Preliminary Results and Notice of AGM

RNS Number : 0560V

Surface Transforms PLC

12 April 2021

 

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.

Surface Transforms plc

("Surface Transforms" or the "Company")

Preliminary Results and

Notice of Annual General Meeting

Surface Transforms (AIM:SCE) is pleased to announce its preliminary results for the year ended 31 December 2020. The Company's Annual Report and Accounts for the year ended 31 December 2020, together with a notice convening the Company's Annual General Meeting at Image Business Park, Acornfield Road, Knowsley Industrial Estate, Liverpool, L33 7UF on Wednesday 2 June at 9.30am. Copies of the Annual Report and Accounts will be available on the Company's website www.surfacetransforms.com as from this posting date.

Highlights

Financial highlights

· Revenues stable at £1,952k (Year to 31 December 2019*: £1,938k) (7 months to 31 December 2019: £1,451k)

· Gross margin increased to 67.1% (Year to 31 December 2019*: 59.5%) (7 months to 31 December 2019: 59.6%)

· Net research costs of £2,468k (Year to 31 December 2019*: £2,437k) (7 months to 31 December 2019 £1,502k) after capitalising £141k (Year/7 months to December 2019*: Nil) of gross expenditure.

· Other administrative expenses increased by £292k to £1,888k (Year to 31 December 2019*: £1,596k)(7 months to 31 December 2019: £1,063)

· Loss before taxation was £2,916k (Year to 31 December 2019*: £2,982k) (7 months to 31 December 2019: £1,760k)

· Research costs partially offset by an accrued R&D tax credit of £600k (Year to 31 December 2019*: £1,131k** reflecting 19 months tax credit in FY19)

· Loss per share of 1.54p (Year to 31 December 2019*:1.39p) (7 months to 31 December 2029: 0.97p)

· Cash used in operating activities increased by £241k to £1,012k (Year to 31 December 2019*: £771k)

· Cash at 31 December 2020 was £1,058k (31 December 2019: £770k)

· Capital expenditure in the period was £643k (Year to 31 December 2019*: £376k) (7 months to 31 December 2019: 344k)

· Cash tax credits of £443k received in the period against an accrual of £420k

· Post balance sheet date the Company successfully raised £19m net of fees in a significantly over-subscribed placing, subscription and open offer. In addition to this the Company has agreed a £1m low interest loan with the local authority in March.

Customer and Operational highlights

· Secured a £27.5m contract over four years from a global automotive, (OEM 8) with start of production ("SOP") in H2 2021. Discussions continue regarding follow on business

· Secured a contract in excess of £5m over 5 years on the Koenigsegg Gemera with SOP of mid-2022. The third contract award from this customer

· SOP was delayed on the Aston Martin Valkyrie

· Continued to install, test and system integrate the new machines in OEM Production Cell One; on target to meet customer SOPs in mid-2021

· Dealt with the implications of Covid 19 lockdown. Prioritised employee welfare whilst managing to stay open and therefore suffered minimal impact to both new projects and short-term sales

Restarted Combined Heat and Power (CHP) project, further enhancing our ESG objectives

Board Appointments

· Strengthened the Board with the appointment of two new non-executive directors with substantial experience in the global automotive industry

· After 17 years on the Board Kevin D'Silva is retiring with effect from April 12 2021

* Year to December 2019 figures are unaudited. Using an unaudited comparative period is considered an alternative performance measure and is intended to aid the users of the accounts to compare like-for-like between the two periods.

** R&D tax receipt in year to December 2019 was inflated due to change in accounting policy, moving from cash receipt basis to accruals basis.

Chairman's Statement

The twelve months to December 2020, covered in this report, in combination with recent events in 2021 mark the "coming of age" for Surface Transforms plc. In this period the Company has increased its order book to £43m with multi-year contracts, some of which extend to 2027; has virtually completed the installation of capacity for £20m p.a. sales; has raised the capital required to fund a further expansion to £35m p.a. sales, as yet uncontracted but realistically anticipated; and significantly strengthened the Board.

The Company is now poised to move into profit and cash generation, initially on a monthly basis as OEM 8 and Aston Martin Valkyrie enter production in the second half of 2021, and then looking forward to reporting full year profits and cash generation in 2022.

Progress on Customers:

OEM 8 : In September 2020 the Company announced that it had been notified of its selection, as a tier one supplier, on a vehicle by a global vehicle manufacturer, we describe as OEM 8. The selection was as the standard fit, sole supplier of the carbon ceramic brake disc on both axles of a variant of a key model in their range.

The lifetime revenue on this contract, commencing in the second half of 2021, is estimated to be approximately £27.5m. In line with normal automotive practice, there are no minimum values in the contract. Forecast production volumes in the contract show a ramp up to full series volume commencing in second half of 2021 with annual revenue being approximately £8m p.a. for the following three years. The contract currently covers series production to 2024 but may potentially be extended and is priced in GBP.

The technical approval is for an engineering package that we expect the customer to implement on other cars in their planned new model range - known as "carry-over" in the automotive industry. If these models are launched we are confident that our brake discs will be on these cars.

Koenigsegg Gemera : In June 2020 the Company announced that it has been selected as the tier one sole supplier of carbon ceramic brake discs on both axles of the Koenigsegg Gemera. The lifetime value of the contract is in excess of £5m with a start of production in mid-2022 completing in mid-2027. Revenue is expected to be generated broadly evenly over the contract with approximately £1m per year being recognised in each of the four mid-programme years commencing 2023.

