Xaar Regulatory News (XAR)

19 September 2023

Xaar plc

2023 INTERIM RESULTS

STRATEGIC PROGRESS WITH PERFORMANCE ON TRACK

Xaar plc ("Xaar", the "Group" or the "Company"), the leading inkjet printing technology group, today announces its unaudited interim results for the six months ended 30 June 2023.

Financial Summary:

1 - EBITDA is calculated as statutory operating profit before depreciation, amortisation and impairment of property, plant and equipment, intangible assets and goodwill. Adjusted EBITDA is calculated as EBITDA excluding other adjusting items as defined as follows. Adjusted Measures exclude the impact of share-based payment charges, exchange differences relating to intra-group transactions, gain on derivative financial instruments, restructuring and transaction expenses, research and development expenditure credit, fair value loss or gains on financial assets at FVPL, amortisation of acquired intangibles, and discontinued operations as reconciled in note 2.

2 - Net cash at 30 June includes cash, cash equivalents and treasury deposits.

Figures and percentages included in this report are subject to rounding adjustments arising from conversion to £millions from actual figures. Accordingly, figures shown for the same category presented in different tables may vary slightly, and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

Financial highlights

· Revenue of £34.5 million in line with expectations

· Group adjusted profit before tax for the period year up 29% to £1.8 million

· Gross margin of 40% is in line with H1 2022, driven by targeted favourable sales mix and cost management offsetting the factory upgrade investment

· R&D spend of £2.6 million, equating to 8% of Group Revenue, underscores the continued investment on the product roadmap, with a focus on the ImagineX platform

· Robust balance sheet with net cash of £7.3 million (2022: £12.7 million) following planned investment in working capital to ensure customer demand is met

Strategic and operational highlights

· Increasing number of customers developing products, with additional product launches expected in H2 2023 and expected recovery in key markets

· Commercial partnership with Quantica announced on 5 July 2023 enhances the Group's leading position in jetting highly viscous fluids

· Phase 1 of factory efficiency programme completed on time and within budget

· Product Print Systems business ("EPS") delivered a strong performance in the period with both revenue and margin growth

· Sustainability roadmap embedded within the business with clear strategy to reach 'net zero' by 2030

John Mills, Chief Executive Officer, commented:

"We remain focused on the successful delivery of our strategy and taking advantage of the significant opportunities that will drive profitable growth. We have seen continued positive momentum across the business, with increased visibility over customer product launches and a robust pipeline.

Our products, especially Aquinox, are generating strong interest from existing and new customers, underlining our leadership in printing highly viscous fluids.

Phase 1 of our factory efficiency programme has been successfully completed on time and within budget positioning us to deliver increased efficiency and capacity, whilst realising significant cost savings.

Whilst being mindful of the external environment, we remain optimistic about the future with encouraging signs of recovery in key markets and the business in good shape to make further progress and to deliver a full year performance in line with our expectations. With a substantial market opportunity and the progress made, we remain well positioned to realise our exciting potential."

Contacts:

A presentation for analysts and investors will be held via webcast and conference call at 09:00 today. For further details, please contact Xaar@teneo.com

Significant strategic progress

Xaar has delivered a good performance in the last six months in line with our expectations. We continue to execute our strategy of delivering compelling products in each of our market segments and remain focused on the significant opportunities that will drive profitable growth.

This strategy is now delivering with our products, especially Aquinox, generating strong interest from both existing and new customers underlining our leadership in jetting highly viscous fluids which, alongside other advantages, provide significant sustainability benefits, as well as reducing our customers' time to market.

Our positive momentum has continued during the reporting period. We have seen an increase in the number of customers adopting Xaar technology and we now have clearer visibility of their product launches, which will drive performance in the second half of this year and beyond.

Phase 1 of our factory upgrade has been successfully completed on time and within budget, positioning us to deliver increased efficiency and capacity, whilst realising significant cost savings. Further phases of development, expected to start in early 2025, will see increased modernisation of our manufacturing facilities leading to greater efficiencies and scale potential.

We have seen continued good performance from EPS, Megnajet and FFEI, with EPS especially continuing to drive excellent revenue and profit growth. As part of our decision to strategically withdraw from the Life Science part of FFEI, we sold non-core IP assets delivering a profit of £2.0 million.

Continued strong trading - in line with expectations

We have delivered performance in H1 2023 in line with management expectations, further demonstrating the operational and strategic progress across the Group. The Group has increased resilience with performance driven by all elements of the business, and an ongoing focus on cost control and careful cash management.

Revenue for the period was £34.5 million representing a decrease of 6% against H1 2022.

The Printhead business has a clear customer-focussed commercial strategy, and we are pleased to have grown our customer base and maintained our market share. The economic challenges globally, particularly rising interest rates, have directly impacted capital equipment purchases by some customers in the period. The performance also reflects the tough comparative period in Q1 2022 where demand in China was high prior to the implementation of COVID related restrictions.

Revenue for the Printhead business was relatively flat compared to H2 of last year and we are now seeing encouraging signs of recovery, with the lifting of restrictions in China along with an increase in customer product launches that incorporate Xaar's technology, which we expect to drive demand for printheads.

We have been able to demonstrate the strength of our technology in market sectors beyond Ceramics, especially the key growth area of 3D printing, and continue to see strong customer engagement where we have a competitive advantage by enabling customers to reduce their own development times.

