Interim Results

RNS Number : 0557R

Surface Transforms PLC

26 February 2019

 

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.

26 February 2019

Surface Transforms plc.

("Surface Transforms" or the "Company")

Half-year financial results for the six months ended 30 November 2018

Surface Transforms (AIM:SCE) manufacturers of carbon fibre reinforced ceramic materials, announces its half-year financial results for the six months ended 30 November 2018.

Financial highlights

·    Revenue decreased 3% to £509k (H1-2017: £524k)

·    Gross profit increased 13% to £322k (H1-2017: £286k)

·    Loss before and after tax increased 15% to £1,482k (H1-2017: £1,294k)

·    Cash at 30 November 2018 was £745k (31 May 2018: £923k)

·    Successful equity placing raising £1,466k (net of expenses) in the period

·    Capital expenditure on property, plant and equipment of £156k (H1-2017: £684k) mainly related to the installation of OEM Production Cell One

·    Inventory of £1,062k (31 May 2018: £855k)

Sales and Operational Highlights

·    Successful testing for OEM5 with all the key engineering tests completed satisfactorily and also received approved supplier status to OEM5 including confirmation that the Company meets VDA 6.3 (and IATF 16949) standards

·    Continuing progress on testing for OEM3

·    Delay of six months to SOP confirmed by OEM6 but no impact on lifetime revenues and discussions started for follow on OEM6 vehicle

·    Capital expenditure on OEM Production Cell One virtually completed with phase one capacity expected to be operational in summer 2019

·    Company secured accreditation to new quality standard IATF 16949 and Environmental standard ISO 14001

·    Post balance sheet date, Company migrated its computer systems to a new enterprise system compatible with the needs of the German automotive OEMs.

Financial Review

Revenue in the period decreased slightly to £509k (H1-2017: £524k) and the split between retrofit and near OEM was comparable to last year. Sales to OEM6 were due to commence in March 2019 but as previously announced, SOP has been delayed by six months.  However, this has no impact on sales in this reporting period.

Gross profit increased to £322k (H1-2017: £286k) and gross profit margin was 63% (H1-2017: 55%), the movement resulting from cost reduction activities beginning to have an effect at the new plant.

Administrative expenses increased to £730k (H1-2017: £547k) primarily due to higher insurance costs, upgrades to the IT infrastructure in the business and increased headcount.

Research expenses increased slightly to £1,073k (H1-2017: £1,033k) due to continuing focus on delivering final product to target OEM customers. The continued high spend was primarily due to increased cost of engineers and extensive external testing together with material costs to deliver these programmes.

Cash at the end of the half-year was £745k (31 May 2018: £923k). In the period the Company successfully placed 9 million shares at 17 pence each in an oversubscribed placing raising net proceeds of £1,461k.

Loss per share was 1.22p (H1-2017: 1.17p).

Progress with potential OEM Customers

The Company continues to test products with customers as described in recent announcements

OEM5: Further progress has been made with German OEM5 during the period. The customer has advised that they intend to select the disc supplier for the target car in the spring.

As previously notified, the customer is approving the Company's disc with both a slightly modified "traditional" pad as well as a more environmentally friendly pad. This has slightly delayed testing; nonetheless the tests have gone well, with the products comfortably passing all the key criteria on the critical tests. However because the pad-disc configuration is now different from the original testing some regulatory tests need to be repeated in February and March 2019; the Board is not concerned about the time implications on the overall project of these relatively minor repeat tests.

Additionally OEM5 has reviewed the Company's quality processes, logistics capability, financial strength and capacity plan and has approved Surface Transforms as a potential supplier to them. The Company has been informed, "… it is now officially possible for (OEM5) to place orders under the condition that the development department is happy with the required performance of ST discs". As part of this process their quality team completed an onsite brief review of the Company's compliance with VDA 6.3 (and IATF 16949) and confirmed compliance.

The Company has broadly agreed initial pricing and is in the process of agreeing commercial terms.

OEM3: Work on passing the OEM3 rig test continues with good progress having been made in the period on understanding the reason for process variability and reducing the variability in subsequent tests.  Whilst results have improved, the Company is not yet consistently meeting the performance criteria of OEM3.  However, this work is expected to complete in the next few months, consistent with the next round of nomination dates.

