TWD.L Regulatory News (TWD)

23 September 2020

TRACKWISE DESIGNS PLC

("Trackwise", the "Company" or the "Group")

Interim Results for the six months ended 30 June 2020

Trackwise Designs (AIM: TWD), a leading provider of specialist products using printed circuit technology, is pleased to announce its interim results for the six months ended 30 June 2020.

Financial highlights

· Revenues £2.39m (H1 2019: £1.547m)

· Improved Harness Technology™ ("IHT") revenues of £252k (H1 2019: £547k)

· Gross margin 17.8% (H1 2019: 38%)

· Adjusted EBITDA of £102k (H1 2019: £237k)

· Adjusted operating loss of £365k (profit H1 2019: £61k)

· Reported profit after taxation of £921k (loss H1 2019: £(64k))

· Net cash* of £1.612m (31 December 2019: net debt £0.302m)

· Basic EPS of 4.98 pence per share

* Excludes IFRS 16 lease liabilities

Operational highlights

· Trading performance impacted by COVID-19

· Gross margin reflects increased capacity investment prior to anticipated increased business and the impacts of COVID-19

· Acquisition of Stevenage Circuits Ltd ("SCL"), for an adjusted total consideration of £1.8m

o strengthening manufacturing capabilities and customer base

o SCL has traded cash positively since acquisition

· Deepened relationships with key customers in our target IHT markets: electric vehicles ("EV"), medical and aerospace, including first production order for IHT in EV

o increased IHT total customers and opportunities to 82 (H1 2019: 57)

o 10 NDAs signed in period to commence design phase of potential new customer orders; (14 including post-period NDAs); building a pipeline of future revenue opportunities

Post period highlights

· Significant manufacturing agreement signed with UK EV OEM worth up to £38m

· Commissioning of Direct Imaging machine to facilitate increased IHT production efficiency and capacity at Tewkesbury site

· Continued investment in capabilities to support series production

Outlook

Looking ahead, while the Company's full year performance will reflect the difficult economic trading conditions, the EV manufacturing contract win and progress in our two other core target markets, medical and aerospace, support our convictions of IHT's merit and its potential to be a catalyst for transformation in these markets, with our innovation enabling the global technology of the future. We are excited about the near and long-term prospects for Trackwise with growing visibility of an increasing number of opportunities.

Philip Johnston, CEO of Trackwise, commented: "While the business remained open and safely operational throughout the period, like many businesses we were not immune from the impacts of COVID-19. Nevertheless we have made excellent progress strategically with the acquisition of Stevenage Circuits, which has extended our product range, our expertise and customer base and increased our production capabilities, enabling us to move towards the facility in Tewkesbury becoming dedicated to IHT production.

Since the period end, we completed the commissioning of the critical roll to roll direct imaging machine, which represents the final investment of our IPO proceeds and we secured the highly significant three-year contract to manufacture IHT for electric vehicles.

Looking ahead, while the Company's full year performance will reflect the difficult economic trading conditions, the EV manufacturing contract win and progress in our two other core target markets, medical and aerospace, support our convictions of IHT's merit and its potential to be a catalyst for transformation in these markets, with our innovation enabling the global technology of the future.

With a growing customer base and pipeline, and a net cash position, we are confident in our ability to deliver on these growth opportunities as trading conditions normalise."

Enquiries

Notes to editors

Trackwise is a UK-based manufacturer of specialist products using printed circuit technology.

The full suite includes: Improved Harness Technology™ ("IHT") and Advanced PCBs - Microwave and Radio Frequency ("RF"), Short Flex, Flex Rigid and Rigid Multilayer products.

IHT uses a proprietary, patented process that Trackwise has developed to manufacture multilayer flexible printed circuits of unlimited length. While the technology has many applications, the directors expect that one of its primary uses will be to replace traditional wire harness in a variety of industries.

The Company manufactures on two sites, located in Tewkesbury and Stevenage (following the acquisition of Stevenage Circuits Ltd in April 2020). It serves customers in Europe, North America, Asia and Australia.

Trackwise Designs plc was admitted to trading on AIM in 2018 with the ticker TWD. For additional information please visit www.trackwise.co.uk.

