Notes to the interim statements

Six months ended 30 June 2021

1.   General information

These consolidated interim financial statements represent the consolidated interim financial statements of Alphawave IP Group plc ('the Company' or 'Alphawave IP') and its subsidiaries (together 'the Group').

This report for the six months ended 30 June 2021 is the first half-yearly financial report presented by the Group.

The principal activities of the Company and its subsidiaries are described on page 3.

The Company is a public limited company whose shares are listed on the London Stock Exchange and is incorporated and domiciled in the United Kingdom. The address of its registered office 65 Gresham Street, London, EC2V 7NQ.

2.   Basis of preparation

The consolidated interim financial statements of the Company have been prepared in accordance with UK-adopted international accounting standards ("IAS") 34 Interim Financial Reporting and should be read in conjunction with the Group's Historical Financial Information ("HFI"), which includes the consolidated financial statements as of and for the year ended 31 December 2020. They do not include all the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to give an understanding of the changes in the Group's financial position and performance since the last annual consolidated financial information included in the HFI as of 31 December 2020 and for the six months ended 30 June 2020.

These condensed consolidated interim statements do not comprise of statutory accounts within the meaning of Section 435 of the Companies Act 2006. The comparative figures for the six months ended 30 June 2020 are not the Group's statutory accounts for that financial period. The preparation of these consolidated interim financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement and complexity, or areas where assumptions and estimates are significant to the consolidated interim financial statements are disclosed in note 3.

The Company was incorporated on 9 December 2020 and admitted to listing on the London Stock Exchange on 18 May 2021. On 14 May 2021, a reorganisation of Alphawave IP's corporate structure was completed through which the Company became the sole owner of Alphawave IP Inc. Thereafter, pursuant to an agreement between the Company, Alphawave IP Inc. and each of the members of Alphawave IP Inc., the issued and outstanding Alphawave IP Inc. Common Shares were exchanged for 20 Ordinary shares of the Company with a nominal value of £1.

This has been accounted for as a common control transaction under IFRS 3.B1 (see note 15). Therefore, the condensed consolidated financial statements for the period ended 30 June 2021 comprises an aggregation of financial information of the Company and the consolidated financial information of Alphawave IP Inc.

These condensed financial statements were authorised for issue by the Company's Board of Directors on 20 September 2021.

Going concern

As of 30 June 2021, the Group had cash and cash equivalents of US$519.1m. Considering the Group's financial position as of 30 June 2021 and its principal risks and opportunities, a going concern analysis has been prepared for at least the twelve-month period from the date of signing the consolidated interim financial statements ("the going concern period") utilising realistic scenarios and applying a severe but plausible downside scenario. Even under the downside scenario, the analysis demonstrates the Group can continue to maintain sufficient liquidity headroom and continue to comply with all financial obligations. Therefore, the Directors believe the Group is adequately resourced to continue in operational existence for at least the twelve-month period from the date of signing the consolidated interim financial statements. Accordingly, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the consolidated interim financial statements.

Basis of organisation

The Group's management has performed its evaluation for reporting its reportable segments, if any, and concluded that the Group's business constitutes only one operating segment as all its products and services are of similar nature and focus on customers from the same industry. Its entire revenues, expenses, assets and liabilities pertain to the one business as a whole. This has been ratified by the chief operating decision makers ("CODM"), Tony Pialis (CEO) and Daniel Aharoni (CFO), who are deemed best placed to evaluate the entity's operating results to assess performance and to allocate resources.

Functional currency

For presentational purposes these consolidated interim financial statements are presented in US dollars. This has changed from the HFI which was presented in Canadian dollars. Each of the three trading entities in the group have different functional currencies, with Alphawave IP Inc. being accounted for in CAD, Alphawave IP Corp. in USD and the Company in GBP.

Accounting policies

The accounting policies that have been used in the preparation of these consolidated interim financial statements are the same as those applied in the HFI for the year ended 31 December 2020 as from those listed below this paragraph. New standards effective on or after 1 January 2021 have been reviewed and do not have a material effect on the Group's financial statements.

Share-based payments

The Group operates an equity-settled, share-based payment compensation plan, under which the entity receives services from employees as consideration for equity instruments, options and RSU's, of the Group. The fair value of the employee service received in exchange for the grant of the options is recognised as an expense over the vesting period.  

Where options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised.

If an option is cancelled this is accounted for as an acceleration of the vesting period and any amount unrecognised is recognised immediately.

Strategic, integration and other non-recurring items

The Group incurred costs from certain strategic, integration and other non-recurring items, e.g. IPO costs. Management has disclosed these separately to enable a greater understanding of the underlying results of the trading business so that the underlying run rate of the business can be established and compared on a like-for-like basis each year.

Change in Presentation of Income Statement

For the 6 month period ending 30 June 2021 the Company has presented its Income Statement by Function, which since our IPO in May 2021, is the most informative way to communicate its financial information and a method which, at a high level, highlights the most important operational drivers in the business. Prior to this reporting period and specifically for the last reporting period to 30 December 2020 the company presented its Income Statement costs by Nature. This was as a privately owned entity and was the most appropriate way of monitoring costs and performance at that time.