OEM6: As signalled in the trading update on 4 December 2018 there is a delay (now confirmed) of six months to the SOP of the car originally scheduled for SOP in June 2019 - which implied SOP in March 2019 for Surface Transforms. The delay has nothing to do with any brake system parts. Discussions are continuing on both the precise new SOP date and amelioration of the cost of this delay to the Company. In the meantime, the Board is not changing the previous advice provided regarding the risk to current year sales of £500k but with no impact on lifetime revenues from the project itself.

The Company has also begun discussions with this customer on the next car model that is expected to have significantly higher volumes than the current model. Unsurprisingly (as it involves the same customer personnel) the delays on the current model are slowing discussions on the new model; nonetheless the customer has told us of their wish to keep the "blood line" between the two cars, a statement the Board believes to be promising for ultimate selection.

Aerospace: The Company is still awaiting the outcome of discussions between the landing gear manufacturer, airframe builder and the US DOD on its request for pre funding before undertaking any further work on this project.

Knowsley facility

OEM Production Cell One: Capital expenditure on OEM Production Cell One is virtually complete. The final furnace for this cell has successfully completed a number of production runs at the supplier's premises but as a further risk mitigation exercise the decision has been made to complete the manufacture of the OEM6 production parts in Germany and then ship the furnace in Q2 of the calendar year. This would then give the Company time to successfully commission the new furnace before the production is required from this furnace for the next series of new programmes.

The other furnaces are either in production or finalising software installation. The Company continues to expect OEM Production Cell One to be operational in summer 2019.

Environmental awards and permits: The Company was awarded the environmental standard ISO 14001 in November 2018. The Company is concluding its discussions with the Environmental Agency on securing all the necessary permits for full capacity volume production of OEM Production Cell One.

VDA 6.3 and IATF 16943: As previously notified, conformance with the stand-alone German VDA certification has always been a pre requisite to supply to the German automotive industry. Historically, Surface Transforms conformed with TS 16949, which many German OEMs considered to be less demanding than the German developed VDA 6.3.  TS 16949 has been superseded by the new International Automotive Task Force (IATF) quality standard 16949, which German OEMs now see as equivalent to VDA 6.3. Surface Transforms secured accreditation to this standard in July 2018. This does not remove the need for on-going customer quality audits but they are much more "light touch" looking for evidence of continuing conformance with the standards. The first of these audits was conducted by OEM5 in the period and was completed to their satisfaction.

Computer Systems: German OEMs require their suppliers to have computer compatibility with their computer systems; in practice this has meant the Company migrating to the SAP computer system. After extensive work this transition took place, post balance sheet date, in December 2018. There were some inevitable disruptions in December and January but the factory and internal processes are now running smoothly again.

Outlook

The Company signalled a change in the outlook for the current financial year in a trading update on 4 December, reflecting a concern on the SOP date for OEM6. This slippage has now been confirmed as being six months, in line with the concerns expressed at that time. There are no further changes to expectations for the current year.

The outlook for the next financial year ending 31 May 2020 is unchanged in respect of automotive sales but the on-going lack of clarity on the potential aerospace contract, hazards  £600k of forecast sales in that year, albeit there is still time to resolve the financial discussions between the key parties.

The Company reaches cash break even when OEM 6 enters production in the financial year 2019-20. Thereafter the outlook is clearly dependent upon winning the expected OEM contracts described above which are scheduled for start of volume production in the 2021 to 2022 calendar years. The Board remains optimistic about being awarded these potential contracts.

Summary

The Company continues its journey from a development company to a mainstream volume automotive supplier with a site capable of revenues of £50m per year in a market that could ultimately reach £1 billion.

The delay on SOP for OEM6 is frustrating but has no medium-long term impact on the fortunes of the Company and, indeed, the Company continues to expect follow on orders on new models from this customer. Equally importantly, after a number of frustrating years and delays, the past six months has seen particular progress on testing at both OEM5 and OEM3.

The task in the remainder of the financial year is to turn this progress on testing into firm orders. The Board remains confident of delivering this objective.

In respect to operations, the improvement in gross margin percentage demonstrates the impact of the investment and cost reduction programme over recent years. The new, cost competitive, first commercial cell of the factory will be operational mid year - consistent with the capacity needs of target customer programmes. Additionally the Board is now confident that that the factory has the quality systems, computer infrastructure and internal processes required to be successful as a mainstream automotive supplier.

Finally may I conclude by recording the Board's appreciation of the outstanding contribution by all members of staff. Thank You!

