Interim Results

RNS Number : 1872Y

Surface Transforms PLC

05 September 2022

 

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018.  Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

5 September 2022

  Surface Transforms plc

("Surface Transforms" or "the Company")

Interim results for the six months ended 30 June 2022

Surface Transforms (AIM: SCE) manufacturers of carbon fibre reinforced ceramic automotive brake discs, announces its interims results for the six months ended 30 June 2022.

Financial highlights

· Revenue increased 137% to £2.9m (H1-2021: £1.2m)

· Cash at 30 June 2022 was £6.7m (Dec 2021: £13.0m)

· Gross profit increased 129% to £1.7m (H1-2021: £0.7m)

· Administrative expenses increased 45% to £4.2m (H1-2021: £2.9m) , primarily in preparation of sales growth expected in H2-2022

· Loss before tax increased to £2.5m (H1-2021: £2.2m)

· Capital expenditure on property, plant and equipment was £2.8m (H1-2021: £0.8m)

· Profit guidance maintained for full year 2022 and upgrades for 2023 to 2025

Sales and operational highlights

· Commenced series production with OEM 8, Aston Martin Valkyrie and Koenigsegg Jesko, the volume effects of which will be seen in H2-2022

· Awarded new contract with existing customer, OEM 8 having a contract value of approximately  £100m, replacing the previous contract valued at £27.5m

· Additionally, post balance sheet date, announced a £13m lifetime value contract win with a new battery electric vehicle customer OEM 9

· Contracted sales order book now approximately £190m (lifetime value)

· Prospective contract pipeline ("PCP") now approximately £400m (lifetime value) in addition to £190m contracted sales order book

· Completed phase one of the capacity installation at Knowsley bringing sales capacity to £20m p.a.

· Ordered all the equipment for phase two capacity plan that will bring total sales capacity to £50m p.a. in early 2023 thereby improving short term production resilience

· Fixed price energy contracts protect gross margin until Q2 of 2023. Thereafter significantly more efficient new furnaces reduce unit energy consumption offsetting cost increases

Outlook

The commencement of OEM 8 series monthly volumes, even if slightly later than originally planned, brings Surface Transforms  into profitability for the financial year ending 31 December 2022 . Assisted by higher development income, the Company was also profitable in June and July.

The financial impact of this small delay in OEM 8 start of production ("SOP") is offset by higher than forecast development revenues with other customers. As a result, guideline profitability remains unchanged for 2022 even though sales guidance is now expected to be approximately £1.5m below previous expectations.

Moreover, looking forward to the three years 2023 to 2025, and having concluded volume discussions with OEM 8, the Board is very pleased to increase sales guidance in these years by approximately 10% p.a., almost wholly attributable to OEM 8. There are some offsetting costs - approximately £0.8m p.a. reflecting additional production overheads to support sales growth; the overall effect is to upgrade forecast profitability for 2023 to 2025. 

The Company will also benefit from the super deduction scheme that will allow £15m of accelerated tax allowances, which when combined with the Company's carry forward losses will ensure that even when profitable and based upon existing contracted values the Company will not be paying corporation tax until after 2025.

Financial Review

Revenue in the period rose 137% to £2.9m driven by increased sales to OEM customers, with a significant increase in development revenue to these same customers. In addition, steady growth to near OEM and retrofit customers boosted revenue.

Gross profit increased to £1.7m however there was deterioration of 2 percentage points in gross margin due to the higher proportion of subcontracted testing which carries a lower margin than other development income. It should be noted however that after the delivery of the 2 dynamometers the Company has on order, future testing margins for OEM customers will be closer to usual development margins. The external forces of higher energy costs had no impact on Surface Transforms as the Company has fixed price contracts that continue onto May 2023. Thereafter new furnaces due for delivery by Q1 2023 significantly reduce unit energy consumption thereby offsetting external cost increases.

