joined IQE as CEO on 10 January 2021 Company pension contribution: • CEO 10% of salary • CFO 10% of salary The 10% pension contribution is consistent with that available to the wider workforce For the year ending 31 December 2022, the maximum opportunity remains 120% of salary for both the CEO and the CFO. The performance measures are EBITDA (weighted 40%), revenue (15%), operating cash flow (15%), and personal and strategic objectives (30%). In line with the recruitment policy, Americo Lemos was granted an exceptional award under the LTIP on joining IQE equal to 200% of his salary. The CFO will receive an award of 150% of salary. For the 3-year performance period ending 31 December 2024, the performance measures are EPS (weighted 40%), relative TSR (15%), absolute TSR (15%), revenue (10%) and strategic objectives (20%). 25% of the award will vest at threshold, increasing on a straight- line basis to 100% for stretch. There is nil vesting below the threshold level 2% salary increases for the previous CEO and the CFO In line with approach for wider workforce Allowances and benefits unchanged from prior year. CEO and CFO pension contributions 10% of salary The 2021 annual bonus payout for both the previous CEO and the CFO was nil The awards granted to the previous CEO and the CFO in 2019 lapsed as the applicable performance conditions were not met CEO shareholding 69% of salary. CFO shareholding 0% of salary. Tim Pullen joined IQE at the start of 2019 61 Where innovation startsCorporate Governance Directors’ Remuneration Policy IQE aims to attract, retain and motivate high calibre executives, whilst recognising the need to be cost effective, and to incentivise significant industry out- performance. The Remuneration Committee established a remuneration policy that balances these factors, taking account of investor feedback and prevailing best practice. This section of the Directors’ Remuneration Report sets out the Policy for Executive Director remuneration which was adopted at the start of 2020. Function Operation Opportunity Performance metrics Base salary To recognise the individual’s skills and experience and to provide a competitive total package. Base salaries are reviewed annually, with reference to market levels, individual contribution, the experience of each Executive and increases across the Group. Any adjustments become effec- tive on 1 April. Pension To provide an opportunity for executives to build up income on retirement. All Executives are members of the Group pension scheme and/or receive a cash pension allowance. Salary is the only element of remuneration that is pensionable. Benefits To provide non-cash benefits which are competitive in the market in which the executive is employed. Executives receive benefits which consist primarily of health cover, private medical insurance, life assurance, long- term disability insurance and reimburse- ment for fuel, although may include other benefits that the Remuneration Committee deems appropriate in the circumstances. Annual Bonus To incentivise and reward strong performance against financial and personal annual targets, thus delivering value to shareholders and being consistent with the delivery of the strategic plan. Performance measures, targets and weightings are set at the start of the year. The scheme is based on a combination of financial performance and personal objectives. At the end of the year, the Remuneration Committee determines the extent to which the financial perfor- mance targets and personal objectives have been achieved. Bonus payments up to 100% of salary are delivered in cash or in the form of stock grants. Clawback (of any bonus paid) may be applied during employment or for 2 years 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. n/a Any base salary increases are applied in line with the outcome of the Remuneration Committee’s review. In respect of existing Executive Directors, it is anticipated that salary increases will generally be in line with those of salaried employees as a whole. In exceptional circumstances (including, but not limited to, a material increase in job size or com- plexity, material market misalignment) the Remuneration Committee has discretion to make appropriate adjustments to salary levels to ensure they remain appropriate. Executive Directors receive a pension contribution of 10% of salary or an equivalent cash allowance. This aligns with the pension arrangements for IQE’s employees where employee contribu- tions are ‘double-matched’ up to a limit of a 10% contribution from IQE. Benefits may vary according to role and individual circumstances. Eligibility to benefits and the cost of benefits are reviewed periodically. n/a n/a The Remuneration Committee retains discretion to approve a higher cost in exceptional circumstances (e.g. reloca- tion or expatriation) or in circumstances where market rates have changed (e.g. cost of insurance cover). For Executive Directors, the maximum annual bonus opportunity will be 120% of base salary. The bonus pays 0% at Threshold, 50% at Target and 100% at stretch, with straight-line vesting between these levels. Any bonus earned over 100% of base salary would be paid in the form of share grants. 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 plan. Performance vs. targeted levels will be measured at budgeted FX rates. Personal/strategic objectives will represent no more than 30% of the maximum opportunity and will be set annually to capture expected individual contributions to IQE’s strategic plan. The personal element will be restricted to 15% of the maximum opportunity in the event the thresholds for two out of the three relevant financial measures are not met. 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. Any adjustment would be carefully considered and fully explained in the Annual Report on Remuneration. Further details of the measures, weight- ings and targets applicable are provided on page 66 in the Annual Report on Remuneration. 62 IQE plc Annual Report and Financial Statements 2021 Function Operation Opportunity Performance metrics LTIP To drive sustained long-term performance that supports the creation of shareholder value. The LTIP provides for normal awards of up to 150% of salary. In exceptional circumstances, including but not limited to recruitment, normal awards may be made up to 200% of salary to secure the right individual. Up to 25% of the LTIP will be paid for achieving Threshold performance, increasing on a straight-line basis to full vesting for achieving Stretch perfor- mance. Under the long-term incentive plan (LTIP) annual awards of shares or nil-cost options may be made to participants. Award levels and performance condi- tions are reviewed before each award cycle to ensure they remain appropriate. The Committee has the discretion to authorise a payment, in shares, equal to the value of dividends which would have accrued on vested shares during the vesting period. Malus (of any unvested LTIP) and clawback (of any vested LTIP) may be applied during employment or for 2 years 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. Vesting of LTIP awards is subject to achieving performance conditions and continued employment. LTIP awards to Executive Directors have the same vesting period as those issued to IQE’s other employees, being measured over three consecutive financial years. The Remuneration Committee has limited discretion to change the perfor- mance conditions and cannot make any performance condition materially easier to satisfy without shareholder approval. If no entitlement has been earned at the end of the relevant performance period, awards lapse. The Remuneration Committee has discretion to adjust outcomes to ensure they fairly reflect underlying perfor- mance. The Remuneration Committee also considers environmental, social, governance and health and safety criteria, to ensure there is no reward for failure. Notes to the policy table Performance measure selection and approach to target setting The measures used under the annual bonus plan are selected annually to reflect IQE’s main objectives for the year and reflect both financial performance and personal contributions to delivering the strategic plan. The performance conditions for new LTIP awards are selected to reflect IQE’s long-term objectives which support the creation of shareholder value. In terms of the performance conditions for the LTIP, the Remuneration Committee considers Fully Diluted Adjusted Earnings per Share (‘EPS’) to be a key measure of IQE’s long-term bottom line performance, while Total Shareholder Return (‘TSR’) is a measure which strongly aligns management and shareholder interests. The Remuneration Committee also considers that it is appropriate to include performance conditions which look at absolute revenue growth and the achievement of IQE’s strategic objectives. Targets applying to the bonus and new LTIP awards are reviewed annually, based on a number of internal and external reference points. Performance targets are intended to be stretching and achievable, and reflect IQE’s strategic priorities and its market opportunities. Remuneration policy for other employees All employees are eligible to participate in a discretionary annual bonus and receive awards under the LTIP. Shareholding guidelines The Remuneration Committee wishes to encourage Executive Directors to build up a significant shareholding in the Company. Shareholding guidelines are therefore in place to require Executive Directors to acquire a shareholding (excluding shares held conditionally pursuant to LTIP performance) equivalent to 200% of base salary. 50% of any shares vesting (post-tax) under the new LTIP are required to be held until the relevant shareholding level is achieved. Executive Directors are expected to build up the required shareholding within five years of appointment to the Board, although the Remuneration Committee will exercise appropriate discretion where Executive Directors have been impeded from building up the requisite shareholding due to business performance. Details of the Executive Directors’ current shareholdings are provided in the Annual Report on Remuneration at page 55. Non-Executive Director remuneration Non-Executive Director Date of appointment letter Remuneration per annum Phil Smith Sir Derek Jones Carol Chesney Victoria Hull1 Andrew Nelson Sir David Grant2 30 November 2016 1 December 2017 13 May 2019 16 July 2021 30 October 2021 1 September 2012 £125,000 £50,000 £50,000 £50,0001 £75,000 £50,000 1 Victoria Hull was appointed to the Board on 1 August 2021 2 Sir David Grant retired from the Board on 18 September 2021 Subject to re-election by shareholders, Non-Executive Directors are appointed by the full Board and retire annually in accordance with the Company’s Articles of Association. The remuneration of Non-Executive Directors are matters reserved for the full Board, subject to an individual limit of £150,000 per annum or such other figure as shareholders may approve plus reasonable expenses in accordance with the Company’s Articles of Association. The Non-Executive Directors are not eligible to participate in IQE’s performance related bonus plan, long-term incentive plans or pension arrangements. Copies of the Non-Executive Directors’ appointment letters are available for inspection at the Company’s registered office during normal business hours. 63 Where innovation startsCorporate Governance Executive Director remuneration Americo Lemos Tim Pullen £2,800k £2,313k £1,237k £649k £1,561k £1,326k £753k £415k Minimum On Target Stretch Stretch 50% Minimum On Target Stretch Stretch 50% Fixed Pay Annual Bonus LTIP * LTIP value calculated based on market value of the options at the date of grant less the nominal grant price The ‘Minimum’ scenario comprises fixed remuneration, i.e. base salary, pension, and benefits, which are the elements of the remuneration package not linked to performance. The figures for base salary and pension (10% of salary) are as of 1 January 2022, while those for taxable benefits are based on the latest single figure table for 2021. The ‘On-Target’ scenario reflects fixed remuneration as above, plus a target bonus payout of 50% of maximum and threshold vesting for the LTIP of 25% of maximum. The ‘Stretch’ scenario reflects fixed remuneration, plus full payout of the annual bonus (120% of salary) plus full vesting of the normal LTIP of 150% of salary (200% of salary for Americo Lemos, for 2022 only). The ‘Stretch + 50%’ reflects the ‘Stretch’ scenario plus an assumed 50% share price appreciation over the LTIP performance period. Approach to recruitment remuneration External appointments In the cases of hiring or appointing a new Executive Director from outside the Company, the Remuneration Committee may make use of all the existing components of remuneration, as follows: Component Base salary Pension Benefits Annual Bonus LTIP Approach Maximum annual grant value 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. New appointees will be granted awards under the LTIP on the same terms as other executives, as described in the policy table. In line with normal annual limit Up to 200% of salary on appointment; in line with normal annual limit thereafter In determining the appropriate remuneration for a new executive director appointee, the Remuneration Committee will take into consideration all relevant factors (including nature and quantum of each component of remuneration and the jurisdiction from which the candidate was recruited) to ensure that arrangements are in the best interests of IQE and its shareholders. The Remuneration Committee may make an award in respect of a new appointment to ‘buy out’ remuneration arrangements forfeited on leaving a previous employer on a like-for-like basis, which may be awarded in addition to the ongoing remuneration elements outlined in the table above. In doing so, the Remuneration Committee will consider relevant factors, including time to vesting, performance conditions attached to awards, and the likelihood of these conditions being met. Any ‘buy-out’ awards will typically be made under the existing annual bonus and LTIP schemes, although in exceptional circumstances the Remuneration Committee may exercise the discretion available under Listing Rule 9.4.2 R to make awards using a different structure. Any ‘buy- out’ awards would have a fair value no higher than the awards forfeited. The Remuneration Committee will take advice from independent remuneration consultants on the structure and award package for a new Executive Director. 64 IQE plc Annual Report and Financial Statements 2021 Internal appointments In the case an internal promotion to the Board, the Remuneration Committee will use the same policy as detailed above, although there will be no opportunity for a buyout. However, where an individual has contractual commitments made prior to their promotion to Executive Director level, the Company will continue to honour these arrangements. Non-Executive Directors In recruiting a new Non-Executive Director, the Remuneration Committee will utilise the policy as set out on pages 62 & 63. Service contracts and treatment for leavers and change of control Executive Mr Americo Lemos Mr Tim Pullen Date of service contract 10 January 2022 4 February 2019 Executive Director service contracts, including arrangements for early termination, are carefully considered by the Remuneration Committee. Each of the Executive Directors has a rolling service contract requiring 6 months’ notice of termination on either side. Such contracts contain no specific provision for compensation for loss of office, other than an obligation to pay for any notice period waived by the Company, where pay refers to salary, benefits and pension only. Executive Directors’ service contracts are available to view at the Company’s registered office. When considering exit payments, the Remuneration Committee reviews all potential incentive outcomes to ensure they are fair to both shareholders and participants. The table below summarises how the awards under the annual bonus and LTIP are typically treated in different circumstances, with the final treatment remaining subject to the Remuneration Committee’s discretion: Reason for leaving Calculation of vesting / payment Annual bonus Resignation ‘Good leaver’1 Change of control 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 pro-rated for time worked. The Remuneration Committee retains discretion to vary this treatment in individual circumstances. Resignation Outstanding awards lapse LTIP ‘Good leaver’1 and change of control The Committee determines whether and to what extent outstanding awards vest based on the extent to which performance conditions have been achieved and the proportion of the vesting period worked. 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 a change of control, awards may alternatively be exchanged for new equivalent awards in the acquirer where appropriate. 1A ‘good leaver’ is a participant ceasing to be employed by the Group by reason of death, disability, ill health, retirement in agreement with the Company or any other reason that the Committee determines in its absolute discretion. External appointments 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. None of the Executive Directors received any remuneration from external directorships during the year. Consideration of conditions elsewhere in the company When making decisions on changes to Executive Director remuneration, the Remuneration Committee considers changes to pay and conditions across the Group. To this end, the Remuneration Committee receives a summary of the proposed level of average increase for employees prior to the annual salary review. For Executive Directors, the Remuneration Committee does not formally consult with employees on the executive remuneration policy and implementation. Consideration of shareholder views The Remuneration Committee maintains a regular dialogue with the Company’s major shareholders. Following the 2019 AGM, IQE Management consulted with shareholders regarding the concerns raised regarding the adoption of the new all employee LTIP plan. IQE has made the necessary changes to the administration of the LTIP to align leaver provisions for all employees to those set out for the Executive Directors. ‘Good Leavers’ will receive a pro-rated reduction to vesting based on performance and the portion of the vesting period expired up to the time of the termination of employment. The Committee maintains a view of the commitments to issue shares under the LTIP as a percentage of the issued share capital in any rolling 10-year period, acknowledging the Investment Association principles recommending a 10% limit and the report from the Institutional Shareholder Service in connection with the adoption of the LTIP in 2019. The LTIP currently allows for a maximum dilutive effect of 15%. The dilutive effect of commitments issued under the LTIP is declining year on year and the Committee is confident that this will fall below the recommended 10% limit in the next few years. 65 Where innovation startsCorporate Governance Annual Report on Remuneration Role of the Committee The Remuneration Committee has responsibility for determining the policy for Executive Director remuneration and setting remuneration for the Company Chair and Executive Directors. Key responsibilities • recommending the remuneration policy for Executive Directors, whilst considering the remuneration for the Executive Leadership Team and remuneration policies for employees below the Board • approving the principles of IQE’s LTIP and the parameters, including performance conditions, for the annual awards under the LTIP • maintaining appropriate dialogue with shareholders on remuneration matters • preparing the annual remuneration report to shareholders to show how the remuneration policy has been implemented. Membership Victoria Hull – Chair Phil Smith Derek Jones Carol Chesney Meetings and attendance The Remuneration Committee met twice in 2021. All members attended each meeting. The Chief Executive Officer and Chief Financial Officer attended meetings to present proposed performance ratings for the Executive Directors and Executive Management Board and remuneration policies principles for the workforce. The Chief Executive Officer and Chief Financial Officer did not attend those parts of the Committee meetings relating to the Committee’s decisions on their own performance and remuneration. Remuneration Committee role, membership and advice The primary role of the Remuneration Committee is to determine and agree with the Board fair and reasonable remuneration arrangements for the Chairman and Executive Directors. The main activities of the Remuneration Committee during the year were as follows: • evaluated the performance of the Chief Executive Officer and Chief Financial Officer • determined annual bonuses payable to Executive Directors and the Executive Leadership Team in 2021; • determined basis of salary increases for IQE’s employees, including the Executive Directors and the Executive Leadership Team • evaluated the proposed awards under the Company’s LTIP; • reviewed and approved performance conditions for LTIP awards; • reviewed and approved the Executive Directors’ salaries for 2022; • determined performance targets for the Executive Directors’ 2022 annual bonus and LTIP awards in line with IQE’s strategic plan; • evaluated revisions to IQE’s LTIP and cash bonus schemes for employees • considered proposed workforce policies on performance rating and proposed policy for workforce pay increases • drafted the Directors’ Remuneration Report; • considered benchmarking and advice from independent remuneration consultants, Mercer | Kepler. The Remuneration Committee’s Terms of Reference are set out on the Company’s website at www.iqep.com. During the year, the Remuneration Committee comprised all of the Non-Executive Directors. The number of meetings held during 2021 by the Remuneration Committee and attendance by the individual Committee members at such meetings is set out in the Board Report on page 47. Mercer | Kepler provides independent advice to the Remuneration Committee. Mercer | Kepler is a signatory to the Code of Conduct for Remuneration Consultants in the UK, operated by the Remuneration Consultants Group, and which requires all advice to be objective and independent (see www. remunerationconsultantsgroup.com for more information). Services provided by Mercer | Kepler included advice on remuneration packages for executives, assistance with a review of incentive arrangements and support on drafting this Directors Remuneration Report, as well as other ad-hoc advice on remuneration. Fees of £18,500 inclusive of VAT were paid to Mercer | Kepler in respect of services it provided to the Company in 2021. The Committee considers that Mercer | Kepler is independent, does not have any connections with IQE that may impair their independence, and does not provide any services to the Group other than its advice on remuneration. 66 IQE plc Annual Report and Financial Statements 2021 Board changes There were a number of Board changes during 2021 and at the beginning of 2022. Dr Andrew Nelson completed his transition from CEO on 30 October 2021, and became a non-independent Non-Executive Director and President on the same date. He received salary, benefits, and pension for his executive role in respect of the period 1 January to 30 October 2021, as set out in the single figure table below. He will continue to receive pay in lieu of notice, in line with the terms of his employment contract, until April 2022, totalling £274,600.86. He did not receive a bonus for 2021 and no LTIP award vested to him as the applicable performance targets were not met. His outstanding LTIP awards will continue in effect, albeit with a pro rata reduction to reflect time served in his executive role and the extent of any vesting will be determined at the end of the relevant performance period. Dr Andrew Nelson receives an annual fee of £75,000 in his new role as a Non-Executive Director and President. Americo Lemos was appointed as CEO on 10 January 2022. His salary is £575,000, and he receives benefits and pension in line with the remuneration policy. He is eligible for an annual bonus of up to 120% of salary, subject to the normal performance targets, and he received an exceptional award under the LTIP of 200% of salary in 2022, again subject to the normal performance targets. It is anticipated that from 2023, Americo’s LTIP award will be 150% of salary. Over the first 12 months of his employment, Americo will also receive a buyout award in respect of remuneration foregone at his previous employer with a value equal to £1,000,000, comprising a cash bonus totalling £800,000 and an award of 583,709 shares, worth £200,000. The buyout award is not subject to any performance conditions, though malus and clawback provisions apply. Phil Smith, the Non-Executive Chair, took on an executive role for the period 7 September 2021 to 9 January 2022 to support the transition from the previous CEO to the new CEO. For this period only, Phil received a total fee on a per diem rate of £2,750. Sir David Grant retired from the Board on 18 September 2021. Victoria Hull was appointed as an Non-Executive Director on 16 July 2021, and receives an annual fee of £50,000. Single total figure of remuneration for Executive Directors (audited information) The table below sets out a single figure for the total remuneration received by each Executive Director for the year ended 31 December 2021 and the prior year: Salary Benefits3 Starting Bonus Pension6 Total fixed Annual bonus4 Long-term incentive5 Total variable Total Executive Remuneration Non-executive fees Total Director Remuneration Dr. Andrew Nelson1 2021 £’000 450 7 – 50 507 – – – 507 13 520 2020 £’000 538 7 – 54 599 511 – 511 1,110 – 1,110 Mr Tim Pullen 2021 £’000 368 11 25 37 441 – – – 441 – 441 2020 £’000 363 11 131 36 541 344 – 344 885 – 885 Mr Phil Smith2 2021 £’000 2020 £’000 97 – – – 97 – – – 97 125 222 – – – – – – – – – 125 125 11Dr Andrew Nelson is entitled to payments in lieu of notice totalling £275,000 that are payable in six equal monthly instalments over a period commencing from the date of his retirement as Chief Executive Officer on 31 October 2021. 2Mr Phil Smith’s executive remuneration relates to the period subsequent to his appointment as Executive Chairman on 7 September 2021. Non-executive fees relate to Mr Phil Smith’s role as Non-Executive Chairman prior to 7 September 2021. 3Benefits consist of health cover, private medical insurance, life assurance, long term disability insurance, fuel and car repairs. 4Annual bonus payable in cash. 5No LTIPs vested. 6Executive Directors are entitled to participate in a defined contribution scheme, in relation to which the Company contributes 10% of salary or equivalent cash allowance. Incentive outcomes for year ending 31 December 2021 Annual Bonus The annual bonus for 2021 was determined by a combination of cash, revenue and profit targets and non-financial personal/strategic targets. The Committee set stretching performance targets for 2021 which were linked to the strategy and financial performance of the Group. Financial performance for 2021 was below expectations which meant that there was no annual bonus for the Chief Executive Officer or the Chief Financial Officer. The Committee is satisfied the policy has operated as intended and has concluded that there are no circumstances arising where it would need to exercise discretion to adjust any of the variable pay outcomes. Long-term incentive plan 966,246 LTIP options awarded to Andrew Nelson and 699,814 LTIP options awarded to Tim Pullen, both in 2019, have not satisfied the applicable performance criteria and have lapsed. 67 Where innovation startsCorporate Governance Percentage change in CEO remuneration The table below shows the percentage change in CEO remuneration from the prior year compared to the average percentage change in remuneration for other employees. The CEO’s annual remuneration includes base salary, taxable benefits and annual bonus. The % change in annual remuneration for other employees is calculated using the increase in the earnings of all employees who were employed in the UK throughout 2020 and 2021. The Committee considers the UK employee population to be the most appropriate comparison for CEO vs. other employee pay, as all executive directors are currently employed in the UK, our UK employee population includes employees at all levels of the organisation, and pay inflation in our other geographies is affected by different local market factors. Salary Pension Benefits Annual bonus Total Dr. Andrew Nelson1 2020 £’000 538 54 7 511 1,110 2021 £’000 463 50 7 – 520 Increase % -16.2% -7.9% 0.0% n/a All UK Employees 2020 £’000 5,438 – 39 – 2021 £’000 5,833 – 53 – 5,886 5,477 Increase % 7.3% n/a 36.1% n/a 1Dr Andrew Nelson’s executive remuneration relates to the period prior to his retirement as Chief Executive Officer on 31 October 2021. His salary includes executive and non-executive remuneration (salary and fees) but excludes payment in lieu of notice (£275,000). Relative importance of spend on pay The graph below shows shareholder distributions (i.e. dividends and share buybacks), total employee pay expenditure and investment in capital expenditure, research & development and intangibles for the financial years ended 31 December 2020 and 31 December 2021, along with the year-on-year percentage change. m £ 50 40 30 20 10 0 5.3% 76.8% Employee Remunera�on Costs n/a Distribu�on to shareholders 2021 2020 Investment in Capex, R&D and intangibles Review of past performance The following graph charts the Total Share Return (‘TSR’) of the Company and the FTSE AIM Index (to which IQE is a member) over the period from 1 January 2016 to 31 December 2021. The table below details the Chief Executive’s “single figure” remuneration over the same period. Historical TSR performance ) 0 0 1 o t d e s a b e r ( R S T 900 800 700 600 500 400 300 200 100 0 Jan-16 Jan-17 Jan-18 IQE Jan-19 Jan-20 AIM All Share Jan-21 Historical CEO remuneration CEO single figure of remuneration (£000) STI award as a % of maximum opportunity LTI award as a % of maximum opportunity 2017 1,087 100% n/a 2018 3,683 20% 62% 2019 599 0% 0% 2020 1,110 79% 0% 20211 507 0% 0% 1Dr Andrew Nelson’s executive remuneration relates to the period prior to his retirement as Chief Executive Officer on 31 October 2021. 