OEM 5: In the previous year, 2019, the Company was awarded an €11m (£9.8m) order from this German mainstream manufacturer. SOP is expected to be in 2022 and continues until tapering off in 2027. During 2020, the Company successfully supported OEM 5 on their vehicle system integration tasks and the car testing required to achieve vehicle homologation.

The Company continues to progress discussions on "carry over" orders with this customer. The outcome of these discussions has been delayed by the customer's revision to their new product introductions timetable as a result of the pandemic. In effect the engineering lockdowns have put their new model decisions back by one year.

OEM 9 : This potential customer is a new entrant to the automotive market. The Company has largely completed testing, is in detailed commercial discussions with the customer, and progress is most encouraging. An issue that previously emerged during commercial discussions was the timing gap between expected nomination and SOP being different from our experience elsewhere with implications for capacity availability. This issue formed the backdrop for the decision to raise funds required for capacity expansion in Q1 2021. This is covered in more detail, in the capacity and OEM Production Cell Two review below.

Aston Martin Valkyrie: The Company had anticipated SOP on this vehicle in 2020 originally forecasting approximately £900k of sales in the year. In the event the SOP has been delayed until the second half of 2021. The sales have not been lost as the cars have been presold (with deposits).

OEM 3 : This Company is a division of a major German vehicle manufacturer and has been given responsibility by the parent company for approval of a second source carbon ceramic brake disc across all divisions in the group. The customer has a unique and demanding environmental test that has challenged the Company for a number of years. However particularly good progress was made in the year on the fundamental chemistry underlying the technical challenge. As a result, the Company is now able to report materially improved product performance, against the criteria in this test and is in discussions with the customer on the new test reports.

Other OEMs: The year also saw a considerable acceleration of both test rig and vehicle testing by a number of other new customers some of whom are likely to nominate in the next twelve months for SOP in 2024 and 2025. The Company anticipates winning a proportion of these new programmes.

Retrofit and Near OEM customers : Retrofit describes end use customers swapping out either iron or competitor discs for our product on already registered cars. Near OEM encompasses the large number of very niche car manufacturers producing or modifying less than 100 unregistered cars per year, often much less than that.

It was a successful year for these customers and the resultant sales were the prime reason that the Company was able to ride out the worst excesses of the Covid-19 pandemic. In simple terms, whilst our mainstream OEM customers essentially locked down in the year, our near OEM and retrofit customers did not and nor did we.

These customers have been the mainstay of the early years of Surface Transforms, providing road mileage experience, end use customer testimonials and not insignificant cash over ten years. The customers remain important to us, and we continue to expect near OEM sales to grow, but the combined financial impact of retrofit and near OEM will diminish proportionately as the mainstream OEMs contribute to revenue.

Progress on Operations:

Overview: The Company's Knowsley site has a footprint that, with further capital expenditure, is sufficient for £75m p.a. sales made up of a £4m Small Volume Production Cell and five broadly equal modular OEM Production Cells. The first of these cells is under construction, completion mid-2021, bringing the site installed capacity to £20m p.a. sales. The second cell is planned - and now financed - with completion targeted for early 2023 which will then bring installed capacity to £35m p.a.

Small Volume Production Cell (SVP): Almost all the 2020 and half of the 2021 sales are produced in the SVP Cell. It is therefore encouraging to report considerable progress on improving productivity and increasing capacity in this cell in addition to a step change in internal quality control and first-time yields. The Board sees this as an example of the potential for continuous improvement in the Company when production processes are stabilised under professional production management. Production management can be justifiably proud of their performance in SVP in 2020.

OEM Production Cell One: This is the first production cell for our newly won contracts with mainstream vehicle manufacturers. Almost all the equipment was delivered in 2019 and the 2020 year has been devoted to repeat testing and system integration of the whole cell. The cell has been designed on lean manufacturing principles. The focus is therefore now more on the overall process rather than individual machines, consequently all machines must work at the same rate (known as takt-time) with minimal inventory between machines.

Whilst the Cell carries out much the same tasks as SVP a number of the detailed processes are new including bringing in-house previously bought-out operations. Whilst there have been some minor teething problems, which have needed to be overcome the bulk of the work is now complete and the Board is confident that the cell will be ready for customers' SOP in mid-2021.

Capacity and OEM Production Cell Two: Future production cells will be replicas of Production Cell One and thus we anticipate the cell could be built in approximately 18 months. Historically the timeline between contract award and SOP has been two years and thus the Company should have been able to build production on the back of firm contracts. This remains the case for OEMS 1 to 7.

However, the "disruptor" OEMs - notably OEMs 8 and 9 - work to shorter timescales and therefore the Company does not have the luxury of investment decisions linked to firm contracts. Accordingly, the Company took the decision in late 2020 to double capacity, in anticipation of potential, but yet to be awarded, further contracts from the disruptors. Albeit the risk of unwanted capacity is somewhat ameliorated by the expectation of wins, requiring capacity, from some of the new OEMs in 2024 and 2025. Thus, the real risk is one of timing (too early) not eventual need.

The Company, post year end, successfully concluded a significantly over subscribed equity fundraising, which raised net proceeds of £19m to finance a new OEM Production Cell Two, and for general working capital purposes and headroom.

