TIDMSCE
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 GBP1,952k (Year to 31 December 2019*:
GBP1,938k) (7 months to 31 December 2019: GBP1,451k)
-- 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 GBP2,468k (Year to 31 December 2019*:
GBP2,437k) (7 months to 31 December 2019 GBP1,502k) after
capitalising GBP141k (Year/7 months to December 2019*: Nil) of
gross expenditure.
-- Other administrative expenses increased by GBP292k to
GBP1,888k (Year to 31 December 2019*: GBP1,596k) (7 months to 31
December 2019: GBP1,063)
-- Loss before taxation was GBP2,916k (Year to 31 December
2019*: GBP2,982k) (7 months to 31 December 2019: GBP1,760k)
-- Research costs partially offset by an accrued R&D tax
credit of GBP600k (Year to 31 December 2019*: GBP1,131k**
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 GBP241k to
GBP1,012k (Year to 31 December 2019*: GBP771k)
-- Cash at 31 December 2020 was GBP1,058k (31 December 2019: GBP770k)
-- Capital expenditure in the period was GBP643k (Year to 31
December 2019*: GBP376k) (7 months to 31 December 2019: 344k)
-- Cash tax credits of GBP443k received in the period against an accrual of GBP420k
-- Post balance sheet date the Company successfully raised GBP19m net of fees in a significantly over-subscribed placing, subscription and open offer. In addition to this the Company has agreed a GBP1m low interest loan with the local authority in March.
Customer and Operational highlights
-- Secured a GBP27.5m 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 GBP5m 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 GBP43m with multi-year contracts, some of which
extend to 2027; has virtually completed the installation of
capacity for GBP20m p.a. sales; has raised the capital required to
fund a further expansion to GBP35m 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 GBP27.5m. 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 GBP8m 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 GBP5m 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
GBP1m 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
EUR11m (GBP9.8m) 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 GBP900k 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 GBP75m p.a. sales
made up of a GBP4m 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 GBP20m p.a. sales. The second cell is planned
- and now financed - with completion targeted for early 2023 which
will then bring installed capacity to GBP35m 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 GBP19m 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 GBP2
billion p.a. market.
-- Utilise our manufacturing capacity revenue of circa GBP20
million p.a., with expansion underway to circa GBP35 million p.a.
and with the footprint available to reach circa GBP75 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 GBP1,952k from GBP1,938k
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 GBP27.5m and GBP5m 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 GBP240k 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 GBP2.25m after
fees as a measure to support the Company through the expected
impact of Covid-19.
Administrative expenses increased by GBP292k to GBP1,888k (seven
months to December 2019: GBP1,063k; year to December 2019:
GBP1,596k). 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 GBP2,468k (seven months to December
2019: GBP1,502k) broadly in line with the prior year to December
2019 GBP2,437k. These costs were net of capitalisation of GBP141k
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 GBP1,058k (31 December 2019:
GBP770k). In addition, the Company expects the receipt of an
R&D tax credit totalling GBP600k during the coming year (seven
months to December 2019: GBP320k).
* 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 GBP2,917k (seven months to December
2019: GBP1,760k; year to 31 December 2019: GBP2,982k). 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 GBP600k
(seven months to December 2019: GBP320k; year to 31 December 2019:
GBP1,131k). Consequently the loss after taxation was GBP2,303k in
the year to 31 December 2020 (seven months to December 2019:
GBP1,317k; year to 31 December 2019: GBP1,851k) .
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 GBP19m
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 GBP1m 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 EUR5billion, 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 Managerial roles
as at 31 December as at publication
2020 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
GBP'000 GBP'000 GBP'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
GBP'000 GBP'000 GBP'000 GBP'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 redemption Retained
capital account reserve Loss Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'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
Share premium Capital Retained
capital account reserve Loss Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'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 7m to 31st 12m to
31st December December 31st December
2020 2019 2019
Audited Unaudited
GBP'000 GBP'000 GBP'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 GBP2,303k 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 7m to 31st 12m to 31st
December December December
2020 2019 2019
Audited Unaudited
GBP'000 GBP'000 GBP'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 7m to 31st 12m to 31st
December December December
2020 2019 2019
Audited Unaudited
GBP'000 GBP'000 GBP'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 7m to 31st 12m to 31st
December December December
2020 2019 2019
Audited Unaudited
GBP'000 GBP'000 GBP'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 GBP250,000 or greater. For companies with
profits of GBP50,000 or less the corporation tax rate will remain
at 19%. A tapered rate will be introduced for companies with
profits greater than GBP50,000 and less than GBP250,000. 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 +44 151 356 2141
Kevin Johnson, CEO
Michael Cunningham, CFO
David Bundred, Chairman
Zeus Capital Limited (Nomad & Joint Broker) +44 203 829 5000
David Foreman/ Dan Bate/ Jordan Warburton (Corporate
Finance)
Dominic King (Corporate Broking)
finnCap Ltd (Joint Broker ) +44 20 7220 0500
Ed Frisby/Giles Rolls (Corporate Finance)
Richard Chambers (ECM)
For further Company details, visit www.surfacetransforms.com
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