Administrative costs, before research and development costs, rose 27% to £1.6m (H1-2021: £1.3m) driven in the main by salaries and increased depreciation. This was offset by a forex gain of £0.2m resulting from the decision to purchase dollars against expected furnace commitments. Research and development costs increased 59% to £2.5m (H1-2021: £1.6m), primarily driven by salaries and an increase in material usage as part of the acceptance process for new furnaces.

Planned capital expenditure of £2.8m occurred in the period being predominately payments for furnaces either under construction or delivered.

Cash at the period end was £6.7m with £3.1m held in irrevocable letters of credit. To this should be added £0.7m of an R&D tax credit received post balance sheet date. The Company remains in a net cash position of £5.5m (H1-2021: £16.9m).

Progress with potential OEM customers

OEM series production

Having won contracts in the period 2018 to 2021, the Company is now in series production with OEM 8, Aston Martin Valkyrie and Koenigsegg Jesko. Delays in SOP dates is a universal challenge across all customers. Accordingly, for our own planning we take a more prudent view on customer SOP dates. Nonetheless, when in production, we remain confident that forecast future revenue streams are de risked as volumes have historically all been in line with, or better than, guidance provided by the OEMs; a generic characteristic of the luxury car segment in which we operate. Indeed, as noted above, following our recent discussions with OEM 8, including the increase in the lifetime value of the contract, we are now increasing guidance on the Company's expected sales through to 2025.

The next customer SOP will be with OEM 5 in Q1 2023 on a contract with a lifetime value of €11m.

OEM new contract wins

In the sales guidance of the Company, only contracts won and contracted are included as our order book. When converting these lifetime value awards to annual forecasts, the Company now includes a contingency for delays against customer SOP dates.

The Company's contracted order book rose from £115m in December 2021 to £180m in June 2022, and approximately £190m as at the date of this statement.

In March 2022,   the Company announced that it had signed a new contract with its existing customer, OEM 8 with a contract value of approximately £100m . This contract replaced the previously announced contract from September 2020 , valued at approximately £27.5m . This increased contract value of over £70m was driven by both significantly increased demand for the existing model and the contract being extended to 2027.

Post balance sheet date, the Company won a £13m contract award with OEM 9. This new customer is a "disruptor" entrant to the Battery Electrical Vehicle (BEV) market.

The Company continues to expect to be able to announce at least one significant new contract in the remainder of 2022.

OEM prospective contract pipeline ("PCP")

In this category, the Company only includes active development programmes, where there is a known model, with realistic expected volumes, a customer SOP date, engineering activity and meaningful commercial discussions. On these criteria, the PCP contains programmes with OEM 1, OEM 5, OEM 6, OEM 7, OEM 8, OEM 9, and OEM 10.

In addition to the £190m contracted order book noted above the Company has a PCP of £400m lifetime value sales; on average the contracts are now normally 5 years and typically enter production 2 years after contract win.

These prospective contracts are almost all with existing customers and are described as "carry-over" from a previously won contract onto another vehicle in the customers' range. The prospect of winning carry-over is higher than a new product with a new customer as most of the engineering sign off has been done and generally pricing is broadly agreed. The high proportion of carry-over in our PCP gives confidence, but not certainty, of converting the pipeline into orders. The biggest risk is of course, that the programme itself gets cancelled as happened with an OEM 5 programme during the COVID pandemic, but we are protected to a certain extent against this given the number of different OEMs and models now comprising our PCP.

We are in discussions with other new customers, but it is premature to include these prospects in our planning.

Self-evidently, winning even a portion of this PCP would strain current capacity limits and the Board is therefore modelling various options in response to this issue.

OEM Business Development KPIs

As part of the process of measuring progress on the above the Company has agreed upon several business development KPIs. Using March 2021 as the comparator the KPIs show the progress that has been made by the Company up to date:

o 3 contracts in series compared with zero in March 2021

o 10 contracted models compared with 5 in March 2021

o £190m order book compared with £43m in March 2021

o 4 carry-over contracts compared with 1 in March 2021

o 5-year average contract life compared with 3.8 in March 2021

o 6 contracted OEMs compared with 4 in March 2021

o £400m PCP compared with £164m in March 2021

Retrofit and Near OEM

Retrofit sales are fitment of our discs onto already registered cars replacing either the in-situ grey iron, or not infrequently, our competitor's carbon ceramic ("CC") discs. Near OEM sales are to several very low volume specialist manufacturers, some of whom make less than ten cars per year. Sales into these segments have been the bedrock of Surface Transforms over the past ten years.