David Bundred

Chairman 

For enquiries, please contact:

Surface Transforms plc.

Kevin Johnson, CEO                                                              [phone]

Michael Cunningham CFO

David Bundred, Chairman

Cantor Fitzgerald Europe (Nomad & Joint-Broker)    [phone]

David Foreman / Richard Salmon/ Michael Boot (Corporate Finance)                       

Caspar Shand-Kydd/ Gregor Paterson / Maisie Atkinson (Sales)

finnCap Ltd (Joint-Broker)                                                     [phone]

Ed Frisby / Giles Rolls (Corporate Finance)

Richard Chambers (ECM)

For further Company details, visit www.surfacetransforms.com

Statement of Total Comprehensive Income

For the six months ended 30 November 2018

		Six Months Ended	Six Months Ended	Year Ended
	Note	30 Nov 2018	30 Nov 2017	31 May 2018
		£'000	£'000	£'000
		Unaudited	Unaudited	Audited
Revenue		509	524	1,363
Cost of Sales		(187)	(238)	(445)
Gross Profit		322	286	918
Administrative Expenses:
Before research and development costs		(730)	(547)	(1,083)
Research and development costs		(1,073)	(1,033)	(2,002)
Total administrative expenses		(1,803)	(1,580)	(3,085)
Other operating income		-	-	-
Operating loss before exceptional items		(1,480)	(1,294)	(2,167)
Exceptional items		(3)	-	(133)
Financial income		1	-	1
Financial expenses		-	-	-
Loss before tax		(1,482)	(1,294)	(2,299)
Taxation	2	-	-	465
Loss for the year after tax		(1,482)	(1,294)	(1,834)
Other comprehensive income		-	-	-
Total comprehensive loss for the year attributable to members		(1,482)	(1,294)	(1,834)
Loss per ordinary share
Basic and diluted	3	(1.22)p	(1.17)p	(1.66)p
EBITDA (including tax credits and excluding share-based payments*)		(1,244)	(1,107)	(1,514)

* EBITDA  numbers, including that for the year ended 31 May 2018, are unaudited

Statement of Financial Position

As at 30 November 2018

	Six Months Ended	Six Months Ended	Year Ended
	30 Nov 2018	30 Nov 2017	31 May 2018
	£'000	£'000	£'000
	Unaudited	Unaudited	Audited
Non-current Assets
Property, plant and equipment	4,069	2,962	4,096
Intangibles	218	136	192
	4,286	3,098	4,288
Current assets
Inventories	1,062	735	855
Trade and other receivables	619	510	776
Cash and cash equivalents	745	3,275	923
	2,425	4,520	2,554
Total assets	6,711	7,618	6,842
Current liabilities
Other interest bearing loans and borrowings	(65)	(2)	(29)
Trade and other payables	(478)	(1,024)	(790)
	(543)	(1,026)	(819)
Non-current liabilities
Government Grants	(200)	(196)	(200)
Other interest bearing loans and borrowings	(357)	(294)	(275)
Total liabilities	(1,100)	(1,516)	(1,294)
Net assets	5,611	6,102	5,548
Equity
Share capital	1,230	1,140	1,140
Share premium	18,972	17,592	17,596
Capital reserve	464	464	464
Retained loss	(15,055)	(13,094)	(13,652)
Total equity attributable to equity shareholders of the company	5,611	6,102	5,548

 

Statement of Cash Flow

For the six months to 30 November 2018

	Six Months Ended	Six Months Ended	Year Ended
	30 Nov 2018	30 Nov 2017	31 May 2018
	£'000	£'000	£'000
	Unaudited	Unaudited	Audited
Cash flow from operating activities
Loss after tax for the year	(1,482)	(1,294)	(1,834)
Adjusted for:
Depreciation and amortisation charge	158	137	287
Equity settled share-based payment expenses	80	51	33
Financial expense/(income)	1	-	(1)
Taxation	-	-	(465)
	(1,244)	(1,106)	(1,980)
Changes in working capital
Increase in inventories	(206)	(228)	(348)
Decrease/(increase) in trade and other receivables	157	(145)	(411)
(Decrease)/increase in trade and other payables	(252)	339	106
	(1,544)	(1,140)	(2,633)
Taxation received	-	-	465
Net cash used in operating activities	(1,544)	(1,140)	(2,168)
Cash flows from investing activities
Acquisition of tangible and intangible assets	(156)	(684)	(2,024)
Capital Government grants received	-	55	-
Net cash used in investing activities	(156)	(629)	(2,024)
Cash flows from financing activities
Proceeds from issue of share capital, net of expenses	1,466	3,439	3,443
Payment of finance lease liabilities	(5)	(10)	(8)
Proceeds from other loans	62	83	148
Net cash generated from financing activities	1,523	3,512	3,583
Net (decrease)/increase in cash and cash equivalents	(178)	1,743	(609)
Cash and cash equivalents at the beginning of the period	923	1,532	1,532
Cash and cash equivalents at the end of the period	745	3,275	923

