SINGULUS
TECHNOLOGIES

Annual Report 2018

Independent Auditor´s Report

To Singulus Technologies AG, Kahl am Main
Report on the audit of the consolidated financial statements and the management report

Audit Opinions
We have audited the consolidated financial statements of Singulus Technologies Aktiengesellschaft,  Kahl am Main,  (hereinafter referred to as "Singulus AG" or the "Company"), and its subsidiaries (the "Group"), which comprise the  consolidated balance sheet as at December 31, 2018, and the  consolidated income statement, consolidated statement  of comprehensive income, consolidated  statement of changes in equity and consolidated statement of cash flows for  the fiscal year from January 1 to December 31, 2018, and notes to the consolidated financial statements, including a   summary of significant accounting policies. In addition, we have audited the combined management report of the  Singulus Technologies Group and Singulus AG (hereinafter referred to as the  "Management Report") for the fiscal year  from January 1 to December 31, 2018.

In our opinion, on the basis of the knowledge obtained in the audit,

  •  the accompanying consolidated financial statements comply, in all material respects, with the IFRSs as adopted by  the EU, and the additional requirements of German commercial law pursuant to § [Article] 315e Abs. [paragraph] 1 HGB [Handelsgesetzbuch: German Commercial Code] and, in compliance with these requirements, give a true and fair view  of the assets, liabilities, and financial position of the Group as of December 31, 2018, and of its financial performance  for the financial year from January 1 to December 31, 2018, and
  •  the accompanying management report as a whole provides an appropriate view of the Group's position. In all material respects, this management report is consistent with the consolidated financial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development.

Pursuant to § 322 Abs. 3 Satz [sentence] 1 HGB, we declare that our audit has not led to any reservations relating to the legal compliance of the consolidated financial statements and of the management report.

Basis for the Audit Opinions
We conducted our audit of the consolidated financial statements and of the management report in accordance with § 317 HGB and the EU Audit Regulation (No. 537/2014, referred to subsequently as "EU Audit Regulation") and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Our responsibilities under those requirements and principles are further described in the "Auditor's Responsibilities for the Audit of the Consolidated Financial Statements and of the Management Report" section of our auditor's report. We are independent of the group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these requirements. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions on the consolidated financial statements and on the management report.

Material uncertainty as to the Company's ability to continue as a going concern
We refer to section A: "General" in the notes and the disclosures in the section entitled "Report on risks and opportunities" of  the combined management report of the Singulus Group and Singulus AG. In these sections, the Executive Board disclosed that the Company would only be able to maintain sufficient liquidity in fiscal years 2019 and 2020 if installments to be paid  on the basis of major orders already contracted are actually made or not subject to a material delay and the orders also  taken into account in the liquidity planning are completed as planned. These events and circumstances indicate that there are  material uncertainties which can raise doubts as to the ability of the Company to continue to operate as a going concern within the meaning of § 322 Abs. 2 Satz 3 HGB. This has not changed our audit opinion. 

Key Audit Matters in the Audit of the Consolidated Financial Statements

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the  consolidated financial statements for the fiscal year from January 1 to December 31, 2018. These matters were addressed  in the context of our audit of the consolidated financial statements as a whole, and in forming our audit opinion thereon;  we do not provide a separate audit opinion on these matters.

Goodwill impairment

Please refer to notes 4.5 and 4.16 to the consolidated financial statements for information on the accounting policies and assumptions applied. Disclosures on the amount of goodwill can be found in note 11 to the consolidated financial statements.

Risk for the financial statements
At December 31, 2018, goodwill amounted to EUR 6.7 million, or 31.5% of Group equity.

Goodwill relates solely to the "Solar" operating segment and is tested for impairment at this level annually and on an ad hoc basis. To that end, the carrying amount of the goodwill is compared against the recoverable amount of the Solar operating segment. If the carrying amount is greater than the recoverable amount, an impairment must be recognized. To test for impairment, the Company primarily determines the value in use and compares this against the respective carrying amount. The value in use is determined using a valuation model that is based on the discounted cash flow method. Goodwill was tested for impairment as of December 31, 2018. Goodwill impairment tests are complex and require that discretion be exercised when making assumptions. Such assumptions include the expected revenue and earnings trend, including an assumption as to the growing market share for the global new machinery business for selected production facilities of the Solar operating segment for the next five years, the assumed long-term growth rates and the discount rate used.

As a result of the impairment tests, the Company did not identify any need to recognize any impairment on goodwill. However, the Company's sensitivity analysis for the value in use found that if revenue were to fall beneath the target by more than 29.5% or if the planned EBIT margin were to fall more than 8.3 percentage points below the target, this would result in goodwill being written down to the value in use.

