Risk Report

(including the declaration in accordance with § 289 (5) and § 315 (2) no. 5 HGB)

The following disclosures apply to both parent company SINGULUS TECHNOLOGIES AG and to the SINGULUS TECHNOLOGIES Group. The parent company plays a key role in our risk and opportunity management.

OBJECTIVES AND PRINCIPLES OF RISK MANAGEMENT

For SINGULUS TECHNOLOGIES, efficient and forward-looking risk management is a crucial and value-creating task. Risk management is a core business function and has a decisive impact on the success of our business activities.

Specifically, risk management supports the achievement of our corporate objectives by providing transparency about the Company's risk situation as the basis for risk-conscious decisions, by identifying potential risks to the Company's net assets, financial position, and results of operations, and by prioritizing the risks and necessary actions. In addition, risk management ensures the targeted management of risks through implementing and monitoring the appropriate measures. Furthermore, it aims to limit risks to an acceptable level and to optimize risk costs.

Risk management helps increase enterprise value, is aligned with the interests of investors and stakeholders, and serves to ensure regulatory compliance.

Risk management at SINGULUS TECHNOLOGIES is based on the following principles:

  • Risk management is primarily ensured by the operating segments as part of their management tasks;
  • Risk management cannot be limited to financial risks, but must cover all risks associated with the Company's business activities;
  • Risk management must constitute an integral part of the business processes;
  • The prerequisite for effective risk management is the clear and coherent allocation of tasks and responsibilities, and a systematic risk management process;
  • Support and active involvement from management;
  • The efficiency and reliability of the risk management system must be monitored on an ongoing basis and adjusted where necessary;
  • The risk management system must be appropriately documented, and the risk management
    principles and guidelines must be determined in writing and communicated to the respective functions;
  • Opportunities are not part of risk management.

In particular, risk management is aimed at making the following contributions:

  • To improve risk awareness and transparency;
  • To identify, appropriately manage, and monitor all material risks;
  • To highlight risk accumulations;
  • To provide reliable management information about the Company's risk situation.

    Risk management organisation

    Risk management is integrated into SINGULUS TECHNOLOGIES' existing organization. It does not constitute an independent structure. The risk management organization at SINGULUS TECHNOLOGIES is the responsibility of the heads of the respective departments, who are supported by the risk manager and the Chief Financial Officer. The Chief Financial Officer agrees all activities connected with risk management at SINGULUS TECHNOLOGIES with the Chief Executive Officer.

    In order to identify risks, risk development is reflected once per year in the corporate planning, and new risks arising from the Company's perspective for the business development of all SINGULUS TECHNOLOGIES production companies and sales subsidiaries are discussed. Risks are reported directly at parent company level due to the weak independence of the sales subsidiaries. The respective managing directors or departmental heads are responsible for subsequently formulating and implementing risk management measures. The Finance and Controlling departments support the heads of the departments in carrying out the individual stages of the risk management process. The risk manager is responsible for the Company's methods and guidelines, and coordinates risk reporting within the SINGULUS TECHNOLOGIES Group.

    The Executive Board has overall responsibility for the implementation of a suitable and efficient risk management system to ensure the timely identification and management of situations capable of jeopardizing the continued existence of the Company.

    The risk management organization of SINGULUS TECHNOLOGIES AG:

    The risk management process in the SINGULUS TECHNOLOGIES Group

    Overall, the risk management system is a continuous process in accordance with the business risk management process:

    STAGE1: ESTABLISHMENT OF GOALS, CONTENT AND INFRASTRUCTURE

    The alignment of the risk policy (including goals and thresholds), the risk management processes, and the definition of the relevant systems and instruments form the basis for the strategic risk management process. The original definitions must subsequently be expanded or modified as part of a long-term control cycle.

    STAGE 2: RISK ANALYSIS 

    In a second step, risks are initially identified and documented, after which they are analyzed from a wide variety of perspectives and finally assessed, if possible. A theoretical risk portfolio is used to ensure a complete risk inventory. Analysis and updates are performed as part of the annual planning. Risk reporting on the development of material risks is carried out on a quarterly basis.

    Risks are assessed using an ordinal scale. Gross loss is assessed. This assessment is repeated on a quarterly basis.

    Gross loss is defined as the negative earnings impact on EBIT for the Group. The probability of occurrence is the subjective estimate of the probability of occurrence for the current fiscal year. Specifically, the probability is classified as low, medium, or high. The assessments are "gross" in each case, i.e., the existing controls and measures are not taken into consideration. The relevance indicators used to categorize gross risk are defined in the table below. The assumptions are derived from the specific maximum loss values (relative to Group equity) taken from long-term historical observations. In addition, the short- and medium-term liquidity risk is monitored on an ongoing basis. Please refer to the report on expected developments for the current assessment.

    Maximum loss
    Relevance Characteristics from to
    1 Insignificant risks that do not have a material impact on EBIT or enterprise value. EUR 0 EUR 0.5 million
    2 Medium risks that have a noticeable impact on EBIT. EUR 0.5 million EUR 2.5 million
    3 Significant risks that have a considerable
    impact on EBIT or lead to a noticeable reduction in enterprise value.
    EUR 2.5 million EUR 10 million
    4 Serious risks that lead to negative EBIT
    and a substantial reduction in enterprise value.
    EUR 10 million EUR 20 million
    5 Risks jeopardizing the Company's continued existence, with a material likelihood of threatening the existence of the Company as a going concern. > EUR 20 million

    The probability of occurrence is subsequently estimated for each individual risk (classification as high, medium, or low).

    STAGE 3: FORMULATION OF THE RISK MANAGEMENT STRATEGY 

    Specific measures and indicators can be derived on the basis of risk management strategies. These strategies are defined with respect to the Company's overall strategy and risk preference. In principle, management has the following alternatives at its disposal to manage risk:

       

    • Avoid risks
      Risk avoidance leads to a complete elimination of the risk, e.g., through withdrawing from a risky or unprofitable business.
    •  

    • Reduce risks
      Risk reduction aims to limit the probability of occurrence and/or the impact on EBIT or corporate objectives to an acceptable level, e.g., through improving early risk identification and implementing countermeasures.
    •  

    • Transfer (insure) risks
      Coverage transfers a potential loss to a third party, e.g., via the corresponding insurance protection.
    •  

    • Assume (accept) risks
      When risks are accepted, the direct form of risk financing by SINGULUS TECHNOLOGIES is described, e.g., financial coverage through recognizing provisions. Risk development is monitored by the corresponding employees, without specific risk management measures being introduced.
    •  

    STAGE 4: DESIGN AND IMPLEMENTATION OF SUITABLE STRUCTURES AND MEASURES 

    The necessary structures and measures are subsequently derived and implemented on the basis of the risk management strategy previously formulated.

    STAGE 5: MONITORING OF EFFECTIVENESS 

    The measures implemented must be regularly monitored and reviewed for effectiveness. Compliance with statutory documentation requirements must also be ensured.

    STAGE 6: ADAPTATION OF MEASURES AND CONTINUOUS IMPROVEMENT PROCESS 

    The changing environment means that risk management must be understood as a continuous process. For this reason, it is inevitable that the risk management process is continuously adapted to external and internal developments. Intensive knowledge management remains necessary to enable this. The departure point in the SINGULUS TECHNOLOGIES risk management process is the corporate strategy, which provides the basis for defining and communicating business goals.

    The risk management system is reviewed by impartial individuals, i.e., by people who are not directly involved in managing risk. The following basic review requirements apply:

       

    • Supervisory Board
      The Supervisory Board is responsible for reviewing the effectiveness of risk management. The Executive Board reports to the Supervisory Board on the current status of risk management at least once per year.
    •  

    • Audit
      The audit of the annual financial statements in accordance with § 317 (4) HGB includes an assessment of whether the Executive Board has suitably implemented the measures for which it is responsible in accordance with § 91 (2) AktG, and whether the monitoring system that must subsequently be established is adequate for the early detection of developments posing a risk to the Company's continued existence.
    •  

    In summary, the following relevance indicators and probabilities of occurrence in the reporting year result for the individual material risk groups identified compared to the previous year:

    20172016
    Relevance*Probability of occurrenceRelevance*Probability of occurrence
    Sales market risk in Solar segment••••medium•••••medium
    Project risks•••••medium•••••medium
    Technological risks•••medium•••medium
    Financial risks•••••medium•••••low
    Procurement market risks•••medium•••low

    * Measured using relevance indicators from 1 through 5

    The following sections provide an explanation of those risk areas or individual risks from among the overall risks identified for the Group that from today's perspective have a material impact on the net assets, financial position, and results of operations of SINGULUS TECHNOLOGIES AG and of the Group, and that can lead to negative deviations from targets.

    SALES MARKET RISK

    Risk description:

    SINGULUS TECHNOLOGIES is dependent on the willingness of its global customers to invest in new production systems for solar cells, optical media, and semiconductors.

    To a large extent, developments in the market for photovoltaic systems in recent years have relied on the regulatory environment and global subsidiaries for investments in photovoltaic systems. Although reliance on the cost effectiveness of photovoltaic systems is increasingly being reduced due to the decrease in system costs, the future global market for these systems will remain dependent on the continuation of state subsidies for investments in photovoltaics. This trend is particularly visible in the principal markets of China and the USA.

    If the appeal of photovoltaics loses ground to other means of renewable energy generation in the future, or if these other technologies develop more favorably than photovoltaics due to technical, economic, regulatory, or other reasons, investments in photovoltaics could cease, reduce, or at least fall significantly short of the levels forecast by SINGULUS TECHNOLOGIES.

    In addition, competition may continue to increase as a result of future business combinations or partnerships between individual competitors or the market entry of additional competitors. Growing competition may also lead to lower prices for the Company's production systems or even to a significant loss of market share.

    In the Solar segment, the Company currently conducts its business with a small number of major customers. This particularly the case in view of the major order and future business relationships with the state-owned company CNBM in China. There is a risk that major customers noticeably reduce or terminate the business relationship with the Company. In such a case, it is unlikely that the Customer will be able to compensate for the lost business volumes with new customers in the short or medium term.

    In addition, the Chinese market harbors significant political risk if the Chinese government realigns or adjusts its energy policy, shifts its subsidy policy for new production methods in the solar area to focus on technologies other than CIGS or HJT, or even only if it does not implement the expansion of its production capacities in the currently stated scope.

    Impact:

    Due to the improved order situation at the end of the fiscal year, the market risk in the Solar segment is classified as relevance indicator 4 (previous year: 5) with still with a medium probability of occurrence. As a consequence, this risk is classified as serious and could substantially reduce enterprise value. Management expects significant growth rates in the Solar segment in the years to come, and this division should provide the largest contribution to revenue and earnings in the future, also considering that the entry into new business areas. It is highly dependent on CNBM in particular and its continued demand for CIGS production equipment. Most of the order backlog is already currently destined for the Chinese market. If the order intake in this area remains below the assumed levels in the fiscal years to come, this would have a significant negative impact on the net assets, financial position, and results of operations. If the expansion of renewable energies were given a lower priority by the Chinese government and as a result, the expansion of solar parks were to decline significantly over the coming years, this would have a material effect on the investment appetite of Chinese customers and thus on the Company's most important sales market.

    Due to the hesitant introduction of the new UHD standard, our customers have once again delayed their planned capital investments in the Optical Disc segment. From today's perspective, market risk is classified as a significant risk with a relevance indicator of 2 (previous year: 3) and medium probability of occurrence (previous year: medium); this is due to the ongoing changes in consumer behavior and the associated further decrease in the importance of this segment.

    The Semiconductor segment continues to be viewed as immaterial due to the low volumes with regard to possible revenue.

    Measures:

    External data such as the results of market research, as well as close contact with our customers and monthly comparisons of actual and planned figures, help to improve our estimates of future trends.

    PROJECT RISK

    Risk description:

    We define project risk as relating to orders for non-standardized systems with a purchase price generally exceeding EUR 3 million. This affects the Solar and Semiconductor segments. Specifically, the risks relate to budget and project schedule overruns, non-compliance with acceptance criteria, as well as contract cancellations, the associated non-acceptance of systems, and the resulting contractual risks.

    Impact:

    If risks materialize in connection with project processing, these could have a considerable adverse impact on the Company's business activities, especially with regard to larger projects. In particular, the risk of budget overruns is assessed as material. Particularly the planned processing of the project with the major customer CNBM for the delivery of production systems for manufacturing CIGS solar modules is of great importance to the continued existence of the Company. The associated orders are key to the Company's strategy and confirm its leading position in the area of CIGS solar technology. The materialization of project risks within these activities would lead to significant negative effects on the net assets, financial position, and results of operations of the Company. If these projects were to fail in whole or in part, or the planned profit not sufficiently realized, this could have significant negative effects on the net assets, financial position, and results of operations, even to the extent of jeopardizing the continued existence of the Company. Accordingly, we continue to classify the project risks as relevance indicator 5 (previous year: 5). As in the previous year, the probability of occurrence was classified as medium.

    Measures:

    Project calculations, project schedules, and project-specific risk assessments and liquidity planning are carried out at the proposal phase for the purposes of risk management. Changes in parameters are monitored on an ongoing basis in parallel to project progress with the aim of identifying potential project risks and implementing the necessary measures at an early stage. Prepayments and part-payments on completion of project milestones are routinely agreed to reduce the risk of cancellation. However, it cannot be ruled out that customers will cancel orders before making prepayments or the relevant part-payments following project milestones. If SINGULUS TECHNOLOGIES has already provided up-front services and incurred expenses in connection with order processing, the ability to enforce these claims against the customer would in some circumstances be uncertain.

    FINANCIAL RISK

    Risk description:

    The SINGULUS TECHNOLOGIES Group is exposed to financial risk, primarily with regard to liquidity risk. It is also exposed to credit risk in relation to receivables from customers. The Solar business may require additional financing arrangements depending on project-specific requirements. In particular, prepayments made by customers must frequently be secured by guarantees. For this purpose, the Company must deposit a large amount of cash with the guarantors as collateral. This collateral is not available to the Company to finance working capital and, depending on the progress of the project, could lead to liquidity squeezes.

    The payment history of customers, particularly of CNBM, is of great significance for the ongoing liquidity position and the future improvement of the Company’s credit rating. If the inflows of liquidity related to the CNBM projects should fail to occur or be delayed for a longer period of time, this would under certain circumstances lead to significant negative effects on the net assets, financial position, and results of operations in the course of the 2018 and the 2019 fiscal years, even to the extent of jeopardizing the continued existence of the Company.

    Impact:

    As in the previous year, we currently classify liquidity risk as relevance indicator 5 (previous year: 5), and credit risk remains at relevance indicator 3 (previous year: 3). Despite the successful implementation of a cash capital increase in December 2017 and an ongoing improved order situation, we no longer classify the probability of occurrence for liquidity risk as low, but now consider it to be medium. In particular, coverage of guarantees must be restructured in order to reduce the cash deposit for the project in Bengbu and further prepayments by the customer CNBM received as planned. Material delays in payment within these projects could not be compensated for.

    The financing commitments from banks and insurers will need to be significantly increased to fund the required guarantee lines in the upcoming fiscal year so that the additional new orders underlying the positive business trend can be appropriately financed. The liquidity risk of the Company can only be reduced given sufficient availability of cash and cash equivalents from customer prepayments.

    As in the prior year, we assess the probability of occurrence for credit risk as low.

    Measures:

    A liquidity reserve in the form of cash and credit lines will be maintained to safeguard the SINGULUS TECHNOLOGIES Group's solvency and financial flexibility at all times. Liquidity plans will be regularly drafted and compared with actual developments to ensure the early detection of liquidity risks. The Company is currently negotiating new guarantees with significantly reduced collateral. In connection with the expansion of the Bengbu site through the addition of five CISARIS systems, the Company extended guarantee lines for EUR 12.0 million in January 2018. These were fully backed by cash and cash equivalents. The Company is currently in negotiations to restructure the coverage of the guarantee lines extended. Under this, the Company would receive cash and cash equivalents in the amount of up to EUR 12.0 million as a result of the reduction of the cash deposit. In November 2017, the Company also extended a loan with a volume of EUR 4.0 million until November 2018 in order to further secure liquidity.

    The receivables portfolios of the individual SINGULUS TECHNOLOGIES Group companies are reviewed at short intervals to analyze credit risk. We use export credit insurance as the primary instrument to hedge against credit risk relating to foreign customers. Customers' creditworthiness and payment history are continually monitored and corresponding credit limits are set. In addition, risks in individual cases are limited where possible through credit insurance and bank guarantees. Please also refer to the risk of erosion of half the share capital of SINGULUS TECHNOLOGIES AG in the forecast contained in the management report to the annual financial statements in accordance with HGB.

    TECHNOLOGY RISK

    Risk description:

    The SINGULUS TECHNOLOGIES Group operates in highly competitive markets. If product refinements or new product developments produce undesirable results, this could lead to significant costs.

    Impact:

    As in the previous year, we currently classify the risk of undesirable or delayed development as relevance indicator 3 with a medium probability of occurrence.

    Measures:

    Analysis of market requirements is a key aspect in reviewing development risk. We reduce the risk of undesirable or delayed development through cooperating with partners and research institutes, as well as via a continuous evaluation process in which the efficiency, chances of success, and general framework of development projects are continuously reviewed. Monitoring the planning of the various development projects is a key part of this process. The necessary impairment write-downs are recognized for capitalized development costs that are considered to be impaired. Analyzing, unlocking, and exploiting chances for success to safeguard and expand the Company's competitiveness also constitute key aspects of strategic planning.

    PROCUREMENT RISK

    Risk description:

    The availability, unplanned price increases, and inadequate quality of purchased components constitute a risk for SINGULUS TECHNOLOGIES. High inventory levels present a further risk.

    Impact:

    In light of the high inventory levels, we currently classify inventory risk as relevance indicator 3 (previous year: 3) as in the previous year and continue to consider this to be a low probability of occurrence (previous year: low). From our current perspective, we assume sufficient coverage of the inventory risk. At the end of the fiscal year, we classify the risk in regard to the availability, quality, and price increases of purchased components as relevance factor 3 (previous year: 3), and we consider this to be a medium probability of occurrence (previous year: low). We do not expect any significant price increases in the short to medium term based on current contractual negotiations and analysis of market expectations. The average inventory backlog rate and the number of quality complaints were mostly within the target range throughout the entire fiscal year.

    Measures:

    Delivery capacity and compliance with our quality requirements for purchased components are subject to constant monitoring. Inventory management constitutes a further component of risk management. This includes reviewing the marketability of, and days inventory held (DIH) for, goods and purchased components, as well as analyzing their age structure. In order to avoid unplanned price increases, some of the contracts entered into with suppliers are long-term if this is deemed necessary for production planning purposes.

    COMPLIANCE RISKS

    Risk description:

    As a company operating internationally, the SINGULUS TECHNOLOGIES Group is exposed to a wide range of legal, tax, and regulatory risks in addition to the operational and financial risks. In particular, these include risks associated with product liability, patent law, and company law. The outcomes of legal disputes and litigation can cause considerable damage to the Company’s reputation and business or at least involve significant costs.

    In addition, disregard for laws, regulatory requirements, and the guidelines aligned with these requirements could have serious negative impacts on the Company. These include, for instance, risks related to corruption and violations of export conditions.

    Impact:

    The outcomes of litigation is subject to uncertainties. As a result, judicial or regulatory decisions or settlements may lead to expenses that are either not or are not fully covered by insurance, and which could therefore have an impact on our business and the corresponding financial key performance indicators.

    Within SINGULUS TECHNOLOGIES AG, a large share of the litigation risk is due to the action brought by Alster & Elbe Inkasso GmbH, Hamburg.

    With regard to this action brought against the Company and five other defendants for a sum of EUR 750 million in compensation, the Karlsruhe regional court dismissed the action on July 26, 2017 in its entirety. The decision of the court confirms the Company’s legal position as well as the information provided in the risk report as of December 31, 2016. Alster & Elbe withdrew its appeal against the first instance decision. The decision is therefore final. There is no longer a material legal risk to the Company.

    We currently classify the effects of compliance violations as relevance indicator 3 (previous year: 5) with a low probability of occurrence.

    Measures:

    Legal risks are identified using a systematic approach and are managed with the assistance of external lawyers.

    To prevent potential violations of the law, the SINGULUS TECHNOLOGIES Group has established a Group-wide Code of Conduct. This is intended to provide employees with specific rules of behavior for various situations. Individual employee training on individual questions about a variety of legal provisions represents yet another measure aimed at preventing compliance violations.

    KEY ACCOUNTING FEATURES OF THE SINGULUS TECHNOLOGIES GROUP'S INTERNAL CONTROL SYSTEM AND RISK MANAGEMENT SYSTEM

    The SINGULUS TECHNOLOGIES Group's internal control and risk management systems are integrated into one overall system. The internal control system comprises the principles, procedures and measures introduced throughout the Company by the management in order to implement the management's decisions throughout the organization. Specifically, this includes:

       

    • Ensuring the effectiveness and profitability of the business activities
    •  

    • Correctness and reliability of the internal and external accounting
    •  

    • Compliance with the requirements applicable to the Company
    •  

    The risk management system includes the entirety of all organizational regulations and measures developed to identify and manage risks arising out of operating activities. The following structures and processes relating to the (Group) accounting processes were implemented at the SINGULUS TECHNOLOGIES Group:

    The overall responsibility for the internal control system with regard to the (Group) accounting processes rests with the Executive Board. All companies included in the consolidated financial statements are integrated under a clearly defined management and reporting organization. Under the (Group) accounting processes, features of the internal control and risk management system are classified as important if they materially influence the Group's accounting and the overall presentation of the consolidated financial statements, including the Group management report. This includes the following elements in particular:

       

    • Identifying material risk areas and controls that influence the Group-wide accounting process
    •  

    • Monitoring the Group-wide accounting process and the corresponding findings at the Executive Board level
    •  

    • Preventative finance and accounting control measures at the Group and the subsidiaries included in the consolidated financial statements
    •  

    In addition, the findings from the ongoing reporting process are used to further develop the internal control system.

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