Whilst the segment will ultimately be dwarfed by the many times larger OEM segment, it remains important to short term profitability and cash generation. It is therefore encouraging to report that sales in the period in this segment rose to £1.3m compared with £0.8m in H1-2021.

Progress on Operations

  Progress on OEM 8 production: Throughout the first half of the year the Company has progressively increased its output rate to meet the volume requirements of OEM 8, a task that has not been without its challenges but has not resulted in any abnormal launch customer situations. Now that the Company is in production the task is to get ahead of the customer's daily needs.

Phase 2 capacity installation: The current site sales capacity is £20m p.a. We will be selling at this monthly run rate in the second half of 2022, much earlier than expected because of the increased requirements from OEM 8 and thus leaving less than planned manufacturing resilience. In February 2021 the Board anticipated the need for more 2023 capacity, albeit on lower sales projections and raised £20m to install that additional capacity - then described as Production Cell 2 - to bring total site capacity to £35m sales p.a. As a result of a new and enhanced manufacturing strategy, this second phase will now actually deliver a site sales capacity of £50m p.a. at no extra cost, reflecting both a revised site plan and a productive partnership with our furnace supplier partners. The Company has ordered all the plant required in the plan and expects completion progressively up to the first half of 2023.

This £50m p.a. sales capacity is sufficient for the expected sales in 2023 but tests resilience towards the end of the year. Thereafter, both based on expected wins from our PCP list and allowing for our need for resilience, we must plan for monthly run rate demand being more than this capacity in the next 12 to 18 months.

Cost Pressures and Cost Reductions: The significant increase in gas and electricity costs is obviously a concern for all manufacturing companies but, in combination with long standing cost reduction projects, the overall impact to Surface Transforms will be to stabilise costs rather than reduce margins. This fortunate situation arises from the fact that reducing gas and electricity consumption has been a key feature of our ESG goals over the past several years and an important element of our phase 2 capacity plan. The subsequent gas and electricity usage reduction projects are therefore now protecting margin rather than improving it. Previous guidance had not included these cost reductions benefits.

When markets return to normality, we expect these efficiencies will be manifested as cost reductions.

Progress on Environmental Social and Governance

The Company continues to extend its ESG credentials particularly on electrical vehicles ("EV") as well as internal combustion engine vehicles ("ICE"). Weight reduction is an ever-present need for range extension on EVs whilst on ICEs the weight reduction reduces carbon emissions through lower fuel consumption. Additionally, CC discs significantly reduce brake dust particles being released into the atmosphere and watercourse, an issue of increasing interest to regulators. Finally, CC discs materially reduce the prospect of galvanic corrosion, a safety concern for grey iron discs on EVs.

However, the Company is seeking to do more than rely on our product benefits to achieve its ESG goals. In the reporting period ESG activities included:

Environment

· Regular measurement of progress against several sustainability criteria selected by the Board

· Carbon footprint reduction set as one of the key criteria in the selection of the Company's furnace partner's technology

· As part of our determination to be a good neighbour, the Company installed continuous emission measuring equipment that exceeds regulatory requirements

· Progress on the plan to build a Combined Heat and Power Plant

Social

· Providing well paid employment opportunities in one of the most deprived boroughs in the country

· Committing to no employee to be paid below living wage

· Continued to deepen the Company's relationships with the local community

· Active participation in the local authority apprentice scheme

· Beginning a graduate apprentice scheme in September 2022

· Discussions with local schools and technical colleges to create partnerships and improve mutual understanding

Governance and Board Changes

· Continued the process of refreshing board membership, begun in 2021. In April 2022 the Board announced the appointment of Ian Cleminson. Ian is currently Executive Vice President and Chief Financial Officer of Innospec Inc., an international specialty chemical business employing 1900 personnel, in 23 countries with sales of over  $1.5 billion  and quoted on the US NASDAQ exchange with a market capitalisation of over  $2 billion .