EPS delivered an excellent performance. Revenue increased 16%, against the equivalent period of 2022, with growth across all its product lines, driven by digital inkjet single pass machines. We have increased customer engagement with a strong sales pipeline which is driving revenue growth, higher gross margins, and strong profitability.

FFEI and Megnajet, continue to perform well. These businesses provide us with an expanded product range enabling real traction and opportunity in the printbar and print engine markets, along with fluid management systems.

Our plan has been to focus on products that support our core strategy. As a result, we are considering options to withdraw from the non-core Life Sciences part of the FFEI business, and the sale of IP in this area is part of this process. We delivered a one-off profit of £2.0 million through this sale which helped offset the one-off impact of Phase 1 of our factory re-organisation at Huntingdon completed in Q1.

Gross margin was maintained at 40% despite inflationary cost pressures and the closing of the Huntingdon factory for two months to complete Phase 1 of the operational re-organisation. This was driven by an increase in Printhead of 3 ppts to 44% helped by a favourable sales mix, and EPS which increased Gross Margin to 40% from 39% in the comparative period.

Group Adjusted EBITDA grew from £3.0 million to £3.5 million driven by a positive adjusted EBITDA in each of our businesses (EPS adjusted EBITDA of £1.7 million (H1 2022: £1.2 million), FFEI adjusted EBITDA of £2.3 million (H1 2022: £0.5 million), and Megnajet adjusted EBITDA of £0.4 million (H1 2022: £0.3 million)) other than Printhead which, due to the fall in revenue and the Q1 closure of the factory, posted negative adjusted EBITDA of £0.9 million (H1 2022: positive £0.9 million). 

Group adjusted profit before tax for H1 2023 was £1.8 million, an increase when compared to H1 2022 (£1.4 million) and H2 2022 (£1.4 million).

Strong balance sheet and operational investment

The Group retains a strong balance sheet and cash position. Net cash at 30 June 2023 was £7.3 million, representing a net outflow of £1.2 million in the period.

During this period we invested £3.2 million in inventory allowing the Printhead business to increase its holding of finished goods. This systematic approach over the last 12 months gives us confidence that we can deliver on customer demands for the remainder of the year and into 2024. We believe that we are winning business through the advantage of offering shorter lead times than our competition which ensures we are well placed to capitalise on the commercial opportunities we have.

In addition, we have invested £1.1 million (H1 2022: £1.5 million) in operational upgrades along with the factory upgrade completed in March 2023.

R&D investment in innovation is critical to the ongoing success of the business, and we will continue to invest in our R&D capabilities across the Group to ensure our technology remains market leading. During H1 2023 we invested £2.6 million (H1 2022: £3.3 million). The continued strong cash generation across the business and prudent cash management has enabled us to make these investments. We will maintain our disciplined approach to balance sheet management, and it remains a key priority to allow for further investment in the business focussing on operational capability.

In June 2023 we successfully agreed a Revolving Credit Facility (RCF) of £5 million with our lead bank, HSBC, which allows for accelerated investment in the business and our operational capability.

Operational improvements driving greater efficiency and increased capacity

Operational improvements have been made by investing in our manufacturing facilities to increase efficiency and lower costs. The first phase of this programme has now been completed and the Huntingdon factory re-organisation was completed in early 2023 on time and under budget.

This will enable us to operate more efficiently, increase capacity and yields whilst crucially generating significant cost savings, especially in reducing our energy consumption. Accordingly, this investment will deliver a rapid return and payback in less than a year.

As a result of this investment, we will increase capability and capacity enabling us to take advantage of the opportunities which we expect to drive our future growth.

This is the first phase of our efficiency upgrade programme, and we plan to invest a further £10-15 million over the next three to four years which we intend to fund through operational cash generation. The next phase of investment is expected to take place in early 2025, depending on business needs, which will result in more modern, efficient, and environmentally beneficial manufacturing facilities across the business.

Significant market opportunity

We have a strong proposition across our five key market sectors. Our digital inkjet technologies provide compelling propositions to transform print processes across a wide range of applications, and we can supply our customers with the products they need to develop their printers. This means we have significant opportunities for complementary revenue, incremental to printhead sales, where we can shorten our customers' product development time to market.

The medium and long-term opportunity for the business remains significant. Whilst we already have good market share in core, mature markets such as Ceramics and Coding & Marking, further growth opportunities exist because of our market leading technologies and clear competitive advantage.

During 2023 we have made the most significant progress in 3D printing, where our ability to print high viscosity fluids is transforming the industry. The 3D printing sector is experiencing a greater level of customer product launches, thereby providing greater revenue potential opportunity for our products than previously expected.

Historically Xaar has almost exclusively operated in the B2B (Business to Business) area across our product ranges and applications, however there is an emerging opportunity for 3D printing in the B2C (Business to Consumer) sector where we can facilitate growth.

We are partnering with established system providers for our Xaar Irix printhead to enable a new generation of full colour, inkjet-based desktop 3D printing systems that are higher resolution and more flexible than the existing technologies. We anticipate this new generation of 3D printers to be launched over the next six to twelve months.

We have seen increased customer engagement as our printhead product range has expanded and our ability to offer a broader solution to customers with fluid management systems and printbars, as evidenced by the increasing number of customers developing machines with our products. Both our current product offering and our products in development will help drive our success in meeting this customer demand.