3.   Significant accounting estimates and judgements

The preparation of consolidated interim financial statements in conformity with IAS 34 requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated interim financial statements and the reported amounts of revenues and expenses during the period. Such estimates are periodically reviewed and any adjustments necessary are reported in earnings in the period in which they become known. Actual results could differ from these estimates.

Beginning in March 2020 the Governments of Canada and Ontario, as well as foreign governments instituted emergency measures as a result of the COVID-19 virus. The Group has continued to operate with limited impact on its financial position and cash flows. Management believes that the Group's accounting estimates are fairly determined, however, the ongoing uncertainty due to the unpredictable nature of COVID-19 may affect some of the significant estimates in the next six months to December 2021.

The areas which require management to make significant estimates in determining carrying values include, but are not limited to:

(a)     Revenue recognition

In the determination of allocation of revenues to work-in-process and deferred revenues, management must assess the stage of completion of custom IP license contracts based on hours completed compared to total estimated hours to complete. Such estimations are inherently uncertain due to unforeseen delays in technological research. Refer to note 5 for further information regarding the sensitivity in the estimation uncertainty.

(b)   Share-based payments

Judgement is used in determining the fair value of the share options at the grant date, including determining comparable listed companies against which the future volatility of the share price is compared and expected dividend yield. Such judgments are inherently uncertain and changes in these affect the fair value determination. See note 16.

(c)   Research and development costs

Judgement is exercised in determining whether costs incurred should be capitalised in line with IAS 38. The judgement includes whether it is technically feasible to complete the relevant assets on which costs are incurred so that it will be available for use or sale. See note 8.

4.   Alternative Performance Measures ("APMs")

The Group uses certain financial measures that are not defined or recognised under IFRS. The Directors believe that these non-GAAP measures supplement GAAP measures to help in providing a further understanding of the results of the Group and are used as key performance indicators within the business to aid in evaluating its current business performance. The measures can also aid in comparability with other companies who use similar metrics. However, as the measures are not defined by IFRS, other companies may calculate them differently or may use such measures for different purposes to the Group.

Bookings

Bookings excluding royalties comprise license fees, flexible spending accounts, non-recurring engineering and support and maintenance from contracted and typically non-cancellable orders that will ultimately result in recognised revenue. Bookings including royalties include company estimates of potential future royalties which may result in recognised revenues.

Bookings are a measure of operating performance used by management to assess order intake in each period, whether we are successfully converting our pipeline into committed orders and therefore how effective we have been in executing our strategy. Bookings are a key performance indicator used to assess the Group's performance for internal reporting purposes.

Earnings before interest, taxation, depreciation and amortisation "EBITDA"

EBITDA provides a supplemental measure of earnings that facilitates review of operating performance on a period-to-period basis by excluding items that are not indicative of the Group's underlying operating performance and is a key profit measure used by the Board to assess the underlying financial performance of the Group. EBITDA is stated before the following items and for the following reasons:

·    Interest is excluded from the calculation of EBITDA because the expense bears no relation to the Group's underlying operational performance.

·    Charges for the depreciation of property and equipment, acquired intangibles and right of use assets are excluded from the calculation of EBITDA, as they are non-monetary items.

·    Tax is excluded from the calculation of EBITDA because the expense bears no relation to the Group's underlying operational performance.

Operating profit to EBITDA reconciliation

*US$1,278k of depreciation in H1 2021 split by function is US$1,143k R&D / Engineering, US$39k Sales & Marketing and US$96k General & Administration

Two further measures are Adjusted EBITDA and Adjusted Profit after Tax, defined in the tables below. These further allow for a more accurate assessment of the underlying business performance by making exclusions of items which do not form part of the Group's normal underlying operations.

EBITDA to adjusted EBITDA reconciliation

* One-off legal costs incurred as a result of our execution of the China Product Partnership. Whilst still included in operating expenses and not included in non-recurring IPO costs, this expense was deemed to be one-off and added back to Adjusted EBITDA.

Profit after tax to adjusted profit after tax reconciliation

Adjusted profit per ordinary share attributable to the shareholders (expressed in cents per ordinary share)

5    Revenue

Revenue in the consolidated interim statement of income and comprehensive income is analysed as follows:

Sensitivity analysis

Revenue recognition for product revenue is determined using the input method on a percentage completion basis. The percentage of completion is calculated as a function of total hours estimated to fulfil the contract. The table below illustrates the sensitivity the percentage of completion estimate has on revenue recognition:

Please see the 'Financial Highlights' section on page 6 for further information on revenue, including the significant increase in revenue in H1 2021 compared to H1 2020.

Below is a reconciliation of the movement in accrued income during the period:

Below is a reconciliation of the movement in deferred income during the period:

This deferred revenue balance is all expected to be satisfied within 12 months of the balance sheet date.

The flexible spending account has increased to US$8.4m at the end of June 2021 from US$2.3m at the end of December 2020. This represents mainly non-current deferred income, and these are contracts with customers who have committed to regular periodic payments to us over the term of the contract. These payments are not in respect of specific licenses or other deliverables, but they can be used as credit against future deliverables. 