68 IQE plc Annual Report and Financial Statements 2021 Scheme interests awarded in 2021 (audited information) Executive director Dr Andrew Nelson Mr Tim Pullen Award type Date of award # shares awarded Face value End of performance period Nil-cost option 1 January 2021 1,118,938 Nil-cost option 1 January 2021 753,236 £807,649 £543,686 31 December 2023 31 December 2023 The face value of the shares awarded was based on the share price as at the date of award, being 73.18p as at 1 January 2021, less the 1p nominal value exercise price. Vesting of 60% of the awards are subject to absolute justified dilutive EPS targets as illustrated on the chart below where EPS is measured at 31 December 2023. Vesting of 40% of the awards are subject to absolute TSR targets as illustrated on the chart below where TSR is measured over the three years 31 December 2023. l y r a a S % 100 90 80 70 60 50 40 30 20 10 0 0.50 0.55 0.60 0.65 0.70 0.75 0.80 >0.80 EPS l y r a a S % 100 90 80 70 60 50 40 30 20 10 0 100% 110% 120% TSR 130% >130% Exit payments made in the year (audited information) Dr Andrew Nelson is entitled to payments in lieu of notice totalling £275,000 that are payable in six equal monthly instalments over a period commencing from the date of his retirement as Chief Executive Officer on 31 October 2021. Payments to past Directors Payments made to past directors totalled £82,500 (2020: £75,000) and reflect on-going services received from Dr Howard Williams following his retirement from the Board in 2019. Single total figure of remuneration for Non-Executive Directors (audited information) The table below sets out a single figure for the total remuneration received by each Non-Executive Director for the year ended 31 December 2021 and the prior year: Phil Smith Mrs Carol Chesney Sir Derek Jones Andrew Nelson2 Victoria Hull3 Sir David Grant4 NED fees 2021 £’000 125 50 50 13 21 41 2020 £’000 125 50 50 n/a n/a 50 Other 2021 £’000 97 Nil Nil n/a Nil Nil 2020 £’000 Nil Nil Nil n/a Nil Nil Total 2021 £’000 222 50 50 13 21 45 2020 £’000 125 50 50 – – 50 1Phil Smith took on an executive role for the period 7 September 2021 to 9 January 2022 to support the transition from the previous CEO to the new CEO. Other in the table above reflects the additional fees that Phil Smith received over the period 7 September to 31 December 2021 to reflect the additional time commitment associated with his executive role during this period 2Dr Andrew Nelson was appointed as President and Non-Executive Director on 30 October 2021 following his transition from CEO. The fees shown in the table above relate to his non- executive role in respect of the period 1 November to 31 December 2021 3Mrs Victoria Hull was appointed to the board as an independent non-executive director on 1 August 2021. The fees shown in the table above relate to her service in respect of the period 1 August to 31 December 2021 4Sir David Grant retired from the board on 18 September 2021. The fees shown in the table above relate to his service in respect of the period 1 January to 18 September 2021 69 Where innovation startsCorporate Governance Implementation of remuneration policy for 2022 Base salary The Remuneration Committee: determined that no increase in salaries would be awarded for 2022. Executive Director Americo Lemos1 Tim Pullen Annual base salary at 1 January 2021 Annual base salary at 1 January 2022 Percentage increase £369,706 N/A £369,706 NIL 1 Americo Lemos was appointed as the Group’s CEO on 10 January 2022 on a salary of £575,000. Pension Executive Directors are entitled to a pension contribution of 10% of salary or equivalent cash allowance. The typical employee pension contribution is up to 10% of salary. Annual bonus For 2022, the Executive Directors will have the opportunity to receive a cash bonus to be paid after the announcement of full year results for 2022, based on a mix of financial measures for the 2022 financial year and agreed personal and strategic objectives: EBITDA (weighted 40% of the maximum opportunity), revenue (15%), operating cash flow (15%), and personal and strategic objectives (30%). Each measure has a threshold, on-target, and stretch target approved by the Board of Directors in at the time of Budget approval. Threshold and on-target performance will result in a bonus payment of 0% and 50% of the maximum opportunity, respectively. The maximum bonus payout will be 120% of base salary if all stretch targets are met. Any payout above 100% of salary will be made in the form of a share grant, calculated based on the average of the share price on the three days preceding the date of the Annual Results Announcement. There will no bonus for the financial element of the bonus if threshold EBITDA is not satisfied. In the event of zero payout for financial performance, the maximum payout for personal and strategic measures will be restricted to 50% of the maximum bonus amount for that element. LTIP For 2022, the CEO received an award of 200% of salary on appointment (as part of his buyout), and the CFO will receive an award of 150% of salary, in line with the policy. 40% of the award will vest on EPS performance, 15% on relative TSR performance vs. the FTSE All-Share Index, 15% on absolute TSR performance, 10% on revenue growth, and 20% on strategic objectives. The performance targets for the financial and TSR measures are set out below. Performance measure Weighting (% of award) Threshold (25% vesting) Stretch (100% vesting) EPS (IQE plc’s Fully Diluted Adjusted Earnings per Share achieved for the year ended 31 December 2024) Relative TSR vs. FTSE All-Share Index Absolute TSR Revenue growth Strategic scorecard 40% 15% 15% 10% 20% 0.60 1.00 TSR equal to Index TSR equal to Index+30% over the period 8% p.a. 10% p.a. 16% p.a. 20% p.a. Targets are deemed commercially sensitive and will be disclosed at vesting No award will vest below Threshold performance, and vesting will increase on a straight-line basis between Threshold and Stretch. 70 IQE plc Annual Report and Financial Statements 2021 Directors’ interests A table setting out the beneficial interests of the Directors and their families in the share capital of the Company as at 31 December 2021 is set out below. Since 1 January 2021 there have been the following changes in Directors’ interests in shares. 2021 Americo Lemos1 Tim Pullen Phil Smith Carol Chesney Dr Andrew Nelson Derek Jones Victoria Hull Sir David Grant Shares owned as at 1 Jan 2021 Shares owned as at 1 Jan 2022 Shareholding requirement % salary/fee Current shareholding % salary/fee – – – – – – 40,000 40,000 36,190,417 36,190,417 – – – – 215,000 215,000 200% 200% N/A N/A N/A N/A N/A N/A 34% 0% N/A N/A N/A N/A N/A N/A 1 Americo Lemos was appointed as the Group’s CEO on 10 January 2022 Executive Directors are expected to build up a shareholding of 200% of salary within five years of appointment to the Board. As first announced on 6 August 2019, Andrew Nelson has entered into a sale and repurchase agreement with Equities First Holdings pursuant to which 12,121,711 Ordinary Shares are held subject to the Agreement. Andrew Nelson, including persons closely associated with him, maintained a beneficial interest in 36,190,417 Ordinary Shares, representing approximately 4.52% of the Company’s issued share capital. Share Options (audited information) 2021 Dr Andrew Nelson Tim Pullen 2020 Dr Andrew Nelson Tim Pullen Unvested and subject to continued performance 2,899,470 1,850,483 Unvested and subject to continued performance 2,746,778 1,797,061 Unvested and subject to continued employment – – Unvested and subject to continued employment – – Vested but unexercised Vested during year Lapsed during year Exercised during year – – – – 966,246 699,814 Nil Nil Vested but unexercised Vested during year Lapsed during year Exercised during year – – – – 462,846 – – – Summary of shareholder voting at the 2021 AGM Results of the vote on the remuneration report at the IQE’s AGM on 23 June 2021 are as below: For (including discretionary) Against Total votes cast (excluding withheld votes) Votes withheld Total votes cast (including withheld votes) Total number of votes % of votes cast 463,251,895 6,694,707 469,946,602 86,374 470,032,976 98.57 1.42 99.9 0.01 100 71 Where innovation startsCorporate Governance t r o p e R e e t t i m m o C G S E ESG Committee Chair’s Introduction The Environmental, Social and Governance (‘ESG’) Committee was established on 24 January 2022. Phil Smith is Chair of the Committee. The ESG Committee will be responsible for developing and monitoring the execution of IQE’s ESG strategy and the communication of IQE’s ESG activities with our stakeholders. The ESG Committee will also be responsible for monitoring the Board’s engagement with IQE’s people, with Derek Jones acting as the Board’s workforce representative and reporting to the ESG Committee. The ESG Committee will be focussed on driving momentum and providing guidance in the development of IQE’s ESG strategy. The Committee will ensure that the strategy aligns with IQE’s short and long term business goals and that the strategy is effective and implemented accordingly. Given its recent establishment, the ESG Committee will be bringing further updates to our stakeholders through 2022 and we look forward to receiving your feedback on those. Phil Smith Committee Chair 29 March 2022 72 IQE plc Annual Report and Financial Statements 2021 ESG Committee Chair’s Introduction Role of the committee The ESG Committee is responsible for developing and monitoring the execution of IQE’s ESG strategy and the communication of that strategy to IQE’s stakeholders. Key responsibilities • ensure that IQE has a fit-for-purpose ESG strategy and for driving momentum behind the development and implementation of that strategy • be responsible for communicating IQE’s position on Environmental, Social and Governance issues • ensure that the strategy meets IQE’s short and long term business objectives • review the effectiveness of the strategy and the governance for its successful delivery • approve ESG reporting and specifically any reporting and data included in IQE’s Annual Report • report to the Board about the Committee’s work and progress against the strategy Membership Phil Smith – Chair Drew Nelson Derek Jones (responsible for workforce engagement) Meetings and attendance The ESG Committee will meet at least twice a year. 73 Where innovation startsCorporate Governance Directors’ Report The Directors present their Annual Report and the Financial Statements for IQE plc (the “Company”) for the year ended 31 December 2021. Principal Activities and Future Development The Company is the ultimate holding company of a group of subsidiary undertakings (the “Group”) engaged in the research, design, development, manufacture and sale of compound semiconductor materials. An overview of our principal activities and an indication of likely future developments in the Group is given in the Strategic Report. Strategic Report The Strategic Report is set out on pages 2 to 47 of the Annual Report. Directors & Directors’ Interests Biographies of all of the Company’s directors at the date of this Annual Report, including Non-Executive Directors, appear on pages 42 & 43 of the Annual Report. Victoria Hull was appointed to the Board as Non-Executive Director on 1 August 2021 and Sir David Grant retired from the Board on 18 September 2021. Victoria has replaced Sir David as Chair of the Remuneration Committee. Andrew Nelson completed his transition from Chief Executive Officer to President and Non-Executive Director on 30 October 2021. Americo Lemos was appointed as the Group’s new Chief Executive Officer and a director on 10 January 2022. The beneficial interests of the directors in the Company’s share capital is shown on page 66 of the Remuneration Report. The beneficial interests of Andrew Nelson, President and Non-Executive Director, and Tim Pullen, CFO, have changed during the year as they participate in the Company’s LTIP. No director was beneficially interested in the shares of any subsidiary company at any time during the year. In the year to 31 December 2021, no director had a material interest in any contract of significance with the Company or any of its subsidiaries. Insurance and Indemnities The Group maintains insurance to cover its directors and officers against their costs in defending themselves in legal proceedings taken against them in that capacity and in respect of damages resulting from the unsuccessful defence of any proceedings. In addition, to the extent permitted by UK law, the Group indemnifies its directors and officers for liabilities arising from such proceedings. Neither the insurance nor the indemnity provides cover for situations where the director has acted fraudulently or dishonestly. Risk Management and Principal Risks A description of risk management and the principal risks facing the business are set out on pages 40 to 44 of the Annual Report. Relationship with Suppliers and Customers Our relationships with our customers are explained throughout the Annual Report, particularly on page 38. Our relationships with our suppliers is specifically covered on page 30 of the Annual Report. The Group seeks to agree favourable credit terms with its suppliers where possible. Payment is made in accordance with the agreed terms. Auditor and Disclosure of Information to the Auditor The Company’s auditor throughout the period of this Annual Report was KPMG LLP, who were appointed on in December 2017. As at the date of the approval of this Annual Report, as far as each director is aware, there is no relevant audit information of which the Company’s auditor is unaware. Each director has taken all such steps as he or she ought to have taken as a director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. 74 IQE plc Annual Report and Financial Statements 2021 Share Capital The Company’s share capital is made up of one class of ordinary shares of 1p each which each carry one vote at general meetings of the Company. Except as set out in the Articles of Association or in applicable legislation, there are no restrictions on the transfer of shares in the Company and there are no restrictions on the voting rights in the Company’s shares. The full rights and obligations attaching to the Company’s ordinary shares, as well as the powers of the directors, are set out in the Company’s Articles of Association, a copy of which is available on the Company’s website. These can also be obtained from Companies House or by writing to the General Counsel and Company Secretary. The Company is not aware of any agreements entered into between any shareholders in the Company which restrict the transfer of shares or the exercise of any voting rights attached to the shares. The Company has not acquired any of its own shares during 2021 (2020: nil). Substantial Shareholdings As at 28 February 2022, the following are beneficial interests of 3% or more (where the holding is direct) or of 5% or more (where the holding is indirect) which have been notified to the directors of the Company. Shareholder Invesco T Rowe Price Global Investments Canaccord Genuity Wealth Management Hargreaves Lansdown Interactive Investor Dr Andrew W Nelson Lombard Odier Investment Managers M&G Investments Source: Equiniti Investor Analytics Dividends Shares 142,435,802 78,503,237 64,551,914 60,671,260 43,223,014 40,317,234 36,287,627 27,742,549 Issued Capital % 17.71 9.76 8.03 7.54 5.37 5.01 4.51 3.45 The directors do not recommend the payment of a dividend (2020: £nil). Research and Development The Group continues to devote significant resources to the research and development and the updating and expansion of its range of products in order to remain at the forefront of its world markets. Further information on the expenditure on research and development is contained in Note 6 of the Financial Statements. The amount of research and development expenditure capitalised, and the amount amortised, in the year, are given in Note 6 of the Financial Statements. Employment Policies A review of the Group’s employment policies is provided on pages 24 to 27 of the Annual Report. Political Donations The Group has a policy of not making political donations and no political donations were made during the year (2020: nil). Climate Change, Greenhouse Gas and Energy Emissions The Group recognises Climate Change is a key challenge for the world and is working to minimise its environmental impact through a rigorous environmental management system, in order to minimise greenhouse gas (GHG) and energy emissions. We recognise that as a technology leader, IQE is in a unique position to be able to improve energy efficiency through our products. Our approach to environmental protection is underpinned by our Environmental Policy and Environmental Management System, which ensures all our sites operate in compliance with ISO 14001 requirements. We target minimisation of GHG and energy emissions, as well as focusing on waste, water and recycling initiatives. Details of our GHG and energy emission figures, as well as the measures we are undertaking to promote energy efficiency, including incorporating energy saving features into facility design, can be found on page 35. In January 2022 the Group formed an Environment, Social and Governance Committee in recognition of the importance of ESG to IQE’s stakeholders and the wider environment. The Committee will be chaired by me and will be responsible for ensuring that the Group has a fit-for-purpose ESG strategy and for supporting management with building momentum behind that strategy. We look forward to bringing further updates on ESG matters through 2022. Phil Smith Chairman, IQE plc 29 March 2022 75 Where innovation startsCorporate Governance Statement of Directors’ responsibilities in respect of the Annual Report and the Financial Statement Statement of Directors’ responsibilities in respect of the financial statements The directors are responsible for preparing the Annual 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. Under the AIM Rules of the London Stock Exchange they are required to prepare the Group’s financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and applicable law and they have elected to prepare the parent Company financial statements on the same basis. 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 their profit or loss 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, relevant and reliable; • state whether they have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; • assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The directors have decided to prepare voluntarily a Directors’ Remuneration Report in accordance with Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 made under the Companies Act 2006, as if those requirements applied to the company. The directors have also decided to prepare voluntarily a Corporate Governance Statement as if the company were required to comply with the Listing Rules and the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority in relation to those matters. Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. We consider the Annual Report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. Approved by the Board and signed on behalf by: Phil Smith Chairman, IQE plc. 29 March 2022 76 IQE plc Annual Report and Financial Statements 2021 Independent auditor’s report Overview Materiality: group financial statem ents as a whole Coverage £1,200k (2020:£1,250k) 0.8% of total revenues (2020: 0.7% of total revenues) 88% (2020: 91%) of total group revenues Key audit matters vs 2020 Recurring risks Carrying value of goodwill ▲ Carrying value of developm ent intangibles not yet available for use Revenue recognition Valuation of investm ents in and recoverability of receivables from subsidiaries ◄► ◄► ◄► Parent Comp any only Event driven risk Going concern ◄► to the members of IQE plc 1. Our op inion is unmodified We have audited the financial statem ents of IQE PLC (“the Com pany”) for the year ended 31 Decem ber 2021 which com prise the consolidated incom e statem ent, consolidated statem ent of com prehensive incom e, consolidated balance sheet, consolidated statem ent of changes in equity, consolidated cash flow statem ent, parent com pany balance sheet, parent com pany statem ent of changes in equity, parent com pany cash flow statem ent, and the related notes, including the accounting policies in note 2. In our opinion: — the financial statem ents give a true and fair view of the state of the Group’s and of the parent Com pany’s affairs as at 31 Decem ber 2021 and of the Group’s loss for the year then ended; — the Group financial statem ents have been properly prepared in accordance with UK- adopted international accounting standards; — the parent Com pany financial statem ents have been properly prepared in accordance with UK- adopted international accounting standards and as applied in accordance with the provisions of the Com panies Act 2006; and — the financial statem ents have been prepared in accordance with the requirem ents of the Com panies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirem ents including FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. 77 77 Financial StatementsWhere innovation starts 2. Key audit matters: including our assessment of risks of material misstatement Key audit m atters are those m atters that, in our professional judgm ent, were of m ost significance in the audit of the financial statem ents and include the m ost significant assessed risks of m aterial m isstatem ent (whether or not due to fraud) identified by us, 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 engagem ent team . These m atters were addressed in the context of our audit of the financial statem ents as a whole, and in form ing our opinion thereon and we do not provide a separate opinion on these m atters. In arriving at our audit opinion above, the key audit m atters, in decreasing order of audit significance, were as follows: : The risk Our resp onse Carrying value of goodwill Forecast b ased assessment Our procedures included: (£64.3 m illion; 2020: £63.7 m illion) Refer to note 2.8 (accounting policy), 3.1 (accounting estim ate) and note 13 (financial disclosures). We consider the carrying value of goodwill and the risk over potential im pairm ent to be a significant audit risk because of the opportunity for m anipulation and the inherent uncertainty involved in forecasting and discounting future cash flows, which are the basis of the assessm ent of recoverability. In 2021, the risk of im pairm ent is heightened due to the potential im pact of current m arket conditions on the tim ing and level of cash flows; in particular the adoption of 5G technology, the global dem and for sm artphones and the trade tensions between the US and China. The cash flow forecasts and the growth therein, and the discount rate, are key judgm ents and assum ptions used in the Director’s im pairm ent review. The effect of these m atters is that, as part of our risk assessm ent, we determ ined that the value in use of goodwill has a high degree of estim ation uncertainty, with an opportunity for m anipulation with a potential range of reasonable outcom es greater than our m ateriality for the financial statem ents as a whole, and possibly m any tim es that am ount. In 2020, our key audit m atter related specifically to the goodwill allocated to the Wireless CGU. In 2021, we consider there is an increased risk associated with the cash flow forecasts related to the Photonics CGU. As a consequence, the key audit m atter relates to the total goodwill balance (which is allocated to both the Wireless and Photonics CGUs). — Benchmarking assump tions: We challenged the director’s assum ptions and obtained support, such as board-approved plans, independent m arket reports and custom er com m unications, where available, for the cash flow forecasts and growth assum ptions. — Our valuation exp ertise: We independently derived a reasonable range of appropriate discount rates with the assistance of our valuation specialists and com pared these to those calculated by the Group. — Sensitivity analysis: We perform ed both breakeven and reasonably foreseeable scenario sensitivity analysis on the discount rate and growth assum ptions. — Historical comp arison: We evaluated the track record of historical forecasts used against actual results achieved. — Assessing transp arency: We assessed whether the Group’s disclosures reflect the risks and uncertainties inherent in the valuation of goodwill. We perform ed the tests above rather than seeking to rely on any of the group's controls because the nature of the balance is such that we would expect to obtain audit evidence prim arily through the detailed procedures described. Carrying value of develop ment intangib les not yet availab le for use (£3.0 m illion; 2020: £8.2 m illion) Refer to note 2.8 (accounting policy) and note 3.(a) (financial disclosures). Sub jective assessment Our procedures included: The ability of an intangible asset to generate sufficient future econom ic benefits to support its carrying am ount is subject to considerable uncertainty during the developm ent phase and is open to m anagem ent bias. The current wider econom ic conditions are considered to give rise to an increased uncertainty around the ability and com m itm ent to com plete ongoing projects and availability of routes to m arket for new, unproven, technologies. The effect of these m atters is that, as part of our risk assessm ent, we determ ined that there is an increased risk in respect of continued com m ercial viability, and consequently, intention to com plete the developm ent, of previously capitalised developm ent intangibles not yet available for use. — Challenging assump tions: We challenged the Group's assessm ent of the future viability of developm ent intangibles not yet available for use, assessing value in use calculations supporting their com m ercial viability with reference to external evidence, including custom er correspondence for specific projects and/or external m arket analyst reports in respect of the associated technologies. — Personnel interviews: We held discussions with the Group’s Chief Technology Officer to corroborate our understanding of the future uses, opportunities and intention for the developm ent intangibles. — Assessing transp arency: We have assessed whether the group’s disclosures reflect the risks inherent in the valuation of developm ent intangibles not yet available for use. We perform ed the tests above rather than seeking to rely on any of the group's controls because the nature of the balance is such that we would expect to obtain audit evidence prim arily through the detailed procedures described. IQE plc Annual Report and Financial Statements 2021 78 78 2. Key audit matters: our assessment of risks of material misstatement (continued) Revenue recognition 2021/2022 Revenues Our procedures included: The risk Our resp onse (Period end tim ing m atters affecting revenue - total revenue in the period is £154.1 m illion; 2020: £178.0 m illion) Pressures on achieving internal and external expectations of results increase the risk of fraudulent revenue recognition, in particular the recognition of sales around the year-end date. Refer to note 2.22 (accounting policy) and note 4.2 (financial disclosures) — Indep endent confirmation: We obtained direct confirm ation of receivables balances held by a sam ple of custom ers at the year- end date to agree revenue associated with product delivered into Supplier Managed Inventory; — Test of details: We agreed a sam ple of sales transactions around the year-end, based upon their financial significance, to purchase order and external delivery confirm ation, to assess whether the perform ance obligation has been m et and that revenue has not been overstated or understated at the year-end date; — Test of details: We agreed a sam ple of post year-end credit notes, based upon their financial significance, to sales order and external delivery confirm ation, to assess that revenue has not been overstated at the year-end date; We perform ed the tests above rather than seeking to rely on any of the group's controls because the num ber of transactions relating to the risk period m eant that detailed testing is inherently the m ost effective m eans of obtaining audit evidence. Parent Comp any: Valuation of investments in and recoverab ility of receivab les from sub sidiaries (Investm ents: £76.1 m illion; 2020: £91.4 m illion, Receivables: £132.7 m illion; 2020: £133.3 m illion) Refer to notes 2.10 and 2.29 (accounting policy) and notes 16 and 18 (financial disclosures). Forecast b ased assessment Our procedures included: The carrying am ount of the parent com pany’s investm ents in and receivables from subsidiaries represents 95% (2020: 95%) of the com pany’s total assets. While their recoverable am ount is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows, it is not considered to be at a high risk of significant m isstatem ent or subject to significant judgem ent. However, due to their m ateriality in the context of the parent com pany financial statem ents, this is considered to be the area that had the greatest effect on our overall parent com pany audit. Test of detail: We com pared the carrying am ount of 100% of investm ents and receivables with the relevant subsidiaries’ balance sheet to identify whether their net assets, being an approxim ation of their m inim um recoverable am ount, were in excess of their carrying am ount and assessing whether those subsidiaries have historically been profit- m aking. Assessing sub sidiary audit: We assessed the work perform ed by the com ponent auditor of the relevant subsidiary and considered the results of that work on that subsidiary’s profit and net assets. Comp aring valuations: For the investm ents and receivables where the carrying am ount exceeded the net asset value, we com pared their carrying am ount with the expected value of the business based on the subsidiaries’ value in use. We perform ed the tests above rather than seeking to rely on any of the group's controls because the nature of the balance is such that we would expect to obtain audit evidence prim arily through the detailed procedures described. 79 79 Financial StatementsWhere innovation starts 2. Key audit matters: our assessment of risks of material misstatement (continued) The risk Our resp onse Going concern Disclosure Quality Refer to note 2.2 (accounting policy and financial disclosures). The financial statem ents explain how the Board has form ed a judgem ent that it is appropriate to adopt the going concern basis of preparation for the Group and parent com pany. That judgem ent is based on an evaluation of the inherent risks to the Group’s and Com pany’s business m odel, and how those risks m ight affect the Group’s and Com pany’s financial resources or ability to continue operations for a period of at least 12 m onths from the date of approval of the financial statem ents. The risks m ost likely to adversely affect the Group’s and Com pany’s available financial resources and m etrics relevant to debt covenants over this period were: — Uncertainty in the tim ing and level of cash flow forecasts and revenue growth which are inherently linked to the global dem and for sm artphones and the adoption of forthcom ing technologies such as 5G; — While undrawn at the balance sheet date, the Group’s revolving credit facility expires in April 2023; a one year extension option is available but is subject to bank consent. There are also less predictable but realistic second order im pacts, such as the im pact of Covid-19 on custom er dem and, the availability of debt and other financing arrangem ents and the im pact on the wider supply chain, which could result in a reduction of available financial resources. The risk for our audit was whether or not those risks were such that they am ounted to a m aterial uncertainty that m ay have cast significant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed. We considered whether these risks could plausibly affect the liquidity or covenant com pliance in the going concern period by assessing the directors’ sensitivities over the level of available financial resources and covenant thresholds indicated by the Group’s financial forecasts taking account of severe, but plausible, adverse effects that could arise from these risks individually and collectively. Our procedures also included: — Funding assessment: We obtained relevant loan agreem ents and evidence of the revolving credit facility, agreeing facilities available to the Group and recalculated covenant com pliance and headroom based on m anagem ent’s latest forecasts and those in severe but plausible downside scenarios. — Our Covid-19 knowledge: We considered the directors’ assessm ent of Covid-19 related sources of risk for the Group’s business and financial resources com pared with our own understanding of the risks. This included assessing the effects of the pandem ic on the Group over the past two years as well as governm ent guidance on critical industry and key worker status. — Our sector exp erience: We critically assessed the directors’ going concern assessm ent, including the reasonableness of the key assum ptions used in the cash flow forecasts and the level of downside sensitivities applied using our industry knowledge of risks and external m arket research. — Evaluating directors’ intent: We evaluated the achievability of the actions the Directors consider they would take to im prove the position should the risks m aterialise. This included assessing the intent and ability of the Directors to im plem ent these actions in the tim e fram e required and that they were entirely in the Directors’ control. — Assessing transp arency: We assessed the com pleteness and accuracy of the m atters covered in the going concern disclosures by com paring this to the key assum ptions, key sensitivities and m itigating actions considered by the Directors. 