REG - Surface Transforms - Preliminary Results and Notice of AGM
17/04/2023 07:00
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RNS Number : 3444W Surface Transforms PLC 17 April 2023
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 2022.
Financial highlights
· Revenues improved 116% to £5.1m (2021: £2.4m)
· Gross margin was 60% (2021: 65%)
· Net research costs of £5.6m (2021: £3.4m) after capitalising £1.6m
(Year to 31 December 2021 £0.3m) of gross expenditure. Research costs also
partially offset by accrued R&D tax credit of £1.3m (2021: £0.7m)
· Loss after taxation was £4.8m (2021: £4.0m)
· Loss per share of 2.34p (2021: 2.08p)
· Cash used in operating activities increased by £2.8m to £6.5m
(2020: £3.7m)
· Cash at 31 December 2022 was £14.9m (2021(restated): £10m) whilst
capital expenditure in the year was £8.3m (2021: £3.9m)
Customer and Operational highlights
· Increased order book by £175m (lifetime value) to £290m at end of
the year
· Added a new customer - US based OEM 9 - to the growing portfolio of
customers
· Demonstrated the ability to win "carry over" business with existing
customers OEM 10 and OEM 8
· With the £100m OEM 10 contract award took a further step towards
reducing customer concentration risks
· Post balance sheet, resolved a long-standing technical problem that
impacted P&L in both Q4 2022 and Q1 2023. The last major impediment to
meeting ongoing daily customer requirements
· Progressively implemented new production capacity to reach phase 1
target of £20m p.a sales in the year and ordered equipment (delivery Q2 2023)
to reach phase 2 target of £50m p.a sales, operational by September 2023
Board Changes
· During the year the Company welcomed Ian Cleminson to the board as a
new Non-Executive Director. Ian has taken on the role of chair of the audit
committee, effective from October 2022.
· Matthew Taylor has stepped down as chair of the audit committee but
remains as senior independent non-executive director.
· David Bundred (Chairman) resigned from the audit committee in
November 2022 ensuring it is now composed solely of wholly independent
directors.
· After 13 years on the Board, Richard Gledhill retired with effect
from 31 October 2022
· In December Michael Cunningham announced his resignation and will
step down from the board on 31 May 2023
Posting of Annual Report and Notice of Annual General Meeting:
The Company's Annual Report and Accounts for the year ended 31 December 2022,
together with a notice convening the Company's Annual General Meeting ("AGM")
are expected to be posted to shareholders in early May 2023 from which time
they will also be available on the Company's website www.surfacetransforms.com
(http://www.surfacetransforms.com) .
The AGM will be held at the offices of finnCap at 1 Bartholomew Close, London,
EC1A 7BL on Tuesday 27 June at 10.00 a.m.
Chairman's Statement
"A transitional year that leaves us ideally placed for the future"
The twelve months to December 2022 was one of exceptional commercial success
catapulting the Company from being regarded as a start-up to becoming a
serious participant in the plans of mainstream automotive companies. The
Company won £175m (lifetime value) of new orders in the year taking the total
order book to £290m (lifetime value). The wins demonstrated both the
Company's ability to deepen relationships with existing customers (carry over
contracts) as well as developing new long-term relationships as we added a
£100m lifetime value contract award to our relationship with OEM 10, thereby
alleviating customer concentration risks
Our operational performance did not match this commercial progress, albeit
resolved post balance sheet in Q1 2023. Our primary launch customer, OEM 8,
had its own challenges and delayed its start of production (SOP) by six
months. In addition, the Company had several individual but unrelated
technical problems in its own production - explained in more detail below -
which further contributed, albeit less significantly to the 2022 sales being
behind our expectations. This technical problem persisted into Q1 2023 but is
now resolved.
The Company continues to provide capacity for its increasing contracted
demand. During the year, the Company completed its plan to increase capacity
to support sales of £20m p.a. In 2021, the Company raised £19m (net of
expenses) to increase this current £20m p.a. capacity to £50m p.a. sales.
This equipment was specified and ordered during 2022, is being delivered in Q2
2023 and will be operational in Q3 2023.