Cost reduction: The Company saw production cost reductions in 2020 that contributed to improving margin in the year. As previously reported the bulk of the phase one cost reductions will be achieved when Production Cell One is fully implemented in mid-2021. This will mean that the Company will have more than halved production costs over the past five years. However this is a never-ending process and thus the Company is already reviewing plans to repeat that process over the next five years.

Covid-19: The Company operates in Knowsley, the borough with the highest Covid-19 infection rates for much of 2020 and early 2021, and was one of the few UK Tier 3 areas in the summer 2020 lockdown. Accordingly the Company's first priority was the protection of its employees, whilst at the same time, but as a secondary objective, seeking to maintain momentum on both engineering and production at the very point when - after over 15 years - the Company was about to realise its long awaited breakthrough on programmes.

The reaction of the workforce to this conundrum - at all levels - has been exemplary. Some, at Company request, took furlough, all who could worked from home, some of the production team had to shield for both family and personal reasons but the bulk of the production team kept the factory open. Senior management surrendered their bonus entitlement for 2020 and accepted 2021 payment for the 2019 bonus.

Operations were, of course, conducted in a strict Covid secure discipline with social distancing and adherence to government guidelines. The result has been that the engineering/sales projects have been broadly kept on track - the delays were almost universally customer delays - and (as noted in the SVP comments above) production was not merely maintained, it improved.

The net effect can be seen in the contract wins, the acceleration of new projects, increased output and the financial performance. Everybody in Surface Transforms can be proud of these outcomes against the Covid-19 background.

Brexit: As previously reported only about 15% of revenues up to 2024 are into the EU zone and as such it is not a central issue in our planning. Indeed we learnt in the year that a significant proportion of OEM 5's car production on "our" models is to be manufactured in South Africa, not Germany. Nonetheless supply disruption has been seen in the early post- Brexit days. The Company's attitude has been pragmatic; if it now takes weeks to do what used to be done in days, we simply have to accept that reality and plan accordingly. The medium-term response will be a warehouse, or some assembly, on the continent when we reach mature volumes on more than one EU based OEM.

Environment Social and Governance:

Environment: The Company continues to prioritise the actions required to further extend our ESG investment credentials. Our product reduces carbon emissions on internal combustion engine vehicles through reduced vehicle weight; a benefit that is needed even more on heavier, faster accelerating electric vehicles and thus our technology is particularly assisting the transition to electric vehicles. The product also reduces emissions by the significantly extended life contrasted with its iron alternative. Additionally, carbon ceramic brake discs significantly reduce brake pad particles being released into the atmosphere and watercourses. Finally our end of life disc product acts as a carbon sink as the aluminium bell can be recycled and carbon and silica are almost the only remaining elements at the end of the product's life.

Our task however is to ensure that these environmental benefits are not lost in the manufacturing process, through excessive energy usage. Our environmental focus is therefore in this area and, for example, includes restarting the previously halted Combined Heat and Power Plant (CHP) project. The task is to use the waste heat from our furnaces to generate our own power. This project is a key objective for 2021.

But whilst our focus is on energy consumption this is not our sole environmental action area. For example, as part of our determination to be a good neighbour we are going beyond Environmental Agency requirements on emissions reduction, containment and monitoring.

Social: We believe that our prime social goal is the provision of well-paid employment in one of the most disadvantaged areas in the country, there are few companies doubling employment on the Knowsley Industrial Park at the moment. Within this overall objective we are additionally delighted to be part of the local apprenticeship scheme employing our first apprentices in 2020.

The Company is also in early-stage internal discussions on an enhanced community outreach policy and would like to help in education, a key issue in Knowsley.

Finally, combining both environmental and social goals the Company sought the award of ISO 45001 in the year, the international standard for health and safety, this was awarded post reporting date in March 2021.

Governance: The Company adheres to the QCA corporate governance code and in the year completed a self-assessment on compliance. The self-assessment saw the Company broadly compliant with the code with the exception of the need to improve independence and diversity of non-executive directors. This issue has been addressed post balance sheet date and, at the date of this report, the Company believes itself to be fully compliant

Nonetheless the Company is now participating in an external detailed survey of our data against all the sustainability goals to calibrate our internal perceptions.

Summary:

The transformation of our Company in 2020 has been quite remarkable, with progress on almost all fronts. This progress will be demonstrated, financially, when we go into production on OEM 8 and Aston Martin Valkyrie in 2021, at which point we will be profitable and generating cash from operations, before further capital investment.

Finally may I conclude by recording the Board's appreciation of the outstanding contribution by all members of staff, in one of the toughest economic and social backgrounds since WWII. Thank You!

David Bundred

Chairman

9 April 2021

S trategic Report

Operational review and principal activity

Surface Transforms plc 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 original equipment manufacturers (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%, extending product and service life, consistent performance, environmentally friendly through reducing both CO2 emissions and brake pad dust, reducing the total cost of ownership, corrosion free and are highly desirable.

Our strategy is to be a profitable, series production supplier of carbon ceramic brake discs to the large volume OEM automotive market. To achieve this, we work directly with OEMs and closely with Tier One suppliers to meet the customers' requirements on product, price, quality, capacity and security of supply.

In addition, we supply carbon ceramic brake discs to small volume vehicle manufacturing and retrofit high performance kits for performance cars.

· Support our customer across key geographical markets, achieving contract awards to multiple OEMs with products for multiple models with multiyear supply agreements.

· Engineer market leading carbon ceramic brake products, which deliver best in class performance for the luxury and performance brakes markets, which we estimate to be, ultimately, a circa £2 billion p.a. market.

