(MENAFN Editorial) 5 February 2018
IQE plc
("IQE" or the "Company")
IQE plc (AIM: IQE) notes the report published by ShadowFall Capital & Research LLP ("ShadowFall"), which was disseminated to the public on 2 February 2018.
The allegations contained within the report are without merit and provide a misleading analysis of the Company's financial position. The central thesis of this report is a fundamental misrepresentation of the profit and cash generation of IQE, especially with respect to the Company's joint venture agreements.IQE would like to directly address the key themes in the report, correct any misinformation that might arise from the report's inaccuracies and assure shareholders that IQE holds itself to the highest standards of corporate governance, transparency and integrity.
It is also important to note that ShadowFall states that it holds a short position in IQE and so will duly profit from any near-term reduction in IQE's share price, caused by the allegations in the report. ShadowFall made no attempt to review its report with IQE prior to its publication.
The purpose of IQE's joint ventures
The joint ventures in Singapore and Cardiff form an important part of IQE's strategy to be at the leading edge of compound semiconductor innovation, through collaboration with leading universities and supply chain partners.
Transactions with joint ventures
IQE's trade with these joint ventures is clearly reported in the notes to its annual reports and financial statements. The nature of this trade is IQE sub-contracting certain external customer contracts through these joint ventures. By acting as an anchor customer, IQE is providing the joint ventures with initial business to limit their start up losses in their early years of operation.
License income from IQE intellectual property
License income from joint ventures has been reported in detail by the Company in regulatory announcements and in its annual reports and financial statements. In these reports, IQE has made it clear that license income from joint ventures was front-loaded, reflecting the creation of their initial capability to serve commercial contracts. As noted in its most recent trading update, IQE's license income from joint ventures will be less than £2 million in 2017.
In the case of the Cardiff joint venture (CSC), the consideration for intellectual property licensing has been a combination of cash and receivable long-term loans. Both sources of consideration have been clearly stated in IQE's annual reports and financial statements. The revenue that the joint venture generates from IQE meets the cash cost of the joint venture's operation, at no financial gain or loss to IQE. The EBITDA loss of the joint venture in 2016 was £0.7 million, representing the cost of its own management, business development, and administration. The joint venture also has non-cash charges for amortisation of its intellectual property license and a depreciation of assets which gives a net loss of £4.4 million. This has been detailed in IQE's annual reports & financial statements. The ShadowFall report implies that IQE has used the joint venture to "hide" costs of IQE's own business, which is inaccurate.
In the case of the Singapore joint venture (CSDC), to support this business through its start up years, IQE has licensed intellectual property and leased surplus Molecular Beam Epitaxy ("MBE") capacity to the joint venture on a contingent basis, namely these charges only become payable by the joint venture to IQE to the extent that the joint venture generates surplus cash in each year. As required by International Financial Reporting Standards ("IFRS"), the joint venture fully reflects these costs in its own accounts, whereas IQE only accounts for this as income when it has been received in cash. Excluding these contingent charges, the Singapore joint venture generated cash of approximately £2 million from its operations in 2016, and hence paid approximately £2 million of license income to IQE in that year. Asset valuation
In order to reduce overall set up costs, IQE contributed certain fixed assets to the Cardiff joint venture in return for its equity stake. This was undertaken at market value, as determined by an independent professional valuer mutually agreed by the joint venture partners. Cardiff University match funded this value in cash in return for its equity stake in the joint venture. Similarly, the valuation of the intellectual property was validated by an independent accounting firm in a report to the joint venture board.
In 2012, IQE acquired the MBE epi-wafer manufacturing unit of RF Micro Devices ("RFMD"), with the acquisition consideration being settled through a trade discount on sales by IQE to RFMD for a fixed period of 4 years. In accordance with IFRS, this discount was classified as part of working capital. This was described in the Company's annual reports and financial statements and detailed in the notes to the cash flow statement. Had the Company financed this acquisition through debt or equity finance, the payment to acquire this business would have been excluded from the calculation of the free cash generation. As previously reported, this discount period ended in 2016. IQE now fully owns the acquired facility in North Carolina (original cost $110 million) and RFMD (now Qorvo) remains a key customer for IQE.
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