Additionally, in September 2022 the board concluded that even this increase in
capacity was insufficient to meet the expected mid-decade sales forecast and
raised a further £17m (net of expenses) to ultimately lift capacity to £150m
p.a. in two phases, initially to £75m p.a. sales on the existing site, and
then, by building a second factory, raising sales capacity by 2026 to £150m
p.a. To this end, post balance sheet, the Company agreed heads of terms on a
new building adjacent to its current site.
Throughout the year Environmental, Social and Governance (ESG) concerns were
at the forefront of our thinking. We are proud that our products assist in
reducing both engine and brake dust particle emissions. To ensure that we do
not lose these environmental credentials through the production process our
actions have included buying new equipment with power consumption requirements
that will materially reduce our per unit carbon footprint. Our work on the
social aspect of the ESG agenda continues our objective of being "employer of
choice" in Knowsley was strengthened again this year. Additionally, we have
also strengthened our educational activity both within the company and the
community. Within the factory 14% of our workforce is in some form of formal,
externally approved, apprenticeship (including 10 graduate apprentices).
Within the community we have partnered with two local schools in Knowsley and
Liverpool. In respect to the third element of ESG our governance improvement
included increasing the number of independent directors in addition to
changing membership and chairmanship of the audit committee.
Progress on Customers:
For the customer's own reasons we must seek their permission to use their true
names in any written or social media external communications and therefore we
use nomenclatures OEM 1 to (currently) 10 whenever we describe them.
The Strategic Report, below, explains how our products are now at the centre
of the changes taking place in the automotive industry. In summary the
industry is currently undergoing radical and fundamental change. The changes
began with the increasing focus on emissions, initially engine emissions,
driving the growth in Electric Vehicles (EV) but now also with major focus on
brake dust emission; the use of carbon ceramic (CC) disks halves brake dust
emissions. CC discs are a key part of the industry response to these
changes.
It is the combination of our innovative technology with these underlying
forces that is the strategic foundation underpinning our commercial success.
Building on this strong strategic foundation, our commercial priority over the
past few years has been to deepen our presence with existing customers, with a
particular focus on winning carry over contracts with these existing
customers. This objective has been achieved with all key customers having now
awarded carryover contracts, the ultimate accolade of market acceptance.
At the same time we have set ourselves the objective of establishing a
balanced portfolio of customers - mid-decade - with four roughly equal pillars
OEMs 5, 8 and 10 being the three stand-alone customer legs with the fourth
being the combined total of our other mainly specialist car customers. We
already have firm awards that will provide sales in excess of £20m p.a, each
with OEM 8 and 10 by mid-decade. Our contract wins to date with OEM 5 are
currently less than that level but there is more opportunity in the pipeline
with that customer.
During the strains of our technical problems we were pleased that our
customers understood the issues the Company was facing, noted the progress
and, throughout the period continued discussions on future programmes. Our
order book (£290m) is unchanged, and our prospective contract pipeline
(£393m) has grown in the year.
With our technical problems now resolved and new capacity in place, we can now
also return to the task of widening our customer base beyond OEM 10. This will
not be immediately visible to shareholders as the work is necessarily
commercially confidential and it takes many years from opening discussions to
SOP; But shareholders can be comforted both that the pipeline contracts
discussions are still very active and that this next phase of seeking
additional customers is underway, thereby maintaining our explosive sales
growth.
Progress on Operations:
We have demand that has increased from £2m sales in 2020 to approximately
£20m in 2023 and £30m in 2024. Installing the capacity to meet this demand
and troubleshooting the technical problems incurred in the initial volume
production runs was the prime focus of 2022.
· Technical problems: Almost all our, more than 20, manufacturing
sub-processes have had scale-up problems, albeit with most of these
individual, separate, problems being resolved in a few weeks or less. However
there has been one core problem that has taken several months to
satisfactorily resolve, made worse by supply chain issues for furnace
insulation. This issue particularly impacted financial performance in Q4 2022
and Q1 2023. In January 2023 we informed shareholders that it had impacted the
end of 2022 (by about £2m sales in 2022), we had made improvements but said,
at the time that we wished to see several weeks of consistent output before
being comfortable to confirm that the problem had been resolved. This caution
was prescient, as the problem continued into Q1.