· Utilise our manufacturing capacity revenue of circa £20 million p.a., with expansion underway to circa £35 million p.a. and with the footprint available to reach circa £75 million capacity revenue p.a. with future investment.

· Operate lean manufacturing processes, enabling the Company to produce products that are competitively priced with good margins.

· Be a 'Quality Company' with a culture that lives and breathes its world-class business processes and management systems.  We surpass the automotive quality standards (IATF16949); and thus, have the confidence that we are able to pass all customer audits, as evidenced by recent contract wins.

· Protect the environment by minimising the environmental impacts arising from our activities, products and services and be committed to continuous improvement of our environmental performance.

· Support and manage our supply chain which can deliver to our customers' requirements on product, price, quality, capacity and security of supply.

Our overall objective is to work collaboratively with all stakeholders to deliver a sustainable successful business. Succeeding in these activities generates highly desirable, environmentally friendly, world leading quality products, which are price competitive and profitable to the business.

Furthermore, our products and processes are protected by a high level of intellectual property through deep, complex process knowhow and a product which cannot be reverse engineered.

Delivering our objectives:

The continued progress with new automotive contract wins achieved during the year has provided the Company with a clear path to achieving its strategic objective of profitability and cash generation as series supply commences with all our OEM customers.

The Company also continues its engineering development objectives in anticipation of further contract awards for both 'carry over' customer programmes and new customer programmes during 2021 and beyond.

The Company's internal activities are therefore focused on supporting series supply for these contracts and on Company-wide continuous improvement objectives.

· Health and Safety- In the short term there has been a focus on the creation of a Covid-19 safe environment which has been very successful with no loss of operational activity and minimum disruption. Our broader objective of creating and maintaining a safe working culture and environment never stops with all our key performance indicators positive for 2020. As part of our ongoing activities the Company is actively supporting its employees and their families' mental health and wellbeing by implementing a staff support service.

· Customer supply performance-As we enter series supply with our OEM customers a key objective is to deliver good supplier performance, as this, in part, should facilitate being awarded carry over contracts.  Our customers report that our performance is good and we look forward to maintaining this assessment into the future.

· Capacity improvements- With the majority of OEM Production Cell One capacity allotted to current contracts during 2021 and 2022, we have embarked on building OEM Production Cell Two. This programme although complex has been significantly de-risked through the Company's adoption of the modular approach to manufacturing.  OEM Production Cell Two will be a close replica of OEM Production Cell One.  Sourcing and supplier selection has begun with the conclusion of the project expected to provide new capacity during the second half of 2022. 

· Quality- The Company continues to have excellent in-service quality. But improving quality is a never-ending process, particularly in the automotive industry. Our measure of improving quality is therefore primarily focussed on reducing the internal cost of quality; for example, reducing internal processing, which of course also reduces cost; good progress is being made but there is always more to do. Additionally, maintaining IATF 16949 quality approval is another measure of success in this area. This quality approval process requires annual re-certification audits and it is pleasing to report that in the year the Company successfully completed its annual recertification of both IATF 16949 and ISO 9001.  Additionally, the Company has been successfully appraised by a number of OEM customers.

· Environmental- The Company has the objective of being responsible for the environment and improving it.  We are determined to be a good neighbour. We are a ISO 14001 certified company and have an environmental permit to operate our processes.  We protect the environment through control and monitoring of all emissions from our processes and have set objectives to reduce our environmental footprint. This is currently focused on recycling one of our waste stream and generating heat and power for reuse in our processes.  The Company also believes its product addresses key environmental challenges through eliminating the need for replacement part, reducing emissions and particulate pollution and carbon capture and sink.

· Productivity and cost reduction- The cost reduction objectives set a number of years ago are now being realised within our OEM cell manufacturing process.  Many of these cost reductions have also been implemented across our small volume production (SVP) Cell resulting is improved margins.  We continue to view productivity and cost reduction as perpetual with new projects having been identified and earmarked for implementation over the coming years.  We therefore plan to maintain good margins and support our customers to achieve their pricing goals.

· Supply chain performance- As with any manufacturing process we are only as good as our supply chain.  Improvements have been made to our supply chain in terms of both improving our existing suppliers and adding new suppliers to our approved supplier list.  Further improvements have been identified and will be addressed during the year.  We are pleased with progress made and will continue to reduce our supply chain risks and work collaboratively with supplier partners.

Summary

Our investment in people, processes, plant and product has been successful and is aligned to support further progress on our objectives. Our efforts encompassing customers, capacity, health and safety, quality, environment, supply chain, and cost reduction continue.

Section 172 statement

In accordance with the requirements of section 172 of the Companies Act. The board believes that during the year it has acted in a way that they consider, in good faith, would most likely lead to the success of the Company in the long term and to the benefit of all stakeholder groups. During the year the board raised funds to support the Company through the Covid-19 pandemic and utilised these funds in addition to the furlough scheme to retain as many staff as possible and avoid the loss of key skills and knowledge from the business.

The board believes that governance of Surface Transforms is best achieved by delegation of its authority for the executive management of Surface Transforms to the CEO. The board regularly monitors the delegation of authority, updating regularly whilst retaining responsibility.