This is demonstrated with the high level of customer interest and adoption of Aquinox, our new water-based fluid printhead with an increased number of development kits sold in the period. We expect to see customer product launches incorporating Aquinox during H2 this year.

By providing an integrated solution for customers whereby they can access more of the printing ecosystem, we help our customers take advantage of the inkjet opportunity and working with Xaar means a higher chance of success by being faster to market, and therefore, making our customers' investment more profitable. Ultimately this will help us in our overriding strategy to sell more printheads and gives the business increased resilience over volatility in any given market.

Product development and increased capability

The market opportunity for Xaar printheads is significant. We have a unique roadmap of product development to ensure we offer an increasingly vertically integrated commercial strategy to capitalise on this market opportunity.

Our Xaar 2002 printhead has double the resolution of our competitors giving the ability for very high-quality print and incorporates our key technologies which enable printing of very challenging fluids in harsh production environments.

The Xaar Irix remains the flagship product in the Coding and Marking and Direct-to-Shape sectors. It delivers increased throw distance whilst maintaining print quality and along with our Xaar 50X printheads means we are maintaining our position in Coding and Marking and have several opportunities in the Direct-to-Shape market.

The recently launched Aquinox printhead is positioned to drive adoption in Packaging and Textiles markets. The response to the product has been exceptional due to its ability to print high viscosity water-based inks. This gives customers the opportunity to use less energy, with a higher throughput, and more vibrant colours and we expect the first product launches of textile printers to happen in H2 2023.

The already successful ImagineX platform will deliver improved features over the next few years which will provide significant enhancements to the current portfolio, including: 

· substantially improved speed and throughput (frequencies up to 150kHz, equivalent to a threefold increase in speed compared to current products),

· increased throw distance to improve image quality on curved surfaces,

· increased robustness to improve the life of the printhead and maintain image quality,

· higher viscosities enabling a broader range of fluids to be printed (above 100cP), and

· higher resolutions (up to 1440 dpi).

These features will help strengthen our position in markets where we are already well represented and will drive improved adoption in several markets where we are currently not participating. 

The enhancements in our product roadmap support our customers with a clear path to upgrade their products and maintain their product differentiation.

Continued commitment to sustainability

We continue to make significant progress on ESG and the Group's Sustainability Roadmap. The Board remains committed to the business becoming carbon net zero by 2030.

We are passionate about delivering solutions and products for our customers that are cleaner and better for the environment. Our products are well placed to deliver significant benefits commercially and environmentally for our customers through reductions in power consumption and water usage.

We also seek to have a wider positive impact on society by understanding and prioritising employee needs, doing business responsibly, and reaching out to our local communities. All our UK sites have now moved to 100% renewable energy. All printhead product packaging is fully recyclable. Our Apprentice Programme is well developed across the business, and we continue to support activities promoting STEM (Science, Technology, Engineering and Maths) subjects amongst young people as well as several sponsorship programmes supporting university students and industry placements.

Digital inkjet printing is inherently more sustainable compared to traditional analogue printing with a smaller carbon footprint. It reduces and prevents excessive waste and uses less energy due to the ability to print short runs or direct-to-shape. With Ultra High Viscosity Technology and TF Technology ink recirculation, Xaar printheads are capable of printing very viscous fluids which, in the textiles sector for example, results in a reduction in energy used in intensive drying processes. We are passionate about continuing further adoption and understanding of the environmental benefits our products can bring to customers.

Outlook

While remaining vigilant to broader macroeconomic conditions, the Board remains confident of delivering full year results in line with its expectations.

Despite the lifting of COVID related restrictions in China, sales volumes in the Printhead business continue to be affected, but we expect market conditions in the sectors in which we operate to improve during H2 2023 and this, coupled with increased customer product launches, will drive higher demand for Xaar printheads.

We have maintained our policy of increased investment in inventory during 2022 and 2023 to ensure the Group is well placed to capitalise on our targeted opportunities and satisfy customer demand.

There is positive momentum in the business with strong customer interest and customer engagement. Our strategy to diversify across a range of market sectors means further customer product launches are expected in 2024 providing confidence in delivering our medium-term growth plans.

Business Performance

Revenue

Group revenue growth

Revenue for the Group was £34.5 million for the first half of the year, representing a year-on-year decline of £2.1 million (H1 2022: £36.6 million).

These results have been achieved in a difficult trading environment. Restrictions arising from COVID-19 in China have now been lifted, however, there has been an ongoing impact on Printhead revenue. This together with rising costs and interest rates have impacted capital equipment sales globally. Printhead business unit revenue declined £3.1 million when compared to the same period last year. Q1 2022 revenue included a strong business performance from sales in China, driving this variance. When compared to H2, Printhead revenue is close to flat, despite the weak demand generally for capital goods which is a strong indicator of the progress the business has made with customer engagement. EPS revenue increased 16% when compared to H1 2022 and 3% to H2 2022, demonstrating continued excellent progress.

Printhead

Printhead Revenue by Sector 

Printhead revenue for the half year decreased £3.1 million to £17.6 million (H1 2022: £20.7 million), representing the current economic challenges and a strong comparative reporting period in 2022 due to greater sales in China.