The information communicated in this announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

Chairman's Statement

While we acknowledge the impact of COVID-19 on the short-term trading environment, which impeded our ability to complete our investment into new equipment and has prolonged sales cycles, we remain excited about the near and long-term prospects for Trackwise and have visibility of a growing number of opportunities.

The wellbeing of our staff has remained our top priority throughout. We have maintained our strict adherence to all UK Government safety guidelines and focused on working from home where possible, while implementing strict social distancing and additional hygiene measures in our facilities. Our teams responded well to the challenges and I would like to thank them for their efforts.

CEO's Statement

Despite COVID-related headwinds affecting our trading performance, we are pleased to report on excellent strategic progress for the Company during the period. Major achievements have been made in both our production capabilities and our reach into target markets.

The key highlight in the period was the acquisition of SCL in April 2020. This acquisition represents a transformational step forward for Trackwise, extending our manufacturing capabilities and providing capacity at Tewkesbury to deliver IHT series production, while diversifying our revenue streams and customer base.

Post period, the announcement of our first series production order from a UK based manufacturer of electric vehicles signified the next stage of progress for our IHT flexible printed circuit technology and was a key step into one of our strategic markets.

Impact of COVID-19

COVID-19 has impacted much of the manufacturing industry and, despite good progress against our strategic objectives, trading remains challenging across our business. Much of our typical run rate business has continued, but we have seen a slow-down in new orders. A number of new opportunities across our product range remain in discussion with associated revenues now predominantly expected in the following financial year.

Revenues from the medical sector were impacted by the delayed commissioning of new machinery due to lockdown restrictions and this impacted deliveries to a customer. This has now been rectified and the product has been supplied to our customer. We were not alone in experiencing delays in the arrival of manufacturing machinery, with anticipated follow-on orders from customers impacted by delays due to the lockdowns in Europe. We will continue to monitor the situation across our end markets and track our expectations against the sector-wide performance of these industries.

Upgrades to Flexible Printed Circuit ("FPC") manufacturing operations

We continued to strengthen our production capability and capacity by investing in new equipment, installing and commissioning an advanced roll-to-roll direct imaging system and a roll-to-roll flexible circuit laser drilling system. This investment, alongside the acquisition of SCL, will enable Trackwise to significantly boost its operational throughput and address growing customer interest in FPCs based on proprietary IHT technology. We are now much better positioned to serve future market opportunities as they arise, supporting greater volume demands, as well as providing enhanced levels of quality.

IHT

Our IHT technology remains the growth driver for Trackwise and we are confident in the applicability of this proprietary technology to our chosen markets and the significant revenues this has the potential to generate.

We have set out the three markets where we expect to see the greatest levels of growth for IHT. These are:

1. Electric vehicles

2. Medical

3. Aerospace

We have seen positive developments across these markets during this period. IHT customers and opportunities grew to 82 by the end of the period (31 December 2019: 72).

Most significantly, in February we announced an order for the supply of flex PCBs to a UK EV OEM, with a follow-on manufacturing agreement signed earlier this month that could be worth up to £38m over three years subject to annual pricing reviews. This deal is Trackwise's first order for full series production of IHT and is a strong validation of the application of our technology to this market and delivery capability.

We remain active in looking for further opportunities within EVs and expect to benefit from the growing emphasis on the sustainability agenda and an increasing legislative pressure to force the automotive sector towards non-fossil fuel motive power.

There continues to be encouraging levels of interest in IHT from the medical industry and we continue to work closely with prospective customers on trials of our technology with a view to securing a meaningful uptick in revenues in FY21.

In aerospace, our developments with GKN of next generation systems continue despite the well-documented industry-wide slowdown.

In the near-term, revenue opportunities will likely continue to be hindered by COVID-19 disruption, but we remain confident in the applicability of IHT to all our chosen market sectors.

SCL Acquisition and integration

We completed the transformational acquisition of Stevenage Circuits Ltd in April 2020, funded through the support of existing and new investors in a £5.87m placing, significantly increasing our production capabilities. Our focus since completion of the acquisition has been to ensure the integration of SCL is as seamless as possible. SCL has been cash generative since the acquisition, providing a valuable base of largely recurring revenue. SCL has continued to win new contracts with key accounts, though these new projects and associated revenues are expected to be delivered in H2, principally because of COVID-19 related disruption.