However, detailed, quite fundamental process changes were made post balance
sheet date in January and February, resulting in continuous successful
manufacture since that time; we are confident that this problem has finally
been resolved. This was the last major impediment to meeting ongoing daily
customer requirements.
· Capacity: However, the fact that these technical problems are in the
public domain also reflects the reality that we have been capacity
constrained. Arguably, technical problems are an ever-present factor in high
complexity manufacturing. We can reduce them through our work on process
variability and planned maintenance, but never eliminate them. Therefore,
process resilience through capacity is of equal importance to fixing the
problem as they arise. Technical problems only impact the customer and
shareholder perspective when we don't have spare capacity to catch up after
problems are resolved. Delivering the additional capacity is therefore an
equal partner to fixing the technical problems.
The timetable for delivering the new capacity has been described above. The
key is that the two key bottleneck relief furnaces are being delivered in Q2
and will be operational by Q3. We should then have capacity of over £4m per
month against demand of £2m to £3m per month in the second half of the year.
This will certainly make a significant difference to our H2 resilience and
thus confidence in our revised production projections.
· Gas and Energy Cost: As a result of negotiating fixed price energy
contracts pre-Ukraine war the Company was protected from the energy price
surge throughout 2022 with gas prices protected until April 2023. Post
balance sheet Q1 2023 has seen a reduction in energy pricing such that energy
pricing is now back to planned levels. Accordingly, the Company is in the
process of fixing new agreements that will secure this pricing level for the
next two years.
Shareholders will recall that we also reported during the Q4 2022 fund raising
that our new furnaces would significantly reduce energy costs per disc. This
is still the expectation but is regarded as a contingency not yet in the
forecast.
· Operational Management: The Board has been reviewing the managerial
capacity of our current operational management: Accordingly, we have decided
to introduce a more strategic level of management above the current team with
the appointment of a Chief Operating Officer reporting to the Chief Executive
to take a broader view of the operational processes and the three operational
responsibilities. Given the immediacy of the task we have initially appointed
an interim executive to assist the board, who has been working with us since
January 2023; in parallel we have been undertaking a search for a permanent
appointment that is almost complete.
· Recruitment: the pace of growth has inevitably led to significant
recruitment needs, 47 new starters in 2022 continuing at that rate into 2023.
Whilst there are always (often national) skill shortages in specific areas, we
have largely been able to find the skills we want, particularly as we assume
that the unique nature of our processes often requires further training by the
Company. For example, even the best metal machinists need increased skills to
machine carbon ceramic, the Company provides that training.
· Cost reduction: The unit cost will further reduce as the phase 2
(£50m p.a.) capacity comes on stream post balance sheet in 2023. But we will
not stop there. The Company regards reduction in unit disc cost as a
continuous process and is already well advanced on further unit cost reduction
plans.
Progress on Environment Social and Governance:
· Environment: The Company continues to prioritise the actions required
to further extend our ESG investment credentials. Our products reduce engine
carbon emissions on internal combustion engine (ICE) 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. Our products also reduce
emissions by significantly extending product life, contrasted with its iron
alternative. Additionally, carbon ceramic brake discs significantly reduce
brake pad particles being released into the atmosphere and watercourses, an
area that is increasingly being identified for legislation. Finally, our
end-of-life disc product acts as a carbon sink as the aluminium bell can be
recycled and carbon and silicon 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, including our supply chain through excessive
energy usage. Our environmental focus is therefore in this area. The Company
has focussed on specifying and ordering furnaces which will significantly
reduce the amount of energy required to manufacture our product. Specifically
new furnaces have been ordered which should reduce consumption of electricity
to around half that previously used in the older furnaces. Additionally, the
Company is actively planning re-use of its waste streams through a combined
Heat and Power Plant; further reducing our carbon footprint.