The financial statements are subject to the risk that a goodwill impairment not yet incurred as of the balance sheet date was not identified. Furthermore, there is a risk that the notes disclosures on goodwill impairment are not accurate.

Our audit approach
With the assistance of our valuation specialists, we assessed among other things the appropriateness of the discount rate used in the impairment test. In addition, we discussed the expected revenue and earnings trend, including an assumption as to the growing market share for the global new machinery business for selected production facilities of the Solar operating segment, the assumed long-term growth rates with those persons responsible for planning. In addition, we reconciled the three-year plan prepared by the Executive Board and adopted by the Supervisory Board with other internally available forecasts, e.g., for tax purposes, as well as with the draft statement on the going concern assumption for the SINGULUS Group prepared by an external expert. Moreover, we assessed the consistency of the assumptions with external market expectations and Singulus AG's market capitalization.

Furthermore, we assessed the accuracy of prior forecasts by the Company by comparing the projections for the fiscal year against the actual results, and analyzed deviations. As changes in the discount rate can have a material impact on the results of the impairment test, we have compared the assumptions and parameters underlying the discount rate, in particular the risk-free interest rate, the market risk premium and beta, with our own assumptions and publicly available data.

To ensure the arithmetical correctness of the valuation model used, we have verified the Company's calculations on the basis of selected risk-oriented elements.

In order to account for the existing forecast uncertainty for the impairment test, we conducted our own sensitivity analysis to examine possible changes in the earnings trend (in particular revenue and EBIT margins), the discount rate and the long-term growth rate for the recoverable amount by calculating alternative scenarios and comparing them with the Company's figures.

Finally, we assessed whether the notes disclosures on goodwill impairment are accurate. This also involved an assessment of the appropriateness of the disclosures in the notes regarding sensitivities to changes in material assumptions underlying the valuation.

Our conclusions

The calculation method underlying the impairment test for the Solar segment's goodwill is appropriate and complies with the applicable valuation principles. The assumptions and parameters used by the Company in the valuation are balanced overall. The notes disclosures on goodwill impairment are appropriate.

Accounting for construction contracts and revenue recognition

Please refer to note 4.4 to the consolidated financial statements for information on the accounting policies applied. Disclosures of the amount of reported revenue from construction contracts and receivables and liabilities from construction contracts can be found in note 8 to the consolidated financial statements.

Risk of the financial statements

Income from construction contracts amounted to EUR 106.4 million in fiscal year 2018. Receivables from construction  contracts amounted to EUR 14.8 million as of December 31, 2018, taking into account prepayments received of EUR 20.4  and liabilities from construction contracts.

Singulus AG recognizes revenue from construction contracts when it satisfies a performance obligation by transferring a specified asset to a customer. An asset is deemed to have been transferred once the customer obtains control over that asset. Depending on the transfer of control, revenue is recognized either at a point in time or over time in the amount that reflects the consideration to which Singulus AG expects to be entitled.

Singulus AG has determined, on the basis of the following criterion, that the performance obligation for construction contracts is fulfilled over time and that revenue is therefore recognized over time: The Group's performance creates an asset that has no alternative use for the Group and the Group has a legal right to receive payment for the services already rendered, including an appropriate margin.

Where revenue is recognized over time, income and partial contributions to profit or loss are realized according to the degree of completion of the contract. This requires that the earnings from the contract can be reliably estimated. If the contract is expected to result in a loss, that loss must be recognized in full, immediately.

Accounting for construction contracts is complex and subject to discretion. There are uncertainties with respect to estimates, particularly regarding the total estimated contract costs and the calculation of the percentage of completion, which is based on continually updated projections (cost-to-cost method).

The most significant market for construction contracts for the Group is in Asia. The agreements with the customers contain complex contractual provisions.

Due to the relevance of complex contractual agreements and the discretion used when assessing the criteria for assessing the timing of the transfer of control, there is a risk that the revenue and earnings from construction contracts and the related receivables and liabilities may be incorrectly allocated to the respective fiscal years and that expected losses from construction contracts may not be recognized in a timely manner.

Our audit approach

On the basis of our acquired understanding of the process, we have assessed the design, establishment and functionality of identified internal controls, in particular with respect to the correct allocation of costs to individual contracts.