RF

The forthcoming roll out of 5G technology is a re-equipment opportunity which the Board believe will create demand for the Company's RF products, now part of the Advanced PCB division. However, RF continues to be impacted by factors such as Brexit and the US-China trade war, and continues to be compounded by the uncertainty caused by COVID-19. We have adjusted our budget for RF for the year to reflect these factors. RF continues to be profitable, adding value to the Group as a whole.

Financial Review

Revenue for the period increased to £2.389m (H1 2019: £1.547m), benefitting from the inclusion of SCL for Q2. These numbers were disappointing and were the result of the impacts of COVID-19. The issue of new equity at the time of the SCL acquisition strengthened the balance sheet, with net cash of £1.564m at the end of June 2020.

We have continued to invest in our know-how and technical capability which will support the increasing amount of IHT business that we will have throughout the coming years.

Our acquisition of SCL was attractively priced and we acquired the business at a discount to stated net assets, and this gave rise to a credit to the Group P&L account of £1.54m which has bolstered distributable reserves and net assets accordingly. We were able to enforce our rights under the acquisition agreement to have restitution of funds to make good premises and equipment deficiencies that were agreed post acquisition.

The outcome of the period is that earnings per share are 4.98p (H1 2019: (0.43) p).

Summary & Outlook

While COVID-19 impacted revenues in the first half of the year, delaying both the receipt of new orders and the ability to complete our investment in our production facilities, it was nonetheless a period of excellent strategic progress, underpinned by a base of recurring revenues and profit generation in the Advanced PCB business, incorporating RF. The acquisition of SCL has transformed our production capabilities, paving the way for IHT production at scale, while bringing additional expertise and customer base. We have been pleased with the integration and performance of the business to date.

Looking ahead, we are confident the recent IHT manufacturing agreement with a UK manufacturer of EVs will be the catalyst for a step change in Trackwise's revenue and a solid platform on which to build. This, alongside the progress we are making elsewhere in the sector and with partners and prospective customers in medical and aerospace, clearly illustrates the merits of IHT and its potential.

While the Company's full year performance will reflect the difficult economic trading conditions, we expect some improvement in elements of our Advanced PCB business and the growing pipeline for IHT gives us confidence in our ability to deliver meaningful IHT revenue growth in FY21.

The macro-economic backdrop will remain uncertain due to both Brexit and as the pandemic continues to play out, but Trackwise's long-term value proposition remains unchanged. We will continue to carefully monitor and respond to the situation, and supported by net cash on our balance sheet, a stable customer base and growing pipeline, we are confident in our ability to deliver on these growth opportunities as trading conditions normalise.

Interim Condensed Consolidated Statement of Comprehensive Income

Interim Condensed Consolidated Statement of Financial Position

Interim Condensed Consolidated Statement of Changes in Equity

Interim Condensed Consolidated Statement of Cash Flows

1. Corporate information

Trackwise Designs plc is a Company incorporated in the United Kingdom. The registered address of the Company is 1 Ashvale, Alexandra Way, Ashchurch, Tewkesbury, Gloucestershire, GL20 8NB. The principal activity of the Company and the Group is the development, manufacture and sale of printed circuit boards.

2. Accounting policies

Basis of preparation

This unaudited consolidated interim financial information has been prepared in accordance with IFRS as adopted by the European Union including IAS 34 'Interim Financial Reporting'. The principal accounting policies used in preparing the interim results are those it expects to apply in its financial statements for the year ending 31 December 2020. These are unchanged from those applied in the 31 December 2019 Company financial statements except for the addition of the application of Group policies which are now relevant following the acquisition of a material subsidiary from April 2020 and the consolidation of its results and financial position with those of the Company. In particular, IFRS 3 Business Combinations and IFRS 10 Consolidated Financial Statements have been applied.

The financial information does not contain all of the information that is required to be disclosed in a full set of IFRS financial statements. The financial information for the six months ended 30 June 2020 and 30 June 2019 is unreviewed and unaudited and does not constitute the Group or Company's statutory financial statements for those periods.