Printhead revenue in EMEA was £11.1 million compared to £11.2 million in H1 2022, although this is an increase compared to £9.5 million in H2 2022 which is pleasing and reflects on our customer engagement across our market sectors, whilst revenue in the Americas fell. Performance in Asia, and China in particular, has been impacted by COVID-19 restrictions. Restrictions were not implemented in China until Q2 2022, and before then we saw strong Printhead revenue. Although restrictions are now lifted, the economic challenges faced in China are impacting sales of printheads, and we have seen orders from our customers delayed as their own product development times are taking longer. This has particularly impacted revenue in the Ceramics sector (albeit with a recovery in revenue when compared to H2 2022), and Coding & Marking (C&M). Whilst this is disappointing, the underlying market demand remains, we have retained market share, and we are confident in the medium term of returning to the previous growth levels. The number of customer product launches in the coming 12 months is increasing which drives this confidence.

3D printing and Additive Manufacturing (AVM) has seen consistent growth which is pleasing as this reflects our overall customer strategy and enhanced product portfolio. 

EPS

EPS Revenue by Sector

Revenue from the EPS business increased by £1.5 million to £10.7 million (H1 2022: £9.2 million).

This has been driven by digital inkjet machines sales with growth of 28%, which is particularly pleasing as this is the core focus for the business and will drive increased profitability. As our focus has been on the core profitable single pass digital machines, we have seen some decrease in revenue from the pad printing stream, which we would expect to recover during H2 2023. We see a strengthening pipeline and order book and we are well placed to deliver further growth for the full year in 2023.

FFEI and Megnajet

FFEI revenue was £4.8 million which compares to £6.1 million in H1 2022. This results from a focus on the core activities - that of print systems - which was the driver for the acquisition. Accordingly, the non-core activities of the business have seen reduced revenue and we have stated that in time we will exit the Life Science aspect of the business. We are pleased with the growth of Megnajet which has delivered £0.8 million increase (133%), and on a like-for like basis delivered a £0.4 million increase (Megnajet was consolidated in March 2022). We have seen a change in stock levels for some customers which has contributed to the decrease compared to H2 2022.

Gross profit

Gross profit for the period decreased by £0.7 million to £13.8 million (H1 2022: £14.5 million) with the gross margin remaining at 40% (H1 2022: 40%). We have successfully mitigated overhead cost increases, together with impact on profit from the factory shutdown, to increase the Printhead business unit's gross margin which grew to 44% from 41% (although due to the revenue reduction gross profit reduced from £8.5 million from £7.9 million). We were able to do this through a combination of sales price increases and improving utilisation of the factory, as throughput was increased during the period resulting in better overhead cost recovery, supporting gross margin gains.

Gross profit for the EPS business increased to £4.3 million in the period from £3.6 million with gross margin growing year-on-year (H1 2023: 40%, H1 2022: 39%). This reflects the focus we have taken on modernising the business and adopting a modular approach to designing and building machines with a focus on single pass digital machines.

Gross profit for H1 2023 for the FFEI business was £1.3 million (H1 2022: £2 million), and for the Megnajet business was £0.4 million (H1 2022: £0.3 million).

Research & Development

Gross R&D spend of £2.6 million was down £0.7 million in H1 2023 (H1 2022: £3.3 million). On a like-for-like basis the reduction was £0.3m. The reduction in the period comes from reduced spend in FFEI in addition to an internal reallocation of costs between General & Administrative costs and other areas of the business. We are continuing to invest in the business and will maintain the ratio of R&D investment/revenue of 8-10%.

Operating Expenses

Sales and marketing spend for the period was £3.2 million (H1 2022: £3.7 million). This decrease reflects the strong focus on cost management that we have across the business.

General and administrative expenses increased to £10.3 million from £6.0 million in H1 2022. On a like-for-like basis, the increase was £3.1 million. The difference in variance relates to an internal reclassification of costs of £1.2 million (moving costs from General & Administrative expenses) made in H1 2022 that were not made in H1 2023.

Of the £3.1m increase in General and administrative expenses, £1.1m are operational cost increases in the business as we have continued to increase and strengthen our capability and experience across the business, most notably in our R&D, Finance and Human Resources functions. This improved operational capability also includes further and continued investment in infrastructure such as IT, manufacturing, and supply chain management.

Exceptional G&A costs (costs adjusted for adjusted profit before tax) have increased £2.0 million principally due to an increase in the share-based payments charge (IFRS 2) (£0.8 million increase) and £1.2m lower foreign exchange losses on intra group transactions.

Other exceptional costs include £1.0m restructuring costs (of which £0.8m relates to the factory efficiency programme) and £0.5m reduction in the fair value of the contingent consideration receivable due to foreign exchange movements.

Profit for the period

The adjusted profit before tax was £1.8 million in 2023 (H1 2022: £1.4 million).

The adjusted profit of the Printhead business decreased from a £0.4 million loss in H1 2022 to a £2.2 million loss in H1 2023 driven by the reduction in revenue in the period. The EPS business moved from an adjusted £1.1 million profit in 2022 to a £1.5 million profit in H1 2023 due to the increased trading performance. FFEI contributed an adjusted profit before tax of £2.1 million in the period, and Megnajet £0.4 million.

In calculating the adjusted profit before tax, we have adjusted for fair value losses on financial assets of £0.5 million alongside restructuring costs of £1.0 million, foreign exchange losses on intra-group loans of £0.4 million, share-based payments of £1.3 million and amortisation of acquired intangible assets of £0.5 million.

The adjusted EBITDA in the period was £3.5 million (H1 2022: £3.0 million). This was aided by the one-off profit arising from the sale of non-core IP.