80 80 IQE plc Annual Report and Financial Statements 2021 3. Our ap p lication of materiality and an overview of the scop e of our audit scop e of our audit 3. Our ap p lication of materiality and an overview of the Materiality for the group financial statem ents as a whole was set at £1,200k (2020: £1,250k), determ ined with reference to a benchm ark of revenue of which it represents 0.8% (2020: 0.7%). Materiality for the group financial statem ents as a whole was set at £1,200k (2020: £1,250k), determ ined with reference to a We consider total revenue to be the m ost appropriate benchm ark of revenue of which it represents 0.8% (2020: benchm ark as it provides a m ore stable m easure in the group’s 0.7%). continued transition to m ass m arket production. The level of m ateriality reflects the size of the group. We consider total revenue to be the m ost appropriate Materiality for the parent com pany financial statem ents as a benchm ark as it provides a m ore stable m easure in the group’s whole was set at £1,199k (2020: £500k) determ ined with continued transition to m ass m arket production. The level of reference to a benchm ark of parent com pany total assets, m ateriality reflects the size of the group. lim ited to be less than m ateriality for group m ateriality as a whole. It represents 0.6% (2020: 0.2%) of the stated Materiality for the parent com pany financial statem ents as a benchm ark. whole was set at £1,199k (2020: £500k) determ ined with reference to a benchm ark of parent com pany total assets, In line with our audit m ethodology, our procedures on individual lim ited to be less than m ateriality for group m ateriality as a account balances and disclosures were perform ed to a lower whole. It represents 0.6% (2020: 0.2%) of the stated threshold, perform ance m ateriality, so as to reduce to an acceptable level the risk that individually im m aterial benchm ark. m isstatements in individual account balances add up to a In line with our audit m ethodology, our procedures on individual m aterial am ount across the financial statem ents as a whole. account balances and disclosures were perform ed to a lower Perform ance m ateriality was set at 75% (2020: 75%) of threshold, perform ance m ateriality, so as to reduce to an m ateriality for the financial statem ents as a whole, which acceptable level the risk that individually im m aterial equates to £900k (2020: £935k) for the group and £899k (2020: m isstatements in individual account balances add up to a £375k) for the parent com pany. We applied this percentage in m aterial am ount across the financial statem ents as a whole. our determ ination of perform ance m ateriality because we did not identify any factors indicating an elevated level of risk. Perform ance m ateriality was set at 75% (2020: 75%) of We agreed to report to the Audit Com m ittee any corrected or m ateriality for the financial statem ents as a whole, which uncorrected identified m isstatements exceeding £60k (2020: equates to £900k (2020: £935k) for the group and £899k (2020: £62k), in addition to other identified m isstatements that £375k) for the parent com pany. We applied this percentage in warranted reporting on qualitative grounds. our determ ination of perform ance m ateriality because we did not identify any factors indicating an elevated level of risk. Of the group’s 18 (2020: 18) reporting com ponents, we subjected 6 (2020: 7) to full scope audits for group purposes and We agreed to report to the Audit Com m ittee any corrected or 1 (2020: 3) to specified risk-focused audit procedures. The latter uncorrected identified m isstatements exceeding £60k (2020: were not individually financially significant enough to require a £62k), in addition to other identified m isstatements that full scope audit for group purposes, but did present specific warranted reporting on qualitative grounds. individual risks that needed to be addressed. The com ponents within the scope of our work accounted for the Of the group’s 18 (2020: 18) reporting com ponents, we percentages illustrated opposite. The rem aining 12% (2020: 9%) subjected 6 (2020: 7) to full scope audits for group purposes and of total group revenue and 13% (2020: 7%) of total group assets 1 (2020: 3) to specified risk-focused audit procedures. The latter is represented by 11 (2020: 8) reporting com ponents, none of were not individually financially significant enough to require a which individually represented m ore than 5% (2020: 5%) of total full scope audit for group purposes, but did present specific group revenue or total group assets. For these residual individual risks that needed to be addressed. com ponents, we perform ed analysis at a group level to re- exam ine our assessm ent that there were no significant risks of The com ponents within the scope of our work accounted for the m aterial m isstatement within these. percentages illustrated opposite. The rem aining 12% (2020: 9%) of total group revenue and 13% (2020: 7%) of total group assets The Group team approved the com ponent m aterialities, which ranged from £400k to £850k (2020: £350k to £750k), having is represented by 11 (2020: 8) reporting com ponents, none of regard to the m ix of size and risk profile of the Group across the which individually represented m ore than 5% (2020: 5%) of total com ponents. group revenue or total group assets. For these residual com ponents, we perform ed analysis at a group level to re- The Group team instructed one com ponent auditor in respect of exam ine our assessm ent that there were no significant risks of one location as to the significant areas to be covered, including the relevant risks and the inform ation to be reported back. Work m aterial m isstatement within these. perform ed on all other com ponents was perform ed by the group team . The Group team approved the com ponent m aterialities, which ranged from £400k to £850k (2020: £350k to £750k), having Video and telephone conference m eetings were held with the regard to the m ix of size and risk profile of the Group across the com ponent auditor. At these m eetings, the findings reported to com ponents. the Group team were discussed in m ore detail, and any further work required by the Group team was then perform ed by the The Group team instructed one com ponent auditor in respect of com ponent auditor. one location as to the significant areas to be covered, including the relevant risks and the inform ation to be reported back. Work The scope of the audit work perform ed was predom inately perform ed on all other com ponents was perform ed by the group substantive as we placed lim ited reliance upon the Group's internal control over financial reporting. team . Video and telephone conference m eetings were held with the com ponent auditor. At these m eetings, the findings reported to the Group team were discussed in m ore detail, and any further work required by the Group team was then perform ed by the com ponent auditor. 81 The scope of the audit work perform ed was predom inately substantive as we placed lim ited reliance upon the Group's internal control over financial reporting. Key: Key: Revenue £154,096k (2020: Revenue of £178,016k) Revenue £154,096k (2020: Revenue of £178,016k) Group Materiality £1,200k (2020: £1,250k) £1,2 00k Whole financial Group Materiality statements materiality £1,200k (2020: £1,250k) (2020: £1,250k) £1,2 00k Whole financial statements materiality (2020: £1,250k) £900k Whole financial statements performance materiality (2020: £93 5k) £900k Whole financial £85 0k statements performance Range of materiality at 7 materiality components (£400k to 850k) (2020: £93 5k) (2020: £3 50k to £750k) Revenue Group materiality Revenue Group materiality Group revenue £60k Misstatements reported to the audit committee (2020: £6 2k) £85 0k Range of materiality at 7 components (£400k to 850k) (2020: £3 50k to £750k) £60k Misstatements reported to the audit committee (2020: £6 2k) 1 5 Group revenue 88% (2 02 0 91%) 1 5 86 87 88% Group total assets (2 02 0 91%) 6 6 86 87 87% Group total assets (2 02 0 93%) 6 6 87 81 87% (2 02 0 93%) Full scope for group audit purposes 2021 Specified risk-focused audit procedures 2021 87 Full scope for group audit purposes 2020 81 Specified risk-focused audit procedures 2020 Residual components Full scope for group audit purposes 2021 Specified risk-focused audit procedures 2021 Full scope for group audit purposes 2020 Specified risk-focused audit procedures 2020 Residual components 81 81 Financial StatementsWhere innovation starts 4. We have nothing to rep ort on going concern 5. Fraud and b reaches of laws and regulations – ab ility to The Directors have prepared the financial statem ents on the going concern basis as they do not intend to liquidate the Group or the Com pany or to cease their operations, and as they have concluded that the Group’s and the Com pany’s financial position m eans that this is realistic. They have also concluded that there are no m aterial uncertainties that could have cast significant doubt over their ability to continue as a going concern for a period of at least 12 m onths from the date of approval of the financial statem ents (“the going concern period”). An explanation of how we evaluated m anagem ent’s assessm ent of going concern is set out in the related key audit m atter in section 2 of this report. detect Identifying and responding to risks of m aterial m isstatem ent due to fraud To identify risks of m aterial m isstatem ent due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or pressure to com m it fraud or provide an opportunity to com m it fraud. Our risk assessm ent procedures included : — Enquiring of directors, the audit com m ittee and the com pany secretary and inspection of policy docum entation as to the Group’s high-level policies and procedures to prevent and detect fraud, including the Group’s channel for “whistleblowing”, as well as whether they have knowledge of any actual, suspected or alleged fraud. Our conclusions based on this work: — Reading Board, audit com m ittee and rem uneration — we consider that the Directors’ use of the going concern basis of accounting in the preparation of the financial statem ents is appropriate; — we have not identified, and concur with the Directors’ assessm ent that there is not, a m aterial uncertainty related to events or conditions that, individually or collectively, m ay cast significant doubt on the Group’s or Com pany's ability to continue as a going concern for the going concern period; — we have nothing m aterial to add or draw attention to in relation to the Directors’ statem ent in note 2.2 to the financial statem ents on the use of the going concern basis of accounting with no m aterial uncertainties that m ay cast significant doubt over the Group and Com pany’s use of that basis for the going concern period and we found the going concern disclosure in note 2.2 to be acceptable; and — the related statem ent given as if the Listing Rules applied set out on page 45 is m aterially consistent with our audit knowledge. However, as we cannot predict all future events or conditions and as subsequent events m ay result in outcom es that are inconsistent with judgem ents that were reasonable at the tim e they were m ade, the above conclusions are not a guarantee that the Group or the Com pany will continue in operation. m eeting m inutes. — Considering rem uneration incentive schem es and perform ance targets for directors and m anagem ent including bonus targets and Long Term Incentive Plan EPS growth targets for director and m anagem ent rem uneration. We com m unicated identified fraud risks throughout the audit and rem ained alert to any indications of fraud throughout the audit. This included com m unication from the group to the one full scope com ponent audit team of relevant fraud risks identified at the Group level and request to the full scope com ponent audit team to report to the Group audit team any instances of fraud that could give rise to a m aterial m isstatem ent at group. As required by auditing standards, and taking into account possible pressures to m eet profit targets and revisions to m arket guidance, we perform procedures to address the risk of m anagem ent override of controls and the risk of fraudulent revenue recognition, in particular the risk that revenue is recorded in the wrong period. We also identified a fraud risk related to the valuation of goodwill and intangible assets not yet available for use. There is a risk that Group m anagem ent m ay be in a position to m ake inappropriate accounting entries or include bias in the accounting estim ates and judgem ents in order to m eet target results or to overstate the future value of the business. Further detail in respect of these risks are set out in the key audit m atter disclosures in section 2 of this report. We also perform ed procedures including: — Identifying journal entries for all full scope com ponents to test based on risk criteria and com paring the identified entries to supporting docum entation. These included revenue and cash entries to unexpected accounts. — Assessing significant accounting estim ates for bias. 82 82 IQE plc Annual Report and Financial Statements 2021 5. Fraud and b reaches of laws and regulations – ab ility to 5. Fraud and b reaches of laws and regulations – ab ility to detect (continued) detect (continued) Context of the ability of the audit to detect fraud or breaches of law or regulation Owing to the inherent lim itations of an audit, there is an unavoidable risk that we m ay not have detected som e m aterial m isstatem ents in the financial statem ents, even though we have properly planned and perform ed our audit in accordance with auditing standards. For exam ple, the further rem oved non-com pliance with laws and regulations is from the events and transactions reflected in the financial statem ents, the less likely the inherently lim ited procedures required by auditing standards would identify it. In addition, as with any audit, there rem ained a higher risk of non-detection of fraud, as these m ay involve collusion, forgery, intentional om issions, m isrepresentations, or the override of internal controls. Our audit procedures are designed to detect m aterial m isstatem ent. We are not responsible for preventing non-com pliance or fraud and cannot be expected to detect non-com pliance with all laws and regulations. Identifying and responding to risks of m aterial m isstatem ent due to non-com pliance with laws and regulations We identified areas of laws and regulations that could reasonably be expected to have a m aterial effect on the financial statem ents from our general com m ercial and sector experience and through discussion with the directors and other m anagem ent (as required by auditing standards), and from inspection of the Group’s regulatory and legal correspondence and discussed with the directors and other m anagem ent the policies and procedures regarding com pliance with laws and regulations. We com m unicated identified laws and regulations throughout our team and rem ained alert to any indications of non-com pliance throughout the audit. This included com m unication from the group to the one full-scope com ponent audit team of relevant laws and regulations identified at the Group level, and a request for the full scope com ponent auditor to report to the group team any instances of non-com pliance with laws and regulations that could give rise to a m aterial m isstatem ent at group level. The potential effect of these laws and regulations on the financial statem ents varies considerably. Firstly, the Group is subject to laws and regulations that directly affect the financial statem ents including financial reporting legislation (including related com panies legislation), distributable profits legislation and taxation legislation and we assessed the extent of com pliance with these laws and regulations as part of our procedures on the related financial statem ent item s. Secondly, the Group is subject to m any other laws and regulations where the consequences of non-com pliance could have a m aterial effect on am ounts or disclosures in the financial statem ents, for instance through the im position of fines or litigation. We identified the following areas as those m ost likely to have such an effect: health and safety, environm ental and hazardous m aterial legislation, export control legislation, anti-bribery, em ploym ent law and certain aspects of com pany legislation, recognising the nature of the Group’s global m anufacturing and developm ent activities. Auditing standards lim it the required audit procedures to identify non-com pliance with these laws and regulations to enquiry of the directors and other m anagem ent and inspection of regulatory and legal correspondence, if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach. 83 83 Financial StatementsWhere innovation starts 6. We have nothing to rep ort on the other information in Corporate governance disclosures We are required to perform procedures to identify whether there is a m aterial inconsistency between the directors’ corporate governance disclosures and the financial statem ents and our audit knowledge. Based on those procedures, we have concluded that each of the following is m aterially consistent with the financial statem ents and our audit knowledge: — the directors’ statem ent that they consider that the annual report and financial statem ents taken as a whole is fair, balanced and understandable and provides the inform ation necessary for shareholders to assess the Group’s position and perform ance, business m odel and strategy; or — the section of the annual report describing the work of the Audit Com m ittee does not appropriately address m atters com m unicated by us to the Audit Com m ittee, and how these issues were addressed; and — the section of the annual report that describes the review of the effectiveness of the Group’s risk m anagem ent and internal control system s. In addition to our audit of the financial statem ents, the directors have engaged us to review their Corporate Governance Statem ent as if the com pany were required to com ply with the Listing Rules and the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority in relation to those m atters. Under the term s of our engagem ent we are required to review the part of the Corporate Governance Statem ent relating to the Com pany’s com pliance with the provisions of the UK Corporate Governance Code specified for our review. We have nothing to report in these respects. the Annual Rep ort The directors are responsible for the other inform ation presented in the Annual Report together with the financial statem ents. Our opinion on the financial statem ents does not cover the other inform ation and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other inform ation and, in doing so, consider whether, based on our financial statem ents audit work, the inform ation therein is m aterially m isstated or inconsistent with the financial statem ents or our audit knowledge. Based solely on that work we have not identified m aterial m isstatem ents in the other inform ation. Strategic report and directors’ report Based solely on our work on the other inform ation: — we have not identified m aterial m isstatem ents in the strategic report and the directors’ report; — in our opinion the inform ation given in those reports for the financial year is consistent with the financial statem ents; and — in our opinion those reports have been prepared in accordance with the Com panies Act 2006. Disclosures of em erging and principal risks and longer-term viability We are required to perform procedures to identify whether there is a m aterial inconsistency between the directors’ disclosures in respect of em erging and principal risks and the viability statem ent, and the financial statem ents and our audit knowledge. Based on those procedures, we have nothing m aterial to add or draw attention to in relation to: — the directors’ confirm ation within the long term viability statem ent on page 45 that they have carried out a robust assessm ent of the em erging and principal risks facing the Group, including those that would threaten its business m odel, future perform ance, solvency and liquidity; — the Principal Risks disclosures describing these risks and how em erging risks are identified, and explaining how they are being m anaged and m itigated; and — the directors’ explanation in the long term viability statem ent of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statem ent as to whether they have a reasonable expectation that the Group will be able to continue in operation and m eet its liabilities as they fall due over the period of their assessm ent, including any related disclosures drawing attention to any necessary qualifications or assum ptions. Our work is lim ited to assessing these m atters in the context of only the knowledge acquired during our financial statem ents audit. As we cannot predict all future events or conditions and as subsequent events m ay result in outcom es that are inconsistent with judgm ents that were reasonable at the tim e they were m ade, the absence of anything to report on these statem ents is not a guarantee as to the Group’s and Com pany’s longer-term viability. 84 84 IQE plc Annual Report and Financial Statements 2021 7. We have nothing to rep ort on the other matters on 9. The p urp ose of our audit work and to whom we owe which we are required to rep ort b y excep tion our resp onsib ilities Under the Com panies Act 2006, we are required to report to you if, in our opinion: — adequate accounting records have not been kept by the parent Com pany, or returns adequate for our audit have not been received from branches not visited by us; or — the parent Com pany financial statem ents are not in agreem ent with the accounting records and returns; or — certain disclosures of directors’ rem uneration specified by law are not m ade; or — we have not received all the inform ation and explanations we require for our audit. We have nothing to report in these respects. This report is m ade solely to the com pany’s m em bers, as a body, in accordance with Chapter 3 of Part 16 of the Com panies Act 2006 and term s of our engagem ent by the Com pany. Our audit work has been undertaken so that we m ight state to the com pany’s m em bers those m atters we are required to state to them in an auditor’s report, and the further m atters we are required to state to them in accordance with the term s agreed with the Com pany, and for no other purpose. To the fullest extent perm itted by law, we do not accept or assum e responsibility to anyone other than the com pany and the com pany’s m em bers, as a body, for our audit work, for this report, or for the opinions we have form ed. Andrew Camp b ell-Orde (Senior Statutory Auditor) for and on b ehalf of KPMG LLP, Statutory Auditor Chartered Accountants 3 Assem bly Square Britannia Quay Cardiff CF10 4AX 29 March 2022 8. Resp ective resp onsib ilities Directors’ responsibilities As explained m ore fully in their statem ent set out on page 76, the directors are responsible for: the preparation of the financial statem ents including being satisfied that they give a true and fair view; such internal control as they determ ine is necessary to enable the preparation of financial statem ents that are free from m aterial m isstatem ent, whether due to fraud or error; assessing the Group and parent Com pany’s ability to continue as a going concern, disclosing, as applicable, m atters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Com pany or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statem ents as a whole are free from m aterial m isstatem ent, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a m aterial m isstatem ent when it exists. Misstatem ents can arise from fraud or error and are considered m aterial if, individually or in aggregate, they could reasonably be expected to influence the econom ic decisions of users taken on the basis of the financial statem ents. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 85 85 Financial StatementsWhere innovation starts Five-year financial summary Revenue Adjusted EBITDA (see below) Operating (loss)/profit • Adjusted* • Reported (Loss)/profit after tax • Adjusted* • Reported Net cash flow from operations Before adjustments (note 5) Reported Free cash flow** Before exceptional cash flows Reported Net (debt)/cash excluding lease liabilities*** Equity shareholders’ funds Basic EPS – adjusted**** Basic EPS – unadjusted Diluted EPS – adjusted**** Diluted EPS – unadjusted 2021 £’000 154,096 18,679 (6,454) (19,978) (19,281) (31,002) 17,940 18,883 (1,640) (697) (5,804) 234,621 (2.41p) (3.87p) (2.41p) (3.87p) 2020 £’000 178,016 30,101 5,386 (5,517) 2,702 (2,893) 36,324 35,457 24,929 24,062 1,923 260,435 0.29p (0.41p) 0.29p (0.41p) 2019 £’000 140,015 16,246 (4,676) (18,802) (19,010) (35,128) 16,530 8,948 (25,445) (33,027) (15,970) 266,593 (2.46p) (4.51p) (2.46p) (4.51p) 2018 £’000 156,291 26,404 16,040 8,660 11,229 1,189 16,982 16,988 (26,045) (26,039) 20,807 305,730 1.44p 0.13p 1.38p 0.12p 2017 £’000 154,553 37,152 26,534 17,194 24,998 14,660 31,089 29,717 (2,945) (4,317) 45,612 287,950 3.61p 2.11p 3.38p 1.98p * ** The adjusted performance measures for 2021 and 2020 are reconciled in note 5. The adjusted performance measures for 2017-2019 are reconciled in those financial statements. Free cash flow is defined as net cash flow outflow of £14,080,000 (2020: £16,003,000 inflow) before cash flows from financing activities of £11,170,000 (2020: £5,701,000) and net interest paid of £2,213,000 (2020: £2,358,000). *** Net (debt)/cash is defined as cash less borrowings but excluding lease liabilities. **** 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 12). 86 IQE plc Annual Report and Financial Statements 2021 Adjusted EBITDA has been calculated as follows: (Loss)/profit after tax Tax charge/(credit) Interest expense/(income) Share based payments (Profit)/Loss on disposal of PPE Adjusted items Depreciation of PPE Depreciation of right of use asset Amortisation of intangible assets Adjusted EBITDA 2021 £’000 (31,002) 8,811 2,213 1,691 (77) 11,833 13,309 3,854 8,047 18,679 2020 £’000 (2,893) (1,001) 2,165 265 182 6,850 12,983 3,681 7,869 30,101 2019 £’000 (35,128) 10,180 1,458 (771) (245) 18,463 10,477 3,590 8,222 16,246 2018 £’000 1,189 5,558 (87) (1,044) – 7,906 6,773 – 6,109 26,404 2017 £’000 14,660 435 2,099 7,526 22 385 5,637 – 6,388 37,152 87 Financial StatementsWhere innovation starts Consolidated income statement For the year ended 31 December 2021 Revenue Cost of sales Gross profit Selling, general and administrative expenses Impairment loss on financial assets Profit on disposal of property, plant and equipment Operating loss Finance costs Reversal/share of losses of joint ventures accounted for using the equity method Adjusted (loss)/profit before income tax Adjustments Loss before income tax Taxation Loss for the year Loss attributable to: Equity shareholders Non-controlling interest Loss per share attributable to owners of the parent during the year Basic loss per share Diluted loss earnings per share Adjusted basic and diluted loss per share are presented in note 12. All items included in the loss for the year relate to continuing operations. Note 4 5 5 6 8 30 5 9 2021 £’000 154,096 (136,452) 17,644 (37,699) – 77 (19,978) (2,213) – (8,667) (13,524) (22,191) (8,811) (31,002) (31,002) – (31,002) 12 12 (3.87p) (3.87p) 2020 £’000 178,016 (144,866) 33,150 (34,697) (3,788) (182) (5,517) (2,165) 3,788 3,221 (7,115) (3,894) 1,001 (2,893) (3,271) 378 (2,893) (0.41p) (0.41p) Non-controlling interest relates to minority shareholder interests in the Group’s subsidiary, IQE Taiwan ROC, prior to the acquisition of the minority shareholding on 5 October 2020 (note 31). The company has elected to take the exemption under section 408 of the Companies Act 2006 from presenting the parent company profit and loss account. The notes on pages 96 to 143 form an integral part of these consolidated financial statements. 88 IQE plc Annual Report and Financial Statements 2021 Consolidated statement of comprehensive income For the year ended 31 December 2021 Loss for the year Exchange differences on translation of foreign operations* Total comprehensive expense for the year Total comprehensive expense attributable to: Equity shareholders Non-controlling interest * Items that may be subsequently be reclassified to profit or loss. 2021 £’000 (31,002) 4,744 (26,258) (26,258) – (26,258) 2020 £’000 (2,893) (6,104) (8,997) (9,482) 485 (8,997) Items in the statement above are disclosed net of tax. The income tax relating to each component of other comprehensive expense is disclosed in note 9. The notes on pages 96 to 143 form an integral part of these consolidated financial statements. 89 Financial StatementsWhere innovation starts Consolidated balance sheet As at 31 December 2021 Non-current assets Intangible assets Fixed asset investments Property, plant and equipment Right of use assets Deferred tax assets Other financial assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Current tax liabilities Bank borrowings Lease liabilities Provisions for other liabilities and charges Total current liabilities Non-current liabilities Bank borrowings Lease liabilities Deferred tax liabilities Provisions for other liabilities and charges Total non-current liabilities Total liabilities Net assets Equity attributable to the shareholders of the parent Share capital Share premium Retained earnings Exchange rate reserve Other reserves Non-controlling interest Total equity Note 13 16 14 15 10 18 17 18 19 20 20 21 20 20 10 21 23 2021 £’000 95,866 – 129,730 44,267 – – 269,863 31,710 38,860 10,791 81,361 2020 £’000 105,772 – 126,229 37,339 7,821 – 277,161 30,887 38,575 24,663 94,125 351,224 371,286 (37,083) (1,342) (6,230) (4,694) (3,686) (53,035) (10,365) (49,693) (2,060) (1,450) (63,568) (35,605) (1,426) (6,201) (4,798) (515) (48,545) (16,539) (42,226) (2,054) (1,487) (62,306) (116,603) (110,851) 234,621 260,435 8,036 154,632 29,295 26,035 16,623 234,621 – 234,621 8,004 154,185 62,089 21,291 14,866 260,435 – 260,435 The notes on pages 96 to 143 form an integral part of these consolidated financial statements. The financial statements on pages 88 to 143 were authorised for issue by the Board of Directors and approved on 29 March 2022 and were signed on its behalf. Mr T Pullen Mr A Lemos 90 IQE plc Annual Report and Financial Statements 2021 Consolidated statement of changes in equity For the year ended 31 December 2021 Share capital £’000 8,004 Share premium £’000 154,185 Retained earnings £’000 Exchange Rate reserve £’000 62,089 21,291 Other reserves £’000 14,866 – – – – – 32 – 32 – – – – – 447 – 447 (31,002) – (31,002) – – – (1,792) (1,792) – 4,744 4,744 – – – – – – – – 1,850 (93) – – 1,757 8,036 154,632 29,295 26,035 16,623 Share capital £’000 7,961 Share premium £’000 152,385 Retained earnings £’000 Exchange Rate reserve £’000 63,826 27,502 Other reserves £’000 14,919 – – – – – 17 26 43 – – – – – 388 1,412 1,800 (3,271) – (3,271) – – – 1,534 1,534 – (6,211) (6,211) – – – – – – – – 55 57 (165) – (53) Non- controlling interests £’000 – – – – – – – – – – Non- controlling interests £’000 Total equity £’000 260,435 (31,002) 4,744 (26,258) 1,850 (93) 479 (1,792) 444 234,621 Total equity £’000 3,850 270,443 378 107 485 – – – (4,335) (4,335) (2,893) (6,104) (8,997) 55 57 240 (1,363) (1,011) 8,004 154,185 62,089 21,291 14,866 – 260,435 At 1 January 2021 Comprehensive expense Loss for the year Other comprehensive income for the year Total comprehensive expense for the year Transactions with owners Share based payments Tax relating to share options Proceeds from shares issued Acquisition of non-controlling interest Total transactions with owners At 31 December 2021 At 1 January 2020 Comprehensive expense (Loss)/profit for the year Other comprehensive expense for the year Total comprehensive expense for the year Transactions with owners Share based payments Tax relating to share options Proceeds from shares issued Acquisition of non-controlling interest Total transactions with owners At 31 December 2020 Other reserves relate to share based payments. The notes on pages 96 to 143 form an integral part of these consolidated financial statements. 91 Financial StatementsWhere innovation starts Consolidated cash flow statement For the year ended 31 December 2021 Cash flows from operating activities Adjusted cash inflow from operations Cash impact of adjustments Cash generated from operations Net interest paid Income tax paid Net cash generated from operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangible assets Capitalised development expenditure Proceeds from disposal of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Acquisition of minority interest Proceeds from issuance of ordinary shares Proceeds from borrowings Repayment of borrowings Payment of lease liabilities Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Exchange losses on cash and cash equivalents Cash and cash equivalents at 31 December Note 5 26 27 27 27 2021 £’000 17,940 943 18,883 (2,213) (1,275) 15,395 (15,051) (345) (2,994) 85 (18,305) (1,792) 472 – (6,145) (3,705) (11,170) (14,080) 24,663 208 10,791 Restated 2020 £’000 36,324 (867) 35,457 (2,358) (993) 32,106 (4,993) (731) (4,678) – (10,402) (1,363) 240 5,000 (7,030) (2,548) (5,701) 16,003 8,800 (140) 24,663 The notes on pages 96 to 143 form an integral part of these consolidated financial statements. The comparative financial information for 2020 has been restated to reclassify cash flows associated with Acquisition of minority interest from investing activities to financing activities and to reclassify interest lease cash flows from financing activities to net interest paid in cash generated from operating activities. The reclassifications have had no impact on net assets, loss after tax or total cash flow for 2020. 