The board has identified 6 key stakeholder groups and engages with them to foster strong relations and to act fairly between them:

· Customers: Surface Transforms engages with customers throughout the development process, building strong collaborative environments for long term mutual benefit. This is highlighted by carry over contract awards from existing customers and meets the Company's strategic aims of growing our customer base;

· Employees: Our employees are critical to the success of Surface Transforms and we engage through an environment of openness and inclusivity and trying to create a sense of ownership. All employees receive some share options after a qualifying period of employment. The Company has recently commenced employee surveys to monitor employee sentiment and along with the appointment of our new HR executive are placing a higher focus on employee recruitment and retention. In addition with the current stresses on the workforce the Company has made available counselling services for employees;

These actions fit the Company's aim to be an employer of choice within the Knowsley area;

· Government and regulators: The Company is committed to engaging with all relevant government organisations and ensuring adherence to all statutory requirements. The Company has a strong working relationship with the environmental agency and regularly enters dialogue as to the fulfilment of our responsibilities;

· Investors and shareholders: The board gives opportunities for both institutional and retail investors to meet with the Company and to see the progress of the Company. During the year the Company has held a number of webcasts allowing investors to question the board on progress and on our strategy. The Company has engaged one to one with advisors and investors on environmental, social and governance (ESG) issues with a view to improving the Company's performance in this area;

· Partners and suppliers: The Company engages collaboratively with its partners and behaves in a responsible manner and expects partners to act ethically and in a responsible manner. The Company aims to build long term collaborative relationships and has signed long term contracts with suppliers for material supply, giving certainty to their businesses; and

· Society: The Company engages on social media and welcomes engagement with the wider public. In addition the Company is conscious of its position as a growing employer within the Knowsley area, an area of recognised social disadvantage. To this end the Company has during the year commenced an apprentice scheme and has recruited its first two apprentices in October 2020.

The board considers these stakeholders within its strategy discussions, the performance of the Company, the workforce and in its governance.

Financial Review

Revenue in the year was broadly flat at £1,952k from £1,938k in the previous twelve months despite the underlying Covid-19 scenario. The Company is pleased to report that production continued throughout the year uninterrupted. This has allowed the Company to continue to deliver significant levels of production and development parts to new and existing customers and has helped in the successful award of the £27.5m and £5m multi-year contracts from OEM 8 and Koenigsegg during the year.

Gross profit margin increased in the year to 67% from 60% in 2019. This improvement has been primarily driven by improved unit cost but also reflects some improved pricing.

During the year the Covid-19 pandemic forced the Company to utilise the government furlough scheme to cope with a period of reduced customer demand in the first half of the year. This government support amounted to £240k and was important to the continuing health of the Company when at the time there was so much uncertainty. During this period the Company made arrangements with staff to ensure that salaries remained at normal levels during this furlough period. Additionally, any discretionary expenditure was cut. Finally, the senior management team accepted a deferral in the payment of 2019 bonuses until 2021 and cancelled any bonus entitlement in 2020. 

During this early period of the year the Company was again well supported by its shareholder base with the raise of £2.25m after fees as a measure to support the Company through the expected impact of Covid-19.

Administrative expenses increased by £292k to £1,888k (seven months to December 2019: £1,063k;year to December 2019: £1,596k). This increase was almost all in salary costs reflecting extra staffing for OEM Production Cell One and a strengthened management team.

Net research expenses were £2,468k (seven months to December 2019: £1,502k) broadly in line with the prior year to December 2019 £2,437k. These costs were net of capitalisation of £141k in the year (seven months to December 2019: nil;year to December 2019: nil). This is the first year of capitalisation of research and development costs. The Company has not historically capitalised R&D but given the size and likelihood of near term commercial revenues being generated, these meet the definition of an asset and for the future economic benefits of such assets to be amortised over the perceived useful economic lives of the asset, namely on a straight-line basis over the life of the contract to which they relate.

Cash at 31 December 2020 was £1,058k (31 December 2019: £770k). In addition, the Company expects the receipt of an R&D tax credit totalling £600k during the coming year (seven months to December 2019: £320k).

* Year to December 2019 figures are unaudited. Using an unaudited comparative period is considered an alternative performance measure and is intended to aid the users of the accounts to compare like-for-like between the two periods.

Loss before taxation was £2,917k (seven months to December 2019: £1,760k;year to 31 December 2019: £2,982k). As a result of the change to reporting year-end dates there were two receipts of R&D tax credits in 2019 - reflecting 19 months trading. The tax credit in the year to December 2020 was an accrued £600k (seven months to December 2019: £320k; year to 31 December 2019: £1,131k). Consequently the loss after taxation was £2,303k in the year to 31 December 2020 (seven months to December 2019: £1,317k; year to 31 December 2019: £1,851k) .

Loss per share was 1.54p (seven months to December 2019: 0.97p; year to December 2019: 1.39p)

* Year to December 2019 figures are unaudited. Using an unaudited comparative period is considered an alternative performance measure and is intended to aid the users of the accounts to compare like-for-like between the two periods.

Key performance indicators

The Directors continue to monitor the business internally with several performance indicators: order intake, sales output, gross margins, profitability, supply chain capacity, health and safety, quality and manufacturing cost of automotive discs. A set of business milestones has been agreed and are discussed as part of the monthly board meeting. The board have assessed the results against these KPI's and believe that solid progress has been made against the Company's targets.

During the year the Company has performed well against KPI's relating to Health and Safety with no reportable accidents during the year and in excess of 1 year since the last lost time incident. In addition the Company measures its environmental impact through its Environmental management framework and through Performance in Environment Agency audits which have resulted in A grade scores during the year.