· Post balance sheet, in August 2022 Richard Gledhill announced his wish to retire with effect from October 2022. Richard has been a board member since 2009 and the Board thanks him for his considerable contribution over these years and wish him well in his well-deserved retirement.

Summary

2022 is the point at which the hard work of the past decade is being successfully converted to Company profitability. The Company is now in series production with three OEMs whilst at the same time both winning new contracts and significantly expanding the PCP. We continue to maintain profitability guidance for 2022 and are upgrading guidance for the following 3 years.

Our £190m order book is complemented by a £400m PCP. The near-term issue is capacity, whilst maintaining sufficient resilience and the Board is currently modelling options to address this.

These are exciting times for Surface Transforms.

Finally, I would like to conclude by recording the Board's appreciation of the outstanding contribution by all members of the team. Thank You!

David Bundred

Chairman  

For enquiries, please contact:

Surface Transforms plc     [phone]

David Bundred, Chairman

Kevin Johnson, CEO 

Michael Cunningham CFO

Zeus (Nominated Advisor and Joint Broker)     [phone]

David Foreman / Dan Bate / James Edis (Investment Banking)

Dominic King (Corporate Broking)

finnCap Ltd (Joint-Broker)    [phone]

Ed Frisby / Abigail Kelly (Corporate Finance)
Richard Chambers / Barney Hayward (ECM)

About Surface Transforms

Surface Transforms plc. (AIM:SCE) develop and produce carbon‐ceramic material automotive brake discs. The Company is the UK's only manufacturer of carbon‐ceramic brake discs, and only one of two mainstream carbon ceramic brake disc companies in the world, serving customers that include major OEMs in the global automotive markets.

The Company utilises its proprietary next generation Carbon Ceramic Technology to create lightweight brake discs for high‐performance road and track applications for both internal combustion engine and electric vehicles. While competitor carbon‐ceramic brake discs use discontinuous chopped carbon fibre, Surface Transforms interweaves continuous carbon fibre to form a 3D matrix, producing a stronger and more durable product with improved heat conductivity compared to competitor products; this reduces the brake system operating temperature, resulting in lighter and longer life components with superior brake performance. These benefits are in addition to the benefits of all carbon‐ceramic brake discs vs. iron brake discs: weight savings of up to 70%, longer product life, consistent performance, reduced brake pad dust and corrosion free.

For additional information please visit www.surfacetransforms.com

Statement of Total Comprehensive Income
for the 6 months ended 30 June 2022
			Six Months	Six Months	Year
			Ended	Ended	Ended
			30-Jun-22	30-Jun-21	31-Dec-21
			Unaudited	Unaudited	Audited
Revenue	4		2,857	1,207	2,369
Cost of sales			(1,143)	(459)	(821)
Gross profit			1,714	747	1,548
Other Income			24	11	24
Administrative expenses:
Before research and development costs			(1,626)	(1,281)	(2,432)
Research and development costs			(2,549)	(1,607)	(3,405)
Total administrative expenses			(4,175)	(2,888)	(5,837)
Operating loss before non recurring items			(2,437)	(2,130)	(4,265)
Non-recurring items			-	(6)	(180)
Financial income			1	-	-
Financial expenses			(82)	(56)	(134)
Loss before tax			(2,519)	(2,192)	(4,579)
Taxation	2		348	277	627
Loss for the year after tax			(2,171)	(1,915)	(3,952)
Total comprehensive loss for the year attributable to members			(2,171)	(1,915)	(3,952)
Loss per ordinary share
Basic and diluted	3		(1.11)p	(1.03)p	(2.08)p