The total unadjusted loss for the period before tax was £1.8 million (H1 2022: £0.3m). Loss after tax was £1.3 million (H1 2022: profit of £0.4 million).

Balance sheet

The Group retains a strong balance sheet and a net cash position at 30 June 2023 of £7.3 million. This represents a reduction of £1.2 million in net cash since 31 December 2022, which has been driven by planned capital investment and working capital investment.

Non-current assets decreased slightly from £52.0 million at 31 December 2022, to £50.0 million in the first half of the year. Property, plant, and equipment decreased by £0.6 million, driven primarily by the depreciation of assets (£1.4 million), and £1.0 million of capital additions. Goodwill and intangible assets increased by £0.8 million which primarily related to foreign currency exchange movements and the purchase of intangible assets. The fair value of the non-current financial asset at fair value through profit or loss which represents deferred contingent consideration decreased by £0.7 million.

Current assets decreased by £1.7 million. Inventory value has increased by £3.1 million, £1.7 million of which relates to an increase in inventory held by the Printhead business. Trade and other receivables decreased by £0.1 million. The fair value of the current financial asset at fair value through profit or loss decreased by £0.4 million.

Current liabilities increased by £0.9 million due mainly to the change in current lease liability.

The Group maintains a strong disciplined focus on cash, and this has continued through H1 2023. During H1 2023 investing activities saw cash inflow of £1.7 million. As a result of the continued managed investment in inventory, working capital saw an outflow of £2.9 million. Maintenance capital additions were £1.2 million in the period which together with the inventory investment was funded by the IP sale proceeds of £2.3 million and £0.6 million of cash earnout received on the sale of 3D Limited to Stratasys.

The business has a clear plan and strategy which the strong balance sheet and cash position will support. Currently we are focussing investment on internal opportunities to ensure we have the operational capacity and efficiency to meet future demand, alongside investment in our product roadmap development.

Dividend

The Board regularly reviews capital allocation and believes that prioritising investment to enable profitable growth for the business is currently the most appropriate use of capital, therefore, no interim dividend has been declared for 2023.

Directors' responsibilities statement

We confirm that to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with International Accounting Standard 34 - Interim Financial Reporting as adopted by the UK

· the interim management report includes a fair review of the information required by:

o  DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

o  DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By Order of the Board

John Mills

Chief Executive Officer

19 September 2023

No dividends were paid in the current or prior period.

Cash and cash equivalents (which are presented as a single class of asset on the face of the condensed consolidated statement of financial position) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less. The carrying amount of these assets is approximately equal to their fair value.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL INFORMATION

FOR THE SIX MONTHS ENDED 30 JUNE 2023

1. Basis of preparation and accounting policies

Basis of preparation

These interim financial statements have been prepared in accordance with the accounting policies set out in the Group's Annual Report and Financial Statements 2022 on pages 122 to 129 (available at www.xaargroup.com) and were approved by the Board of Directors on 19 September 2023. The interim financial statements for the six months ended 30 June 2023 have been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the United Kingdom. The interim financial statements do not include all the information and disclosures in the annual financial statements and should be read in conjunction with the Group's annual financial statements as at 31 December 2022.

The interim financial statements are unaudited, and they do not constitute statutory financial statements as defined in section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 December 2022 are derived from the Group's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.

Judgements and estimates

In preparing these interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the Group's consolidated Financial Statements for the year ended 31 December 2022, with the addition of an estimate of the split of the carrying value of technology-based intangible asset which was part-disposed during the period and the change in estimate of its remaining useful economic life as detailed below.

On 23 June 2023 FFEI sold patents relating to its Life Science business to a customer for £2,312,000, together with a transfer of associated software and technological know-how over the course of the following 18 months to 31 December 2024 for a separate consideration. The patents sold were acquired by the Group on its acquisition of FFEI in July 2021 and were not separately valued at the time. Splitting the fair value of registered and unregistered patents from their corresponding software and technological know-how requires a significant degree of judgement. Management used product gross margins and replacement cost estimates prepared by external valuation experts at the original acquisition date to estimate that, as at the date of disposal, the portion of the carrying value of the technology-based intangible asset that relates specifically to the patents sold was £276,000, leading to a gain on disposal of £2,036,000 to be recognised in other income note 4 in the consolidated income statement.

The remaining useful economic life of the remaining technology-based intangible asset was reduced from 4 years to 1.5 years to align with terms of contract with the customer. This change in estimate is accounted for prospectively and had an immaterial impact on these interim financial statements.

Significant accounting policies

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2022.

Principal risks and uncertainties

The Board has overall responsibility for the establishment and oversight of the Group's risk management framework. The Board has an established, structured approach to risk management, which includes continuously assessing and monitoring the key risks and uncertainties of the business. An outline of the key risks and uncertainties faced by the Group is detailed on pages 48 to 57 of the Xaar plc Annual Report and Financial Statements 2022, which is available on the Group's website at www.xaargroup.com.

The Board has reviewed these risks as part of half year risk assessment update including several changes which are reflected in the Xaar plc Interim Report 2023. The potential impact of these risks on our strategy and financial performance, together with details of our specific mitigation actions, are set out in the Xaar plc Annual Report and Financial Statements 2022, and at the back of this Interim Report 2023 which includes all the key changes since the Xaar plc Annual Report and Financial Statements 2022.