The Company produces an annual business plan and full monthly forecasts detailing sales, profitability and cash flow to help monitor business performance going forward.

Management meetings are held on a weekly basis, all senior managers attend and discuss production, engineering, financial and quality issues.

Risks and uncertainties

The Company has embedded risk management activities and maintains an effective risk register of the issues that may affect the strategy of the Company or the delivery of its aims. These are highlighted below:

The principal short-term risk is the execution risks associated with bringing the newly purchased furnaces into production. This is being managed by both a project team that has the experience and skills to deliver this type of project as well as pre-delivery testing at the supplier's premises.  Regular weekly and monthly reviews are held and the project's progress is communicated across the Company on a regular basis.

There is also a risk to customer SOP dates and the speed at which the customers move from initial to mature build rates. It is also normal in the automotive industry that customers do not contract minimum build rates. These risks are managed by continuing dialogue with the customers to ensure early notification of possible changes.

As in previous years another major risk faced by the Company is considered to be the speed at which our customers and potential customers adopt the new carbon ceramic product technology. The contract awards in the period indicate the strengthening desire from a number of volume automotive OEMs to incorporate the Company's product in their respective platforms. This risk is constantly assessed by regular customer review meetings but is now clearly much reduced.

There is a risk of delay on customer production due to Covid-19, however as at the date of publication of this report all of our customers have returned to production and there is a customer focus on short term revenue generation. This leads the directors to believe that this risk is currently low unless a further shutdown should occur. Moreover, the business performance in 2020 demonstrates that the Company has robust procedures in place to continue operations throughout the most severe periods of another Covid-19 outbreak.

Brexit is currently causing delivery delays as a result of paperwork issues, however these issues are only affecting retrofit sales at present. Should the delays not improve before the start of production with OEM 5 then it has always been the Company's intention to expand our German facilities to include a warehouse to hold buffer stock for this contract. This risk is ameliorated by the fact that looking forward to 2024 only 15% of total sales are forecast to be within the EU and, indeed OEM 5 has recently informed us that a portion of their production will actually be in South Africa.

The Company has an exposure to exchange risk however this is partially mitigated through natural hedging activities. The contract for OEM 8 has been negotiated in sterling to mitigate any exchange risk and this is the Company's policy where possible.

In terms of uncertainties, product sales are still expected to grow with future OEM projections now supported by contracts. The Board expects continuing growth with Near OEM customers but sales growth is expected to be modest in the retrofit market. This uncertainty is constantly assessed by regular customer meetings and monitoring the level of enquiries and orders for both the Company's products and industry wide.

In summary, the Company has made satisfactory progress in its automotive projects and is progressing well with its expansion plans. Please refer to note 21 for information on financial risk management and exposure.

Events after the reporting period

Following the balance sheet date the Company has raised £19m after fees in a very heavily oversubscribed, placing, subscription and open offer. This action was taken to facilitate the delivery of OEM Production Cell Two within the factory to allow for reduced timescales from new customers. The fund raise also provides the Company with working capital and cash headroom through to profitability once OEM 8 is at full run rate.

In addition to this fundraise the Company continues to be well supported by the local authority and has received a beneficial long term loan of £1m at an interest rate 2% over base rate to assist with the Company's rapid growth plans.

Directors and staff

Directors: Post balance sheet date, in March 2021, the Company strengthened the Board by the appointment of two new independent non-executive directors, Matthew Taylor and Julia Woodhouse

Matthew Taylor joins the Board after retiring from his role as CEO of Bekaert SA in 2020. Bekaert SA is a €5billion, 30,000 employees global steel cord business headquartered in Belgium with 45% of its business in automotive. Prior to this role Matthew was CEO of Edwards Vacuum, CEO of JC Bamford, and Global MD of Land Rover following his early career in sales and marketing roles with Ford after a short spell in the Royal Navy.

Julia Woodhouse also joins the Board as non-executive director. Julia spent her executive career with Ford Motor Company where her roles included Director, Global Power Train Purchasing, based in USA and Director, Global Chassis Purchasing, based in Germany. She retired from Ford in 2018 and is currently a non-executive director of Outokumpu a leading global stainless-steel manufacturer based in Helsinki. Julia is also a member of the RICS Standards and Regulations Board.

Following these appointments, after 17 years on the Board Kevin D'Silva retired with effect from the publication of the preliminary results. The Board wants to thank Kevin for his major role in the very existence of the Company, without his contribution over these years the Company may not even exist and would certainly not be in the shape that it is today.

Management Team:  The Company continued its policy of strengthening management as the Company matures and the managerial needs evolve. Below the CEO, all but one of the management team are new appointees over the past three years.

In January 2020 Leigh Welch was appointed sales director. Leigh has more than 20 years experience of sales roles in the automotive industry and joins Surface Transforms from Delphi Technologies where he held the role of Global Account Manager in the diesel fuel systems business. Previously, Leigh had been Sales Director of the Robert Bosch braking division based in Paris responsible for a product range that included calipers, brake discs and brake system components.

Also in December 2020 the Company appointed its first human resources executive, Rebecca Hooper, reporting to the Chief Executive. Rebecca has worked at both large and small companies, including Raytheon and Unilever and in both traditional engineering and newer digital companies. She brings considerable experience in what has previously been a gap in the management team.

