Proposed divestment of Xaar 3D

RNS Number : 1301O

Xaar PLC

06 October 2021

 

Xaar plc

Proposed divestment of Xaar 3D

Xaar PLC (LON: XAR) ("Xaar", the "Company"), the leading inkjet printing technology group, is pleased to announce that it has conditionally agreed terms with Stratasys Solutions Limited ("Stratasys"), its partner in Xaar 3D Limited ("Xaar 3D"), to accelerate the sale of Xaar's interest in Xaar 3D to Stratasys.

Whilst Xaar 3D has continued to make progress this year there have been delays to the development of Xaar 3D products as a result of the COVID-19 pandemic. As a direct consequence of these delays it was anticipated that Xaar 3D would require more investment than originally planned. Having considered all options for the future financing and ownership structure of Xaar 3D the Board of Xaar has conditionally agreed with Stratasys to amend the terms of the Call Option pursuant to the terms of a conditional call option amendment agreement entered into on 6 October 2021 (the "Call Option Amendment Agreement").

This agreement will provide Xaar 3D with the best opportunity to complete the commercialisation of the product range in the shortest time, would lead to an immediate injection of cash and will enable Xaar to focus on its core business. Xaar will be entitled to receive royalties on products and services sales for up to 15 years.

The proposed amendments to the financial terms of the Revised Call Option are, in summary, as follows:

· A payment of US$12.83 million will become immediately payable on exercise of the Revised Call Option (the "Initial Consideration").

· Payments totalling US$4.63 million will become payable in three instalments, subject to the achievement of three agreed Xaar 3D revenue milestones (the "Earn-out Payments").

· The cap on the Two Per Cent Initial Earn-out is to be increased by US$6.375 million to US$16.375 million and the level of royalty shall be increased from two per cent. to three per cent. of the gross revenue of Stratasys, Xaar 3D and their affiliates which is recognised as earned from sales of Xaar 3D's products and services during the relevant period (the "Three Per Cent Revised Earn-out").

The aggregate of the Initial Consideration together with the Three Per Cent Revised Earn-out and the Earn-out Payments is, therefore, up to US$33.83 million (the "Revised Consideration").

John Mills, Chief Executive Officer, commented:

"This agreement will provide Xaar 3D with the best opportunity to continue its progress and leadership in the field of industrial 3D printing. We have enjoyed our partnership with Stratasys and look forward to continuing to work with them to supply printheads to Xaar 3D and share in the long-term success of the business. The agreement will also allow us to focus on our core business and other opportunities in the market that will support our long-term growth strategy."

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018.  Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

Contact information

Xaar plc	[phone]
Ian Tichias, Chief Financial Officer
John Mills, Chief Executive Officer
Investec Bank plc (Financial Adviser, Sponsor & Broker)	[phone]
David Anderson
Henry Reast
Shalin Bhamra
Tulchan Communications	[phone]
James Macey White
Giles Kernick

Important Notices

Investec Bank, which is authorised by the PRA and regulated in the United Kingdom by the FCA and the PRA, is acting solely for the Company and no-one else in connection with the matters referred to in this Announcement. Investec is not responsible to anyone other than the Company for providing the protections afforded to clients of Investec or for providing advice in connection with the contents of this Announcement or any other matters referred to herein.

This Announcement may contain and the Company may make verbal statements containing "forward-looking statements" with respect to certain of the Company's plans and its current goals and expectations relating to its future financial condition, performance, strategic initiatives, objectives and results. Forward-looking statements sometimes use words such as "aim", "anticipate", "target", "expect", "estimate", "intend", "plan", "goal", "believe", "seek", "may", "could", "outlook" or other words of similar meaning. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond the control of the Company. As a result, the actual future financial condition, performance and results of the Company may differ materially from the plans, goals and expectations set forth in any forward-looking statements. Any forward-looking statements made in this Announcement by or on behalf of the Company speak only as of the date they are made. These forward-looking statements reflect the Company's judgment at the date of this Announcement and are not intended to give any assurance as to future results and cautions that its actual results of operations and financial condition, and the development of the industry in which it operates, may differ materially from those made in or suggested by the forward-looking statements contained in this Announcement and/or information incorporated by reference into this Announcement.