Going concern

The Board continuously reviews the performance of the business and its future prospects, together with other factors likely to affect its future development, performance and position. The Board remains confident in the long-term future prospects for the Group and its ability to continue as a going concern for the foreseeable future.

The Group's day-to-day working capital requirements are expected to be met through the current cash and cash equivalent resources at the balance sheet date of 30 June 2023 of £7.3 million. As set out in note 10, the Group has a £3 million invoice discounting facility, of which £1.1 million was drawn as at 30 June 2023. The Group also has access to a £5 million rolling credit facility with a further £2.5 million accordion of which none has been utilised as of 30 June 2023.

The Group has prepared and reviewed monthly profit and cashflow forecasts which cover a period up to 31 December 2024, the going concern period. This base case forecast position has been compiled by considering the performance of the different businesses across the Group and each of their funding requirements which represents the current Board approved forecasts.

To support the going concern conclusion, a sensitivity analysis has been performed, sensitising assumptions in revenue performance. The outcome of this sensitivity analysis is that the Group can maintain liquidity across the going concern period and will be able to meet all forecasted obligations as they fall due. In addition, covenant requirements on the rolling credit facility, namely interest cover not falling below 4:1 and the leverage ratio not exceeding 2.5 will continue to be met. A reverse stress scenario has also been performed to model the circumstances required to eliminate available liquidity during the going concern period. The Directors believe the possibility of this combination of severe downsides arising to be remote given the recurring revenue base and predictability of forecasts, and that there are numerous controllable mitigating actions such as deferring non-committed capital expenditure and reducing performance related pay which could be taken to avoid a liquidity breach.

Based on the above, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the period to 31 December 2024. For this reason, they have adopted the going concern basis in preparing the financial statements.

2. Reconciliation of adjusted financial measures

EBITDA is calculated as statutory operating profit before depreciation (other than that arising from IFRS16 accounting), amortisation and impairment of property, plant and equipment, intangible assets and goodwill. Adjusted EBITDA is calculated as EBITDA excluding other adjusting items as defined.

Adjusted financial measures are alternative performance measures, which adjust for recurring and non-recurring items that management consider are not reflective of the underlying performance of the Group. Recurring items are adjusted each year irrespective of materiality to ensure consistent treatment. Non-recurring items are identified and adjusted for by virtue of their size or nature.

Share-based payment charges include the IFRS 2 charge for the period of £1,184,000 (H1 2022: £344,000) and the expense relating to National Insurance on the outstanding potential share option gains of £90,000 (H1 2022: £91,000). These costs were included in the general and administrative expenses in the consolidated income statement.

Exchange differences relating to the operations in the United States of America represent exchange gains or losses recorded in the consolidated income statement as a result of intra-group transactions in the United States of America. These costs were included in general and administrative expenses in the consolidated income statement.

Of the restructuring and transaction expenses in the first half of 2023, £255,000 (2022: £226,000) relates to restructuring costs. Cash expenditure arising from restructuring costs in the first half of 2023 was £194,000 (H1 2022: £657,000). The remaining cost of £753,000 in the period to 30 June 2023 relates to the factory efficiency project (2022: nil), all of which is cash expenditure.

The research and development expenditure credit relates to the corporation tax relief receivable relating to qualifying research and development expenditure. This item is shown on the face of the consolidated income statement. Cash receipts of £361,000 received during the period were in relation to the XaarJet Limited RDEC claim which related to the financial year 31 December 2021 (£222,000) and the FFEI Limited RDEC claim for the nine-month period to 31 December 2021 (£139,000).

The fair value loss on financial assets at fair value through profit and loss relates to the sale of Xaar 3D Limited. The net consideration includes contingent consideration that is valued and reported at fair value. The fair value movement is recognised in the income statement as fair value loss on financial assets at fair value through profit and loss. In the period to 30 June 2023, the movement on the financial asset represents foreign exchange loss on retranslation of the asset at the period end.

The amortisation of acquired intangible assets relates to the acquisition of FFEI Limited in 2021 and the acquisition of Megnajet Ltd and Technomation Ltd in 2022. These include patents and customer relationships for FFEI which are being amortised over 3.5 to 6 years for FFEI and IP, brand and customer relationships for Megnajet and Technomation which are being amortised over 8 to 10 years. These costs were included in general and administrative expenses in the consolidated income statement.

1Tax effect of adjusting items is nil in 2023 due to all adjustments being in UK tax jurisdiction which has unrecognised accumulated tax losses so an effective tax rate of zero.

This reconciliation is provided to align with how the Board measures and monitors the business at an underlying level, and is a measure used in establishing remuneration.

3. Business segments

For management reporting purposes, the Group's operations are analysed according to the four operating segments of 'Printhead', 'Product Print Systems' (EPS), 'Digital Imaging' (FFEI) and 'Ink Supply Systems' (Megnajet). These four operating segments are the basis on which the Group reports its primary segment information and on which decisions are made by the Group's Chief Executive Officer and Board of Directors, and resources allocated. Each business unit is run independently of the others and headed by a general manager. The Group's chief operating decision maker is the Chief Executive Officer. There is no aggregation of segments for disclosure purposes.

Ink Supply systems was added from 2 March 2022 as a result of the Megnajet acquisition.

Segment information for continuing operations is presented below:

Unallocated corporate expense relates to administrative activities which cannot be directly attributed to any of the principal product groups, consisting of share-based payment charges.