Statement of Financial Position
As at 30 June 2022
	Six Months	Six Months	Year
	Ended	Ended	Ended
	30-Jun-22	30-Jun-21	31-Dec-21
	£'000	£'000	£'000
	Unaudited	Unaudited	Audited
Non-current assets
Property, plant and equipment	11,325	6,136	9,403
Intangibles	1,018	333	577
	12,343	6,469	9,980
Current assets
Inventories	2,315	724	1,338
Trade and other receivables	987	1,388	376
Other receivables	2,403	-	1,714
Cash and cash equivalents	6,719	17,197	12,966
	12,424	19,309	16,394
Total assets	24,767	25,778	26,374
Current liabilities
Other interest bearing loans and borrowings	(211)	(75)	(325)
Lease liabilities	(299)	(225)	(279)
Trade and other payables	(2,765)	(1,061)	(1,990)
	(3,274)	(1,362)	(2,594)
Non-current liabilities
Government grants	(194)	(200)	(200)
Lease liabilities	(1,402)	(1,077)	(1,449)
Other interest bearing loans and borrowings	(1,054)	(257)	(1,239)
Total liabilities	(5,925)	(2,896)	(5,482)
Net assets	18,842	22,882	20,892
Equity
Share capital	1,954	1,951	1,952
Share premium	41,469	41,436	41,446
Capital reserve	464	464	464
Retained loss	(25,044)	(20,971)	(22,970)
Total equity attributable to equity shareholders of the company	18,842	22,880	20,892

Statement of Cash Flows
for the 6 months ended 30 June 2022
	Six Months	Six Months	Year
	Ended	Ended	Ended
	30-Jun-22	30-Jun-21	31-Dec-21
	'000	'000	'000
	Unaudited	Unaudited	Audited
Cash flow from operating activities
Loss after tax for the year	(2,171)	(1,915)	(3,952)
Adjusted for:
Depreciation and amortisation	441	312	671
Equity settled share-based payment expenses	95	60	96
Foreign exchange (gains)/losses	(210)	28	24
Financial expense	82	56	134
Financial income	(1)	-	-
Loss on disposal of property, plant and equipment	-	6	6
Taxation	(348)	(277)	(627)
	(2,112)	(1,729)	(3,648)
Changes in working capital
Decrease/(increase) in inventories	(977)	(149)	(763)
Decrease/(increase) in trade and other receivables	(951)	(33)	(962)
Increase/(decrease) in trade and other payables	775	87	1,070
	(3,265)	(1,825)	(4,303)
Taxation received	-	-	577
Net cash used in operating activities	(3,265)	(1,825)	(3,726)
Cash flows from investing activities
Acquisition of tangible and intangible assets	(2,751)	(823)	(3,949)
Proceeds from disposal of property, plant, and equipment	-	2	2
Net cash used in investing activities	(2,751)	(821)	(3,947)
Cash flows from financing activities
Proceeds from issue of share capital, net of expenses	24	19,059	19,070
Payment of finance lease liabilities	(80)	(45)	(156)
Proceeds from long-term loans	-	-	1,000
Payments of long-term loans	(303)	(1)	(175)
Interest paid	(82)	(56)	(134)
Net cash generated from financing activities	(441)	18,956	19,605
Net (decrease)/increase in cash and cash equivalents	(6,457)	16,310	11,932
Foreign exchange g ains/( losses)	210	(28)	(24)
Cash and cash equivalents at the beginning of the period	12,966	1,058	1,058
Cash and cash equivalents at the end of the period	6,719	17,340	12,966

Statement of changes in equity
For the six months ended 30 June 2022
		Share capital	Share premium account	Capital reserve	Retained loss	Total
		£'000	£'000	£'000	£'000	£'000
Balance as at 31 December 2021		1,952	41,446	464	(22,970)	20,892
Comprehensive income for the year
Loss for the year		-	-	-	(2,171)	(2,171)
Total comprehensive income for the year		-	-	-	(2,171)	(2,171)
Transactions with owners, recorded directly to equity
Share options exercised		2	22	-	-	24
Equity settled share based payment transactions	-		-	-	96	96
Total contributions by and distributions to the owners		2	22	-	96	120
Balance at 30 June 2022		1,954	41,469	464	(25,045)	18,841

Statement of changes in equity
For the six months ended 30 June 2021
	Share capital	Share premium account	Capital reserve	Retained loss	Total
	£'000	£'000	£'000	£'000	£'000
Balance as at 31 December 2020	1,549	22,779	464	(19,114)	5,678
Comprehensive income for the year
Loss for the year	-	-	-	(1,915)	(1,915)
Total comprehensive income for the year	-	-	-	(1,915)	(1,915)
Transactions with owners, recorded directly to equity
Shares issued in the year	400	19,600	-	-	20,000
Share options exercised	2	29	-	-	31
Cost of issue to share premium	-	(973)	-	-	(973)
Equity settled share based payment transactions	-	-	-	60	60
Total contributions by and distributions to the owners	402	18,656	-	60	19,118
Balance at 30 June 2021	1,951	41,436	464	(20,969)	22,882

Statement of changes in equity
For the 12 months ended 31 December 2021
	Share capital	Share premium account	Capital reserve	Retained loss	Total
	£'000	£'000	£'000	£'000	£'000
Balance as at 31 December 2020	1,549	22,779	464	(19,114)	5,678
Comprehensive income for the year
Loss for the year	-	-	-	(3,952)	(3,952)
Total comprehensive income for the year	-	-	-	(3,952)	(3,952)
Transactions with owners, recorded directly to equity
Shares issued in the year	400	19,600	-	-	20,000
Share options exercised	3	38	-	-	41
Cost of issue to share premium	-	(971)	-	-	(971)
Equity settled share based payment transactions	-	-	-	96	96
Total contributions by and distributions to the owners	403	18,667	-	96	19,166
Balance at 30 December 2021	1,952	41,446	464	(22,970)	20,892

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 5 September 2022.

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 December.

These interim condensed financial statements are for the six months to 30 June 2022. 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 June 2022, 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 December 2021, 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 June 2022 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 December 2022.

Going concern

The financial statements have been prepared on a going concern basis which the Directors believe to be appropriate.  The Company incurred a net loss of £2,171k during the period however the Directors are satisfied, based on detailed cash flow projections and after the consideration of reasonable sensitivities, that sufficient cash is available to meet the Company's needs as they fall due for the foreseeable future and at least 12 months from the date of authorising the accounts. The detailed cash flow assumptions are based on the Company's annual budget, prepared, and approved by the Board, which reflects a number of key assumptions including revenue growth, underpinned by current pipeline; customer compliance with payment terms; other receipts of a value and timing consistent with previous years.

The Directors believe that the Company is well placed to manage its business risks successfully despite the current uncertain economic outlook.  After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future.  Accordingly, they continue to adopt the going concern basis in preparing the interim report and accounts.

Leases and right of use assets

The Company assesses whether a contract is or contains a lease at inception of the contract. A lease conveys the right to direct the use and obtain substantially all the economic benefits of an identified asset for a period of time in exchange for consideration.

A right of use asset and corresponding lease liability are recognised at commencement of the lease. The lease liability is measured at the present value of the lease payments, discounted at the rate implicit in the lease, or if that cannot be readily determined, at the lessee's incremental borrowing rate specific to the term, country, currency and start date of the lease.

The lease liability is subsequently measured at amortised cost using the effective interest rate method. The right of use asset is initially measured at cost, comprising: the initial lease liability; any lease payments already made less any lease incentives received; initial direct costs. The right of use asset is subsequently depreciated on a straight-line basis over the shorter of the lease term or the useful life of the underlying asset. The right of use asset is tested for impairment if there are any indicators of impairment.

Leases of low value assets and short-term leases of 12 months or less are expensed to the income statement, as are variable payments dependent on performance or usage, 'out of contract' payments and non-lease service components.

Segmental reporting

Due to the 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 have 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 differing shapes depending on the intended purpose of the end user.

Critical accounting estimates and judgements

The preparation of financial statements in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income, and expenses. In considering key judgements, management have considered revenue recognised over time as judgement however this is not material in current period. See revenue recognition accounting policy for further details.

Key judgements assessed by management are as follows:

Research and development expenditure

The Board considers the definitions of research and development costs as outlined in IAS 38:  Intangible Assets when determining the correct treatment of costs incurred.  Where such expenditure is technically and commercially feasible, the Company intends and has the technical ability and sufficient resources to complete development, future economic benefits are probable and if the Company can measure reliably the expenditure attributable to the intangible asset it is treated as development expenditure and capitalised on the statement of financial position.

In considering whether an item of expenditure meets these criteria, the Board applies judgement in determining when the items are technically and commercially feasible.

Deferred tax

Judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with an assessment of the effect of future tax planning strategies.  At present management have not recognised deferred tax assets above the value of the deferred tax liability recognised, on the basis that future taxable profits are possible, not probable.

Management do not consider there to be any significant estimates included in the accounts which have a significant risk of causing a material adjustment to carrying amount of assets and liabilities within the next financial year.

Revenue recognition

Revenue arises primarily from the provision of carbon ceramic brake discs.

To determine whether to recognise revenue, the company follows a 5-step process:

1. Identify the existence of a contract with a customer

2. Identify the separable performance obligations

3. Determine an appropriate transaction price for the contract

4. Allocate the transaction price to the performance obligations

5. Recognise revenue either at a point in time, or over time, dependent on how the obligation is satisfied.

The majority of revenue is currently recognised at a point in time, when the control of the goods has passed to the buyer (usually on dispatch of the goods). These contracts contain only one performance obligation being the provision of the specified goods. 

The Company has entered contracts (notably OEM 8), which have a number of separable elements included as part of the provision of pre-production services to the customer.  For such contracts where it has been determined that a good or service is being transferred, the performance obligations which are capable of being distinct must first be identified and then an assessment made of whether the identified performance obligations are distinct in the context of the contract. Judgement is exercised in making this assessment and is driven by what the customers expectation of goods and services to be received are.

When transferring a good or service to the customer the revenue recognition point is determined based on whether the control of the good or service is transferred over time or at a point in time. Where the customer receives and consumes benefits simultaneously over the period of the performance revenue is recognised over time whereas when the service is transferring a good at a point in time the revenue is recognised at that time. Where revenue is recognised on an over time basis, the Company uses a percentage of completion model to recognise the appropriate revenue in the year. This percentage of completion is a judgement based on time booked to the contract.

2.    Taxation

Analysis of credit in the period

			Six months	Six months	Year
			ended	ended	ended
			30-Jun	30-Jun	31-Dec
			2022	2021	2021
			£'000	£'000	£'000
			(unaudited)	(unaudited)	(audited)
UK Corporation tax
Adjustment in respect of prior years' R&D tax allowance			-	(23)	14
R&D tax allowance for current period			348	300	600
			348	277	614

The effective rate of tax for the period/year is lower than the standard rate of corporation tax in the UK of 20%, 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 30-Jun 2022		Six months ended 30-Jun 2021	Year ended 31-Dec 2021
Basic	(unaudited)	(unaudited)			(audited)
Loss after tax (£)	(2,171,000)	(1,915,000)			(3,952,000)
Weighted average number of shares (No. of shares)	195,311,933	185,204,922			190,215,345
Loss per share (pence)	(1.11p)	(1.03p)			(2.08p)

Loss per ordinary share is based on the Company's loss for the financial period of £2,171k (30 June 202: £1,915kloss; 31 December 2021: £3,952k loss). The weighted average number of shares used in the basic calculation is 195,311,933 (30 June 2021: 185,204,922; 31 December 2021: 190,215,345).

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 start-up 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:

Revenue by Geographical Destination	Six Months Ended 30-Jun 2022	Six Months Ended 30-Jun 2021	Year Ended 31-Dec 2021
	£'000	£'000	£'000
United Kingdom	1,167	479	894
Germany	136	95	188
Sweden	84	97	129
Rest of Europe	212	62	136
United States of America	1,157	353	831
Rest of World	102	122	191
	2,857	1,207	2,369

 

END

 

 

IR SSEFSLEESELU