The information contained in this Announcement is subject to change without notice and except as required by applicable law or regulation, the Company expressly disclaims any obligation or undertaking to publish any updates, supplements or revisions to any forward-looking statements contained in this Announcement to reflect any changes in the Company's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statements are based, except where required to do so under applicable law.

No statement in this announcement is intended as a profit forecast or estimate for any period and no statement in this announcement should be interpreted to mean that earnings, earnings per share or income, cash flow from operations or free cash flow for the Company post-transaction for the current or future financial years would necessarily match or exceed the historical published earnings, earnings per share or income, cash flow from operations or free cash flow for the Company. This announcement is not intended to, and does not constitute, or form part of, any offer to sell or an invitation to purchase or subscribe for any securities or a solicitation of any vote or approval in any jurisdiction. Xaar shareholders are advised to read carefully the formal documentation in relation to the Revised Call Option Amendment Agreement once it has been despatched. Any response to the Revised Call Option Amendment Agreement should be only on the basis of the information in the formal documentation to follow.

Introduction

On 12 September 2019, Xaar announced that it had entered into an agreement with Stratasys Solutions Limited ("SSYS"), its partner in Xaar 3D to sell 20 per cent of the enlarged share capital of Xaar 3D to SSYS for US$10 million (which was implemented in combination with an additional issuance of shares by Xaar 3D to SSYS), and grant SSYS a call option to acquire the remaining 55 per cent of Xaar 3D not held by SSYS for at least US$33 million, exercisable over three years (the "Call Option"). Exercising such Call Option would entitle Xaar to receive a two percent royalty on Xaar 3D products and services sales for up to 15 years, subject to a US$10 million cap (the "Two Per Cent Initial Earn-out").

In order to provide for staff incentivisation arrangements at Xaar 3D and in light of the proposed future divestment of Xaar's remaining interests in Xaar 3D, subsequent to the agreement of the Call Option, Xaar determined to set aside five per cent. of certain cash amounts to be received by Xaar from such future divestment for the purpose of staff incentivisation. Accordingly, the amounts payable to Xaar referred to below are shown, as applicable, net of such five per cent. (which, following the exercise of the Revised Call Option (as defined below) will, for practical reasons, be held by SSYS to be distributed to staff at Xaar 3D at SSYS' sole discretion).

Due to delays caused by the impact of the COVID-19 pandemic on the development of Xaar 3D products, the Directors believe there is a risk that the Xaar 3D programme may take longer than anticipated when it entered into the Call Option, and subsequently the Company would be required to commit additional cash funding to Xaar 3D of up to US$10 million over the next two years. Additionally, the delays in the programme increase the risk of Stratasys deciding to not exercise the original Call Option before the end of 2022. The Board of Xaar has, therefore, conditionally agreed with SSYS to amend the terms of the Call Option (the "Revised Call Option") pursuant to the terms of a conditional call option amendment agreement entered into on 6 October 2021 (the "Call Option Amendment Agreement"). The proposed amendments to the financial terms of the Revised Call Option are, in summary, as follows:

· A payment of US$12.83 million will become immediately payable on exercise of the Revised Call Option (the "Initial Consideration").

· Payments totalling US$4.63 million will become payable in three instalments, subject to the achievement of three agreed Xaar 3D revenue milestones (the "Earn-out Payments").

· The cap on the Two Per Cent Initial Earn-out is to be increased by US$6.375 million to US$16.375 million and the level of royalty shall be increased from two per cent. to three per cent. of the gross revenue of SSYS, Xaar 3D and their affiliates which is recognised as earned from sales of Xaar 3D's products and services during the relevant period (the "Three Per Cent Revised Earn-out").

The aggregate of the Initial Consideration together with the Three Per Cent Revised Earn-out and the Earn-out Payments is, therefore, up to US$33.83 million (the "Revised Consideration").

SSYS, by virtue of its 45% shareholding in Xaar 3D, a subsidiary of Xaar, is a related party to the Company for the purposes of Chapter 11 of the Listing Rules. The proposed amendments to the Call Option and the entering into of the Revised Call Option by Xaar is, therefore, considered to be a related party transaction for the purposes of Chapter 11 of the Listing Rules. Consequently, the Revised Call Option is subject to and conditional upon the approval of Shareholders.