	Managerial roles as at 31 December 2020		Managerial roles as at publication date
	Male	Female	Male	Female
Directors	5	-	6	1
Senior managers	3	2	3	2
	8	2	9	3

Outlook

2021 will be one of contrasting halves. The SOP of both key contracts starting in the year (OEM 8 and Valkyrie) is mid-year. Consequently, the first half of the year will be broadly unchanged from the run rate achieved in 2020 whereas the second half will reflect the output from OEM Production Cell One and the contract revenues from these two new contracts.

As a result, the Company expects to be profitable and generating cash from operations on a monthly basis in the second half of 2021 but not before.

On behalf of the board

David Bundred  Dr Kevin Johnson

Chairman  Chief Executive

9 April 2021

Statement of Total Comprehensive Income

For the year ended 31 December 2020

		Year to 31 December		7 months to 31 December		Year to 31 December
		2020		2019		2019
				Audited		Unaudited
		£'000		£'000		£'000
Revenue		1,952		1,451		1,938
Cost of Sales		(642)		(583)		(783)
Gross Profit		1,310		868		1,155
		67%		60%		60%
Other Income		240		-		-
Administrative Expenses:
Before research and development costs		(1,888)		(1,063)		(1,596)
Research and development costs		(2,468)		(1,502)		(2,437)
Total administrative expenses		(4,356)		(2,566)		(4,033)
Operating loss		(2,806)		(1,698)		(2,878)
Financial Income		-		1		2
Financial Expenses		(111)		(63)		(106)
Loss before tax		(2,917)		(1,760)		(2,982)
Taxation		614		443		1,131
Loss for the year after tax		(2,303)		(1,317)		(1,851)
Other comprehensive income
			(2,303)		(1,317)	(1,851)
Loss per ordinary share
Basic and diluted		(1.54)p		(0.97)p		(1.39)p

Unaudited figures for the year to 31 December 2019 have been included to provide like-for-like comparatives with statutory information

Statement of Financial Position

at 31 December 2020

	As At 31 December		As At 31 December
	2020	2020	2019	2019
	£'000	£'000	£'000	£'000
Non-current Assets
Property, plant and equipment	5,626		5,518
Intangibles	278		175
		5,904		5,693
Current assets
Inventories	575		1,006
Deferred tax asset	159		-
Trade receivables	219		817
Other receivables	859		501
Cash	1,058		770
		2,870		3,094
Total assets		8,774		8,787
Current liabilities
Other interest-bearing loans and borrowings	(75)		(118)
Deferred tax liability	(159)		-
Lease liabilities	(224)		(138)
Trade and other payables	(920)		(1,028)
	(1,378)		(1,284)
Non-current liabilities
Government Grants	(200)		(200)
Lease Liabilities	(1,147)		(1,207)
Other interest-bearing loans and borrowings	(371)		(476)
Total liabilities		(3,096)		(3,167)
Net assets		5,678		5,620
Equity
Share capital		1,549		1,361
Share premium		22,779		20,712
Capital redemption reserve		464		464
Retained loss		(19,114)		(16,917)
Total equity attributable to equity shareholders of the company		5,678		5,620

Statement of Changes in Equity

For the 7 months to 31 Dec 2019
	Share capital	Share premium account	Capital redemption reserve		Retained Loss		Total
	£'000	£'000	£'000		£'000		£'000
Balance as at 31 May 2019	1,360	20,704	464		(15,706)		6,822
Comprehensive income for the year
Loss for the period	-	-	-		(1,317)		(1,317)
Total comprehensive income for the year	-	-	-		(1,317)		(1,317)
Transactions with owners, recorded directly to equity
Share options exercised	1	8	-		-		9
Equity settled share based payment transactions-		-	-		106		106
Total contributions by and distributions to the owners	1	8	-		106		115
Balance at 31 Dec 2019	1,361	20,712	464		(16,917)		5,620

For the year to 31 Dec 2020
	Share capital	Share premium account	Capital reserve	Retained Loss	Total
	£'000	£'000	£'000	£'000	£'000
Balance as at 31 Dec 2019	1,361	20,712	464	(16,917)	5,620
Comprehensive income for the year
Loss for the year	-	-	-	(2,303)	(2,303)
Total comprehensive income for the year	-	-	-	(2,303)	(2,303)
Transactions with owners, recorded directly to equity
Shares issued in the year	185	2,220	-	-	2,405
Share options exercised	3	24	-	-	27
Cost of issue off to share premium	-	(177)	-	-	(177)
Equity settled share based payment transactions		-	-	106	106
Total contributions by and distributions to the owners	188	2,067	-	104	2,361
Balance at 31 Dec 2020	1,549	22,779	464	(19,114)	5,678