4. Other income

On 23 June 2023, FFEI sold patents relating to its Life Sciences business to a customer for £2,312,000. These Patents had a NBV in the group consolidated accounts of £276,000 and as such a profit on disposal of £2,036,000 has been recognised.

Other, comprises compensation received due to a legal claim.

In 2022, government grants were received from the UKRI Future Leaders Fellowship scheme by FFEI. Further details can be obtained by referring to note 7 within the Group's financial statements for the year ended 31 December 2022.

5. Interest receivable and payable

Investment income

Finance costs

6. Income tax

The major components of income tax (credit)/charge in the income statement are as follows:

The Finance Act 2021, which was substantively enacted on 10 June 2021, amended the main rate of corporation tax in the UK from 19% to 25% from 1 April 2023. The H1 taxation has been computed on a blended tax rate for 2023. However, due to the unrecognised accumulated tax losses and the R&D tax credits, the effective tax rate in UK jurisdiction Group companies is negative. The UK tax credit is in relation to R&D tax credits.

The overseas tax charge is in relation to the USA EPS business unit where the federal tax rate is 21% and the effective tax rate is 19%.

The closing deferred tax asset as at 31 December 2022 and 30 June 2023 is due to the accumulated tax losses of the Group's USA companies and has been calculated using the US tax rates at which the deferred tax asset is expected to be reversed in future periods.

Whilst the Board believes in the long-term potential and profitability of the Printhead business unit, the forecast taxable losses over the next couple of years mean that the UK tax losses will not be utilised in the short term. Therefore, no deferred tax asset has been recognised relating to UK losses for 30 June 2023. As at 31 December 2022, the Group has unused capital losses of £1.1 million available for offset against future gains. These losses may be carried forward indefinitely.

In the year ending 31 December 2022, the Group claimed R&D tax relief and R&D expenditure credit (RDEC), where the R&D credit receivable is included in operating loss. In the current reporting period, the Group is claiming only R&D tax relief, though there may be RDEC to claim in H2 2023.

7. Earnings per ordinary share - basic and diluted

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

Potential ordinary shares are treated as dilutive if their conversion to ordinary shares would decrease earnings per share or increase loss per share.

Adjusted earnings per share is earnings per share adjusted for the items as indicated in note 2.

8. Share capital and own shares

During the six months ended 30 June 2023 a total of 137,552 new ordinary shares of 10 pence each were issued under the Company's LTIP and Share option schemes for £29,507. During the six months ended 30 June 2022, there were no new ordinary shares issued.

During the six months ended 30 June 2023, 85,459 shares (H1 2022: 128,533) were used by the ESOP to satisfy share award exercises with no shares purchased by the ESOP (H1 2022: ESOP purchased 221,751 shares for £0.5 million).

9. Goodwill

The carrying amount of goodwill at 30 June 2023 was £6,903,000 (31 December 2022: £7,163,000).

Goodwill acquired in a business combination is allocated, at acquisition, to the cash-generating units (CGUs) that are expected to benefit from that business combination. Goodwill occurred from the acquisition of Engineered Printing Solutions (EPS) in July 2016, FFEI Limited in July 2021 and Megnajet in March 2022.

As part of the reportable segments, goodwill amounting to £5,553,000 is attributed to Product Print Systems (a single CGU), £689,000 is attributed to FFEI (a single CGU), and £661,000 is attributed to Megnajet (a single CGU).

The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. No impairment has been identified and therefore no impairment loss has been recognised during the current and preceding period.

The recoverable amount of the CGU is determined from a value-in-use calculation. The annual impairment review for Product Print Systems and Megnajet will continue to be performed on 31 December each year.

FFEI Limited goodwill impairment review:

As at 30 June 2023, due to an agreement to transfer a material portion of the Life Sciences business to client, over the period 23 June 2023 to 31 December 2024, an impairment indicator was identified in respect of goodwill allocated to FFEI Limited. As a result, a review for impairment was performed on a value in use basis. Following this review, no impairment was recognised. A cash flow forecast was prepared for a period to 31 December 2027 based upon the strategic plan for the business and a terminal value determined using a 2% growth rate in FFEI Limited, based on the Bank of England Long term target inflation rate.

To evaluate the risk of impairment, the Group adjusted its cash flows over the forecast period to reflect constraints on key assumptions including new product introductions, regional expansion and growth rates of existing products. These adjusted cash flows are based on the forecast as described and bring a reduction of £3 million to the 31 December 2022 value in use. The discount rate applied to the cash flow projections is 15.3%, this was calculated by updating the year end rate obtained from external third-party advice for observable market inputs. Where market observable inputs were not available consideration was given to the historic performance of the input and the sensitivity of the input to market changes since year end. The discount rate reflects the risk-free rate, equity beta and local market premium as calculated at 30 June 2023 with an additional 1% company specific risk premium.

The recoverable amount calculated based on the base case forecast set out above exceeds the carrying value of the FFEI Limited CGU by £2.6 million. Sensitivity analysis has been performed, flexing assumptions regarding expected sales volumes, sales mix and margins to determine the recoverable amount of the CGU. Further stress testing has been completed on each key assumption (Revenue, Discount Rate and Long-Term Growth Rate) for the FFEI Limited business.