Information on Xaar 3D

Xaar 3D is developing 3D printing machines which leverage the benefits of industrial Xaar printheads. These machines deposit a fine layer of plastic powder, onto which Xaar piezoelectric printheads print a high resolution cross-sectional pattern of the parts to be manufactured. The complete powder layer is exposed to infra-red energy, causing the imaged powder to absorb this energy and fuse. This process is then repeated layer by layer until the whole build is complete.

In order to maximise the revenue opportunity and expedite time-to-market for Xaar 3D's products, on 11 July 2018, Xaar announced a joint investment agreement with SSYS to develop 3D printing solutions based on high speed sintering technologies, forming Xaar 3D. Xaar's position in the 3D business is one of technology enabler and our end goal has been, and remains to, supply printheads for use in 3D applications and not become an OEM in the sector. That was the rationale behind our joint venture agreement with SSYS, a recognised leader in 3D with a proven track record and strong routes to market, and the subsequent option agreement signed with SSYS.

For the year ended 31 December 2020, Xaar 3D generated a loss before tax of approximately £6.4 million. The value of the gross assets of Xaar 3D as at 31 December 2020 was approximately £10.0 million.

For the six months ended 30 June 2021, Xaar 3D recorded a loss of £3.5 million, up from £2.9 million recorded over the six months ended 30 June 2020. The increased level of losses in the business primarily relate to R&D expenses recognised in the period, which increased by £0.5 million compared to H1 2020.  

Background to and reasons for the amendment to the terms of the Option Agreement

On 12 September 2019, Xaar announced that it had entered into an agreement with SSYS to sell 20 per cent of the enlarged share capital of Xaar 3D to SSYS for US$10 million (which was implemented in combination with an additional issuance of shares by Xaar 3D to SSYS), and grant SSYS a call option to acquire the remaining 55 per cent of Xaar 3D not held by SSYS for at least US$33 million. Exercising such Call Option would entitle Xaar to receive a two percent royalty on Xaar 3D products and services sales for up to 15 years, subject to a US$10 million cap. At the point of entering into the Call Option, Xaar 3D was recapitalised and Xaar 3D's funding was deemed sufficient to operate the business through to full commercialisation, with the sale of initial products being contributed to by the Group and SSYS.

In April 2020, the Board announced its strategy to return the Group to profitability and deliver sustainable growth for the long term. This included focussing on the Group's printhead business and Xaar Bulk technology; to focus on the Group's product print system business, ("EPS"); to utilise existing technologies and expand into adjacent markets; and to execute its 3D business unit strategy following the investment by SSYS in Xaar 3D in 2019.

As announced on 30 September 2020 in the Company's interim results for the six months ended 30 June 2020, the focus for Xaar 3D for 2020 was the successful testing of machines, shipping these machines to SSYS for beta trials and establishing the go-to-market teams and infrastructure prior to product launch. The Company announced on 14 January 2021 in its year end trading update that further progress with product development and testing in Xaar 3D, despite continued COVID-19 related delays, was made and the Company continues to work closely with SSYS to optimise the approach to commercialisation of the Xaar 3D product range.

It was announced on 27 April 2021, in the Company's results for the year ended 31 December 2020, that whilst Xaar 3D continued to make progress over 2020, it was impacted by the COVID-19 pandemic, which affected the programme most significantly in two areas. Firstly, due to restrictions put in place in Denmark, the number of people able to access the Copenhagen facility has been limited, and these limitations have restricted both the test capacity and the speed at which testing can take place. Secondly, travel restrictions have prevented the team from travelling and has meant face-to-face time with the sub-contract manufacturer has also been limited and has affected the program timeline.

Due to delays caused by the impact of the COVID-19 pandemic on the development of Xaar 3D products, the Directors believe there is a risk that the Xaar 3D programme may take longer than anticipated when it entered into the Call Option, and subsequently the Company would be required to commit additional cash funding to Xaar 3D of up to US$10 million over the next two years. Subsequently, in the announcement of the Company's results for the year ended 31 December 2020, it was stated that Xaar 3D was classified as a discontinued operation and is held on the Group's balance sheet as an asset held for sale. Additionally, the delays in the programme increase the risk of Stratasys deciding to not exercise the original Call Option and means Xaar considers it to be unlikely that Stratasys would exercise their option before the end of 2022.