 

Statement of Changes in Equity

For the six months to 30 November 2018

	Share capital	Share premium account	Capital reserve	Retained loss	Total
	£'000	£'000	£'000	£'000	£'000
Balance as at 31 May 2018	1,140	17,596	464	(13,652)	5,548
Comprehensive income for the year
Loss for the year	-	-	-	(1,482)	(1,482)
Total comprehensive income for the year	-	-	-	(1,482)	(1,482)
Transactions with owners, recorded directly to equity
Shares issued in the year	90	1,445	-	-	1,535
Cost of issue off to share premium	-	(69)	-	-	(69)
Equity settled share based payment transactions	-	-	-	79	79
Total contributions by and distributions to the owners	90	1,376	-	79	1,545
Balance at 30 November 2018	1,230	18,972	464	(15,055)	5,611
For the six months to 30 November 2017
	Share capital	Share premium account	Capital reserve	Retained loss	Total
	£'000	£'000	£'000	£'000	£'000
Balance as at 31 May 2017	903	14,390	464	(11,851)	3,906
Comprehensive income for the year
Loss for the year	-	-	-	(1,294)	(1,294)
Total comprehensive income for the year	-	-	-	(1,294)	(1,294)
Transactions with owners, recorded directly to equity
Shares issued in the year	237	3,677	-	-	3,914
Cost of issue off to share premium	-	(475)	-	-	(475)
Equity settled share based payment transactions	-	-	-	51	51
Total contributions by and distributions to the owners	237	3,202	-	51	3,490
Balance at 30 November 2017	1,140	17,592	464	(13,094)	6,102
For the year to 31 May 2018
	Share capital	Share premium account	Capital reserve	Retained loss	Total
	£'000	£'000	£'000	£'000	£'000
Balance as at 31 May 2017	903	14,390	464	(11,851)	3,906
Comprehensive income for the year
Loss for the year	-	-	-	(1,834)	(1,834)
Total comprehensive income for the year	-	-	-	(1,834)	(1,834)
Transactions with owners, recorded directly to equity
Shares issued in the year	237	3,681	-	-	3,918
Cost of issue off to share premium	-	(475)	-	-	(475)
Equity settled share based payment transactions	-	-	-	33	33
Total contributions by and distributions to the owners	237	3,206	-	33	3,476
Balance at 31 May 2018	1,140	17,596	464	(13,652)	5,548

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 26 February 2019.

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 2018. They have not been prepared in accordance with IAS 34, Interim Financial Reporting that 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 2018, 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 2018, 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 2018 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 2019.

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 continue 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 that the Directors believe to be appropriate. Whilst the Group incurred a net loss of £1,482k 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
	2018	2017	2018
	£'000 (unaudited)	£'000 (unaudited)	£'000 (audited)
UK Corporation tax
Current tax on income for the period	-	-	-
Research and development tax repayment	-	-	465
	-	-	465

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
	2018 (unaudited)	2017 (unaudited)	2018 (audited)
	Pence	Pence	Pence
Loss per share:
Basic and diluted	(1.22)	(1.17)	(1.66)

Loss per ordinary share is based on the Company's loss for the financial period of £1,482k (30 November 2017: £1,294k loss; 31 May 2018: £1,834k loss). The weighted average number of shares used in the basic calculation is 121,461,646 (31 May 2018: 110,280,735; 30 November 2017: 110,071,506).

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 2018 (unaudited)	Six months ended 30 Nov 2017 (unaudited)	Year ended 31 May 2018 (audited)
	£'000	£'000	£'000
United Kingdom	111	132	504
Rest of Europe	178	113	294
United States of America	208	175	529
Rest of World	12	104	36
	509	524	1,363

 

END

 

 

IR SEIFMIFUSESE