92 IQE plc Annual Report and Financial Statements 2021 Parent company balance sheet For the year ended 31 December 2021 Non-current assets Intangible assets Property, plant and equipment Investments Deferred tax assets Trade and other receivables Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Bank borrowings Provisions for other liabilities and charges Total current liabilities Non-current liabilities Bank borrowings Provisions for other liabilities and charges Total non-current liabilities Total liabilities Net assets Shareholders’ equity Share capital Share premium Retained earnings Other reserves Total equity Note 13 14 16 10 18 18 19 20 21 20 21 23 2021 £’000 1,943 107 76,069 127 132,677 210,923 2,125 262 2,387 2020 £’000 3,713 15 91,420 3,975 133,314 232,437 2,609 635 3,244 213,310 235,681 (30,387) – (740) (31,127) – (962) (962) (32,089) 181,221 8,036 154,632 1,829 16,724 181,221 (25,631) – (515) (26,146) – (1,325) (1,325) (27,471) 208,210 8,004 154,185 31,101 14,920 208,210 The parent company’s loss for the financial year amounted to £29,272,000 (2020: £7,586,000 loss). The notes on pages 96 to 143 form an integral part of these consolidated financial statements. The financial statements on pages 88 to 143 were authorised for issue by the Board of Directors and approved on 29 March 2022 and were signed on its behalf. Mr T Pullen Mr A Lemos 93 Financial StatementsWhere innovation starts Parent company statement of changes in equity For the year ended 31 December 2021 At 1 January 2021 Comprehensive expense Loss for the year Total comprehensive expense Transactions with owners Share based payments Tax relating to share options Proceeds from shares issued Total transactions with owners At 31 December 2021 At 1 January 2020 Comprehensive expense Loss for the year Total comprehensive expense Transactions with owners Share based payments Tax relating to share options Proceeds from shares issued Total transactions with owners At 31 December 2020 Share capital £’000 8,004 Share premium £’000 154,185 – – – – 32 32 – – – – 447 447 Retained earnings £’000 31,101 (29,272) (29,272) – – – – Other reserves £’000 14,920 – – 1,850 (46) – 1,804 Total Equity £’000 208,210 (29,272) (29,272) 1,850 (46) 479 2,283 8,036 154,632 1,829 16,724 181,221 Share capital £’000 7,961 Share premium £’000 152,385 – – – – 43 43 – – – – 1,800 1,800 Retained earnings £’000 38,687 (7,586) (7,586) – – – – Other reserves £’000 15,004 – – 55 26 (165) (84) Total Equity £’000 214,037 (7,586) (7,586) 55 26 1,678 1,759 8,004 154,185 31,101 14,920 208,210 Other reserves relate to share based payments. The notes on pages 96 to 143 form an integral part of these consolidated financial statements. 94 IQE plc Annual Report and Financial Statements 2021 Parent company cash flow statement For the year ended 31 December 2021 Cash flows from operating activities Cash outflow from operations Interest received Income tax paid Net cash used in operating activities Purchase of intangible assets Purchase of property plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of ordinary shares Proceeds from borrowings Repayments of borrowings Net cash generated from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December The notes on pages 96 to 143 form an integral part of these consolidated financial statements. Note 26 2021 £’000 (2,337) 1,905 – (432) (314) (106) (420) 479 – – 479 (373) 635 262 2020 £’000 (2,336) 1,842 – (494) (845) (12) (857) 240 5,000 (5,000) 240 (1,111) 1,746 635 95 Financial StatementsWhere innovation starts Notes to the financial statements For the year ended 31 December 2021 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. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3. 2.2 Going concern The Group made a loss of £31,002,000 (2020: £2,893,000 loss) and used £13,872,000 of cash and cash equivalents (2020: £15,863,000 generated) resulting in a net debt position (excluding lease liabilities) of £5,804,000 (2020: £1,923,000 net cash) as at 31 December 2021. The following matters have been considered by the directors in determining the appropriateness of the going concern basis of preparation in the financial statements: • The Group’s operations are geographically diversified. Manufacturing operations are located at ten different sites across three continents, significantly lessening the impact of potential disruption at any single site as a result of the ongoing Coronavirus pandemic. All manufacturing sites continue to remain operational and production has not been affected by any disruption at any of the Group’s global sites. • The Group dual or multi-sources key raw materials (substrates, gases, spares and consumables) wherever possible, from a broad range of global suppliers, reducing the likelihood of potential disruption to production from any single supplier. The Group continues to work closely with suppliers and customers to manage inventory levels in order to create supply chain resilience against potential disruption. All manufacturing sites continue to remain operational and production has not been affected by any supply chain disruption. • The Group’s trading has remained resilient throughout the year ended 31 December 2021 although emerging softness in smartphone related demand, weakness in 5G infrastructure demand and on-going foreign exchange headwinds have resulted in a decline in revenue for the year to £154,096,000 (2020: £178,016,000) and an adjusted loss before tax of £8,667,000 (2020: £3,221,000 profit). • The Group’s net debt (excluding lease liabilities) position of £5,804,000 (2020: £1,923,000 funds) remains low in the context of total available facilities of £55,900,000 (2020: £55,550,000) with the increase in the net debt position principally reflecting the Group’s investment activities where investment in technology development and capacity expansion in the second half of 2021 has exceeded cash generated from operations. Net debt (excluding lease liabilities) consists of £10,791,000 (2020: £24,633,000) of cash net of bank loans of £16,595,000 (2020: £22,740,000) which are repayable over a period to 29 August 2024. • On 24 January 2019, the Group agreed a new £25,900,000 ($35,000,000) three-year multi-currency revolving credit facility from HSBC Bank plc. On 30 December 2021 the multi-currency revolving credit facility was extended for an additional 15-month period to 30 April 2023 and includes an option that requires HSBC Bank plc consent to extend the facility for a further 12-month period to 30 April 2024. The Group has complied with all covenants associated with the facility. • On 29 August 2019, the Group agreed a new £30,000,000 five-year Asset Finance Loan facility from HSBC Bank plc of which £25,000,000 has been drawn. The Group has complied with all covenants associated with the facility. • The Group generated cash from operating activities of £15,395,000 (2020: £32,106,000) and its financial forecasts and projections for the period up to and including 31 December 2023 show that the Group is forecast to continue to comply with its banking covenants and has adequate cash resources to continue operating for the foreseeable future. • The Group’s severe but plausible downside financial forecasts have been prepared with significant reductions to future forecast revenues, designed to reflect severe downside scenarios associated with demand risks for the period to 31 December 2023. The severe but plausible downside scenario, applied to the Group’s financial forecasts, which take account of current trading and customer demand, assumes a ~17% reduction in 2022 revenue and a ~31% reduction in 2023 revenue partially offset by mitigations within the control of the company, including deferred investment in employee related costs and certain capital projects across the forecast period. The severe but plausible downside scenario illustrates that the Group is forecast to continue to comply with its banking covenants but would require either the exercise of the extension option contained in the revolving credit facility from HSBC Bank plc, or refinancing of the revolving credit facility at the extension option date in April 2023. The severe but plausible downside scenario illustrates that a facility of ~£16,500,000, significantly below the Group’s current committed revolving credit facility of £25,900,000 could be required in 2023. The Group has a long-standing and trusted relationship with its bankers, HSBC Bank plc, who remain supportive and who have, at the date of this report, formally extended the Group’s £25,900,000 ($35,000,000) revolving credit facility until April 2023 with an option, that requires HSBC Bank plc consent, to extend the facility for a further 12-month period. On this basis, the directors believe that the group has, or will have access, to adequate cash resources to continue operating for the foreseeable future even in a severe but plausible downside scenario. 96 IQE plc Annual Report and Financial Statements 2021 2.2 Going concern The Group meets its day-to-day working capital and other cash requirements through its bank facilities and available cash. The Group’s cash flow forecasts and projections, in conjunction with the level of assessed covenant headroom on the Group’s committed bank facilities show that the Group and the Company have adequate cash resources to continue operating and to meet its liabilities as they fall due for a period of at least 12 months from the date of approval of the financial statements, such that the directors consider it appropriate to adopt the going concern basis of accounting in preparing the consolidated financial statements. 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 2021: • Amendments to IFRS 9 ‘Financial Instruments’, IAS 39 ‘Financial Instruments: Recognition and Measurement’, IFRS 7 ‘Financial Instruments: Disclosures, IFRS 4 ‘Insurance Contracts’, IFRS 16 ‘Leases’ related to interest rate benchmark reform (phase two) and the issues that arise from the implementation of the reforms, including the replacement of one benchmark with an alternative one. • Amendment to IFRS 16 ‘Leases’ which provides an optional practical expedient for lessees from assessing whether a rent concession related to COVID-19 is a lease modification. • Amendments to IFRS 16 ‘Leases’ which provides an extension to an optional practical expedient for lessees from assessing whether a rent concession related to COVID-19 is a lease modification beyond 30 June 2021. 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 2021 and have not been applied in preparing these consolidated financial statements. • 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’. • 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 and interpretations are expected to have a material effect on the financial statements of the Group or parent company. 2.4 Consolidation The consolidated financial statements comprise the results of IQE plc (the Company) and its subsidiary undertakings, together with the Group’s share of the results of its associates and joint venture. 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 over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases. Inter-company transactions, balances and unrealised gains or losses on transactions between Group companies are eliminated and accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 97 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 2. Significant accounting policies continued 2.4 Consolidation continued Joint ventures The Group applies IFRS 11 to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The nature of the Group’s joint arrangements has been assessed and each joint arrangement has been determined to be a joint venture. Joint ventures are accounted for using the equity method. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. Gains by the Group on transactions with joint ventures are eliminated against the carrying value of the Group’s interest in its joint ventures to the extent that the gain does not exceed the carrying amount. In circumstances where a gain exceeds the carrying amount the Group has made an accounting policy choice to recognise the gain in the comprehensive income statement, subject to an assessment of recoverability of value from the joint venture rather than recognising the gain as deferred income in the consolidated balance sheet. When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of the Group’s net investment in the joint ventures), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures. Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. Business combinations The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Where the fair values of acquired identifiable assets, liabilities and contingent liabilities are initially recognised on a provisional basis, these are reassessed during the 12-month period following the date of the business combination. Adjustments to the fair values as at the date of acquisition that result from new information that existed at the date of acquisition, which if known at the time would have resulted in a different amount being recognised within this ‘measurement period’ are recorded, with any net impact being added to or deducted from the goodwill recognised. Such adjustments are recognised in both the current period and restated comparative period balance sheets as if the final fair values had been used in the initial recognition of the acquisition. Subsequent to the measurement period, any adjustments to the recorded fair value of identifiable assets, liabilities and contingent liabilities are taken through the income statement as an exceptional income or expense. The Group recognises any non-controlling interest on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets. Acquisition related costs are expensed as incurred. 2.5 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 but 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 it relates. Any impairment identified is immediately charged to the Consolidated Income Statement. Subsequent reversals of impairment losses for goodwill are not recognised. Negative goodwill arising on an acquisition where the fair value of identifiable assets, liabilities and contingent liabilities exceeds the fair value of the consideration is credited and recognised in the consolidated income statement immediately. b) Patents, trademarks and licences Separately acquired patents, trademarks and licences are shown at historical cost. Patents, trademarks and licences acquired in a business combination are recognised at fair value at the acquisition date. Patents, trademarks and licences have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of the assets over their estimated useful lives of 10 to 15 years. Amortisation is charged to selling and general administration expenses in the income statement. The carrying value of patents, trademarks and licences is reviewed for potential impairment if events or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the Consolidated Income Statement. 98 IQE plc Annual Report and Financial Statements 2021 2.5 Intangible assets c) 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 refer to the materials consumed; the directly attributable labour; and the directly attributable 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 in-line with the expected production volume profile over the period during which the economic benefits are expected to be received, which typically range between 3 and 8 years. The estimated remaining useful lives of development costs are reviewed at least on an annual basis. Amortisation commences once the project is completed and the development has been released into production. Amortisation is charged to selling and general administration expenses in the income statement. The carrying value of capitalised development costs in respect of completed projects is reviewed for impairment if events or circumstances indicate a potential impairment. Projects that remain under development at the reporting date are reviewed for impairment at least annually or more frequently if events or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the Consolidated Income Statement. d) Software Directly attributable costs incurred in the development of bespoke software for the Group’s own use are capitalised and amortised on a straight-line basis over the expected useful life of the software, which typically range between 3 and 10 years. Amortisation is charged to selling and general administration expenses in the income statement. The carrying value of capitalised software costs is reviewed for potential impairment if events or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the Consolidated Income Statement. The costs of maintaining internally developed software and annual license fees paid to utilise third party software are expensed as incurred. e) Customer contracts recognised on acquisition Customer contract intangible assets that form part of the identifiable net assets of an acquired business are recognised at their fair value and amortised on a systematic basis over their useful economic life which is up to 7 years. Amortisation is charged to selling and general administration expenses in the income statement. The fair value of customer contracts 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 qualification to which the contract relates. The carrying value of customer contract intangible assets is reviewed for potential impairment if events or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the Consolidated Income Statement. 2.6 Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any provision for impairment. Cost comprises all costs that are directly attributable to bringing the asset into working condition for its intended use. Depreciation is calculated to write down the cost of property, plant and equipment to its residual value on a straight-line basis over the following estimated useful economic lives: Freehold buildings Short leasehold improvements Plant and machinery Fixtures and fittings 15 to 25 years 5 to 27 years 5 to 15 years 3 to 5 years No depreciation is provided on land or assets yet to be brought into use. Depreciation is charged to cost of sales and selling and general administration expenses in the income statement. Costs incurred after initial recognition are included in the assets’ carrying amounts or recognised as a separate asset as appropriate only when it is probable that future economic benefits associated with them will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial year in which they are incurred. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within ‘profit/loss on disposal of property, plant and equipment’ in the income statement. Assets residual values and useful economic lives are reviewed, and adjusted if appropriate, at the end of each reporting period. The carrying value of property, plant and equipment is reviewed for potential impairment if events or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the Consolidated Income Statement. 99 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 2. Significant accounting policies continued 2.7 Leases The Group assesses whether a contract is or contains a lease, at inception of the contract. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. 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), leases of low value assets (such as small items of office furniture and equipment) and leases with variable rentals not linked to a relevant index (see note 3a). 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. Right-of-use assets and lease liabilities are recognised at the lease commencement date. Right-of-use assets are initially measured at cost, and subsequently measured at cost less any accumulated depreciation and impairment losses, adjusted for certain remeasurements of the lease liability. 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 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. Right-of-use assets are presented as a separate line in the consolidated statement of financial position. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. 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) when there is a change in future lease payments. Changes in future lease payments can arise from a change in an index or rate, a change in the assessment of whether a purchase or extension option is reasonably certain to be exercised or from a change in assessment about whether a termination option is reasonably certain not to be exercised. The Group did not make any such adjustments during the current year. Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs and are included in the line “Cost of sales” in profit or loss (see note 3a). 2.8 Impairment of non-financial assets Intangible assets that have an indefinite useful life or intangible assets not ready to use are not subject to amortisation and are reviewed for potential impairment at least annually or more frequently if events or circumstances indicate a potential impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value (less disposal costs) and value in use. Value in use is based on the present value of the future cash flows relating to the asset, discounted at the Group’s risk adjusted pre-tax discount rate. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. 2.9 Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out method. Cost comprises direct materials and, where applicable, direct labour costs and attributable overheads that have been incurred in bringing the inventories to their present location and condition based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less applicable selling expenses. 2.10 Trade receivables Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. 2.11 Cash and cash equivalents In the consolidated statement of cash flows, cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts are presented within cash and cash equivalents where the Group has a right of set-off under its treasury arrangements that are pooled by territory. 2.12 Preference share debt instruments Preference share financial assets are debt instruments due from a related party (see note 30). Debt instruments are initially recognised at fair value and subsequently measured at amortised cost on the basis that the financial asset is held with the objective of collecting the contractual cash flows and the contractual terms of the instrument give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. 100 IQE plc Annual Report and Financial Statements 2021 2.13 Financial assets Financial assets are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the financial instrument and are derecognised when the rights to receive cash flows have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Classification of financial assets On initial recognition, a financial asset is classified as measured at amortised cost, fair value through other comprehensive income – debt investment, fair value through other comprehensive income – equity investment or fair value through profit or loss. The classification depends on the purpose for which the financial assets were acquired and the classification is determined at the date of initial recognition. Financial assets are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the reporting period following the change in business model. A financial asset is measured at amortised cost if it meets both of the following conditions: • it is held within a business model whose objective is to hold assets to collect contractual cash flows; and • its contractual terms give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding Amortised cost financial assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the reporting period where the item is classified as a non-current asset. The Group’s financial assets comprise trade and other receivables (note 2.10), cash and cash equivalents (note 2.11), preference share debt instruments (note 2.12) and contract assets (note 2.22). Amortised cost and effective interest method Financial assets are measured at amortised cost using the effective interest method. The effective interest rate is the rate that discounts estimated future cash receipts excluding expected credit losses, through the expected life of the debt instrument, or, where appropriate, a shorter period, to the gross carrying amount of the debt instrument on initial recognition. The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any loss allowance. The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any loss allowance. Interest income, foreign exchange gains and losses and impairment are recognised in profit or loss. Any gain or loss on derecognition is recognised in profit or loss. Impairment of financial assets The Group recognises a loss allowance for expected credit losses (‘ECL’) on trade receivables, contract assets and investments in debt instruments that are measured at amortised cost. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument. Expected credit losses are measured as an allowance equal to 12-month ECL for stage 1 assets, or lifetime ECL for stage 2 or stage 3 assets. An asset moves to stage 2 when its credit risk has increased significantly since initial recognition. In circumstances where credit risk increases to the point that it becomes highly probable that the debt instrument will not become recoverable, the Group considers that this would represent a default event and moves to stage 3. The Group recognises lifetime ECL for trade receivables and contract assets. The ECL on these financial assets are estimated based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors including observable data such as changes in arrears or economic conditions that provide an indication that a debtor is experiencing significant financial difficulty, default or delinquency in payment that correlate with defaults. For preference share debt instruments, the Group recognises lifetime ECL when there has been a significant increase in credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to twelve-month ECL. Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial instrument. In contrast, twelve-month ECL represents the portion of lifetime ECL that is expected to result from default events on a financial instrument that are possible within 12 months after the reporting date. Credit impaired financial assets At each reporting date, the Group assesses whether financial assets carried at amortised cost are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. The gross carrying amount of a financial asset is written off (either partially or in full) to the extent that there is no realistic prospect of recovery. Significant increase in credit risk – Preference share debt instruments In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument at the reporting date with the risk of a default occurring on the financial instrument at the date of initial recognition. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward- looking information that is available without undue cost or effort. Forward-looking information considered includes the future prospects of the joint venture entity in which the Group holds its preference share debt, obtained primarily from financial forecasts and projections prepared by management of the joint venture entity as well as consideration of various external sources of actual and forecast economic information that relate to the joint venture’s core operations. 101 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 2. Significant accounting policies continued 2.13 Financial assets In particular, the following information is considered when assessing whether credit risk has increased significantly since initial recognition: • existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant decrease in the joint venture’s ability to redeem the preference share debt; • existing or forecast adverse changes in the joint venture’s business plan and financial projections indicating a significant extension to the period prior to redemption of the preference share debt; • an actual or expected significant deterioration in the operating results of the joint venture; • significant increases in credit risk on other financial assets of the joint venture; and • an actual or expected significant adverse change in the regulatory, political or technological environment that results in a significant decrease in the joint venture’s ability to redeem the preference share debt. In the event that the credit risk assessment results in a probable delay in forecast repayment of the debt instrument compared to the original expectation the Group considers that this represents a significant increase in credit risk. In circumstances where credit risk increases to the point that it becomes highly probable that the debt instrument will not become recoverable the Group considers that this would represent a default event. Measurement and recognition of expected credit losses The measurement of ECL is a function of the probability of default, loss given default (i.e. the magnitude of the loss if there is a default) and the exposure at default. The assessment of the probability of default and loss given default is based on historical data adjusted by forward-looking information as described above. Exposure at default is represented by the gross carrying amount of the financial asset at the reporting date. ECL for financial assets is estimated as the difference between all contractual cash flows that are due to the Group in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the original effective interest rate. If the Group has measured the loss allowance for a financial instrument at an amount equal to lifetime ECL in the previous reporting period, but determines at the current reporting date that the conditions for lifetime ECL are no longer met, the Group measures the loss allowance at an amount equal to 12-month ECL at the current reporting date. The Group recognises an impairment gain or loss in profit or loss for financial assets with a corresponding adjustment to the carrying amount in the consolidated balance sheet. 2.14 Financial liabilities and equity Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs. Repurchase of the Company’s own equity instruments is recognised and deducted directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments. Financial liabilities Financial liabilities are classified as measured at amortised cost or fair value through profit and loss. A financial liability is classified as fair value through profit and loss if it is classified as held-for-trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at fair value through profit and loss are measured at fair value and net gains and losses, including any interest expense, are recognised in profit or loss. Other financial liabilities are measured at amortised cost using the effective interest method. Financial liabilities are non-derivative financial liabilities with fixed or determinable payments and they are included in current liabilities, except for maturities greater than 12 months after the reporting period where the item is classified as a non-current liability. The Group’s financial liabilities comprise trade and other payables (note 2.15), borrowings (note 2.16) and lease liabilities (note 2.7) in the consolidated balance sheet. 2.15 Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables 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. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 2.16 Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost using the effective interest method. 2.17 Borrowing costs General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that take a substantial period of time to get ready for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. 