The Board announced on 14 September 2021 in the Company's results for the six months ended 30 June 2021, that its printhead business continues to perform well, with a growing pipeline of new product development. The Board believes the Group's ImagineX platform, which builds upon several technology and development programmes from the Group's legacy Bulk and Thin Film investment, is driving the next phase of Xaar's success by enabling the business to increase its addressable market whilst establishing market leading products across all sectors. The Board added that the Company's continued strong performance which, despite challenging market conditions, demonstrates the positive momentum its strategy is driving across the business.

On 12 July 2021 the Board announced the completion of the acquisition of FFEI Limited ("FFEI"), a leading integrator and manufacturer of industrial digital inkjet systems and digital life science technology for an initial cash consideration of £3.7 million, which reflected existing FFEI free cash reserves, with an additional £5.4 million deferred consideration to be paid out over three years (the "Acquisition"). The Acquisition of FFEI strengthens Xaar's capabilities and skills and will accelerate Xaar's existing growth strategy.

The Board, therefore, believes that its sole focus on delivering its printhead and print systems strategy will be vital to the future success of the business, and investment of both management time and capital (including the application of the proceeds from the Revised call Option) should be prioritised in these business lines and not Xaar 3D as the underpin to the Group's future growth.

Proposed amendments to the terms of the Call Option

The payment terms of the Revised Call Option are as follows:

· A fixed payment of US$12.83 million will become immediately payable in cash on exercise of the Call Option.

· Payments totalling US$4.63 million will become payable in three instalments, subject to the achievement of three agreed Xaar 3D revenue milestones during the five years following completion. The three agreed Xaar 3D revenue milestones are as follows:

1.  upon Xaar 3D achieving cumulative revenue of US$10 million, US$593,750 shall become payable to Xaar ("Milestone 1");

2.  upon Xaar 3D achieving cumulative revenue of US$30 million (which, for the avoidance of doubt, shall include the revenues counted in achieving Milestone 1), US$2,018,750 shall become payable to Xaar ("Milestone 2"); and

3.  upon Xaar 3D achieving cumulative revenue of US$90 million (which, for the avoidance of doubt, shall include the revenues counted in achieving Milestone 1 and Milestone 2), US$2,018,750 shall become payable to Xaar ("Milestone 3") (Milestone 1, Milestone 2 and Milestone 3 together being the "Milestones").

· The cap on the Two Per Cent Initial Earn-out is to be increased by US$6.375 million to US$16.375 million and the level of earn-out shall be increased from two per cent. to three per cent. of the gross revenue of SSYS, Xaar 3D and their affiliates which is recognised as earned from sales of Xaar 3D's products and services during the relevant period.

The payment due to be received by Xaar following the exercise of the Revised Call Option by SSYS will, therefore, be US$12.83 million and the aggregate of the Initial Consideration together with the Three Per Cent Revised Earn-out and the Earn-out Payments is, therefore, up to US$33.83 million.

Pursuant to the terms of the Call Option Amendment Agreement SSYS and Xaar 3D Holdings have undertaken to exercise the Revised Call Option, conditional amongst other matters, upon approval by the Shareholders of the amendment to the Call Option, and which will result in the sale of Xaar 3D to SSYS.

In addition to the financial terms detailed above, the Call Option Amendment Agreement includes terms consistent with a transaction of this nature including a non-compete undertaking pursuant to which the Company and its affiliates agree not to compete with the business of Xaar 3D for a period of three years from the date of completion, certain warranties and indemnities not considered to be unusual for a transaction of this nature and certain escrow terms to enable SSYS access to the Company's print-head technology in the unlikely event of the insolvency of the Company so as to enable SSYS to continue to manufacture the Xaar 3D products in such circumstances.