6    Employee Costs excluding Directors and Key management personnel

The average number of employees during the period, analysed by category, was as follows:

The number of employees at the end of each period, analysed by category, was as follows:

7    Directors and Key management personnel compensation

One director and key management personnel exercised options during the period. Details of that Directors' exercise of options are as follows:

* 30 June 2021 number of shares has been adjusted for the 20 for 1 split that happened immediately prior to the IPO in May 2021. June 2020 has not been adjusted.

8    Research and Development

The Group incurred research and development costs that have been expensed in the statement of income and comprehensive income. The amounts expensed through salaries, subscriptions, subcontracting, depreciation of right-of-use asset, equipment rentals, and prototype which relate to research and development are as follows:

9    Finance income and expense

10 Non-recurring IPO costs

In accordance with the Group's policy for non-recurring items, the following charges were included in this category for the period:

One-off costs relating to Project Aurora, the project name for the Group's initial public offering on the London Stock Exchange, that were not able to be offset against share premium under IAS 32 totalled US$5,316,269. Over half of these total fees related to LSE admission fees and legal costs associated with the IPO. Per IAS 32, costs that relate to the stock market listing or are otherwise not incremental and not directly attributable to issuing new shares should be recorded in the statement of comprehensive income.

11 Income tax credit/charge

Tax benefit/(expense) is recognised based on management's best estimate of the weighted-average annual income tax rate expected for the full financial year multiplied by the pre-tax income of the interim reporting period.

During the six months ended 30 June 2021 and 2020, the Group recorded a consolidated tax expense of US$1.1m and US$1.6m, respectively, which represented effective tax rates in continuing operations of 29.7% and 27.6%, respectively. The effective tax rate in the current period is primarily driven by the Company's operations in Canada, the US and the UK.

12 Earnings per share

Basic earnings per share is calculated by dividing net income from operations by the weighted average number of common shares outstanding during the period.

Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding during the period to assume conversion of all potential dilutive share options and restricted share units to common shares.

* 30 June 2020 number of shares has been adjusted for the 20 for 1 split that happened immediately prior to the IPO in May 2021, in order to give comparative figures. The EPS values have also been adjusted to reflect this.

13 Intangible assets

The intangible asset is a license to use IP. This IP is being developed by a 3rd party vendor and amounts paid to date represent instalments to initiate the development which is carried at cost. No amortisation is recorded as the intangible asset is not yet available for use. The carrying amount was tested for impairment at 30 June 2021 which concluded that no adjustments are necessary.

14 Cash and cash equivalents

Please see the 'Financial Highlights' section on page 6 for further information on cash, including the significant increase in cash as at 30 June 2021 compared to as at 31 December 2020.

15 Share capital

On 14 May 2021, the Company acquired the entire issued share capital of Alphawave IP Inc. in return for 576,908,920 Ordinary Shares issued by the Company with a nominal value of £1. This was based on 20 shares in the Company for each share in Alphawave IP Inc.

In addition, the Company issued 87,835,796 shares with a nominal value of £1 as part of its listing on the London Stock Exchange at a price of US$5.79 (£4.10), resulting in gross proceeds to the Company of US$509.0m (£360.1m) accounted for as share capital of US$124.1m (£87.8m) and share premium of US$384.9m (£272.3m).

Net proceeds after bank syndication fees were US$492.1m (£347.1m) with further costs relating to the issuance of shares resulting in total costs of US$23.0m (£16.3m), chargeable to the share premium account. However, the Company received US$22.2m (£15.7m) as proceeds of a stock stabilisation programme which were set off against these IPO costs, resulting in the net proceeds of US$0.8m being posted to the share premium account.

As part of the transaction, all options held over Alphawave IP Inc. stock became, by way of an amendment to option agreements, options in Company shares, on the basis of 20 options in the Company for 1 option in Alphawave IP Inc., each with an exercise price of 1/20^th of the original exercise price at the grant date.

On the IPO date, 13,049,861 options were exercised into ordinary shares in the Company. The options exercised all had prices below the £1 nominal value as a result of them maintaining their original exercise prices when they were granted as options in the shares of Alphawave IP Inc. This resulted in exercise proceeds of US$4.1m (£2.8m) with the shortfall in Share Capital of US$14.4m (£10.2M), being transferred from the merger reserve to the Share Capital account.

The reorganisation of the Company's corporate structure described above has been accounted for as a common control transaction and has been given effect from 1 January 2020. This has resulted in the opening share capital position being adjusted as if the reorganisation had happened on that date. In addition, a merger reserve has been established which reflects the difference between the share capital issued to acquire the shares in Alphawave IP Inc. and the share capital of Alphawave IP Inc. acquired at the transaction date of 14 May 2021.

The Currency Translation reserve arises out of the difference between the Net Asset position as at 30 June 2021 being translated into our presentational currency of USD at that date and the Equity balances being translated into our presentational currency at the date of the transaction.

* Reflects the 20 ordinary shares in the Company issued with a nominal value of £1 in exchange for 1 share in Alphawave IP Inc., immediately prior to the IPO on 14 May 2021 and as part of the reorganisation. See prospectus for more details of the IPO and Reorganisation.