102 IQE plc Annual Report and Financial Statements 2021 2.18 Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into, and they are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The group designates certain derivatives as either: • hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges), or • hedges of a net investment in a foreign operation (net investment hedges) Cash flow hedges and derivatives that qualify for hedge accounting The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedge reserve within equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, within other gains/(losses). Cash flow hedges and derivatives that do not qualify for hedge accounting Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in profit or loss and are included in other gains/(losses). Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss within other gains/(losses). Gains and losses accumulated in equity are reclassified to profit or loss when the foreign operation is partially disposed of or sold. 2.19 Government grants Government grants are recognised at fair value when there is reasonable assurance that the Group has complied with the conditions attaching to them and the grants will be received. Grants related to purchase of assets are treated as deferred income and allocated to the income statement over the useful lives of the related assets while grants related to expenses are treated as other income in the income statement. 2.20 Share capital and other reserves Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. Other reserves relate to share based payment transactions. 2.21 Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Restructuring provisions comprise site closure costs and employee termination payments. Provisions are not recognised for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects the time value of money and the risks specific to the obligation. 103 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 2. Significant accounting policies continued 2.22 Revenue recognition Revenue represents the transaction price specified in a contract with a customer for goods, services and intellectual property licenses provided in the ordinary course of business net of value added and other sales related taxes. Standard Customer Products Revenue is recognised when the goods are delivered and have been accepted by customers. For contracts that permit the customer to return an item, revenue is recognised to the extent that it is highly probable that a significant reversal in the amount of revenue recognised will not occur. The amount of revenue recognised is adjusted for expected returns, which are estimated based on historical data for each specific type of product with a refund liability recognised as part of trade receivables. The Group reviews its estimate of expected returns at each reporting date and updates the amounts of any liability accordingly. A receivable is recognised when the goods are delivered, since this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. Bespoke Customer Products Revenue is recognised for bespoke customer products with no alternative use where the Group has a guaranteed contractual right to payment on an over time basis prior to the delivery of goods to the customers’ premises. Revenue is recognised on an input basis by reference to the stage of completion of the manufacturing process, a process which includes an epitaxial wafer manufacture stage and a metrology and wafer test stage which are both typically completed within a limited number of days. The amount of revenue recognised is adjusted for expected returns, which are estimated based on historical data for each specific type of product with a refund liability recognised as part of trade receivables. The Group reviews its estimate of expected returns at each reporting date and updates the amounts of any liability accordingly. The Group operates supplier managed inventory arrangements for certain global customers where the Group is responsible for ensuring that contractually agreed levels of inventory are maintained at specified locations. The Group has a guaranteed contractual right to payment for the bespoke customer products manufactured under these arrangements with revenue recognised on an over time basis. Intellectual Property Licenses Intellectual property license income relates to the sale of finite and perpetual period licenses. Revenue is recognised for intellectual property licenses with a right to use over a finite period when control of the license is transferred to the customer in accordance with the terms of the relevant licensing agreement and collection of the resulting receivable is reasonably assured. Revenue is recognised for perpetual intellectual property licenses with a right to use when a signed agreement or other persuasive evidence of an arrangement exists, the intellectual property has been delivered, the license fee is fixed or determinable and collection of the resulting receivable is reasonably assured. 2.23 Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Directors, who oversee the allocation of resources and the assessment of operating segment performance. 2.24 Finance income and finance costs The Group’s finance income and finance cost include interest income and interest expense. Interest income or expense is recognised using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the gross carrying amount of the financial asset, or the amortised cost of the financial liability. In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit impaired) or to the amortised cost of the liability. However, for financial assets that have become credit impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset. 104 IQE plc Annual Report and Financial Statements 2021 2.25 Pension costs The Group operates defined contribution pension schemes. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. Contributions are charged in the Consolidated Income Statement as they become payable in accordance with the rules of the scheme. The Group has no further obligations once the contributions have been made. 2.26 Share based payments The Group operates a number of equity-settled share-based compensation plans under which the Group receives services from employees as consideration for equity instruments in IQE plc. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense in the consolidated income statement and as a credit in other reserves in the consolidated statement of changes in equity except for the social security element of the award which is treated as cash settled with the liability recognised in other taxation and social security within trade and other payables in the consolidated balance sheet. The total amount to be expensed is determined by reference to the fair value of the options granted including any market performance conditions (for example, an entity’s share price); excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period) and including the impact of any non-vesting conditions (for example, the requirement for employees to save or hold shares for a specific period of time). Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the consolidated income statement, with a corresponding adjustment to equity. When the options are exercised, the company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and the balance to share premium. In the company’s own financial statements, the grant of share options to the employees of subsidiary undertakings is treated as a capital contribution. Specifically, the fair value of employee services received (measured at the date of grant) is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity financial statements. The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge will be treated as a cash-settled transaction. 2.27 Foreign currency Items included in the financial statements of each subsidiary are measured using the currency of the primary economic environment in which the subsidiary operates (“the functional currency”). The consolidated financial statements are presented in sterling, which is the Group’s presentational currency. Foreign currency transactions are translated into the subsidiaries functional currency at the rates of exchange ruling at the date of the transaction, or at the forward currency hedged rate where appropriate. Monetary assets and liabilities in foreign currencies are translated into the subsidiaries functional currency at the rates ruling at the balance sheet date. All exchange differences are taken to the income statement. The balance sheets of overseas subsidiaries are translated into sterling at the closing rates of exchange at the balance sheet date, whilst the income statements are translated into sterling at the average rate for the period. The resulting translation differences are taken directly to reserves. Foreign exchange gains and losses on the retranslation of foreign currency borrowings that are used to finance overseas operations are accounted for on the ‘net investment’ basis and are recorded directly in reserves provided that the hedge is effective. 2.28 Current and deferred tax Income tax for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity, respectively. Current tax is the expected tax payable on the taxable income for the year using rates substantially enacted at the balance sheet date, and any adjustments to tax payable in respect of prior years. Amounts receivable from tax authorities in relation to research and development tax relief under the RDEC scheme are recognised within operating profit in the period in which the research and development costs are treated as an expense. Where amounts are outstanding at the year end and have not been formally agreed, an appropriate estimate of the amount is included within other receivables. Deferred tax is provided in full on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the amounts used for taxation purposes. Deferred tax is calculated at the tax rates that have been enacted or substantially enacted at the balance sheet date. Deferred tax assets are only recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax liabilities are recognised for taxable temporary differences, unless specifically exempt. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current taxation assets against current taxation liabilities and it is the intention to settle these on a net basis. 2.29 Investment in subsidiaries Investments in subsidiaries are held at cost of investment less provision for impairment in the parent company financial statements. 2.30 Other equity investments Other equity investments are held at cost less provision for impairment in both the parent company and Group financial statements on the basis that the Group (and Company) does not have the ability to exert significant influence or control over the strategic and operating activities of the other equity investments. 105 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 2. Significant accounting policies continued 2.31 Alternative performance measures Income Statement Alternative income statement performance measures are disclosed separately in the financial statements after a number of adjusted non-cash items, non- operational items and significant infrequent items that would distort period on period comparability where it is deemed necessary by the Director’s to do so to provide further understanding of the financial performance of the Group. Adjusted items are material items of income or expense that have been shown separately due to the significance of their nature or amount. The tax impact of adjusted items is calculated applying the relevant enacted tax rate for each adjusted item. Details of the adjusted items are included in note 5. Balance Sheet Alternative balance sheet performance measures for net debt are disclosed separately in the financial statements after adjustments to exclude lease liabilities where it is deemed necessary by the Director’s to do so to provide further understanding of the financial position, gearing and liquidity of the Group. Cashflow Statement Alternative cash flow statement performance measures are disclosed separately in the financial statements that reflect the cash impact of adjusted items included in alternative income statement performance measures. Adjusted items are material items of income or expense that have been shown separately due to the significance of their nature or amount. Details of the adjusted items are included in note 5. 3. Critical accounting judgements and key sources of estimation uncertainty The Group’s principal accounting policies are described in note 2. The application of these policies necessitates the use of estimates and judgements in a number of areas. Accordingly, the actual amounts may differ from these estimates. The main areas involving significant judgement and estimation are set out below: (a) Critical accounting judgements in applying the Group’s accounting policies Joint Venture – Evaluation of rights, levels of control and influence The determination of the level of influence or control that the Group has over a business is a mix of contractually defined and subjective factors that can be critical to the appropriate accounting treatment of an entity in the Group’s consolidated financial statements. Control or influence is achieved through Board representation and by obtaining rights of veto over significant decisions relevant to the activities of the entity. Compound Semiconductor Centre Limited (‘CSC’) On 9 July 2015 the Group entered into a joint venture agreement with Cardiff University to create the CSC in the United Kingdom. The commercial purpose of the CSC is the research, development and manufacture of advanced compound semiconductor materials by metalorganic vapour phase epitaxy (‘MOVPE’). The manufacturing and technical capability of the CSC was established with the Group contributing fixed assets, transferring employees (including the current Managing Director of the CSC) and licensing intellectual property with Cardiff University contributing cash. The Group also entered into an agreement with CSC that conveyed to the Group the right to use the CSC’s assets, establishing the Group as the CSC’s cornerstone customer during the early stages of the development of the CSC’s business (see note 30). The Shareholder Agreement establishes that the CSC is jointly controlled by the shareholders. Key decisions, defined as part of contractually agreed Board reserved matters, require approval from directors representing each joint venture partner who have equal Board representation and voting rights. The Group does not control the CSC such that its 50% equity investment in the joint venture is accounted for using the equity method in accordance with the accounting policies set out in note 2. Joint Venture – Right of use asset The Group established CSC with its joint venture partner as a centre of excellence for the development and commercialisation of advanced compound semiconductor wafer products. On establishment of the joint venture, the Group contributed assets as part of its initial investment and entered into an agreement with the joint venture that has been extended in the current year and conveys to the Group the right to use the assets of the joint venture for a minimum period up to 31 March 2023. This agreement, which contains rights attaching to the use of the joint venture’s assets, meets the definition of a lease. In the Group’s judgement, due to the variable nature of the lease payments, which are directly linked to the actual usage of the assets, the lease payments continue to be excluded from the measurement of right of use assets and lease liabilities with the variable lease costs recognised in operating expenses in the income statement as incurred. Joint Venture – Classification of preference share debt The Group classifies its preference share financial assets due from the CSC as debt instruments rather than treating the preference shares as part of the Group’s net investment in the CSC. This is on the basis that these preference shares, redeemable at par, contingent on the generation of cash by CSC, are not deemed to be tantamount to equity. Preference share funding was provided to the CSC by the joint venture partners to accelerate the development and growth of the CSC’s business. The contractual arrangements between the joint venture partners and the CSC require that any surplus cash generated by the CSC is used to redeem the preference share funding provided by the joint venture partners, as envisaged in the CSC business plan contained within the original Joint Venture Shareholder Agreement. Upon transition to IFRS 9, the Group assessed that this financial asset meets the requirements to be measured at amortised cost in line with the treatment previously adopted under IAS 39. The instrument is held within a business model whose sole objective is to collect the contractual cash flows. These cash flows, in turn, represent solely payments of principal and interest on the principal amount outstanding. 106 IQE plc Annual Report and Financial Statements 2021 (a) Critical accounting judgements in applying the Group’s accounting policies Joint Ventures – Credit risk associated with preference share debt As explained in note 2.13, expected credit losses are measured as an allowance equal to 12-month ECL for stage 1 assets, or lifetime ECL for stage 2 or stage 3 assets. The Group has assessed, based on its joint venture’s latest forecast, that recovery of the preference share debt within a reasonable period remains unlikely such that the credit risk remains at a level where the definition of default has been met and the asset continues to be classified at stage 3. In making this assessment, qualitative and quantitative reasonable and supportable forward-looking information associated with the forecast future financial performance and cash generation of CSC has been used (see note 3.6 for details of the calculation of the loss allowance and the associated impairment of the financial asset). Intangible assets – Technology development costs and patents a) CREO™ filter technology assets The Group has cREO™ filter technology related development cost and patent assets totalling £4,692,000 where the Group has taken the decision to pause the development and commercialisation of the associated technology. IQepiMo, the technology developed for high-performance bulk acoustic wave (‘BAW’) RF filters uses the Group’s cREO™ technology platform and is capable of delivering improved BAW filter performance, particularly at higher frequency ranges used within 5G applications. Although the developed technology has a number of potential performance advantages when compared to incumbent technology the level of customer and partner engagement that is required to refine the technology for high-end BAW filters has declined in the current year, a position that has led to the decision in 2021 to significantly scale back the development and commercialisation of the technology given the lack of a clear near-term route to the delivery of commercial volumes and cash flows. The current lack of visibility on the timeline to commercialise the technology and the decision to pause development and commercialisation activities has resulted in a non-cash intangible asset charge of £4,692,000 that has been charged to ‘selling, general and administrative expenses’ in the consolidated income statement following the write-down of the development costs and patent assets to £nil. b) Photonic quasi-crystal technology assets The Group has photonic quasi-crystal technology related development cost and patent assets totalling £2,716,000 where the Group has taken the decision to pause the development and commercialisation of the associated technology. Photonic quasi-crystal technology provides the possibility to create on-wafer optics for advanced sensing applications using the Group’s Nanoimprint lithography technology. Although Photonic quasi-crystal technology has a number of potential advanced sensing applications the level of customer and partner engagement that is required to develop the technology has remained low, a position that has led to the decision in 2021 to significantly scale back the development and commercialisation of the technology given the lack of a clear near-term route to the delivery of commercial volumes and cash flows. The current lack of visibility on the timeline to commercialise the technology and the decision to pause development and commercialisation activities has resulted in a non-cash intangible asset charge of £2,716,000 that has been charged to ‘selling, general and administrative expenses’ in the consolidated income statement following the write-down of development costs and patent assets to £nil. Intangible assets – Technology development assets not yet available for use Intangible assets include development cost assets not yet available for use of £3,046,000 (2020: £8,157,000) which have been reviewed for impairment as at the reporting date. The Group is committed to the technical completion and commercialisation of each of its technology development assets which are governed and controlled by reference to a combination of technical development objectives and market and customer related commercial plans. The recoverable amount of each technology development project is determined based on value in use calculations, using cash flow projections in line with the expected useful economic life of each asset. The value in use calculations are based on management approved risk-adjusted cash flow forecasts for each project and comprise assumptions that include cost to complete forecasts for each technology development and commercial forecasts relating to the level of market penetration, revenue and cost of production for each technology. Adjustments to profit Alternative performance measures are disclosed separately in the financial statements after a number of adjusted exceptional, non-cash, non-operational or significant and infrequent items that would distort period on period comparability where it is deemed necessary by the Director’s to do so to provide further understanding of the financial performance of the Group. Details of the adjusted items are included in note 5. 107 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 3. Critical accounting judgements and key sources of estimation uncertainty continued (b) Critical accounting estimates and key sources of estimation uncertainty 3.1 Goodwill impairment testing Wireless Following the assessment of the goodwill allocated to the Wireless cash generating unit (‘CGU’); to which goodwill of £57,173,000 (2020: £56,704,000) is allocated, the directors consider the recoverable amount of goodwill allocated to the Wireless CGU to be sensitive to the achievement of the Group’s five-year internal forecasts. The five-year forecasts comprise forecasts of revenue, material costs and site manufacturing labour and overhead costs based on current and anticipated market conditions that have been considered and approved by the Board. Whilst the Group is able to manage most of its Wireless CGU costs, significant elements of the Wireless revenue forecasts are inherently linked to global demand for smartphones and the adoption of 5G technology where uncertainty about both the timing and level of growth remains such that the revenue growth rates used within the forecasts are a key sensitivity given current consumer, market and regulatory dynamics. The sensitivity analysis in respect of the recoverable amount of ‘Wireless’ goodwill is presented in note 13. Photonics Following the assessment of the goodwill allocated to the Photonics cash generating unit (‘CGU’); to which goodwill of £7,124,000 (2020: £7,028,000) is allocated, the directors consider the recoverable amount of goodwill allocated to the Photonics CGU to be sensitive to the achievement of the Group’s five-year internal forecasts. The five-year forecasts comprise forecasts of revenue, material costs and site manufacturing labour and overhead costs based on current and anticipated market conditions that have been considered and approved by the Board. Whilst the Group is able to manage most of its Photonics CGU costs, significant elements of the Photonics revenue forecasts are inherently linked to global demand for smartphones, the proliferation of VCSEL technology to advanced sensing applications beyond existing 3D sensing, the adoption of high definition infrared imaging and sensing in health monitoring and environmental applications and the adoption of 5G technology for telecommunication and data communication where uncertainty about both the timing and level of growth remains such that the revenue growth rates used within the forecasts are a key sensitivity given current consumer, market and regulatory dynamics. The sensitivity analysis in respect of the recoverable amount of ‘Wireless’ goodwill is presented in note 13 3.2 Useful economic lives of development cost intangible assets The periods of amortisation used for product and process development cost assets require estimates to be made on the estimated useful economic lives of the intangible assets to determine an appropriate rate of amortisation. Capitalised development costs are amortised in line with the expected production volume profile of the products to which they relate over the period during which economic benefits are expected to be received which is typically between 3 – 8 years. The carrying value of development cost intangible assets is £27,944,000 (2020: £35,803,000). The amortisation charge for development cost intangible assets in the current year is £6,490,000 (2020: £6,430,000). If useful economic lives of development cost intangible assets were reduced by 1 year across the whole portfolio of assets the impact on current year amortisation would be to increase the charge by £1,189,000 (2020: £1,063,000) to £7,679,000 (2020: £7,493,000). 3.3 Valuation of lease liabilities and right of use assets The application of IFRS 16 requires the Group to make judgments and estimates that affect the valuation of the lease liabilities and the valuation of right-of-use assets that includes determining the contracts in scope of IFRS 16, determining the contract term and determining the interest rate used for discounting of future cash flows. The lease term determined by the Group generally comprises the non-cancellable period of lease contracts, periods covered by an option to extend the lease if the Group is reasonably certain to exercise that option and periods covered by an option to terminate the lease if the Group is reasonably certain not to exercise that option. Exercise of extension options, principally existing in the Group’s property leases are assumed to be reasonably certain, except for the Group’s Newport facility where it has been assumed that it is reasonably certain that the Group will exercise its buy-out option at the end of the initial lease term. The same term applied to the length of the lease contract has been applied to the useful economic life of right-of-use assets. The present value of the lease payments applicable to the Group’s portfolio of property and plant leases has been determined using a discount rate that represents the Group’s incremental rate of borrowing, assessed as 2.25% – 2.65% depending on the lease characteristics. If the incremental rate of borrowing was decreased by 0.10% the impact would be to increase the lease liability by £246,000 (2020: £227,000). 108 IQE plc Annual Report and Financial Statements 2021 3.4 Deferred tax assets Deferred tax assets are only recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. This necessitates an assessment of future trading forecasts, capital expenditure and the utilisation of tax losses for each relevant tax jurisdiction where the Group operates. Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits from the same trade is probable. The Group assesses future forecast taxable profit as probable by reference to its five-year plan using underlying cash flow forecasts based on those used in the Group’s goodwill impairment review. Any potential deferred tax asset assessed by reference to the level of future forecast taxable profit over this five-year period has, in the current year, been restricted to the extent of taxable temporary differences due to the Group’s current financial performance and recent history of taxable losses in its UK, US and Singapore operations. The Group did not recognise deferred income tax assets of £31,260,000 (2020: £17,767,000) in respect of losses amounting to £134,808,000 (2020: £78,164,000) that can be carried forward against future taxable income. The deferred tax asset can be recognised if sufficient profits from the same trade arise in future periods. 3.5 Share based payments Share based payment charges associated with long-term incentive plans are calculated taking account of an assessment of the achievability of relevant performance conditions. The share-based payment charge for long-term incentive awards would be £365,000 (2020: £1,032,000) greater in 2021 if it was assumed that all performance criteria for existing awards would be met. 3.6 Preference share debt – Calculation of loss allowance The Group classifies its preference share financial assets due from its joint venture, CSC, as debt instruments. The carrying value of the Group’s preference share debt is £nil (2020: £nil) after the recognition of expected credit losses and the application of the loss absorption requirements of IAS 28.38 (see note 3.9). Expected credit loss impairment continues to be assessed at £7,922,000 (2020: £7,922,000). When measuring expected credit loss on the preference share debt due from CSC the Group uses reasonable and supportable forward-looking information, which is primarily based on assumptions about forecast future financial performance of CSC. The ECL model calculation is based on three key inputs: exposure at default, loss given default, and probability of default. Exposure at default is the carrying amount of the preference share debt. Loss given default is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the Group expect to receive, considering cash flows from any collateral. Probability of default is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of the future financial performance of CSC. Default events and associated probability of default is assessed by reference to a range of scenarios based principally on assumptions and expectations of the future financial performance of CSC that have been derived from CSC’s Board approved 2022 Budget extrapolated over the repayment period using a long-term growth rate of 2%. Following a review of a combination of factors, including CSC’s progress and achievement against its business objectives, current cash flow forecasts for CSC and the capacity of CSC to redeem the debt, the Group has assessed that a position of default continues to exist on this instrument (see note 3(a)) and as a result, lifetime ECL continues to be calculated. Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of the debt instrument and is the difference between the contractual cash flows due and those that the Group expect to receive, considering cash flows from any collateral. The result of this assessment is that the Group considers the ECL to equal the carrying amount of the instrument and therefore the financial asset remains fully impaired. 3.7 Preference share debt – Long term interest The Group treats its preference share financial assets due from its joint venture, CSC, as a long-term interest in an equity accounted investee on the basis that the factors that have led to the recognition of an expected credit loss impairment (note 3.6) indicate that repayment of the preference share debt is no longer expected in the foreseeable future. As a long-term interest in an equity accounted investee, the group has applied the loss absorption requirement in IAS 28.38 to the carrying amount of the preference share financial asset, after the application of the expected credit loss described in note 3.6. Application of the loss absorption requirements after taking account of expected credit losses continue to result in a position where the Group recognises no further allocation of joint venture losses to the preference share financial asset as the carrying value of the preference share debt is £nil (2020: £nil) after recognition of expected credit losses. 109 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 4. Segmental analysis 4.1 Description of segments and principal activities The Chief Operating Decision Maker is defined as the Executive Management Board. The Executive Management Board, consisting of the Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Technology Officer, Executive VP Global Business Development, Wireless and Emerging Products, Executive VP Global Business Development, Photonics & Infrared and the Global Human Resources Director 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 of silicon technologies. The Executive Management Board 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 Management Board and therefore have not been disclosed. 4.2 Revenue – Disaggregation of segmental revenue from contracts with customers The group derives revenue from the transfer of goods, services and intellectual property over time and at a point in time. Revenues from external customers derive from the sale of standard or bespoke compound semiconductor material or from the sale or licensing of intellectual property. Disaggregate Segment Revenue Timing of revenue recognition At a point in time Standard customer products Intellectual property licenses Over time Bespoke customer products Total revenue Disaggregate Segment Revenue Timing of revenue recognition At a point in time Standard customer products Intellectual property licenses Over time Bespoke customer products Total revenue Wireless 2021 £’000 Photonics 2021 £’000 CMOSS++ 2021 £’000 – – 83,217 83,217 Wireless 2020 £’000 – – 94,193 94,193 11,760 – 56,307 68,067 – – 2,812 2,812 Photonics 2020 £’000 CMOSS++ 2020 £’000 14,088 – 67,539 81,627 – – 2,196 2,196 Total 2021 £’000 11,760 – 142,336 154,096 Total 2020 £’000 14,088 – 163,928 178,016 Included within bespoke customer product revenue is revenue of £63,725,000 (2020: £89,900,000) that relates to supplier managed inventory arrangements where billing occurs from the earlier of a specified contractual backstop date following delivery or when the product is drawn from inventory by the customer. Revenues of approximately £54,924,000 (2020: £89,900,000) are derived from two customers (2020: three) who each account for greater than 10% of the Group’s total revenues: Customer Customer 1 Customer 2 Customer 3 Segment Wireless Wireless Photonics 2021 £’000 34,946 8,801 19,978 2021 % revenue 23% 6% 13% 2020 £’000 29,608 31,701 28,591 2020 % revenue 17% 18% 16% There are no customers in the CMOS++ segment that account for greater than 10% of the Group’s total revenue. 110 IQE plc Annual Report and Financial Statements 2021 4.3 Adjusted Operating Profit Adjusted operating profit 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, legal expenses and impairments where the impairment is the result of an isolated, non-recurring event. Adjusted operating profit 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. Revenue Wireless Photonics CMOS++ Revenue Adjusted operating (loss)/profit Wireless Photonics CMOS++ Central corporate costs Adjusted operating (loss)/profit Adjusted items (see note 5) Operating loss Reversal/share of losses of joint venture accounted for using the equity method Finance costs Loss before tax 2021 £’000 83,217 68,067 2,812 2020 £’000 94,193 81,627 2,196 154,096 178,016 7,305 1,737 (586) (14,910) (6,454) (13,524) (19,978) – (2,213) (22,191) 11,393 9,080 (714) (14,373) 5,386 (10,903) (5,517) 3,788 (2,165) (3,894) 111 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 4. Segmental analysis continued 4.4 Geographical information Revenue by location of customer Americas United States of America Rest of Americas Europe, Middle East & Africa (EMEA) France Germany Israel United Kingdom Rest of EMEA Asia Pacific People’s Republic of China Japan Taiwan Rest of Asia Pacific Total revenue Non-current assets by location USA Singapore Taiwan UK 2021 £’000 99,842 99,817 25 13,476 2,166 3,893 1,598 3,643 2,176 40,778 10,311 7,217 21,247 2,003 2020 £’000 118,298 118,251 47 15,250 2,291 6,056 2,131 2,850 1,922 44,468 6,517 3,679 28,348 5,924 154,096 178,016 Property, plant and equipment Intangible assets Right of use assets 2021 £’000 40,824 6,283 31,188 51,435 2020 £’000 42,386 6,811 21,943 55,089 129,730 126,229 2021 £’000 66,177 9,623 4,268 15,798 95,866 2020 £’000 71,010 9,801 5,900 19,061 105,772 2021 £’000 10,071 – 826 33,370 44,267 2020 £’000 4,998 – 268 32,073 37,339 112 IQE plc Annual Report and Financial Statements 2021 5. Adjusted profit measures The Group’s results report certain financial measures after a number of adjusted items that are not defined or recognised under IFRS including adjusted operating profit, adjusted profit before income tax and adjusted earnings per share. The Directors believe that the adjusted profit 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 profit 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 profit measures and the impact on the Group’s reported financial performance. Revenue Cost of sales Gross profit SG&A Impairment loss on financial assets Profit on disposal of PPE Operating (loss)/profit Reversal of JV losses Finance costs (Loss)/profit before tax Taxation (Loss)/profit for the period Share based payments Chief Executive Officer Recruitment Restructuring Impairment – intangibles Onerous contract Patent dispute legal fees Impairment – financial assets Share of JV losses – financial asset Total The nature of the adjusted items is as follows: Adjusted Results £’000 154,096 (135,325) 18,771 (25,302) – 77 (6,454) – (2,213) (8,667) (10,614) (19,281) Pre-tax Adjustment £’000 (1,691) (741) (3,681) (7,411) – – – – (13,524) Adjusted Items £’000 – (1,127) (1,127) (12,397) – – (13,524) – – (13,524) 1,803 (11,721) Tax Impact £’000 (13) – – 1,816 – – – – 1,803 2021 Reported Results £’000 154,096 (136,452) 17,644 (37,699) – 77 (19,978) – (2,213) (22,191) (8,811) (31,002) 2021 Adjusted Results £’000 (1,704) (741) (3,681) (5,595) – – – – (11,721) Adjusted Results £’000 178,016 (144,689) 33,327 (27,759) – (182) 5,386 – (2,165) 3,221 (519) 2,702 Pre-tax Adjustment £’000 (265) – (162) (6,537) (1,840) 1,689 (3,788) 3,788 (7,115) Adjusted Items £’000 – (177) (177) (6,938) (3,788) – (10,903) 3,788 – (7,115) 1,520 (5,595) Tax Impact £’000 210 – 39 1,242 350 (321) – – 1,520 2020 Reported Results £’000 178,016 (144,866) 33,150 (34,697) (3,788) (182) (5,517) 3,788 (2,165) (3,894) 1,001 (2,893) 2020 Adjusted Results £’000 (55) – (123) (5,295) (1,490) 1,368 (3,788) 3,788 (5,595) • Share based payments – The charge (2020: charge) relates to share based payments recorded in accordance with IFRS 2 ‘Share based payment’ of which £1,127,000 (2020: £177,000) has been classified within cost of sales in gross profit and £564,000 (2020: £88,000) has been classified as selling, general and administrative expenses in operating profit. £46,000 cash has been defrayed in the year (2020: £nil) in respect of employer social security contributions following the exercise of unapproved employee share options. • Chief Executive Officer recruitment – The charge of £741,000 include settlement costs and legal fees of £319,000 associated with the transition of the former Chief Executive Officer to a non-executive role and external recruitment fees of £422,000. Cash costs defrayed in the year total £152,000 (2020: £nil) • Restructuring – The charge of £3,681,000 relates to restructuring costs relating to the announced closure of the Group’s manufacturing facility in Pennsylvania, USA and the Group’s manufacturing facility in Singapore. • Restructuring charges of £661,000 (2020: £162,000) relate to employee related costs relating to 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 £342,000 (2020: £nil). • Restructuring charges of £3,020,000 (2020: £nil) consist of employee related costs of £1,540,000 (2020: £nil) and site decommissioning costs of £1,480,000 (2020: £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 £nil (2020: £nil). 113 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 5. Adjusted profit measures continued • Impairment of intangibles – The non-cash charge of £7,411,000 (2020: £6,537,000) relates to the impairment of certain technology development costs and intellectual property patent assets. • The non-cash impairment charge of £7,411,000 relates to the impairment of cREO™ filter technology development costs and patent assets totalling £4,692,000 and the impairment of Photonic quasi crystal technology related development costs and patent assets totalling £2,716,000 where the Group has taken the decision to pause development related activities given the current lack of visibility over the timeline to commercialisation of each of the technologies. • The prior period non-cash impairment charge of £6,537,000 relates to the Group’s non-filter related cREO™ patent and development costs and arose from a lack of intent to continue relevant development activities following the refocus of resource and investment into cREO™ filter related development activities. • Onerous contract – The prior period onerous contract provision of £1,840,000 represents the cost of minimum guaranteed future royalty payments associated with the use of cREO™ technology acquired from Translucent Inc. • Patent dispute legal costs – The prior period credit related to a settlement agreement of £1,825,000 (US$2,500,000) associated with legal costs incurred by the Group that was negotiated with the plaintiff following an arbitration panel ruling in favour of the Group on 17 January 2020. The settlement net of final legal costs of £49,000 has been cash received in 2021. The prior period credit also included an increase in insurance income of £410,000 following final settlement with the Group’s insurers partially offset by legal costs incurred during the prior year of £546,000. Insurance income of £410,000 and legal costs of £546,000 were cash received and cash paid in the prior year. • Impairment of financial asset – The prior period non-cash charge of £3,788,000 (2020: £4,134,000) related to the increase in the expected credit loss associated with the Group’s preference share financial asset due from its joint venture, CSC. • Reversal/share of joint venture losses (financial asset) – The Group treats its preference share financial assets due from its joint venture, CSC, as a long-term interest in an equity accounted investee and is required to apply the loss absorption requirements of IAS 28.38 to the carrying amount of the preference share financial asset, after the application of any expected credit losses as described above. Application of the loss absorption requirements following the increase in expected credit losses in the prior year resulted in the reversal of the Group’s share of joint venture losses previously allocated to the preference share financial asset which resulted in a non-cash credit of £3,788,000 in the prior year. The cash impact of adjusted items in the consolidated cash flow statement represents cash received in respect of the patent dispute settlement net of final legal costs, onerous contract royalty payments associated with the Group’s cREO™ technology, payment of employee related costs associated with the announced closure of the Group’s site in Pennsylvania, national insurance paid in respect of employee share option exercises and payment of certain costs related to recruitment of the group’s new Chief Executive Officer totalling £943,000 (2020: exceptional cash costs: £867,000). Adjusted EBITDA (adjusted earnings before interest, tax, depreciation and amortisation) is calculated as follows: Loss attributable to equity shareholders Non-controlling interest Finance costs Tax Depreciation of property, plant and equipment Depreciation of right of use assets Amortisation of intangible fixed assets Loss/(profit) on disposal of PPE Adjusted Items Share based payments Chief Executive Officer Recruitment Restructuring Impairment of intangibles Patent dispute settlement and legal costs Onerous contract provision Impairment of financial asset Share of joint venture losses (financial asset) Adjusted EBITDA Share based payments Chief Executive Officer Recruitment Restructuring Patent dispute settlement and legal costs Onerous contract provision Impairment of financial asset Share of joint venture losses (financial asset) EBITDA 114 IQE plc Annual Report and Financial Statements 2021 2021 £’000 (31,002) – 2,213 8,811 13,309 3,854 8,047 (77) 13,524 1,691 741 3,681 7,411 – – – – 18,679 (1,691) (741) (3,681) – – – – 12,566 2020 £’000 (3,271) 378 2,165 (1,001) 12,983 3,681 7,869 182 7,115 265 – 162 6,537 (1,689) 1,840 3,788 (3,788) 30,101 (265) – (162) 1,689 (1,840) (3,788) 3,788 29,523 6. Operating loss The operating loss is stated after charging/(crediting): Depreciation of property, plant and equipment Depreciation of right of use assets Amortisation of intangible assets Impairment of intangible assets Impairment of non-current financial assets Services provided by auditors Expenses relating to variable lease payments not included in the measurement of the lease liability Research and development Exchange losses/(gains) Share based payments Cost of raw materials consumed (Profit)/loss on disposal of fixed assets Adjusted items 2021 £’000 13,309 3,854 8,047 7,411 – 382 6,234 1,968 2,378 1,691 59,466 (77) 4,422 2020 £’000 12,983 3,681 7,869 6,537 3,788 434 6,365 897 961 265 72,857 182 313 ‘Expenses relating to variable lease payments not included in the measurement of the lease liability principally relate to the variable cash costs of production based on usage that are payable to the Group’s joint venture, CSC, associated with the Group’s right of use of the joint venture’s assets (note 3 and 32). Services provided by auditors Fees payable to the company’s auditor and its associates for the audit of the parent company and consolidated financial statements Fees payable to the company’s auditor and its associates for other services: • Audit of the company’s subsidiaries • Audit related assurance services • Tax compliance and other advisory services Total KPMG LLP (group auditors) 2021 £’000 2020 £’000 335 27 20 – 382 198 27 20 189 434 115 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 7. Employee costs Employee costs (including directors’ remuneration) Wages and salaries Social security costs Other pension costs Share based payments Average number of employees (including directors) Manufacturing Selling, general and administrative 2021 £’000 37,743 3,279 1,801 1,691 44,514 2020 £’000 37,193 3,207 1,833 265 42,498 2021 Number 2020 Number 546 134 680 536 122 658 Directors’ emoluments, share options and other long-term incentive plan details, including details of all outstanding options and long-term incentive awards and the value of director pension contributions paid are set out in the Remuneration Report where the relevant disclosures have been highlighted as audited. Audited tables include ‘Single total figure of remuneration for Executive Directors’ on page 67, ‘Scheme interest awarded in 2021’, ‘Exit payments made in the year’, ‘Single total figure of remuneration for Non-Executive Directors’ on page 69 and ‘Share Options” on page 71. Key management within the Group comprises members of the Executive Management Board and Non-Executive Directors. Compensation to key management in 2021 totalled £2,404,031 (2020: £3,574,000), consisting of emoluments and other benefits in kind of £2,315,815 (2020: £3,507,000) and pension contributions of £88,216 (2020: £67,000). The charge for share based payment awards to key management totalled £705,681 (2020: £316,018). 8. Finance (costs)/income Bank and other loans Interest expense on lease liabilities 2021 £’000 (905) (1,308) (2,213) 2020 £’000 (949) (1,216) (2,165) 116 IQE plc Annual Report and Financial Statements 2021 9. Taxation Income tax expense Current tax on profits for the year Total current tax charge Origination and reversal of temporary differences Adjustment in respect of prior years Total deferred tax charge/(credit) Total tax charge/(credit) 2021 £’000 1,124 1,124 8,199 (512) 7,687 8,811 2020 £’000 1,132 1,132 (1,425) (708) (2,133) (1,001) The tax on the Group’s loss before tax differs from the theoretical amount that would arise from applying the standard rate of corporation tax in the UK of 19.00% (2020: 19.00%) as follows: Loss on ordinary activities before taxation Tax charge at 19.00% thereon (2020: 19.00%) Effects of: Expenses not deductible for tax purposes Overseas tax rate differences Utilisation of previously unrecognised losses Tax losses for which no deferred tax asset was recognised Derecognition of previously recognised deferred tax assets Share option schemes Pre-measurement of deferred tax – change in UK tax rate Adjustments in respect of prior years Total tax (charge)/credit for the year 2021 £’000 (22,191) 4,216 (984) 196 – (4,135) (8,190) (426) – 512 (8,811) 2020 £’000 (3,894) 740 (303) 112 300 (264) (825) 159 374 708 1,001 Recognition of deferred tax assets is based on an assessment of future cash flow forecasts and the associated profitability of the Group’s operations, an assessment which has restricted the ability of the Group to recognise deferred tax assets for current year UK, US and Singapore trading losses and has resulted in the partial reversal and de-recognition of previously recognised UK and US tax losses. Deferred tax asset recognition has been restricted in the UK to reflect future forecast profitability, an assessment that includes the impact of the Group’s consolidation and investment in central and functional roles in the UK. As a result, lower utilisation of UK deferred tax assets is projected which has restricted the ability to recognise deferred tax assets for current year losses and resulted in the partial reversal and de-recognition of previously recognised UK tax losses. Deferred tax asset recognition has been restricted in the US to reflect future forecast profitability, an assessment that includes the impact of 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. As a result, lower utilisation of US deferred tax assets is projected which has restricted the ability to recognise deferred tax assets for current year losses and resulted in the partial reversal and de-recognition of previously recognised US tax losses. Deferred tax asset recognition has been restricted in Singapore due to the announced closure and planned cessation of operations at the Singapore manufacturing site in 2022. The share option schemes amount shown above represents the change in the expected tax impact on the exercise of options, principally reflecting the reduction in future corporation tax deductions associated with a reduction in the number of options where performance criteria are expected to be achieved. The Group’s results report certain financial measures after a number of adjusted items with a tax impact of £1,803,000 credit (2020: £1,520,000 credit) as detailed in note 5. Finance Act 2021, which was substantively enacted on 24 May 2021, included legislation to increase the rate of corporation tax to 25% from 1 April 2023. Accordingly, the closing UK deferred tax asset in the financial statements has been recognised in accordance with the rate enacted as part of the Finance Act 2021 with any timing differences expected to reverse on or after 1 April 2023 recognised at a corporation tax rate of 25%. Deferred tax is measured at the tax rates that are expected to apply in the relevant territory in the period when the asset is realised or the liability is settled, based on tax rates and tax laws that have been substantively enacted at the balance sheet date. Amounts recognised directly in equity Aggregate current and deferred tax arising in the period and not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity: Deferred tax: Share options Total tax charge to equity for the year 2021 £’000 (93) (93) 2020 £’000 57 57 117 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 10. Deferred Taxation Deferred tax At 1 January Income statement (charge)/credit recognised in the year Tax charge recognised directly in equity Exchange differences At 31 December 2021 £’000 5,767 (7,687) (93) (47) (2,060) 2020 £’000 3,819 2,133 57 (242) 5,767 The amount of deferred tax asset expected to unwind within the next twelve months is £nil (2020: £1,058,000) in relation to utilisation of tax losses. The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Group Deferred tax liabilities At 1 January 2020 Credit to income statement Exchange differences At 31 December 2020 (Charge)/credit to income statement Exchange differences At 31 December 2021 before set-off Set-off of tax* At 31 December 2021 after set-off Deferred tax assets At 1 January 2020 Charged to income statement Charged to equity Exchange differences At 31 December 2020 Charged to income statement Charged to equity Exchange differences At 31 December 2021 before set-off Set-off of tax* At 31 December 2021 after set-off Accelerated Capital Allowances £’000 (10,851) 903 153 (9,795) (1,493) (82) (11,370) Intangibles £’000 (5,031) 321 14 (4,696) 561 (20) (4,155) Tax Losses £’000 18,701 886 – (427) 19,160 (6,216) – 52 12,996 Other £’000 1,000 23 57 18 1,098 (539) (93) 3 469 Total £’000 (15,882) 1,224 167 (14,491) (932) (102) (15,525) 13,465 (2,060) Total £’000 19,701 909 57 (409) 20,258 (6,755) (93) 55 13,465 (13,465) – * Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial position if the entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts are levied by the same taxing authority on the same entity or different entities that intend to realise the asset and settle the liability at the same time. Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits from the same trade is probable. The Group assesses future forecast taxable profit as probable by reference to its five-year plan using underlying cash flow forecasts based on those used in the Group’s goodwill impairment review. Any potential deferred tax asset assessed by reference to the level of future forecast taxable profit over this five-year period has, in the current year, been restricted to the extent of taxable temporary differences due to the Group’s current financial performance and recent history of taxable losses in its UK, US and Singapore operations. The Group did not recognise deferred income tax assets of £31,260,000 (2020: £17,767,000) in respect of losses amounting to £134,808,000 (2020: £78,164,000) that can be carried forward against future taxable income. The deferred tax asset can be recognised if sufficient profits from the same trade arise in future periods. Tax losses in the UK totalling £71,530,000 (2020: £61,778,000) have no date of expiry. Tax losses in Singapore totalling £20,714,000 (2020: £12,396,000) have no date of expiry. Tax losses in the US can be carried forward against future taxable income for 20 years before expiring. Of the Group’s total US tax losses of £95,175,000 (2020: £96,178,000) losses amounting to £8,975,905 and £7,544,665 expire in 2022 and 2023. 118 IQE plc Annual Report and Financial Statements 2021 Deferred tax liabilities have not been recognised for the withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries as such amounts are permanently reinvested. A credit of £376,000 (2020: £291,000) has been recognised within operating profit in relation to claims made under the R&D Expenditure Credit Scheme (RDEC) in the UK. Company Deferred tax assets At 1 January 2020 Credited/(charged) to income statement Charged to equity At 31 December 2020 (Charged)/credited to income statement Charged to equity At 31 December 2021 11. Dividends No dividend has been paid or proposed in 2021 (2020: £nil). 12. Loss per share Tax Losses £’000 2,546 1,157 – 3,703 (3,703) – – Share Options £’000 Other Timing Differences £’000 67 190 26 283 (124) (46) 113 24 (35) – (11) 25 – 14 Total £’000 2,637 1,312 26 3,975 (3,802) (46) 127 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 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 adjustments are detailed in note 5. Loss attributable to ordinary shareholders Adjustments to loss after tax (note 5) Adjusted (loss)/profit attributable to ordinary shareholders Weighted average number of ordinary shares Dilutive share options Adjusted weighted average number of ordinary shares Adjusted basic loss per share Basic loss per share Adjusted diluted loss per share Diluted loss per share 2021 £’000 (31,002) 11,721 (19,281) 2020 £’000 (3,271) 5,595 2,324 2021 Number 2020 Number 801,653,662 4,097,303 797,228,579 11,395,298 805,750,965 808,623,877 (2.41p) (3.87p) (2.41p) (3.87p) 0.29p (0.41p) 0.29p (0.41p) 119 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 13. Intangible assets Group Cost At 1 January 2021 Additions Foreign exchange At 31 December 2021 Accumulated amortisation and impairment At 1 January 2021 Charge for the year Impairment Foreign exchange At 31 December 2021 Net book value At 31 December 2021 At 31 December 2020 Group Cost At 1 January 2020 Additions Foreign exchange At 31 December 2020 Accumulated amortisation and impairment At 1 January 2020 Charge for the year Impairment Foreign exchange At 31 December 2020 Net book value At 31 December 2020 At 31 December 2019 Goodwill £’000 63,732 – 561 64,293 – – – – – 64,293 63,732 Goodwill £’000 66,730 – (2,998) 63,732 – – – – – 63,732 66,730 Patents £’000 Development costs £’000 Software £’000 Customer contracts £’000 8,613 311 2 8,926 4,972 213 2,796 2 7,983 943 3,641 79,467 2,994 745 83,206 43,664 6,490 4,615 493 55,262 27,944 35,803 8,894 1,423 15 10,332 6,298 1,344 – 4 7,646 2,686 2,596 7,327 – 100 7,427 7,327 – – 100 7,427 – – Patents £’000 Development costs £’000 Software £’000 Customer contracts £’000 7,945 677 (9) 8,613 1,377 133 3,471 (9) 4,972 3,641 6,568 76,945 4,678 (2,156) 79,467 35,638 6,430 3,066 (1,470) 43,664 35,803 41,307 8,849 54 (9) 8,894 4,998 1,306 – (6) 6,298 2,596 3,851 7,728 – (401) 7,327 7,728 – – (401) 7,327 – – Total £’000 168,033 4,728 1,423 174,184 62,261 8,047 7,411 599 78,318 95,866 105,772 Total £’000 168,197 5,409 (5,573) 168,033 49,741 7,869 6,537 (1,886) 62,261 105,772 118,456 Customer contract intangible assets relate to customer contracts acquired as part of a business combination. The amortisation charge of £8,047,000 (2020: £7,869,000) and the impairment charge of £7,411,000 (2020: £6,537,000) have been charged to selling, general and administrative expenses in the Consolidated Income Statement. Wireless operating segment development and patent cost impairment charges of £4,692,000 relate to the impairment of the Group’s filter related cREO™ patent and development costs. Photonics operating segment development and patent cost impairment charges of £2,716,000 relate to the impairment of the Group’s photonic quasi crystal patent and development costs. The impairments have arisen following the decision to pause development related activities given the current lack of visibility over the timeline to commercialisation of each of the technologies. The net book value of the assets has been impaired to £nil with the charge recognised in ‘selling, general and administrative expenses’ in the Consolidated Income Statement. Wireless operating segment development and patent cost impairment charges of £6,537,000 in 2020 related to the impairment of the Group’s non-filter related cREO™ patent and development costs. The net book value of the non-filter related cREO™ development costs and patent assets were impaired to £nil with the charge recognised in ‘selling, general and administrative expenses’ in the Consolidated Income Statement in 2020. 120 IQE plc Annual Report and Financial Statements 2021 Impairment tests for goodwill Goodwill is tested for impairment annually and whenever there is an indication of impairment at the level of the CGU to which it is allocated. Multiple production facilities and production assets are included in a single CGU reflecting that production can (and is) transferred between sites and production assets for different operating segments to suit capacity planning and operational efficiency. Given the interdependency of facilities and production assets, goodwill is tested for impairment by grouping operational sites and production assets into CGUs based on type of production. Allocation of goodwill by CGU Wireless Photonics Total Goodwill 2021 £’000 57,169 7,124 64,293 2020 £’000 56,704 7,028 63,732 The recoverable amount of the CGUs has been determined based on value in use calculations, using cash flow projections for a five-year period plus a terminal value based upon a long-term growth rate of 2% (2020: 2%). Value in use calculations are based on the Group’s Board approved 2022 budget and five-year plan where revenue assumptions for years 4 and 5 have typically been extrapolated from year 3 using business segment growth rates that take account of industry trends, external market views and external market research. The key assumptions applied in the 2021 cash flow forecast are summarised below: 2021 Risk adjusted discount rate Photonics growth rate Wireless growth rate 2020 Risk adjusted discount rate Photonics growth rate Wireless growth rate Year 1 % 16.5% 2022 Budget 2022 Budget Year 1 % 15.0% 2021 Budget 2021 Budget Year 2 % 16.5% 5 Year Plan 5 Year Plan Year 2 % 15.0% 3 Year Plan 3 Year Plan Year 3 % 16.5% 5 Year Plan 5 Year Plan Year 3 % 15.0% 3 Year Plan 3 Year Plan Year 4 % 16.5% 5.5% 9.4% Year 4 % 15.0% 14.4% 12.4% Year 5 % 16.5% 5.5% 9.4% Year 5 % 15.0% 14.4% 12.4% The assumptions and growth rates contained in the Group’s value in use calculations have been updated in 2022 to reflect the latest Board approved five year plan which comprises revenue, material costs and site manufacturing labour and overhead cost forecasts that have been assessed and updated by reference to a combination of customer and supplier specific information and market growth assumptions. The risk adjusted discount rate has been increased to reflect greater risk associated with the Group’s growth forecasts given current financial performance of the business. Photonics CGU The recoverable amount of the Photonics CGU determined based on value in use calculations exceeds the carrying amount of the associated goodwill, other intangible assets and property, plant and equipment allocated to the CGU by greater than ~£50,000,000. The Group has carried out a sensitivity analysis on the impairment test for the Photonics CGU, using various reasonably plausible scenarios focused on changes in business segment growth rates and the discount rate applied in the value in use calculations. Growth rates in the value in use calculations take account of continuing market demand for compound semiconductors, driven by macro trends of 5G and connected devices and the increasing proliferation of 3D and advanced sensing end user applications that require enabling compound semiconductor material. An impairment would arise on the carrying amount of the goodwill allocated to the Photonics CGU if the aggregated compound annual growth rate used in the value in use calculations to determine the recoverable amount was ~17.0% or less in the first five-year period. An impairment would arise on the carrying amount of the goodwill, if the discount rate in the value in use calculations used to determine the recoverable amount of the Photonics CGU was increased to ~21.0%. Wireless CGU The recoverable amount of the Wireless CGU determined based on value in use calculations exceeds the carrying amount of the associated goodwill, other intangible assets and property, plant and equipment allocated to the CGU by greater than ~£65,000,000. The Group has carried out a sensitivity analysis on the impairment test for the Wireless CGU, using various reasonably plausible scenarios focused on changes in business segment growth rates and changes in the discount rate applied in the value in use calculations. Growth rates in the value in use calculations take account of continuing market demand for compound semiconductors, driven by macro trends of 5G and connected devices where 5G network infrastructure and 5G mobile handsets are being enabled by next generation wireless compound semiconductor material. An impairment would arise on the carrying amount of the goodwill allocated to the Wireless CGU if the aggregated compound annual growth rate used in the value in use calculations to determine the recoverable amount was 15.0% or less in the first five-year period. An impairment would arise on the carrying amount of the goodwill allocated to the Wireless CGU if the discount rate in the value in use calculations used to determine the recoverable amount of the Wireless CGU was increased to ~22.0%. 121 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 13. Intangible assets continued Company Cost At 1 January 2021 Additions At 31 December 2021 Accumulated amortisation At 1 January 2021 Charge for the year Impairment At 31 December 2021 Net book value At 31 December 2021 At 31 December 2020 Company Cost At 1 January 2020 Additions At 31 December 2020 Accumulated amortisation At 1 January 2020 Charge for the year Impairment At 31 December 2020 Net book value At 31 December 2020 At 31 December 2019 Patents £’000 Software £’000 7,169 285 7,454 3,991 181 2,442 6,614 840 3,178 870 708 1,578 335 140 – 475 1,103 535 Patents £’000 Software £’000 6,329 840 7,169 417 103 3,471 3,991 3,178 5,912 865 5 870 238 97 – 335 535 627 Total £’000 8,039 993 9,032 4,326 321 2,442 7,089 1,943 3,713 Total £’000 7,194 845 8,039 655 200 3,471 4,326 3,713 6,539 Patent cost impairment charges of £2,442,000 relate to the impairment of filter related cREO™ patent costs and photonic quasi crystal patent costs. The impairments have arisen following the decision to pause technology development activities related to the patents given the current lack of visibility over the timeline to commercialisation of the technologies linked to the patents. The net book value of the patent assets has been impaired to £nil. 122 IQE plc Annual Report and Financial Statements 2021 14. Property, plant and equipment Group Cost At 1 January 2021 Additions Disposals Foreign exchange At 31 December 2021 Accumulated depreciation At 1 January 2021 Charge for the year Impairment Disposals Foreign exchange At 31 December 2021 Net book value At 31 December 2021 At 31 December 2020 Land and buildings £’000 Short leasehold improvements £’000 Fixtures and fittings £’000 Plant and machinery £’000 18,329 – – 178 18,507 5,669 921 – – 31 6,621 11,886 12,660 37,787 176 – 384 38,347 21,176 2,097 – – 184 23,457 14,890 16,611 11,500 1,487 – 285 13,272 5,242 1,201 – – 95 6,538 6,734 6,258 190,022 13,868 (2,817) 1,769 202,842 99,322 9,090 74 (2,809) 945 106,622 96,220 90,700 Property, plant and equipment includes assets in the course of construction with a net carrying value of £12,262,000 (2020: £nil). Group Cost At 1 January 2020 Additions Disposals Foreign exchange At 31 December 2020 Accumulated depreciation At 1 January 2020 Charge for the year Disposals Foreign exchange At 31 December 2020 Net book value At 31 December 2020 At 31 December 2019 Land and buildings £’000 Short leasehold improvements £’000 Fixtures and fittings £’000 Plant and machinery £’000 19,238 (883) – (26) 18,329 4,649 1,062 – (42) 5,669 12,660 14,589 39,326 143 – (1,682) 37,787 19,896 2,088 – (808) 21,176 16,611 19,430 11,335 615 (547) 97 11,500 4,644 1,010 (371) (41) 5,242 6,258 6,691 192,350 4,859 (2,761) (4,426) 190,022 96,578 8,823 (2,755) (3,324) 99,322 90,700 95,772 Total £’000 257,638 15,531 (2,817) 2,616 272,968 131,409 13,309 74 (2,809) 1,255 143,238 129,730 126,229 Total £’000 262,249 4,734 (3,308) (6,037) 257,638 125,767 12,983 (3,126) (4,215) 131,409 126,229 136,482 Negative land and building additions totalling £833,000 reflect an adjustment to the cost of construction for the Newport foundry following finalisation of costs with the contractor at the end of the construction contract. 123 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 14. Property, plant and equipment continued Company Cost At 1 January 2021 Additions At 31 December 2021 Accumulated depreciation At 1 January 2021 Charge for the year At 31 December 2021 Net book value At 31 December 2021 At 31 December 2020 Company Cost At 1 January 2020 Additions At 31 December 2020 Accumulated depreciation At 1 January 2020 Charge for the year At 31 December 2020 Net book value At 31 December 2020 At 31 December 2019 Fixtures and fittings £’000 135 106 241 120 14 134 107 15 Fixtures and fittings £’000 123 12 135 104 16 120 15 19 124 IQE plc Annual Report and Financial Statements 2021 15. Right of use assets Group Cost At 1 January 2021 Additions Disposals Foreign exchange At 31 December 2021 Accumulated depreciation At 1 January 2021 Charge for the year Disposals Foreign exchange At 31 December 2021 Net book value At 31 December 2021 At 31 December 2020 Group Cost At 1 January 2020 Additions Foreign exchange At 31 December 2020 Accumulated depreciation At 1 January 2020 Charge for the year Foreign exchange At 31 December 2020 Net book value At 31 December 2020 At 31 December 2019 Land and buildings £’000 Fixtures and Fittings £’000 Plant and machinery £’000 51,050 10,531 (558) (174) 60,849 14,154 3,663 (519) (328) 16,970 43,879 36,896 17 6 – – 23 – 5 – – 5 18 17 681 123 (88) 13 729 255 186 (88) 6 359 370 426 Land and buildings £’000 Fixtures and Fittings £’000 Plant and machinery £’000 49,955 1,569 (474) 51,050 10,848 3,549 (243) 14,154 36,896 39,107 – 18 (1) 17 – – – – 17 – 381 336 (36) 681 133 132 (10) 255 426 248 Total £’000 51,748 10,660 (646) (161) 61,601 14,409 3,854 (607) (322) 17,334 44,267 37,339 Total £’000 50,336 1,923 (511) 51,748 10,981 3,681 (253) 14,409 37,339 39,355 125 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 16. Investments Company Cost At 1 January 2021 Subsidiaries share based payments charge At 31 December 2021 Provisions for impairment At 1 January 2021 Impairment At 31 December 2021 Net book value At 31 December 2021 At 31 December 2020 Company Cost At 1 January 2020 Acquisition of minority interest Subsidiaries share based payments charge Disposals At 31 December 2020 Provisions for impairment At 1 January 2020 At 31 December 2020 Net book value At 31 December 2020 At 31 December 2019 Investments in subsidiaries £’000 123,452 827 124,279 32,032 16,178 48,210 76,069 91,420 Investments in subsidiaries £’000 Other equity investments £’000 121,918 1,438 96 – 123,452 32,032 32,032 91,420 89,886 75 – – (75) – – – – 75 Total £’000 123,452 827 124,279 32,032 16,178 48,210 76,069 91,420 Total £’000 121,993 1,438 96 (75) 123,452 32,032 32,032 91,420 89,961 Details of the company’s subsidiaries are set out in note 29. Investments are reviewed for impairment trigger events annually. This review includes a qualitative assessment of the business performance of each investment and a quantitative assessment of any potential impact on the carrying value of each investment arising from the results of the Group’s value in use calculations prepared as part of the Group’s goodwill impairment review. The announced closure of the Group’s manufacturing facility in Singapore has been identified as an impairment trigger event (2020: none) with the planned cessation of operations and closure of the manufacturing site in 2022 resulting in the impairment of the Company’s investment in its Singapore subsidiaries from a carrying value of £5,353,000 to £nil. The Group’s value in use calculations prepared as part of the Group’s goodwill impairment review has identified an impairment trigger event (2020: none) for the Company’s investment in its sub-group, headed by Wafer Technology International Limited, where current and forecast future financial performance has declined. The decline in forecast future profitability, assessed by reference to the Group’s value in use cash flow forecasts has resulted in a £10,825,000 impairment in the Company’s investment in its Wafer Technology sub-group. Indicators that impairment losses might have reversed are assessed annually. No events indicating a reversal of impairment losses have been identified as part of the review in the current year (2020: none). 126 IQE plc Annual Report and Financial Statements 2021 17. Inventories Group Raw materials and consumables Work-in-progress and finished goods 2021 £’000 25,028 6,682 31,710 2020 £’000 23,666 7,221 30,887 The directors are of the opinion that the replacement values of inventories are not materially different to the carrying values stated above. The carrying values are stated net of impairment provisions of £12,388,000 (2020: £11,551,000). £866,000 (2020: £3,025,000) of inventories were written down during 2021 and an expense recognised in the income statement. 18. Trade and other receivables Current Trade receivables Other receivables Contract assets Prepayments Non-current Amounts owed by group undertakings Other financial assets 2021 Group £’000 20,659 4,170 8,915 5,116 38,860 2021 Group £’000 – – – 2021 Company £’000 – 704 – 1,421 2,125 2021 Company £’000 132,677 – 132,677 2020 Group £’000 21,060 7,795 6,258 3,462 38,575 2020 Group £’000 – – – 2020 Company £’000 – 2,045 – 564 2,609 2020 Company £’000 133,314 – 133,314 Contract assets relate to bespoke manufactured customer products where the Group has a guaranteed contractual right of payment. Contract assets are transferred to receivables at the point that manufactured products are delivered to customers, except for supplier managed inventory arrangements where contract assets are transferred to receivables from the earlier of a specified contractual date following delivery or when the product is drawn from inventory by the customer. All 2020 contract assets have been transferred to receivables during 2021. Amounts owed by Group undertakings are unsecured and repayable on demand. Interest is charged at a rate of 5% per annum (2020: 5% per annum). The Group classifies other financial assets at amortised cost. Other financial assets are classified at amortised cost as the asset is held within a business model whose objective is to collect contractual cash flows and the contractual terms give rise to cash flows that are solely payments of principal and interest. Other financial assets relate to £8,800,000 of impaired Preferred ‘A’ shares (2020: £8,800,000) issued by the Compound Semiconductor Centre Limited (‘CSC’), a joint venture between the Group and Cardiff University (see note 30 for further details). The preference shares carry the following rights: • No voting rights; • Dividend equivalent to the HSBC Bank PLC base rate for the applicable period on the amount paid up, subject to CSC having available profits; • Repayable in proportion to the outstanding principle from surplus cash generated. The estimated fair values of trade receivables, other receivables, contract assets, other financial assets and amounts owed by group undertakings are set out in note 22. 127 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 19. Trade and other payables Current Trade payables Amounts owed by group undertakings Other taxation and social security Other payables Accruals and deferred income 2021 Group £’000 20,878 – 71 1,346 14,788 37,083 2021 Company £’000 2,628 24,972 277 – 2,510 30,387 2020 Group £’000 22,098 – 617 1,033 11,857 35,605 2020 Company £’000 1,728 20,490 1,088 27 2,298 25,631 Accruals and deferred income include no contract liabilities (2020: £nil). Amounts owed to group undertakings are unsecured and repayable on demand. Interest is charged at a rate of 5% per annum (2020: 5% per annum). Other payables include the recognised mark-to-market fair value of £10,000 associated with foreign currency forward exchange contracts held at 31 December 2021 (2020: £nil) that do not qualify for hedge accounting. The foreign currency forward exchange contracts are classified as Level 2 financial instruments. The fair value of Level 2 financial instruments, such as over the counter foreign currency contracts have been determined using observable market data based on quoted market prices or market quotes for similar instruments. If all significant inputs required to fair value the instrument are observable, the instrument is included in level 2. 20. Borrowings Group Non-current borrowings Bank borrowings Lease liabilities Current borrowings Bank borrowings Lease liabilities Total borrowings Bank Borrowings Bank borrowings fall due for repayment as follows Within one year Between one and five years 2021 £’000 10,365 49,693 60,058 6,230 4,694 10,924 70,982 2021 £’000 6,230 10,365 16,595 2020 £’000 16,539 42,226 58,765 6,201 4,798 10,999 69,764 2020 £’000 6,201 16,539 22,740 On 30 December 2021, the Company refinanced its £25,900,000 ($35,000,000) multi-currency revolving credit facility, provided by HSBC Bank plc. The facility is secured on the assets of IQE plc and its subsidiary companies with a committed term to 30 April 2023 and an option to extend the facility for a further 12 months. Interest on the facility is payable at a margin of between 2.00 and 2.80 per cent per annum over SONIA on any drawn balances. The facility is undrawn at 31 December 2021 (2020: Undrawn). On 29 August 2019 a subsidiary of the Group agreed a new £30,000,000 asset finance facility, provided by HSBC Bank plc that is secured over various plant and machinery assets. The facility has a five-year term and an interest rate margin of 1.65% per annum over base rate on any drawn balances. The Group has complied with all the financial covenants of its borrowing facilities during 2021 and 2020. Lease liabilities Lease liabilities fall due for repayment as follows Within one year Between one and five years After five years 2021 £’000 4,694 14,666 35,027 54,387 2020 £’000 4,798 10,966 31,260 47,024 Lease liabilities are effectively secured as the rights to the leased assets recognised in the financial statements revert to the lessor in the event of default. Lease liabilities principally relate to property. 128 IQE plc Annual Report and Financial Statements 2021 21. Provisions for other liabilities and charges Group As at 1 January Charged to the income statement Utilised during the year Foreign exchange As at 31 December Group Current Non-current Total Restructuring £’000 162 3,617 (342) (3) 3,434 Restructuring £’000 2,946 488 3,434 Onerous Contract £’000 1,840 – (138) – 1,702 Onerous Contract £’000 740 962 1,702 2021 Total £’000 2,002 3,617 (480) (3) 5,136 2021 Total £’000 3,686 1,450 5,136 Restructuring £’000 – 162 – – 162 Restructuring £’000 – 162 162 Onerous Contract £’000 – 1,840 – – 1,840 Onerous Contract £’000 515 1,325 1,840 2020 Total £’000 – 2,002 – – 2,002 2020 Total £’000 515 1,487 2,002 The restructuring provision relates to costs relating to the announced closure of the Group’s manufacturing facility in Pennsylvania, USA and the Group’s manufacturing facility in Singapore. • The restructuring provision of £488,000 (2020: £162,000) associated with the announced closure of the Group’s manufacturing facility in the USA relates to employee related costs that are expected to be utilised over a period up to 30 June 2024. • The restructuring provision of £2,946,000 (2020: £nil) associated with the announced closure of the Group’s manufacturing facility in Singapore relates to employee related costs of £1,540,000 and site decommissioning costs of £1,406,000 that are expected to be utilised over a period up to 30 June 2023. The onerous contract provision represents the cost of minimum guaranteed future royalty payments associated with the cREO™ technology acquired from Translucent Inc. The onerous contract provision is expected to be utilised over a period up to 31 December 2024. Company As at 1 January Charged to the income statement Utilised during the year Foreign exchange As at 31 December Company Current Non-current As at 31 December 2021 £’000 1,840 – (138) – 1,702 2021 £’000 740 962 1,702 2020 £’000 – 1,840 – – 1,840 2020 £’000 515 1,325 1,840 The onerous contract provision represents the cost of minimum guaranteed future royalty payments associated with the cREO™ technology acquired from Translucent Inc. The onerous contract provision is expected to be utilised over a period up to 31 December 2024. 129 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 22. Financial Instruments Financial instruments by category Trade and other receivables (excluding prepayments) and cash and cash equivalents are classified as financial assets at amortised cost. Borrowings and trade and other payables are classified as financial liabilities at amortised cost. Both categories are initially measured at fair value and subsequently held at amortised cost. Financial instruments are classified as level 2 per the fair value hierarchy with the exception of preference share instruments which are classified as level 3. Derivatives (forward exchange contracts) are classified as derivatives used for hedging and accounted for at fair value through profit and loss in the consolidated statement of comprehensive income. Financial risk and treasury policies The Group’s finance team maintains liquidity, manages relations with the Group’s bankers, identifies and manages foreign exchange risk and provides a treasury service to the Group’s businesses. Treasury dealings such as investments, borrowings and foreign exchange are conducted only to support underlying business transactions. The Group has clearly defined policies for the management of foreign exchange rate risk. The Group finance team does not undertake speculative foreign exchange dealings for which there is no underlying exposure. Exposures resulting from sales and purchases in foreign currency are matched where possible and the net exposure may be hedged by the use of forward exchange contracts. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and monies on deposit with financial institutions. Customer credit risk is managed at the Group and site level with credit risk assessments completed for all customers. If no independent credit rating is available the credit quality of the customer is assessed by reference to the customers’ financial position, past experience and other relevant factors. Individual credit limits are set based on internal or external ratings in accordance with the Group’s credit risk policies. Where the Group assesses a potential credit risk, this is dealt with either by up-front payment prior to the shipment of goods or by other credit risk mitigation measures. The Group has historically experienced low levels of payment default. Counterparty risk associated with monies on deposit with financial institutions is managed at the Group level in accordance with the Group’s treasury policies. The credit quality of banks has been assessed by reference to external credit ratings, based on reputable credit agencies long-term issuer ratings. Trade receivables and contract assets The credit quality of trade receivables and contract assets that are not impaired have been assessed based on historical information about the counterparty default rate. The Group does not hold any receivable balances with customers with a history of past default. Cash at bank The credit quality of cash has been assessed by reference to external credit ratings based on reputable credit agencies long-term issuer ratings. The Group has cash at bank balances totalling £9,069,000 with banks with A1 credit ratings and cash at bank balances totalling £1,722,000 with A2 credit ratings. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial asset as set out below. In terms of trade receivables, the terms of sale provide that the Group has recourse to the products sold in the event of non-payment by a customer. Assets as per balance sheet Carrying amount Cash and cash equivalents Trade receivables Amounts owed by group undertakings Other receivables excluding prepayments Financial Assets (Preference share receivables) 2021 Group £’000 10,791 20,659 – 13,085 – 44,535 2021 Company £’000 262 – 132,677 704 – 133,643 2020 Group £’000 24,663 21,060 – 14,053 – 59,776 2020 Company £’000 635 – 133,314 2,045 – 135,994 Included in other receivables are contract assets of £8,915,000 (2020: £6,258,000). The Group is exposed to credit concentration risk with its three largest customers which represent 47% (2020: 51%) of outstanding trade receivables and contract asset balances. Customer credit risk is managed according to strict credit control policies. The majority of the Group’s revenues are derived from large multinational organisations that are established customers of the Group with no prior history of default such that credit risk is considered to be low. The Group monitors customer credit ratings and has had no material defaults in the past. 130 IQE plc Annual Report and Financial Statements 2021 Group Not past due Past due 0-30 Past due more than 30 Allowance for bad and doubtful debt At 1 January Charged to the income statement Utilised during the year Foreign exchange Gross 2021 £’000 16,029 3,439 1,606 21,074 Provision 2021 £’000 – – (415) (415) Net 2021 £’000 16,029 3,439 1,191 20,659 Gross 2020 £’000 16,864 4,117 531 21,512 Provision 2020 £’000 – – (452) (452) 2021 £’000 452 (34) (5) 2 415 Net 2020 £’000 16,864 4,117 79 21,060 2020 £’000 223 230 – (1) 452 As at 31 December 2021, 76% (2020: 78%) of trade receivables were within terms. Of the other trade receivables, 68% (2020: 89%) were less than 30 days past due. An allowance has been made for estimated irrecoverable amounts from the sale of goods of £415,000 (2020: £452,000). This allowance has been determined on an expected credit loss basis by reference to past default experience. The individually impaired receivables mainly relate to a number of independent customers. A portion of these receivables is expected to be recovered. The carrying values of trade and other receivables also represent their estimated fair values. Trade receivables and contract assets are primarily denominated in US dollars, as are trade payables limiting the exposure of the Group to movements in foreign exchange rates. Based on the balances held at 31 December 2021 a 1 cent movement in the US dollar to Sterling rate would impact the net value of these instruments by £72,000 (2020: £48,000). Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group manages its funding to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group uses weekly cash flow forecasts to monitor cash requirements and to optimise its borrowing position. The Group ensures that it has sufficient borrowing facilities to meet foreseeable operational expenses. At the year- end the Group had available undrawn facilities of £30,900,000 (2020: £30,735,000). The following table illustrates the contractual maturities of financial liabilities, including interest payments, where applicable and excluding the impact of netting agreements on an undiscounted basis. Contractual cash flow maturities – Other financial liabilities at amortised cost 31 December 2021 Trade and other payables Accruals Bank borrowings Lease liabilities Contractual cash flow maturities – Other financial liabilities at amortised cost 31 December 2020 Trade and other payables Accruals Bank borrowings Lease liabilities Group Contractual Cash flows £’000 Group Less than 12 months £’000 Group Carrying amount £’000 22,224 14,788 16,595 54,387 Group Carrying amount £’000 23,131 11,857 22,740 47,024 107,994 114,689 Group Contractual Cash flows £’000 Group Less than 12 months £’000 22,224 14,788 16,670 61,007 23,131 11,857 23,923 53,194 22,224 14,788 6,250 5,955 49,217 23,131 11,857 6,715 5,931 47,634 104,752 112,105 Group 1 –2 Years £’000 – – 6,250 5,823 12,073 Group 1 –2 Years £’000 – – 6,568 4,649 11,217 Group 2–5 Years £’000 – – 4,170 17,670 21,840 Group 2–5 Years £’000 – – 10,640 13,721 24,361 Group 5+ Years £’000 – – – 31,559 31,559 Group 5+ Years £’000 – – – 28,893 28,893 131 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 22. Financial Instruments continued Contractual cash flow maturities – Other financial liabilities at amortised cost 31 December 2021 Trade and other payables Amounts owed to group undertakings Accruals Contractual cash flow maturities – Other financial liabilities at amortised cost 31 December 2020 Trade and other payables Amounts owed to group undertakings Accruals Financial risk management Company Carrying amount £’000 2,628 24,972 2,510 30,110 Company Carrying amount £’000 1,755 20,490 2,298 24,543 Company Contractual Cash flows £’000 Company Less than 12 months £’000 Company 1 –2 Years £’000 Company 2–5 Years £’000 Company 5+ Years £’000 2,628 24,972 2,510 30,110 2,628 24,972 2,510 30,110 – – – – – – – – – – – – Company Contractual Cash flows £’000 Company Less than 12 months £’000 Company 1 –2 Years £’000 Company 2–5 Years £’000 Company 5+ Years £’000 1,755 20,490 2,298 24,543 1,755 20,490 2,298 24,543 – – – – – – – – – – – – Market risk – Foreign Exchange Risk The Group operates internationally with operations in the United Kingdom, United States of America, Taiwan and Singapore and is exposed to foreign exchange risk arising from various currency exposures, primarily relating to fluctuations in exchange rates between UK sterling, US dollars, Taiwanese dollars and Singapore dollars. The Group’s presentational currency is sterling and foreign exchange risk arises from a combination of future commercial transactions, recognised assets and liabilities denominated in a currency that is not the functional currency of the relevant group entity and net investments in the Group’s foreign operations. The majority of the Group’s sales are denominated in US dollars and therefore the Group’s cash flows are affected by fluctuations in the rate of exchange between US dollar and UK Sterling, Taiwanese dollar and Singapore dollar exchange rates given that the Group is required to fund certain costs at its operations in the United Kingdom, Taiwan and Singapore in local currencies. Foreign exchange risk of this nature is managed using a combination of the natural currency hedge within the Group’s operating model given that a significant proportion of the Group’s costs, including the purchase of certain key raw materials are denominated in US dollars, and, via the use of derivative foreign currency forward exchange contracts. Derivative foreign currency forward exchange contracts are only used for economic hedging purposes and not as speculative investments. Derivative foreign currency forward exchange contracts that do not meet the hedge accounting criteria are classified as ‘held for trading’ for accounting purposes and are accounted for at fair value through profit or loss. These derivative instruments are presented as current assets or liabilities to the extent they are expected to be settled within 12 months after the end of the reporting period. As at 31 December 2021 (2020: £nil) the fair value of foreign currency forward exchange contracts held for trading and recognised in ‘Other payables’ within current liabilities was £10,000. The group’s accounting policy for its cash flow hedges is set out in note 2.18. The Group has certain investments in foreign operations in North America, Taiwan and Singapore, whose net assets are exposed to foreign currency translation risk. Translation exposures that arise on converting the results of overseas subsidiaries are not hedged. As a guide to the sensitivity of the Group’s results to movements in foreign currency exchange rates, a one cent movement in the US dollar to Sterling rate would impact annual earnings by approximately £239,000 (2020: £333,000). Cash flow and fair value interest rate risk The Board is aware of the risks associated with changes in interest rates and does not speculate on future changes in interest rates. Historically the Group has not undertaken any hedging activity in this area although the board keeps this under regular review. The Group’s interest rate risk arises from its cash and cash equivalents, its preference share financial assets and from its bank borrowings. Cash and cash equivalents, including foreign currency cash deposits earn interest at prevailing variable market rates of interest whilst the preference share debt earns interest at HSBC Bank Plc base rate. The Group’s bank borrowings consist of a variable rate asset finance loan secured against the assets to which it relates and a variable rate multi-currency revolving credit facility secured against the assets of the Group. The variable rate UK sterling £30,000,000 asset finance facility, which has a principal outstanding of £16,670,000 (2020: £22,920,000) has a five-year term and an interest rate margin of 1.65% per annum over base rate on any drawn balances. The loan is repayable by monthly instalment commencing on the first anniversary of the facility. The variable rate US dollar $35,000,000 (£25,900,000) multi-currency revolving credit facility, which is undrawn has a committed term to 30 April 2023 and an option to extend the facility for a further 12 months. Interest on the facility is payable at a margin of between 2.00 and 2.80 per cent per annum over SONIA. The Group’s policy is to regularly review its exposure to interest rate risk, and in particular the mix between fixed and floating rate financial assets and financial liabilities. The percentage of financial assets and financial liabilities bearing variable rate interest was 100% (2020: 100%). As a guide to the sensitivity of the Group’s results to movements in interest rates, a 50-basis point (0.5%) movement in interest rates on the interest-bearing financial assets held at 31 December 2021 would impact annual interest income by approximately £nil (2020: £nil). A 50-basis point (0.5%) movement in interest rates on the interest-bearing liabilities held at 31 December 2021 would impact annual interest costs by approximately £83,000 (2020: £114,000). 132 IQE plc Annual Report and Financial Statements 2021 Capital risk management The Group’s main objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and adjusts it in the light of changes in economic conditions and the characteristic of the underlying assets. The Group monitors capital by reviewing net debt against shareholders’ funds. The position of these indicators and the movement during the year is shown in the Five-Year Financial Summary. The Group defines total capital as equity in the consolidated balance sheet plus net debt or less net funds. Total capital at 31 December 2021 was £298,830,000 (2020: £305,536,000). The Group monitors capital on the basis of a gearing ratio. The gearing ratio is calculated as net debt divided by total capital and at 31 December 2021 was 20.1% (2020: 14.8%). All covenants in relation to the Group’s borrowing facilities have been complied with during the year. Fair values Fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows: Group Cash and cash equivalents Trade receivables Other receivables Contract assets Financial Assets (Preference share receivables) Trade and other payables Bank borrowings Company Cash and cash equivalents Amounts owed by group undertakings Other receivables Trade and other payables Basis for determining fair value 2021 Carrying amount £’000 10,791 20,659 4,170 8,915 – (22,224) (16,595) 5,716 2021 Carrying amount £’000 262 132,677 704 (27,600) 106,043 2021 Fair value £’000 10,791 20,659 4,170 8,915 163 (22,224) (16,595) 5,879 2021 Fair value £’000 262 132,677 704 (27,600) 106,043 2020 Carrying amount £’000 24,663 21,060 7,795 6,258 – (23,131) (22,740) 13,905 2020 Carrying amount £’000 635 133,314 2,045 (22,245) 113,749 2020 Fair value £’000 24,663 21,060 7,795 6,258 163 (23,131) (22,740) 14,068 2020 Fair value £’000 635 133,314 2,045 (22,245) 113,749 The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments reflected in the table above. Cash and cash equivalents Cash and cash equivalents earn interest at prevailing variable market rates of interest such that the carrying value of cash and cash equivalents is deemed to reflect fair value. Trade receivables, other receivables and contract assets Trade receivables, other receivables and contract assets are short-term assets with a remaining life of less than one year such that the amortised cost carrying value of the assets is deemed to reflect fair value. Financial Assets (Preference share receivables) The fair value of preference share receivables was calculated by reference to assumptions about forecast future financial performance of CSC and the associated level of expected credit losses. Amounts owed by group undertakings Amounts owed by group undertakings are long-term assets with a remaining life of greater than one year with outstanding balances accruing interest at a rate of 5% per annum such that the amortised cost carrying value of the assets is deemed to reflect fair value. Trade and other payables Trade and other payables are short-term liabilities with a remaining life of less than one year such that the amortised cost carrying value of the liabilities is deemed to reflect fair value. Bank borrowings The carrying value of bank borrowings is deemed to reflect fair value as interest payable on bank borrowings is charged at a variable rate assessed as close to current market rates. 133 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 23. Share capital Group and Company Allotted, called up and fully paid Ordinary shares of 1p each 2021 Number of shares 2021 £’000 2020 Number of shares 803,555,756 8,036 800,364,569 2020 £’000 8,004 The movement in the number of ordinary shares during the year was: At 1 January Employee share schemes IQE Taiwan minority interest acquisition – equity consideration At 31 December 3,191,187 ordinary shares (2020: 4,222,267 ordinary shares) were issued during the year as follows: 2021 Number 800,364,569 3,191,187 – 2020 Number 796,142,302 1,615,578 2,606,689 803,555,756 800,364,569 Employee share schemes IQE Taiwan minority interest acquisition 2021 Number of shares 3,191,187 – 3,191,187 2021 Consideration 1.0p to 23.0p 2020 Number of shares 1,615,578 2,606,689 4,222,267 2020 Consideration Nil to 45.0p 55.15p The share premium arising from consideration received from employee share scheme exercises of £472,000 (2020: £240,000) was £447,000 (2020: £388,000). The share premium arising from the non-cash equity consideration paid to minority interest shareholders in IQE Taiwan Corporation for the purchase of their minority equity shareholdings was £nil (2020: £1,412,000). 134 IQE plc Annual Report and Financial Statements 2021 24. Share based payments The total amount charged to the income statement in 2021 in respect of share-based payments was £1,691,000 (2020: £265,000). Long-term incentive plan The IQE Plc Share Option Scheme was adopted on 26 May 2000 and amended by shareholders at the Annual General Meeting on 17 May 2002. Under the scheme, the Remuneration Committee can grant long-term incentive awards over shares in the company to directors and employees of the Group. Long-term incentive share awards are granted with contractual lives of between three and ten years with a fixed exercise price of 1 penny equal to the nominal value of the ordinary share. Directors Long-term incentive awards become exercisable between three and ten years from the date of grant subject to continued employment and achievement of performance conditions relating to growth in earnings per share and total shareholder return targets over a three-year vesting period that cannot be extended. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Details of the Directors long-term incentive plan are set out in the Remuneration Report. Employees Long-term incentive awards become exercisable between three and five years from the date of grant subject to continued employment and the achievement of performance conditions relating to a combination of growth in earnings per share targets over a three-year vesting period that cannot be extended and growth in earnings per share and total shareholder return targets over a three-year vesting period that cannot be extended. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Long term incentive awards are valued using either the Black-Scholes option-pricing model or the Monte Carlo simulation model with the total fair value of the award that is to be expensed charged to the income statement over the vesting period of the long-term incentive award. Share option scheme The IQE Plc Share Option Scheme was adopted on 26 May 2000 and amended by shareholders at the Annual General Meeting on 17 May 2002. Under the scheme, the Remuneration Committee can grant options over shares in the company to employees of the Group. 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. Options become exercisable between one and ten years from the date of grant subject to continued employment and the achievement of performance conditions, including growth in EBITDA and earnings per share against various targets. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Share options are valued using the Black-Scholes option-pricing model with the total fair value of the award that is to be expensed charged to the income statement over the vesting period of the share option. The principal assumptions used in the calculation of the fair value of long-term incentive awards and share option awards are as follows: Principal assumptions Weighted average share price at grant date Weighted average exercise price 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 2021 49.94 5.99 3 10 3 70% 0.6% 0% 2020 45.19 17.54 3 10 3 60% 0.7% 0% 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. The fair value of long-term incentive awards and share options granted during the year ended 31 December 2021 was £4,497,360 (2020: £2,296,000). The weighted average fair value of long-term incentive awards granted during the year ended 31 December 2021 was 71.1p (2020: 20.1p). 135 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 24. Share based payments continued The movements on long-term incentive awards and share options during the year were as follows: At 1 January Granted Exercised Cancelled/lapsed At 31 December 2021 Number of options 22,081,637 6,437,146 (2,506,993) (1,603,675) 24,408,115 2021 Average exercise price (pence) 10.08p 1.00p 17.64p 24.43p 2020 Number of options 20,639,474 8,337,449 (1,274,323) (5,620,963) 5.99p 22,081,637 2020 Average exercise price (pence) 17.41p 1.80p 1.93p 23.36p 10.08p The weighted average share price at the date share options were exercised was 57.2p (2020: 53.05p). As at 31 December 2021, the total number of long-term incentive awards and share options held by employees was 24,408,115 (2020: 22,081,637) as follows: Option price pence/share 9.15p – 50.25p 1.00p – 28.17p 1.00p – 27.75p 1.00p – 23.83p 18.42p – 25.17p 1.00p – 37.92p 1.00p – 169.50p 1.00p – 143.30p 1.00p – 125.00p 1.00p 1.00p At 31 December Option period ending 31 December 2021 31 December 2022 31 December 2023 31 December 2024 31 December 2025 31 December 2026 31 December 2027 31 December 2028 31 December 2029 31 December 2030 31 December 2031 2021 Number of options 2020 Number of options – 430,423 4,150,061 3,321,245 211,250 252,000 407,500 240,000 3,408,779 5,895,388 6,091,469 1,271,715 782,418 3,646,379 4,274,648 232,500 1,108,500 495,000 290,000 4,595,211 5,385,266 – 24,408,115 22,081,637 25. Parent company profit and loss As permitted by Section 408 of the Companies Act 2006, the income statement of the parent company is not presented as part of these financial statements. The parent company’s loss for the financial year amounted to £29,272,000 (2020: £7,586,000 loss). 136 IQE plc Annual Report and Financial Statements 2021 26. Cash generated from operations Group Loss before tax Finance costs Depreciation of property, plant and equipment Depreciation of right of use assets Amortisation of intangible assets Impairment of intangible assets Impairment of PP&E Impairment of financial assets Share of joint venture Inventory write downs (note 17) Loss/(profit) on disposal of fixed assets Non-cash provision movements Share based payments Cash inflow from operations before changes in working capital (Increase)/decrease in inventories Decrease/(increase) in trade and other receivables (Decrease)/increase in trade and other payables Cash inflow from operations Company Loss before tax Finance income Finance costs Foreign exchange Depreciation of property, plant and equipment Amortisation of intangible assets Impairment of intangible assets Impairment of investments Loss on disposal of equity investment Non-cash provision movements Share based payments Cash outflow from operations before changes in working capital (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Cash outflow from operations 2021 £’000 (22,191) 2,213 13,309 3,854 8,047 7,411 74 – – 866 (77) 3,617 1,691 18,814 (1,368) 2,930 (1,493) 18,883 2021 £’000 (25,470) (5,493) 445 307 14 321 2,442 16,178 – – 915 (10,341) 3,926 4,078 (2,337) 2020 £’000 (3,894) 2,165 12,983 3,681 7,869 6,537 – 3,788 (3,788) 3,025 182 2,002 265 34,815 (4,128) (7,151) 11,921 35,457 2020 £’000 (8,898) (5,716) 340 (214) 16 200 3,471 – 75 1,840 60 (8,826) (51) 6,541 (2,336) 137 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 27. Reconciliation of net cash flow to movement in net funds/(debt) (Decrease)/increase in cash in the year Increase in borrowings Repayment of borrowings Repayment of leases Net movement resulting from cash flows Net debt at 1 January Net movement resulting from cash flows Non-cash movements Net debt at 31 December 2021 £’000 (14,080) – 6,145 3,705 (4,230) (45,101) (4,230) (10,860) (60,191) Restated 2020 £’000 16,003 (5,000) 7,030 2,548 20,581 (63,948) 20,581 (1,734) (45,101) Non-cash movements include £11,397,000 (2020: £1,923,000) of new lease liabilities and the impact of foreign exchange of £537,000 (2020: £189,000). The comparative financial information for 2020 has been restated as described in the footnote to the consolidated cash flow statement. 28. Analysis of net debt Bank borrowings due after one year Bank borrowings due within one year Lease liabilities due after one year Lease liabilities due within one year Total borrowings Cash and cash equivalents Net debt At 1 January 2021 £’000 (16,539) (6,201) (42,226) (4,798) (69,764) 24,663 (45,101) Cash flow £’000 – 6,145 – 3,705 9,850 (14,080) (4,230) Other non-cash movements £’000 At 31 December 2021 £’000 6,174 (6,174) (7,467) (3,601) (11,068) 208 (10,860) (10,365) (6,230) (49,693) (4,694) (70,982) 10,791 (60,191) Cash and cash equivalents at 31 December 2020 and 31 December 2021 comprised balances held in instant access bank accounts and other short-term deposits with a maturity of less than 3 months. Non-cash movements include £11,397,000 (2020: £1,923,000) of new lease liabilities and the impact of foreign exchange of £537,000 (2020: £189,000). 138 IQE plc Annual Report and Financial Statements 2021 29. Subsidiary undertakings Class of capital Proportion of shares held Activity Country of incorporation Registered Office Name of company IQE (Europe) Limited IQE Inc IQE KC LLC Ordinary shares of £1 100%* Common stock of $0.001 100%* Limited liability company 100%* IQE Taiwan ROC Ordinary shares of NT$10 100% IQE RF LLC Limited liability company 100%* IQE Silicon Compounds Limited Ordinary shares of £1 100% MBE Technology Pte Ltd CSDC Private Limited Preferred shares of S$1 Ordinary shares of S$1 Common stock of $1 par value 100% 100% 100%* Wafer Technology Limited Ordinary shares of £1 100%* NanoGaN Limited Ordinary shares of £0.001 100% Galaxy Compound Semiconductors Inc Common stock of $0.00 par value 100%* EPI Holdings Limited Ordinary shares of £1 100% Manufacture of advanced semiconductor materials Manufacture of advanced semiconductor materials Manufacture of advanced semiconductor materials Manufacture of advanced semiconductor materials Manufacture of advanced semiconductor materials Manufacture of silicon epitaxy Manufacture of advanced semiconductor materials Research, development and Manufacture of semiconductor materials Manufacture of semiconductor compounds and ultra-high purity materials Development of advanced semiconductor materials Manufacture of semiconductor compounds and ultra-high purity materials Dormant holding company UK USA USA Taiwan USA UK Singapore Singapore UK UK USA UK KTC Wireless LLC Limited liability company 100% Dormant holding company USA IQE USA Inc IQE Solar LLC Limited liability company 100% Dormant holding company USA Limited liability company 100%* Dormant company USA IQE Properties Inc Limited liability company 100%* Property holding company USA Wafer Technology International Limited * Indirect holdings Ordinary shares of £1 100% Dormant holding company UK Pascal Close, St Mellons, Cardiff CF3 0LW, UK 119 Technology Drive, Bethlehem, PA 18015, USA 200 John Hancock Road, Taunton, MA 02780, USA No. 2-1, Li-Hsin Road Hsinchu Science Park Hsinchu 300, Taiwan 265 Davidson Avenue Somerset, NJ 08873, USA Pascal Close, St Mellons, Cardiff CF3 0LW, UK 30 Tampines industrial Avenue 3 Singapore 528775 30 Tampines industrial Avenue 3 Singapore 528775 Pascal Close, St Mellons, Cardiff CF3 0LW, UK Pascal Close, St Mellons, Cardiff CF3 0LW, UK 9922 E Montgomery Avenue, #7, Spokane, WA 99206, USA Pascal Close, St Mellons, Cardiff CF3 0LW, UK 119 Technology Drive, Bethlehem, PA 18015, USA 119 Technology Drive, Bethlehem, PA 18015, USA 119 Technology Drive, Bethlehem, PA 18015, USA 119 Technology Drive, Bethlehem, PA 18015, USA Pascal Close, St Mellons, Cardiff CF3 0LW, UK The proportion of voting rights of subsidiaries held by the Group is the same as the proportion of shares held. All UK subsidiaries are exempt from the requirements to file audited financial statements by virtue of section 479A of the Companies Act 2006. In adopting the exemption, IQE plc has provided a statutory guarantee to these subsidiaries in accordance with section 479C of the Companies Act 2006. 139 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 30. Joint Venture The Group holds investments in one joint venture as follows: Name of company Class of capital Proportion of shares held Activity Compound Semiconductor Centre Limited * Indirect holdings Common stock of £1 par value 50%* Research, development and Manufacture of semiconductor materials Country of incorporation UK Registered Office Pascal Close, St Mellons, Cardiff CF3 0LW, UK Compound Semiconductor Centre Limited (‘CSC’) On 9 July 2015 the Group entered into a joint venture agreement with Cardiff University to create the CSC in the United Kingdom. The shareholder agreement establishes that the CSC is jointly controlled by the shareholders who have an equal share of the voting rights such that the Group’s investment in the joint venture is accounted for using the equity method in accordance with the accounting policies set out in note 2 and note 3. The commercial purpose of the CSC is the research, development and manufacture by metal organic vapour phase epitaxy (‘MOVPE’) of advanced compound semiconductor materials in Europe. The business was set-up by the joint venture partners to provide a bridge between early stage research and high-volume manufacturing and was established in a manner to provide the CSC with the capability to deliver specialist compound semiconductor product development, prototyping and early stage manufacturing services to academic and industrial customers from its own compound semiconductor foundry. On the formation of the joint venture the Group contributed fixed assets, independently valued at £12,000,000, transferred employees and licensed intellectual property to establish the CSC’s manufacturing and technical capability whilst at the same time entering into an agreement with CSC that has been extended in the current year and conveys to the Group the right to use the assets of the joint venture for a minimum period up to 31 March 2022 (see note 3a). Cardiff University contributed cash. The intellectual property license relates to technical know-how and is licensed to the CSC under the terms of a perpetual licence that can only be terminated in a limited number of circumstances, none of which currently apply as the CSC is not in breach of the license agreement. The Group has no obligation to enhance or develop the licensed intellectual property. The licence fee of £20,000,000, mutually agreed by the Group and Cardiff University was recognised as license income in accordance with the Group’s revenue recognition policy for perpetual licenses (see note 2) in 2015 and 2016 when the intellectual property was transferred to the CSC. The contractual right granted by the CSC to the Group to use its assets provides the Group with access to manufacturing capacity and de-risks the initial establishment of the CSC as the Group operates as a cornerstone customer during the early stages of the development of the CSC’s business when it is required to fund running costs associated with its foundry whilst developing its business and own independent revenue streams. Costs associated with the right to use the assets of the CSC are charged to the Group at a mutually agreed price by the Group and Cardiff University. The price reflects the Group’s right to use the assets and is variable based on the CSC’s cash cost of production (including direct labour, materials and other foundry costs) which provides the CSC with a low cost, low risk route to build its business whilst covering its manufacturing related operating costs. The arrangements between the joint venture parties, structured to provide the Group with its required level of manufacturing capacity and to provide the CSC with sufficient flexibility to develop its business envisaged that reliance on the Group as the cornerstone customer will reduce. The CSC continues to achieve key business milestones, including the development of its own independent commercial customer relationships and funded collaborative research and development projects which has resulted in its reliance on the Group gradually reducing as these independent relationships and revenue streams continue to develop with external revenue totalling £1,732,000 (2020: £1,973,000). The CSC’s financial year end is 31 December which is co-terminus with the Group and has been used to prepare the consolidated Group financial statements and the summary CSC financial information set out below. No dividend has been received by the Group from the CSC (2020: £nil). Summary information for Compound Semiconductor Centre Limited £’000 Revenue EBITDA Profit from continuing operations Profit for the period Total comprehensive income for the period Summary balance sheet Non-current assets Current assets Current Liabilities Non-current Liabilities Equity attributable to Joint Venturers 140 IQE plc Annual Report and Financial Statements 2021 2021 £’000 8,222 78 1,208 1,208 1,208 2021 £’000 5,057 2,026 (1,846) (10,212) (4,975) 2020 £’000 8,637 276 1,490 1,490 1,490 2020 £’000 5,823 2,221 (1,636) (12,593) (6,185) Carrying value of equity interest in CSC Ltd Net liabilities of CSC Ltd Proportion of the Groups ownership interest Groups share of net liabilities Elimination of unrealised gains on transactions with CSC Ltd Cumulative absorption of JV losses against long term JV preference share debt (note 5) Cumulative unrecognised losses Carrying amount of the Groups interest in the JV Summary of cumulative unrecognised losses Unrecognised losses brought forward Unrecognised unrealised gains on transactions with CSC Ltd Profit in the year Reversal/absorption of JV losses against long term JV preference share debt (note5) Cumulative unrecognised losses carried forward 2021 £’000 (4,975) 50% (2,487) (12,000) 163 14,324 – 2021 £’000 (17,642) – 604 – (17,038) 2020 £’000 (6,185) 50% (3,091) (12,000) 163 14,928 – 2020 £’000 (14,600) – 746 (3,788) (17,642) Comparative financial information has been adjusted to reflect the final audited 2020 CSC financial statements. The adjustment to the disclosure has had no impact on the Group’s consolidated loss for the year, total net assets or cash position. 31. Acquisitions IQE Taiwan ROC On 5 October 2020, the group acquired the remaining 9.82% of issued shares held by third party minority shareholders in its subsidiary, IQE Taiwan ROC, taking its equity ownership from 90.18% to 100.00%. Immediately prior to the purchase, the carrying amount of the existing 9.82% non-controlling interest in IQE Taiwan ROC was £4,335,000. The acquisition was effected using a statutory share swap arrangement under Taiwan’s Business Mergers and Acquisition Law (the ‘Share Swap’) with the final total consideration payable to the minority shareholders determined by the Taiwan Court in 2021. Selling shareholders, representing 5.04% of the issued shares in IQE Taiwan ROC accepted the Share Swap and in 2020 received an aggregate consideration of £1,437,646 which was settled via the issuance of 2,606,689 ordinary shares in IQE plc at a price per ordinary share of 55.15p. Selling shareholders, representing 4.78% of the issued shares in IQE Taiwan ROC rejected the Share Swap and had their shares purchased for cash based at a price determined by the Taiwan Court as part of the normal process followed under Taiwan’s Business Mergers and Acquisition Law. Cash consideration of £1,363,000 was paid in 2020 to selling shareholders who rejected the Share Swap with further cash consideration and interest of £1,739,000 paid to these selling shareholders in 2021 following a final price determined by the Taiwan Court. The Group recognised a decrease in non-controlling interests of £4,335,000. The effect on the equity attributable to the owners of IQE Taiwan ROC following the final purchase price determination by the Taiwan Court during the current year is summarised as follows: Carrying amount of non-controlling interests acquired Consideration paid to non-controlling interests – Equity consideration – Cash consideration (Deficit)/excess of consideration paid recognised in the transactions with non-controlling interests reserve within equity 2021 £’000 4,335 1,438 3,155 (258) 2020 £’000 4,335 1,438 1,363 1,534 141 Financial StatementsWhere innovation starts Notes to the financial statements continued For the year ended 31 December 2021 32. Related party transactions The Group purchased services during the year from Newport Wafer Fab Limited totalling £75,504 (2020: £69,212) and at the year-end had an outstanding payable of £15,101 (2020: £nil) due to Newport Wafer Fab Limited. Newport Wafer Fab Limited is wholly owned by Neptune 6 Limited. Dr AW Nelson was a director of Neptune 6 Limited and in conjunction with his close family Dr AW Nelson owned a controlling interest in Neptune 6 Limited up until 5 July 2021 when he ceased to be a person with significant control and his appointment as a director of Neptune 6 Limited was terminated. Group Transactions with Joint Venture - Compound Semiconductor Centre Limited CSC was established by the Group and its joint venture partner as a centre of excellence for the development and commercialisation of advanced compound semiconductor wafer products in Europe. On its formation the Group contributed assets to the joint venture valued at £12,000,000 as part of its initial investment. The activities of CSC include research and development into advanced compound semiconductor wafer products, the provision of contract manufacturing services for compound semiconductor wafers to certain subsidiaries within the IQE plc Group and the provision of compound semiconductor manufacturing services to other third parties. CSC operates from its manufacturing facilities in Cardiff, United Kingdom and leases certain additional administrative building space from the Group. During the year the CSC leased this space from the Group for £115,000 (2020: £115,000) and procured certain administrative support services from the Group for £235,000 (2020: £235,000). As part of the administrative support services provided to CSC the Group procured goods and services, recharged to CSC at cost, totalling £3,881,648 (2020: £3,740,282). CSC entered into an agreement with the Group following its formation which has been extended in the current year and conveys to the Group the right to use the assets of the joint venture for a minimum period up to 31 March 2023. Costs associated with the right to use the CSC’s assets are treated by the Group as operating lease costs (see note 3a). Costs are charged by the CSC at a price that reflects the CSC’s cash cost of production (including direct labour, materials and site costs) but excludes any related depreciation or amortisation of the CSC’s property, plant and equipment and intangible assets respectively under the terms of the joint venture agreement between the parties. Costs associated with the right to use the CSC’s assets totalled £6,234,000 (2020: £6,365,000) in the year. CSC sold property, plant and equipment to the Group during the year for £nil (2020: £1,423,750). The purchase price was based upon an independent valuation performed by Liquidity Services UK with the consideration settled in cash. At 31 December 2021 an amount of £1,030,000 (2020: £322,000 owed from) was owed from the CSC at year end. In the Groups balance sheet ‘A’ Preference Shares with a nominal value of £8,800,000 (2020: £8,800,000) are included in financial assets at an amortised cost of £nil (2020: £nil) and the Group has a shareholder loan of £244,000 (2020: £241,000) due from CSC. Company Transactions with Group Companies 2021 IQE (Europe) Limited IQE Silicon Compounds Limited Wafer Technology Limited IQE USA Inc IQE Inc IQE KC LLC IQE RF LLC KTC Wireless LLC Galaxy Compound Semiconductors Inc IQE Taiwan ROC MBE Technology Pte Ltd CSDC Private Limited Income £’000 Expense £’000 Trade Receivable £’000 Trade Payable £’000 Loan Receivable £’000 627 1,007 271 – 819 938 – – 139 4 22 – (66) – (33) – (2) – – – – (11) – (2,938) 767 1,424 389 – 970 1,049 – – 144 20 54 – (8) – (19) – (2) – – – – – – – 4,403 28,502 – 8,550 103,386 – 520 – – – 11,614 – Loan Payable £’000 – – (8,319) – – (5,582) – (16,623) (6,753) – – – 142 IQE plc Annual Report and Financial Statements 2021 2020 IQE (Europe) Limited IQE Silicon Compounds Limited Wafer Technology Limited IQE USA Inc IQE Inc IQE KC LLC IQE RF LLC KTC Wireless LLC Galaxy Compound Semiconductors Inc IQE Taiwan ROC MBE Technology Pte Ltd CSDC Private Limited 33. Commitments Income £’000 Expense £’000 Trade Receivable £’000 Trade Payable £’000 Loan Receivable £’000 513 738 205 – 557 982 – – 102 – 13 – (100) – (15) – (92) – – – – (11) – (936) 538 1,122 349 – 717 933 – – – 118 47 – – – – – (5) – – – – – – – 11,700 23,115 – 8,134 95,858 1,736 494 – – – 9,503 – Loan Payable £’000 – – (4,866) – – – – (15,973) (6,102) – – – The Group had capital commitments at 31 December 2021 of £780,000 (2020: £nil). 34. Post balance sheet events On 23 March 2022 the group announced to senior management the discontinuance of its nanoimprint lithography operations located in Taiwan. The cessation of nanoimprint lithography activities is expected to result in restructuring cash costs that are currently being assessed and the impairment of intangible technology development cost assets of £3,330,000. Technology assets developed prior to the cessation of activities will be retained by the Group. 143 Financial StatementsWhere innovation starts Glossary APD Avalanche Photodiode. A high-performance detector used for high-speed communication systems Artificial intelligence (AI) A simulation of human intelligence in machines, including machines which are programmed to mimic human action or exhibit humanistic traits such as learning or problem-solving Augmented Reality (AR) A technology that superimposes a computer-generated image on a user’s view of the real world to provide a composite view BiHEMT A device that integrates a PHEMT and HBT into the same structure in order to reduce device footprint, commonly used in RF systems such as mobile handsets Compound semiconductor A semiconductor formed from more than one element, typically comprising a mixture of elements from Groups III and V of the Periodic Table. Cloud computing A network of remote servers hosted on the internet to store, manage and process data CMOS++ cREO® CVD Device structure DFB Laser Dilute Nitride EEL Epitaxy (epitaxial growth) Compound materials on Silicon Crystalline Rare Earth Oxide. This is a novel material developed by IQE for next generation filter and GaN applications. Chemical Vapour Deposition. IQE’s technique for making Advanced Silicon/Group IV epiwafers, characterised by using compound sources (typically hydrides) flowed across a hot wafer where they are “cracked” (reacted) to get the desired material. CVD occurs in a similar pressure regime to MOCVD The term used to describe the particular series of epitaxial layers on a substrate crystal. They are typically specified by their thickness, composition, electrical and opto-electronic properties Distributed Feedback Laser. An EEL where a grating is integrated into the layer stack to improve performance, commonly used in high speed communication systems A material where small amounts of Nitrogen are added to GaAs in order to enable GaAs to be used in applications typically reserved for InP Edge Emitting Laser. A laser characterised by an elliptical light beam emitting from the edge of the wafer, often used in high- speed communication systems Deposition of high quality, crystalline layers on a substrate. By specifically choosing the composition and sequence of the layers in epitaxial growth, the optical and electrical properties of the epiwafer are able to be tuned and these individual layers are referred to as ‘epilayers’ Epiwafer or epitaxial wafer The term used to describe the substrate crystal with epitaxial layers deposited thereon (see also (“wafer”) GaAs GaN GaSb Ge HBT InP Gallium Arsenide Gallium Nitride Gallium Antimonide Germanium Heterojunction Bipolar Transistor, a commonly used device for power amplification in mobile handsets Indium Phosphide Integrated circuit A combination of electronic devices integrated onto a single substrate or chip Internet of Things (IoT) Network of physical objects – “things” which are able to collect and transfer data over a wireless network without human intervention IQepiMo™ IQGeVCSEL 150™ IQDN-VCSEL A template technology developed by IQE for RF filters and other applications requiring low resistance buried electrodes A technology developed by IQE for 6” VSCSELs on Germanium A technology developed by IQE for the growth of long wavelength (> 1300 nm) VCSELs on GaAs substrates IR LiDAR MBE MIMO MOCVD Infrared Light detection and ranging – a method for measuring distances by illuminating the target with a laser light Molecular Beam Epitaxy. One of IQE’s primary techniques for making compound semiconductor epiwafers, characterised by deposition using elemental sources impinging on a hot wafer where a reaction occurs to get the desired material. MBE occurs at extremely low pressures (known as ultra-high vacuum) that are comparable to that of outer space. Multiple-input, multiple-output. Two or more transmitting or receiving antennas are used on a wireless device to optimise the speed, range and reliability of that device. Metal Organic Chemical Vapour Deposition. One of IQE’s primary techniques for making compound semiconductor epiwafers, characterised by deposition using compound sources (typically metal organics and hydrides) that are flowed across a hot wafer where they are “cracked” (reacted) to get the desired material. MOVCD occurs at much higher pressures than MBE and also goes by the name MOVPE (Metal Organic Vapour Phase Epitaxy) Nanoimprint Lithography (NIL) A method of wafer patterning that allows cost effective, mass production of very small feature sizes OEM Original equipment manufacturer Opto-electronic device A device or structure in which light and electricity interact to produce, detect or manipulate light PiN A detector used in high-speed communication systems 144 IQE plc Annual Report and Financial Statements 2021 PHEMT PQC Reactor RF Pseudomorphic High Electron Mobility Transistor. A commonly used device for high-speed switching for wireless communications Photonic Quasi-crystal. A unique technology owned by IQE that enables beam steering capabilities for advanced optical products The equipment used to produce epitaxial layers on a substrate Radio frequency Semiconductor A material with resistivity which lies somewhere between that of a conductor and an insulator Si SiC Silicon Silicon Carbide Structured light scanner A 3D scanning device which measures an object using projected light patterns and a camera system Substrate The term used to describe the base wafer used for the epitaxial substrate crystal growth process Time of Flight (ToF) camera A camera which calculates the distance between the subject by measuring the trip time of an artificial light signal emitted by a laser or LED VCSEL Wafer 3D Sensing 5G Vertical Cavity Surface Emitting Laser, an opto-electronic component used in a variety of applications The term used to describe the substrate crystal in the form of thinly sliced discs or the substrate disc with one or more epitaxial layers deposited upon it Three-dimensional depth sensing technology which is enabled by IQE’s VCSELs 5th generation mobile network designed to provide enhanced connectivity and higher speeds 145 Financial StatementsWhere innovation starts Investor information Registered Office Pascal Close St Mellons Cardiff CF3 0LW United Kingdom Investor Relations Amy Barlow Phone: +44 (0)2920 839 400 investors@iqep.com Principal Bankers HSBC Bank Plc 8 Canada Square London E14 5HQ Auditors KPMG LLP 3 Assembly Square Britannia Quay Cardiff CF10 4AX Nominated Advisers and Brokers NOMAD and Joint Broker Peel Hunt LLP 7th Floor 100 Liverpool Street London EC2M 2AT Joint Broker Citigroup Global Markets Limited 33 Canada Square Canary Wharf London E14 5LB Registrar Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA Financial Public Relations Headland Consultancy Cannon Green, 1 Suffolk Lane London EC4R 0AX iqe@headlandconsultancy.com Share price information Exchange: London Stock Exchange FTSE AIM Index Ticker: IQE:LN ISIN: GB0009619924 Share price performance as at 31 December 2021 Earning/loss per share: (3.87p) 100 90 80 70 ) 60 P B G 50 ( e c i r p e r a h S 40 30 20 10 0 Jan 21 Apr 21 Jul 21 Oct 21 Dec 21 146 IQE plc Annual Report and Financial Statements 2021 I Q E p l c A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 2 1 IQE plc Pascal Close St Mellons Cardiff, CF3 0LW United Kingdom www.iqep.com
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