The carrying amount of goodwill would exceed its recoverable amount, when compared to the adjusted cash flows, if the following 'reasonably possible changes' were to occur:

• An average decline of 35% in forecast volumes of Printbar sales over the forecast period; or

• An increase in the discount rate by 3.2%

10. Financial instruments

Fair value of the Group's financial assets and financial liabilities that are measured at fair value on a recurring basis:

Some of the Group's financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following table gives information about how the fair value of these financial assets and financial liabilities are determined (in particular the valuation technique(s) and inputs used).

There were no transfers between Level 1 and 2 during the current or prior year.

Reconciliation of Level 3 fair value measurements of financial instruments:

On 1 November 2021, the sale of Xaar 3D Limited to Stratasys was completed and Xaar received net cash of £9,272,000 and contingent consideration of £10,863,000. The contingent consideration had a fair value of £11,606,000 as at 31 December 2022. The contingent consideration is recognised as financial asset at fair value through profit or loss. During the period, Xaar received an earn-out income amounting to $691,000 or £550,000. The fair value of the contingent consideration as at 30 June 2023 is £10,542,000. All of the fair value loss in the currently reporting period is due to the weakening of the USD against the British pound.

Short-term borrowings

Short term borrowings include an advance against customer invoices assigned to a third party as part of an invoice discounting arrangement. At the reporting date the carrying value of the customer invoices assigned and associated liabilities were:

Interest on the invoice discounting facility is charged daily when the facility is in an overdrawn position at a rate equivalent to the appropriate base rate +1.75% pa. There is an annual service fee of £25,000 charged monthly, and there was a one-off arrangement fee to open the facility of £10,000. No interest is payable on the unutilised element on the facility.

The facility limit was £5 million as at 30 June 2023 and operates for a minimum of twelve months from inception (September 2022). The facility can be cancelled with a three-month notice period. There are no covenants attached to the invoice discounting facility. Subsequent to the reporting date, the facility limit was reduced to £3 million which is still in excess of the eligible invoice value expected for the foreseeable future.

Eligible debts in GBP and USD denomination are legally assigned to the facility provider as, or soon after, they are raised. The facility makes available 90% of the debts to Xaar Jet Limited, subject to certain monetary funding limits and concentration percentages by customer. XaarJet Limited remain responsible for collecting the debts as the collection agent for the finance provider and the remittances are made into an account held for the benefit of the finance provider, the balance of which is held as a liability in XaarJet Limited.

No fair value adjustments are deemed necessary for these amounts; however, the receivables are subject to an allowance for doubtful debt. The invoice discounting facility is secured with fixed rate charges over purchased debts and a floating charge over the assets of Xaar Jet Ltd.

It remains the entity's responsibility to appropriately insure, manage and recover the debts assigned under the arrangement, and the transferred assets are subject to recourse at any time. This means the Group retained substantially all the risks and rewards and the control over the assets, thus derecognition criteria of accounts receivable were not met.

Revolving Credit Facility

On 14 June 2023, Xaar PLC entered into a Revolving Credit Facility (RCF) agreement of £5 million, which matures on 14 June 2025, with an option to extend for a further year, subject to lender approval. The agreement includes an accordion option of a further £2.5 million which can be requested at any time during the facility period, subject to lender approval and relevant fees.

Issue costs of £125,000 associated with the implementation of the facility have been recorded in the balance sheet and will be amortised across the life of the facility (24 months).

The facility bears an interest rate of the Sterling Overnight Indexed Average (SONIA) rate plus 2.35% margin, with a charge of 40% of the margin chargeable on undrawn and uncancelled amounts of the RCF.

The facility is secured by fixed and floating charges over the assets of the Group.

Interest cover, leverage and capital expenditure covenants are in place which are measured quarterly, based on the Group financial statements. The Group monitors compliance of the covenants on an ongoing basis. As at 30 June 2023, the Group remains compliant with the covenants.

At 30 June 2023, no drawings had been made under the RCF.

11. Reconciliation of liabilities arising from financing activities

12. Discontinued operations

The Thin Film business which was discontinued in 2019 incurred costs in 2021 and 2022 which mainly related to supplier and customer liabilities and inventory for last time buy sales. All liabilities have now been settled and we maintain an amount of inventory that is fully provided and not likely to be sold.

The results of Thin Film related activities for the period are shown below:

The net cash flows incurred by Thin Film are as follows:

13. Date of approval of interim financial statements

The interim financial statements cover the period 1 January 2023 to 30 June 2023 and were approved by the Board on 19 September 2023.

Further copies of the interim financial statements are available from the Company's registered office, 3950 Cambridge Research Park, Waterbeach, CB25 9PE, and can be accessed on the Xaar plc website, www.xaargroup.com.

Risks and uncertainties

Several potential risks and uncertainties exist which could have a material impact on the Group's performance over the second half of the financial year and could cause actual results to differ materially from expected and historical results.

The Group has continued identifying, evaluating, and managing the key risks which could impact the Group's performance over the six months to 30 June 2023.

The full list of principal risks identified at the year-end and a description of how they relate to the Group's strategy and the approach to managing them are set out on pages 52 to 57 of the Xaar plc Annual Report and Financial Statements 2022, which is available on the Group's website at www.xaar.com.

Management and the Board have reviewed these risks and concluded they will continue to remain relevant for the second half of the financial year. The principal risks as at 30 June 2023, showing any changes from the 2022 year-end disclosure, are summarised in the table below: