Half-year Report

RNS Number : 9805F
Surface Transforms PLC
27 February 2018
 

The information communicated within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

 

27 February 2018

 

Surface Transforms plc.

("Surface Transforms" or "the Company")

 

Half-year financial results for the six months ended 30 November 2017

 

Surface Transforms (AIM:SCE) manufacturers of carbon fibre reinforced ceramic materials, announces its half-year financial results for the six months ended 30 November 2017.

 

Financial highlights:

 

·      Revenue increased to £524k (H1-2016: £327k)

·      Loss before and after tax increased to £1,294k (H1-2016: £976k)

·      Cash at 30 November 2017 was £3,275k (31 May 2017: £1,532k)

·      Successful equity placing raising £3,439k (net of expenses) in the period

·      Capital expenditure on property, plant and equipment of £684k (H1-2016: £680k) mainly related to the installation of Production OEM cell 1

·      Inventory of £735k (31 May 2017: £507k)

 

Sales and Operational Highlights:

 

·      Small Volume Production (SVP) cell is in steady state production

·      Continuing progress on installation of Production OEM cell 1 including purchase of the ceramic infiltration furnaces (albeit post period end cash transaction)

·      Start of production (SOP) on the Aston Martin Valkyrie project scheduled for early 2019. Additional demand from Aston Martin (mainly relating to dealer spares) has added an additional £1m of revenue to the programme

·      Testing to satisfy OEM Three road car requirements continues with only one product test yet to be completed; the Company still believes it can meet the customer's requirements and expects to conclude this testing when required during this year

·      As previously notified OEM Three and Five will conduct their VDA 6.3 quality processes audit after the conclusion of the product testing

·      Whilst the Company successfully completed OEM Three's testing requirements for its racetrack car, they have changed the racetrack cars requirements, that necessitates a re-design (and therefore re-test) of the carbon ceramic disc. Management therefore consider it unlikely this product will be launched in the current race season

·      Near OEM sales were flat in the period, however the Company now expects further growth in this market in the next two years, particularly in the specialist US conversion segment

·      A project plan received from the Company's target airframe customer indicates a delayed SOP of the upgraded aircraft to January 2020. This reduces revenues by approximately £1.4m over the two financial years FY 2019 and FY 2020; programme and financial offset discussions are continuing

 

Financial Review:

 

The increase in revenue from FY 2016 has been delivered primarily from additional sales of aftermarket products, with sales to near OEM customers flat. Development revenues have been low in the first half of the year but are expected to increase in the second half as development income from the Aston Martin project begins in earnest.

Revenue of £524k were £50k less than notified in the trading update issue on 20 November 2017. This reflects a supply chain disruption in the last week of the trading period that was quickly rectified in the second half trading period and has no impact on the expected year end numbers.

 

Gross profit increased to £286k (H1-2016: £201k) and gross profit margin was 55% (H1-2016: 61%), the movement being a function of product mix, with aftermarket kits having lower margin than development income.

 

Administrative expenses rose by £115k to £547k (H1-2016: £432k) primarily due to increased costs of the new site combined with upgrades to the IT infrastructure in the business and increased headcount.

 

Research expenses rose to £1,033k (H1-2016: £750k) due to continuing focus on delivering final product to target OEM customers. The increase was primarily due to additional salaries to increase the available resource for these intensive programs.

 

An R&D tax credit of £464k (H1-2016: £356k) was received in the last week of January 2018 outside the trading period reported. Total loss for the period was therefore £1,294k (H1-2016: £976k).

 

Cash at the end of the half-year was £3,275k (31 May 2017: £1,532k). In the period £3,439k of new share capital was raised of which £684k (H1-2016 £680k) was expended in the period on capital equipment relating to OEM cell 1.  23,750,460 of  new shares were issued at a price of 15.5p each which increased share premium by £3.2m.

 

Loss per share was 1.17p (H1-2016: 1.08p).

 

Outlook

 

The Company continues to expect year-end sales to be in line with management expectations.

 

Research expenditure will continue at its current higher level and the increased site costs reflect the on-going higher costs of the new site. These increased costs are already reflected in existing Company budgets and the Company expects to finish the year with a loss in line with budget.

 

The Company's projections indicate that there is sufficient cash to reach the point of operational cash generation in FY 2020.

 

Progress with potential OEM Customers

 

The key metric for the Company continues to be the advancement of the game changing contracts where the current status is as follows:

 

Automotive

                                                                                                                                                                                                                                                    

Aston Martin Valkyrie: SOP remains early 2019 and the inclusion of contracted dealers' spares demand has added £200k to FY 2019 projections and £800k in FY 2020. This initial spares demand is firm and continuing on-going demand is expected thereafter, although the quantum of the future demand is difficult to forecast as much depends on the mix between track use and road use by the owners.

 

The Company also continues to believe that there is potential to win further models beyond the Valkyrie but it is too early to begin detailed discussions.

 

German OEM Three: There are two projects underway for this customer - volume road car and the specialist racetrack car.

 

In respect to the road car, there remains only one outstanding test to be completed, even though completion of this test has been outstanding for some time. As part of the process the Company has been making a number of parallel changes to the product that have now been combined into a series of "near final" discs. The Company continues to believe that tangible engineering progress has been achieved and that the testing will be completed in time for 2018 selection on the Customer's next product launch.

 

Testing had been completed for the racetrack car but the customer has, for reasons outside the Company's control, changed the size of a key adjacent component that requires Surface Transforms to offer up a reduced size disc. This smaller size requires testing and therefore it seems unlikely that the Surface Transforms product will be introduced in the current race season.

 

British OEM Two and German OEM Four: These are sister companies of OEM 3 and will follow the engineering release of the technology into the Group by OEM Three.

 

German OEM Five: has repeated its wish to use the Company's products, the customer having completed some testing but with further testing remaining. None of the testing is considered onerous by the Board and our products have passed equivalent tests in other development programmes.

 

Aerospace

 

The Company has now received a project plan from the airframe manufacture building the target aircraft, indicating a start of production of the upgraded aircraft in January 2020. This is a further delay from the previously notified January 2019 date (and two years from the original January 2018 date); it has the effect of reducing total revenue by approximately £500k in FY 2019 and £900k in FY 2020. The Board however remain optimistic that some of these lost revenues will be offset by development income in what is now effectively a re-certification programme - as the Company's production processes, and raw material suppliers have changed, the product will require a full re-certification. In line with normal aerospace military practice this process will be customer funded with reasonable profit margins.

 

Knowsley Facility

 

As a reminder the footprint of the Knowsley facility has the potential for anticipated output of 100,000 discs in five replica cells plus the Small Volume Production (SVP) cell. The current planning and finance availability is focused on SVP and the first of these cells.

 

Small Volume Production Cell: This cell - effectively transferred from Ellesmere Port - can now be considered steady state albeit with continuing potential for improvement in daily flow rate, establishment of lean manufacturing disciplines, and reduction in the high inventory levels. The Aston Martin contract will be produced in the SVP cell.

 

OEM Cell 1: All the key technology furnaces are under final test either in Knowsley or at the suppliers' premises. In the last six months, the Company has purchased and is currently installing and testing the ceramic infiltration furnaces, the final piece of the furnace jigsaw. With all the furnaces and services in place, the only outstanding items are the machine tools, which are "off the shelf" with short lead times. The Company expects to achieve pre production capability and volume capacity in the current calendar year to facilitate "off tool" samples, the key criteria for entering the volume production stage.

 

VDA 6.3 Quality Requirement: This is the audit process used by the German OEMs to calibrate the Company's conformance to quality processes. Both German OEM Three and German OEM Five have told the Company that they will undertake the audit when the product testing is complete which is currently expected to be around mid-year.

 

IATF 16949:2016: In parallel to German OEM activity, the British automotive manufacturers have launched an upgrade of their quality standard (previously TS 16949) which now broadly replicates the German VDA standards. All British automotive companies have to achieve this standard by September 2018. The Surface Transforms audit of this transition is in two phases - March 2018 and May 2018. As the processes and procedures are almost identical to VDA requirements, the Company expects to pass this audit.

 

Summary

 

Surface Transforms continues its journey from a development company to a mainstream volume automotive supplier with a site capable of production volumes of 100,000 discs, revenues of £50m and firm and repeatable orders.

 

The past six months has, overall, been one of steady progress rather than major breakthroughs. In this respect the testing on the OEM Three product and the slow but sure installation of the new furnaces in the OEM cell typify the frustrating pace but nonetheless continuing progress, whereas the size of the additional Aston Martin spares order hints at the revenue potential from this marketplace.

 

The Board expects to continue this progress with news of conclusion of the German OEM Three testing and further detail on SOP with German OEM Five. The Board expect trading for the full year will be in line with current management expectations.

 

However I cannot conclude without recording the Board's appreciation of the outstanding contribution by all members of staff. Thank You!

 

 

David Bundred

Chairman

27 February  2018

.

For enquiries, please contact:

Surface Transforms plc.

Kevin Johnson, CEO                                                                                                            +44 151 356 2141

Michael Cunningham CFO

David Bundred, Chairman

 

Cantor Fitzgerald Europe (Nomad & Joint-Broker)                                             +44 20 7894 7000

David Foreman / Richard Salmond (Corporate Finance)                          

Alex Pollen (Sales)

 

finnCap Ltd (Joint-Broker)                                                                                            +44 20 7220 0500

Ed Frisby / Giles Rolls (Corporate Finance)

Stephen Norcross / Richard Chambers (Corporate Broking)                   

 

For further Company details, visit www.surfacetransforms.com

 

 

 

 

Statement of Total Comprehensive Income

For the six months ended 30 November 2017

 

 

 

 

Six months ended

30-Nov 2017

 

Six months ended

30-Nov 2016

 

Year ended

31-May 2017

 

 

 

(unaudited)

 

(unaudited)

 

(audited)

 

Note

 

£'000

£'000

 

£'000

 

 

 

 

 

 

 

 

Revenue

 

 

524

 

327

 

702

Cost of sales

 

 

(238)

(126)

 

(274)

 

 

 

              

 

              

 

 

Gross profit

 

 

286

 

201

 

428

 

 

 

 

 

 

 

 

Administrative expenses:

 

 

 

 

 

 

 

Before research costs

 

 

(547)

 

(432)

 

(1,045)

Research costs

 

 

(1,033)

(750)

 

(1,916)

 

 

 

              

 

              

 

 

Total administrative expenses

 

 

(1,580)

(1,182)

 

(2,961)

 

 

 

              

 

              

 

 

Other operating income

 

 

-

-

 

-

 

 

 

              

 

              

 

 

Operating loss

 

 

(1,294)

(981)

 

(2,533)

 

 

 

 

 

 

 

 

Financial income

 

 

-

 

5

 

5

Financial expenses

 

 

-

 

-

 

-

 

 

 

 

 

 

 

Loss before tax

 

 

(1,294)

 

(976)

 

(2,528)

Taxation

2

 

-

 

-

 

356

 

 

 

              

              

 

 

Loss for the period after tax

 

 

(1,294)

(976)

 

(2,172)

 

 

 

              

              

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss for the period attributable to members

 

 

(1,294)

(976)

 

(2,172)

 

 

 

 

 

 

 

 

Loss per ordinary share

 

 

 

 

 

 

 

Basic and diluted

3

 

(1.17)

 

(1.08p)

 

(2.41p)

EBITDA (including tax credits and excluding share-based payments*)

 

 

(1,107)

 

(874)

 

(640)

 

* EBITDA  numbers, including that for the year ended 31 May 2017, are unaudited

 

 

 

 

 

 

 

 

 

                                                                                                                      

Statement of Financial Position

As at 30 November 2017

 

As at

 

As at

 

As at

 

30-Nov 2017

 

30-Nov 2016

 

31-May 2017

 

(unaudited)

 

 

(unaudited)

 

 

(audited)

 

£'000

 

£'000

 

£'000

Non-current assets

 

 

 

 

 

Property, plant and equipment

               2,962

 

1,242

 

2,415

Intangibles

136

 

-

 

136

Total non-current assets

3,098

 

1,242

 

2,551

 

 

 

 

 

 

Current assets

 

 

 

 

 

Inventories

735

 

763

 

507

Trade and other receivables

510

 

1,193

 

365

Cash and cash equivalents

3,275

 

2,698

 

1,532

Total current assets

4,520

 

4,654

 

2,404

 

 

 

 

 

 

Total assets

7,618

 

5,896

 

4,955

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Other interest-bearing loans and borrowings

(2)

 

(18)

 

(12)

Trade and other payables

(1,024)

 

(845)

 

(685)

Total current liabilities

(1,026)

 

(863)

 

(697)

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

Other interest-bearing loans and borrowings

(294)

 

-

 

(352)

Government Grants

(196)

 

-

 

-

 

 

 

 

 

 

Total liabilities

(1,516)

 

(863)

 

(1,049)

 

 

 

 

 

 

Net assets

6,102

 

5,033

 

3,906

 

 

 

 

 

 

Equity

 

 

 

 

 

Share capital

1,140

 

901

 

903

Share premium

17,592

 

14,370

 

14,390

Capital reserve

464

 

464

 

464

Retained loss

(13,094)

 

(10,702)

 

(11,851)

 

 

 

 

 

 

Total equity attributable to equity shareholders of the Company

6,102

 

5,033

 

3,906

 

 

 

 

 

 

 

 

 

Statement of Cash Flow

For the six months to 30 November 2017

 

 

Six Months Ended

 

Six Months Ended

 

Year ended

 

30-Nov

 

30-Nov

 

31-May

 

2017

(unaudited)

 

2016

(unaudited)

 

2017

(audited)

 

£'000

 

£'000

 

£'000

Cash flows from operating activities

 

 

 

 

 

Loss after tax for the period

(1,294)

 

(976)

 

(2,172)

Adjusted for:

 

 

 

 

 

Profit on disposal of property, plant and equipment

-

 

-

 

-

Depreciation charge

137

 

65

 

145

Equity settled share-based payment expenses

51

 

41

 

88

Financial expenses

-

 

-

 

-

Financial income

-

 

(4)

 

(5)

Taxation

-

 

-

 

(356)

 

 

 

 

 

 

 

(1,106)

 

(874)

 

(2,300)

 

 

 

 

 

 

Changes in working capital

 

 

 

 

 

(Increase)/decease in inventories

(228)

 

(193)

 

63

(Increase)/decrease in trade and other receivables

(145)

 

(221)

 

579

(Decrease)/increase in trade and other payables

339

 

(99)

 

82

 

 

 

 

 

 

 

(34)

 

(1,387)

 

(1,576)

Taxation received

 

-

 

 

-

 

 

356

 

Net cash used in operating activities

(1,140)

 

(1,387)

 

(1,220)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisition of property, plant and equipment

(684)

 

(680)

 

(2,075)

Proceeds from disposal of property, plant and equipment

-

 

-

 

27

Capital Government Grants Received

55

 

-

 

-

 

 

 

 

 

 

Net cash used in investing activities

(629)

 

(680)

 

(2,048)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issue of share capital, net of expenses

3,439

 

11

 

33

Payment of finance lease liabilities

(10)

 

-

 

(10)

Proceeds from other loans

83

 

-

 

-

Interest paid

-

 

(23)

 

-

 

 

 

 

 

 

Net cash from/(used in) financing activities

3,512

 

(12)

 

23

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

1,743

 

(2,079)

 

(3,245)

Cash and cash equivalents at the beginning of the period

1,532

 

4,777

 

4,777

 

 

 

 

 

 

Cash and cash equivalents at the end of the period

3,275

 

2,698

 

1,532

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Changes in Equity

For the six months to 30 November 2017

 

Share capital

Share premium account

Capital reserve

Retained loss

Total

For the six months to 30 November 2017

 

£'000

£'000

£'000

£'000

£'000

Balance at 31 May 2017

903

14,390

464

(11,851)

3,906

 

 

 

 

 

 

Loss for the period

-

-

-

(1,294)

(1,294)

Total comprehensive income for the period

-

-

-

(1,294)

(1,294)

 

 

 

 

 

 

Transactions with owners, recorded directly to equity

 

 

 

 

 

Shares issued in the year

214

3,225

-

-

3,439

Equity settled share-based payments

-

-

-

51

51

Total contributions by and distributions to the owners

214

3,225

-

51

3,490

 

 

 

 

 

 

Balance at 30 November 2017

1,117

17,615

464

(13,094)

6,102

 

 

 

 

 

 

 

Share Capital

Share premium account

Capital reserve

Retained deficit

Total

For the six months to 30 November 2016

 

£'000

£'000

£'000

£'000

£'000

Balance at 31 May 2016

901

14,359

464

(9,767)

5,957

 

 

 

 

 

 

Loss for the period

-

-

-

(976)

(976)

Total comprehensive income for the period

-

-

-

(976)

(976)

 

 

 

 

 

 

Transactions with owners, recorded directly to equity

 

 

 

 

 

Shares issued in the year

-

11

-

-

11

Equity settled share based payments

-

-

-

41

41

Total contributions by and distributions to the owners

-

11

-

41

52

 

 

 

 

 

 

Balance at 30 November 2016

901

14,370

464

(10,702)

5,033

 

 

 

 

 

 

 

 

Share Capital

Share premium account

Capital reserve

Retained deficit

Total

 

For the year to 31 May 2017

 

£'000

 

£'000

 

£'000

 

£'000

 

£'000

 

Balance at 31 May 2016

901

14,359

464

(9,767)

5,957

 

 

 

 

 

 

Loss for the year

-

-

-

(2,172)

(2,172)

Total comprehensive income for the year

-

-

-

(2,172)

(2,172)

 

 

 

 

 

 

Transactions with owners, recorded directly to equity

 

 

 

 

 

Shares issued in the year

2

31

-

-

33

Cost of issue written off to share premium

-

-

-

-

-

Equity settled share-based payments

-

-

-

88

88

Total contributions by and distributions to the owners

2

31

-

88

121

 

 

 

 

 

 

Balance at 31 May 2017

903

14,390

464

(11,851)

3,906

                     

 

                                                                                                                   

 

SURFACE TRANSFORMS PLC

NOTES

 

1.         Accounting policies

 

The interim financial statements are the responsibility of the Directors and were authorised and approved by the Board of Directors for issuance on 27 February 2018.

 

Basis of preparation

 

The Company is a public limited liability Group incorporated and domiciled in England & Wales.  The financial information is presented in Pounds Sterling (£) which is also the functional currency.  The Company's accounting reference date is 31 May.

 

These interim condensed financial statements are for the six months to 30 November 2017. They have not been prepared in accordance with IAS 34, Interim Financial Reporting which is not mandatory for UK AIM listed companies, in the preparation of this half-yearly financial report. While the financial information included has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), these interim results do not contain sufficient information to comply with IFRS.  

 

These interim results for the period ended 30 November 2017, which are not audited, do not comprise statutory accounts within the meaning of section 435 of the Companies Act 2006.

 

Full audited accounts of the Company in respect of the year ended 31 May 2017, which received an unqualified audit opinion and did not contain a statement under section 498(2) or (3) (accounting record or returns inadequate, accounts not agreeing with records and returns or failure to obtain necessary information and explanations) of the Companies Act 2006 and have been delivered to the Registrar of Companies.

 

The accounting policies used in the preparation of the financial information for the six months ended 30 November 2017 are in accordance with the recognition and measurement criteria of IFRS as adopted by the EU and are consistent with those which will be adopted in the annual statutory financial statements for the year ending 31 May 2018.

 

Segmental reporting

IFRS 8 "Operating Segments" requires that the segments should be reported on the same basis as the internal reporting information that is provided to, and regularly reviewed by, the chief operating decision-maker, whom the Group has identified as the CEO.

 

The Board has reviewed the requirements of IFRS 8, including consideration of what results and information the CEO reviews regularly to assess performance and allocate resources, and concluded that all revenue falls under a single business segment.

 

The Directors consider that the Group does not have separate divisional segments as defined under IFRS 8. The CEO assesses the commercial performance of the business based upon consolidated revenues, margins and operating costs and assets are reviewed at a consolidated level.

 

Estimates

The preparation of half-yearly financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these condensed consolidated half-yearly financial statements, the significant judgments made by management in applying the Group's accounting policies and the key sources of estimation uncertainty which will be adopted in the annual statutory financial statements for the year ending 31 May

 

Seasonality of operations

The Company expects to revert to the historic norm of unequal split of sales between the two halves of the year with higher sales in the second half of the year.

 

Going concern

The financial statements have been prepared on a going concern basis which the Directors believe to be appropriate. Whilst the Group incurred a net loss of £1,294k during the period, the Directors are satisfied that sufficient cash is available to meet the Company's liabilities as and when they fall due for at least 12 months from the date of signing the half yearly report. 

 

 

 

2.         Taxation

 

Analysis of credit in the period

 

Six months ended

Six months ended

Year ended

ended

 

30-Nov

30-Nov

31-May

 

2017

2016

2017

 

£'000

(unaudited)

£'000

(unaudited)

£'000

(audited)

 

 

 

 

UK Corporation tax

 

 

 

 

 

 

 

Current tax on income for the period

-

-

-

 

 

 

 

Research and development tax repayment

-

-

356

 

 

 

 

 

-

-

356

 

 

 

 

 

The effective rate of tax for the period/year is lower than the standard rate of corporation tax in the UK of 20 per cent. principally due to losses incurred by the Company.

 

The potential deferred tax asset relating to losses has not been recognised in the financial statements because it is not possible to assess whether there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

 

3.         Loss per share

 

 

 

Six months ended

Six months ended

Year

ended

 

30-Nov

30-Nov

31-May

2017

(unaudited)

2016

(unaudited)

2017

(audited)

 

Pence

Pence

Pence

Loss per share:

 

 

 

Basic and diluted

(1.17)

(1.08)

(2.41)

 

Loss per ordinary share is based on the Company's loss for the financial period of £1,294k (30 November 2016: £976k loss; 31 May 2017: £2,172k loss). The weighted average number of shares used in the basic calculation is 110,071,506 (31 May 2017: 90,145,921; 30 November 2016: 90,106,740).

 

The calculation of diluted loss per ordinary share is identical to that used for the basic loss per ordinary share. This is because the exercise of share options would have the effect of reducing the loss per ordinary share and is therefore not dilutive under the terms of International Accounting Standard 33 "Earnings per share".

 

4.         Segment reporting

 

Due to the startup nature of the business the Company is currently focused on building revenue streams from a variety of different markets.  As there is only one manufacturing facility, and as this has capacity above and beyond the current levels of trade, there is no requirement to allocate resources to or discriminate between specific markets or products.  As a result, the Company's chief operating decision maker, the Chief Executive, reviews performance information for the Company as a whole and does not allocate resources based on products or markets. In addition, all products manufactured by the Company are produced using similar processes. Having considered this information in conjunction with the requirements of IFRS 8, as at the reporting date the Board of Directors has concluded that the Company has only one reportable segment that being the manufacture and sale of carbon fibre materials and the development of technologies associated with this.

 

The Company considers it offers product technology namely carbon fibre re-enforced ceramic material which is machined into different shapes depending on the intended purpose of the end user.

 

Revenue by geographical destination is analysed as follows:

 

 

Six months ended

30 Nov 2017

(unaudited)

Six months ended

30 Nov 2016

(unaudited)

 

Year ended

31 May 2017 (audited)

 

£'000

£'000

£'000

 

 

 

 

United Kingdom

132

165

322

Rest of Europe

113

96

189

United States of America

175

57

191

Rest of World

104

9

-

 

524

327

702

 

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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