The comparative financial information for the full year ended 31 December 2019 has, however, been derived from the audited statutory financial statements for that period. A copy of those statutory financial statements has been delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not include references to any matters to which the auditor drew attention by way of emphasis without qualifying its report and did not contain a statement under section 498(2)-(3) of the Companies Act 2006.

The financial information in the Interim Report is presented in Sterling.

3. Segmental reporting

IFRS 8, Operating Segments, requires operating segments to be identified on the basis of internal reports that are regularly reviewed by the Company's chief operating decision maker. The chief operating decision maker is considered to be the Board of Directors.

The operating segments are monitored by the chief operating decision maker and strategic decisions are made on the basis of adjusted segment operating results. From January 2018 the RF (now part of Advanced PCB) and IHT activities began to be separately reviewed and monitored, initially in respect of revenue.

All assets, liabilities and revenues are located in, or derived in, the United Kingdom. The material assets and liabilities relate to overall activity with the exception of the intangible development costs and deferred grants which are solely in respect of IHT.

In the six months ended 30 June 2020 the Group had two major customers who each represented 12% of revenue (30 June 2019: two major customers who represented 11% and 10% of total revenue, and full year ended 31 December 2019: no major customer representing in excess of 10% of revenue).

Revenue by product and geographical destination was as follows:

4. Income tax

Taxation is provided at the estimated rate of tax for the period, applying 19% (2019:17%) to deferred tax balances, and including the benefit of enhanced allowances for research and development costs.

5. Dividends paid and proposed

No dividends have been paid or proposed in the period ended 30 June 2020 or year ended 31 December 2019.

6. Earnings per share

The calculation of the basic and diluted earnings per share is based on the following data:

Options over 901,909 shares were granted to employees on 15 June 2018 which are still exercisable and potentially dilutive shares included in the weighted average for the period to 30 June 2020. The 1,009,000 of additional options issued on 24 June 2020 are not considered to be dilutive on the period to 30 June 2020.

7. Intangible fixed assets

The capitalised development project costs relate to the significant continuing investment in respect of the Company's Improved Harness Technology ('IHT') process for unlimited length printed circuit boards and know-how which is being developed by the Company with amortisation on the initial development projects commencing in 2018. The remainder of intangible assets is represented by software assets and an unchanged amount of goodwill in respect of the initial technology.

8. Share capital

7,341,250 £0.04 ordinary shares were issued on 31 March 2020 at £0.80 each for cash in order to provided funds for the acquisition made in the period and continuing investment in the business. This increased nominal share capital by £294,000 and share premium by £5,579,000. Share issue costs of £439,000 were charged against the share premium account resulting in a net increase of £5,140,000.

9. Acquisition of Stevenage Circuits Ltd

The Company acquired all of the share capital of Stevenage Circuits Ltd ("SCL"), a UK-based designer and manufacturer of short flex and rigid printed circuit boards, on 1 April 2020. The acquisition primarily adds further manufacturing capacity to enable the demand-led ramp up of Trackwise Design's Improved Harness Technology production, as well as customers and technical, sales and operational expertise.

The assets were acquired at a discount to their provisional fair value resulting in negative goodwill of £1,545,000 which has been credited to the income statement in accordance with IFRS 3 and represents an exceptional item in the period. This relates to the ability of the combined Group to fully utilise the manufacturing capacity of SCL and enhance earnings from the specialist plant and equipment. The consolidated negative goodwill credit is not expected to be taxable.

The provisional fair values of the assets and liabilities acquired are as follows:

Consideration was paid in cash and there is no deferred or contingent consideration payable. Gross trade receivables acquired were £903,000 all of which were expected to be recovered. Right of use property assets are included in property, plant and equipment and lease liabilities within borrowings in the consolidated statement of financial position.

Acquisition related expenses of £214,000 have been charged as an exceptional item in the consolidated income statement. The negative goodwill and acquisition expenses are both considered highly material and significant non-recurring items. They are therefore presented below operating loss in the consolidated income statement.

SCL has contributed £1,224,000 of revenue and incurred a loss of £47,000 included in the consolidated income statement from 1 April 2020 to 30 June 2020 (excluding acquisition expenses and negative goodwill). Had SCL been consolidated from 1 January 2020 it would have contributed another £1,284,000 of revenue and a loss of £23,000 to the six-month period.