In light of the first-time application of IFRS 15, we focused our audit on assessing the executive directors' interpretation of the criteria for recognizing revenue over time. To this end, we have assessed all relevant current construction contracts. For contracts selected based on risk-oriented aspects, we have assessed the appropriateness of significant discretionary decisions, such as estimating the costs still to be incurred. To that end, we discussed the selected construction contracts, including existing risks (e.g., legal and warranty risks), with the Company's relevant contacts (e.g., the Executive Board, sales management, controlling and project managers), analyzed their updated order calculations and the respective percentage of completion, and assessed the associated documents (e.g., contracts, acceptance records). In addition, we compared the accrued actual costs for the selected contracts still in progress with the original cost estimate in order to assess the general accuracy of projections. Based on previous findings, we also assessed whether the respective percentage of completion was appropriately calculated and reported in the balance sheet and income statement.

Our conclusions

Singulus AG's approach to recognizing revenue from construction contracts over time and accounting for construction  contracts is appropriate. The assumptions underlying the accounting for construction contracts are appropriate.

Other Information

The executive directors are responsible for the other information. The other information include the annual report, which is likely to be made available to us after the date of this auditor's opinion, with the exception of the audited annual financial statements and management report and our auditor's report.

Our audit opinions on the annual financial statements and on the management report do not cover the other information,  and consequently we do not express an audit opinion or any other form of assurance conclusion thereon.

In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other information

  • is materially inconsistent with the annual financial statements, with the management report or our knowledge obtained in the audit, or
  •  otherwise appears to be materially misstated.

The annual report does not contain any further components of the management report, other than the "combined management report of the Singulus Group and Singulus AG".

Responsibilities of the Executive Directors and the Supervisory Board for the Consolidated Financial Statements and the Management Report 

The executive directors are responsible for the preparation of the consolidated financial statements that comply, in all material respects, with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to § 315e Abs. 1 HGB and that the consolidated financial statements, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position, and financial performance of the Group. In addition the executive directors are responsible for such internal control as they have determined necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the executive directors are responsible for assessing the Group's ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic alternative but to do so.

Furthermore, the executive directors are responsible for the preparation of the management report that, as a whole, provides  an appropriate view of the Group's position and is, in all material respects, consistent with the consolidated financial  statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future  development. In addition, the executive directors are responsible for such arrangements and measures (systems) as they  have considered necessary to enable the preparation of a management report that is in accordance with the applicable  German legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the  management report.

The Supervisory Board is responsible for overseeing the Group's financial reporting process for the preparation of the  consolidated financial statements and of the management report.

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements and of the Management Report

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and whether the management report as a whole provides an appropriate view of the Group's position and, in all material respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor's report that includes our audit opinions on the consolidated financial statements and on the management report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with § 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. Misstatements  can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and this management report.

We exercise professional judgment and maintain professional skepticism throughout the audit. We also:

  •  Identify and assess the risks of material misstatement of the consolidated financial statements and of the management report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our audit opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,  intentional omissions, misrepresentations, or the override of internal controls.
  • Obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of arrangements and measures (systems) relevant to the audit of the management report in order to design audit procedures that are  appropriate in the circumstances, but not for the purpose of expressing an audit opinion on the effectiveness of these systems.
  •  Evaluate the appropriateness of accounting policies used by the executive directors and the reasonableness of estimates made by the executive directors and related disclosures.
  •  Conclude on the appropriateness of the executive directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are  required to draw attention in the auditor's report to the related disclosures in the consolidated financial statements and in the management report or, if such disclosures are inadequate, to modify our respective audit opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to be able to continue as a going concern.
  •  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements present the underlying transactions and events in a manner that  the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and financial  performance of the Group in compliance with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to § 315e Abs. 1 HGB.
  •  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities  within the Group to express audit opinions on the consolidated financial statements and on the management report.  We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for  our audit opinions.
  • Evaluate the consistency of the management report with the consolidated financial statements, its conformity with  German law, and the view of the Group's position it provides.
  •  Perform audit procedures on the prospective information presented by the executive directors in the management  report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by the executive directors as a basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate audit opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most  significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter.


Other legal and regulatory requirements

Further Information pursuant to Article 10 of the EU Audit Regulation
We were elected as auditor by the annual general meeting on June 28, 2018. We were engaged by the Supervisory Board of Singulus AG on September 11, 2018. We have been the auditor of the Singulus AG without interruption since fiscal year 2012.

We declare that the audit opinions expressed in this auditor's report are consistent with the additional report to the audit  committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report).

German Public Auditor responsible for the engagement

The German Public Auditor responsible for the engagement is Yaman Pürsün.
 
Frankfurt am Main, March 19, 2019


KPMG AG
Wirtschaftsprüfungsgesellschaft


signed Pürsün
Wirtschaftsprüfer


signed Horn
Wirtschaftsprüfer