Statement of Cash Flows

For the year ended 31 December 2020

	12m to 31st December	7m to 31st December	12m to 31st December
	2020	2019	2019
		Audited	Unaudited
	£'000	£'000	£'000
Cash flow from operating activities
Loss after tax for the year	(2,303)	(1,317)	(1,851)
Adjusted for:
Depreciation and amortisation charge	494	289	488
Equity settled share-based payment expenses	106	106	161
Foreign exchange losses	18
Financial expense	111	63	106
Financial income	-	(1)	(2)
Taxation	(614)	(442)	(1,131)
	(2,188)	(1,302)	(2,229)
Changes in working capital
Decrease/(increase) in inventories	431	157	102
Decrease/(increase) in trade and other receivables	520	(501)	(328)
Decrease/(increase) in trade and other payables	(109)	443	640
	(1,346)	(1,203)	(1,815)
Taxation received	334	523	1,044
Net cash used in operating activities	(1,012)	(680)	(771)
Cash flows from financing activities
Acquisition of tangible and intangible assets	(643)	(344)	(376)
Proceeds from disposal of property, plant and equipment
Net cash used in financing activities	(643)	(344)	(376)
Cash flows from investing activities
Proceeds from issue of share capital, net of expenses	2,432	9	1,802
Costs for issue of share capital	(176)
Payment of lease liabilities	(56)	(53)	(53)
Payments of long-term loans	(128)	(25)	(48)
Interest received	-	1	2
Interest paid	(111)	(63)	(106)
Net cash generated from/(used) from investing activities	1,961	(131)	1,597
Net increase/(decrease) in cash	306	(1,155)	450
Foreign exchange losses	(18)	-	-
Cash at the beginning of the period	770	1,925	319
Cash at the end of the period	1,058	770	769

Unaudited figures for the year to 31 December 2019 have been included to provide like-for-like  comparatives with statutory information.

Notes to the financial statements

1.  Basis of preparation and general information

The financial information set out herein does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006.

The financial information for the year ended 31 December 2020 has been extracted from the Company's audited financial statements which were approved by the Board of Directors on 9 April 2020 and which, if adopted by the members at the Annual General

Meeting, will be delivered to the Registrar of Companies for England and Wales.

The reports of the auditor on both these financial statements were unqualified, did not

include any references to any matters to which the auditors drew attention by way of

emphasis without qualifying their report and did not contain a statement under Section

498(2) or Section 498(3) of the Companies Act 2006.

The information included in this preliminary announcement has been prepared on a

going concern basis under the historical cost convention, and in accordance with

International Financial Reporting Standards (IFRSs) as adopted by the EU and the

International Financial Reporting Committee (IFRIC) interpretations issued by the

International Accounting Standards Board (IASB) that are effective or issued and early

adopted as at the date of these financial statements and in accordance with the provisions of the Companies Act 2006.

The Company is a public limited company incorporated and domiciled in England &

Wales and whose shares are quoted on AIM, a market operated by the London Stock

Exchange. The principal activity of the Company is the development and manufacture of

carbon ceramic products for the automotive and aerospace brakes markets. The

registered office is Image Business Park, Acornfield Road, Knowsley Industrial Estate,

Liverpool, L33 7UF.

2.  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 £2,303k 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 signing 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. These forecasts also include the impacts of the Covid situation and the significant post year end fund raise which has increased cash balances.

The current COVID-19 situation is expected to continue to impact operations throughout 2021. In addition the company has taken cash protection measures in order to preserve working capital until the situation has been resolved. The fundraise has however delivered the headroom required to give comfort over going concern.

3.  Segmental reporting

Due to the nature of the business the Company is currently focussed 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.

Revenue by Geographical Destination	12m to 31st December	7m to 31st December	12m to 31st December
	2020	2019	2019
		Audited	Unaudited
	£'000	£'000	£'000
United Kingdom	487	963	1,056
Rest of Europe	569	165	489
United States of America	806	251	312
Rest of World	90	72	81
	1,952	1,451	1,938

4.  Taxation

	12m to 31st December	7m to 31st December	12m to 31st December
	2020	2019	2019
		Audited	Unaudited
	£'000	£'000	£'000
Analysis of credit in year
UK corporation tax
Adjustment in respect of prior years  - R&D tax allowances	14	123	593
R&D tax allowance for current year	600	320	588
Total income tax credit	614	443	1,131
	12m to 31st December	7m to 31st December	12m to 31st December
	2020	2019	2019
		Audited	Unaudited
	£'000	£'000	£'000
Reconciliation of effective tax rate
Loss for year	(2,303)	(1,317)	(1,851)
Total income tax credit	(614)	(443)	(1,131)
Loss excluding income tax	(2,917)	(1,760)	(2,982)
Current tax at average rate of 19%	(554)	(334)	(567)
Effects of:
Non-deductible expenses	1	1	1
Change in unrecognised timing differences
Current year losses for which no deferred tax recognised	553	333	567
R&D tax allowance for current year	(600)	(320)	(538)
Adjustment in respect of prior years - R&D tax allowances	(14)	(123)	(593)
Income tax credit	(614)	(443)	(1,131)

In the Spring Budget 2021, the Government announced that from 1 April 2023 the corporation tax rate will increase to 25% for companies with profits of £250,000 or greater. For companies with profits of £50,000 or less the corporation tax rate will remain at 19%. A tapered rate will be introduced for companies with profits greater than £50,000 and less than £250,000. Since the proposal to increase the corporation tax rates had not been substantively enacted at the balance sheet date, its effects are not included in these financial statements. However, it is likely that the overall effect of the change, had it been substantively enacted by the balance sheet date, would be immaterial.

For enquiries, please contact

Surface Transforms plc  [phone]

Kevin Johnson, CEO

Michael Cunningham, CFO

David Bundred, Chairman

Zeus Capital Limited (Nomad & Joint Broker)  [phone]

David Foreman/ Dan Bate/ Jordan Warburton (Corporate Finance)

Dominic King (Corporate Broking)

finnCap Ltd (Joint Broker )  [phone]

Ed Frisby/Giles Rolls (Corporate Finance)

Richard Chambers (ECM)

For further Company details, visit www.surfacetransforms.com

 

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