Whilst the Company has, in accordance with the terms of the Call Option Amendment Agreement, undertaken to procure that Xaar 3D Holdings shall perform on demand any of its obligations or undertakings under the Call Option Amendment Agreement, including any obligation to pay on demand any amount that Xaar 3D Holdings is liable to pay under the Call Option Amendment Agreement (and shall upon the default of any such payment obligation, pay and discharge that obligation on behalf of Xaar 3D Holdings), the liability of Xaar 3D Holdings under the warranties and indemnities included in the Call Option Amendment are, with the exception of certain warranties and indemnities given in relation to intellectual property (the "IP Warranties & Indemnities"), subject to a buy-side warranty and indemnity insurance policy (the "W&I Policy") that has been entered into in connection with the Call Option Amendment Agreement.  Pursuant to the terms of the W&I Policy, the sole recourse of SSYS under those warranties and indemnities (not being the IP Warranties & Indemnities) in excess of £1.00 is to bring a claim against the W&I Policy.  With regards to the IP Warranties & Indemnities, any recourse of SSYS is limited to any amounts of the Three Per Cent Revised Earn-out that actually becomes payable following the receipt of a claim against the IP Warranties & Indemnities and there would be no recourse against any amounts of the Three Per Cent Revised Earn-out already paid at such time, nor against the Initial Consideration or any Earn-out Payments.

In connection with the Revised Call Option a new supply agreement has been entered into between Xaar 3D, XaarJet and SSYS on 6 October 2021 (the "New Supply Agreement") conditional upon completion of the Revised Call Option. The existing Supply Agreement (as defined below) shall be superseded by the New Supply Agreement and shall terminate upon completion of the Revised Call Option. 

In addition a new service agreement to cater for certain transitional services has been entered into between the Company and Xaar 3D on 6 October 2021 (the "New Service Agreement") conditional upon completion of the Revised Call Option. The existing Service Agreement (as defined below) shall be superseded and shall terminate upon completion of the Revised Call Option.

The New Supply Agreement will be for a minimum duration of five years and thereafter it shall automatically renew for a term of three years unless either party serves notice to terminate.  Pursuant to the terms of the New Supply Agreement, XaarJet has agreed to supply SSYS with printheads at an agreed level of pricing with XaarJet having the ability to upwardly adjust such pricing subject to certain usual restrictions. Save for certain specified amendments, XaarJet's standard warranty conditions shall apply to the printheads supplied under the New Supply Agreement.

The purpose of the New Service Agreement is to cater for certain transitional services required by SSYS following the exercise of the Revised Call Option. Pursuant to the terms of the New Service Agreement Xaar has agreed to provide Xaar 3D with certain ordinary course transitional services, including with regards to the provision of office space, finance and accounts support, procurement management and information technology, at an agreed level of pricing. The New Service Agreement provides SSYS with such transitional services for a period of 90 days from completion of the Revised Call Option, unless terminated earlier for convenience by SSYS, and save that certain services relating to the provision of office space shall continue until the lease relating to such office space is formally transferred from the Company to Xaar 3D.  The liability of the Company under the New Service Agreement shall be limited to the fees payable to the Company thereunder.

General Meeting

As noted above, the Revised Call Option is subject to the passing of the Resolution at the General Meeting. A notice convening the General Meeting, to be held at the offices of Xaar at 1 Hurricane Close, Ermine Business Park, Huntingdon, Cambridgeshire, PE29 6XX UK at 10.00 a.m. on 25 October 2021, is set out at Part IV of the shareholder circular to be published.

The General Meeting is being convened for the purposes of considering and, if thought fit, passing the Resolution which is required to implement the Revised Call Option.

Timetable

Latest time and date for receipt of proxy vote from Shareholders for the General Meeting	10.00 a.m. on 21 October 2021
Latest time and date for receipt of CREST proxy instructions from Shareholders	10.00 a.m. on 21 October 2021
Voting Record Time for General Meeting	10.00 a.m. on 21 October 2021
General Meeting	10.00 a.m. on 25 October 2021
Expected date of Completion	1 November 2021

Notes:

(1)  The times and dates set out in the expected timetable of principal events above and mentioned throughout this announcement may be adjusted by Xaar (in consultation with Investec), in which event details of the new times and dates will be announced to a Regulatory Information Service.

(2)  References to times in this announcement are to London time unless otherwise stated.

 

END

 

 

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