· Social: We believe that our prime social goal is the provision of
well-paid, safe employment in one of the most disadvantaged areas in the
country. There are few companies expanding employment on the Knowsley
Industrial Park at the rate of Surface Transforms. The Company has adopted the
policy of meeting the real living wage as set by the Living Wage Foundation
for all employees. As part of our employee welfare concerns, we are proud that
we are on target, in April 2023, to reach the anniversary of our fourth year
without a reportable accident. Given the hazardous nature of our furnace
processes and cutting machinery this is no mean achievement.
We have also increased our commitment to education both within the factory and
the community. Within Surface Transforms 24% of our employees are graduates or
above, thus training and education is key to future success, as a result 14%
of our workforce are in formal apprenticeships including a graduate apprentice
scheme that was started in the year. We are taking the view that our
technology is so unique we need to grow our own people to meet our long-term
personnel needs.
Within the community we have partnered with two local schools one in Knowsley
and the other in Liverpool. Our partnership with the Knowsley school who do
not have a sixth form (the norm in Knowsley) is aimed at encouraging younger
teenagers, particularly girls, to see science as being fun and in the real
world. Many of these children have little aspiration to or even understanding
of why you should study STEM subjects. Success will be measured by an increase
in pupils selecting STEM subjects for GCSE and then going onto further
education in those subjects outside the borough. The Liverpool school is, by
contrast, a high achieving UTC specialising in STEM subjects and our
partnership includes internships, work experience, visits and some modest
sponsorship. The partnership is already seeing success with some of their
A-level students having applied for graduate apprenticeships with the Company.
We also see other internal benefits as our own employees greatly enjoy working
with both partnership schools.
The Company also regards its separate positive engagement with the smaller
"retail" investors as being part of its social goals. To this end the Company
offers research notes aimed at the smaller investor, site visit Capital Market
days for non-institutional investors, and webinars where non-institutions can
hear management presentations and quiz senior executives.
The Company maintains its certifications in ISO 45001 and ISO 27001.
· Governance: The Company adheres to the QCA corporate governance code.
Following the findings of the last self-assessment carried out by the Company
which identified independence as an issue, a further independent non-executive
director has been appointed and the Company believes itself to be fully
compliant with the code. The Company also strengthened the independence and
accounting technical capability of the audit committee. The Board conducts an
internal review of its effectiveness using a questionnaire. The survey was
last conducted in Q1 2021. Accordingly, questionnaires have been completed in
Q1 2023 and the Board will meet in April 2023 to discuss the feedback.
Summary:
The management team are justifiably proud of their commercial achievements, in
2022. However, the year saw several technical problems, both externally and
internally. Externally our major customer OEM 8 delayed their SOP causing a
major shortfall in sales outcome. Internally almost all our processes had
challenges as we scaled tenfold from our £2m p.a. base. Most were dealt
with quickly, but one particular problem persisted for many months.
Nonetheless, albeit six months late our customer announced SOP at the end of
the year, and we believe that we finally fixed our technical problem in
February 2023. We can now deliver the large order book.
Achieving forecast revenue and profitability targets in 2023 remains our key
goals. We will achieve ongoing monthly profitability during Q2 of 2023,
however we do not yet know the extent to which we can catch up the first
quarter shortfall and thus the overall result for the year.
Strategic Report
Operational Review and principal activity
Our strategic objective 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.
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.
· Support our customers 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 a circa £2 billion market
· Build manufacturing capacity revenue of circa £50m p.a., with the
footprint available to reach circa £75m capacity revenue p.a. for which we
raised £17m in Q4 2022
· 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
sustainability of supply
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:
Automotive OEMs
The continued progress on building capacity for our game changing contracts
provides a clear path to achieving its strategic objective of profitability
and cash generation. Coupled with this the continued success of winning
additional 'carry over' contracts and new major OEM customer contracts has
significantly strengthened the revenue growth curve for the Company over the
coming years.
The Company also continues its successful engineering development objectives
in anticipation of further contract awards for both 'carry over' customer
contracts and new customer contracts during 2022 and beyond.
The Company's internal activities are therefore focused on supporting series
supply for these contracts and on Companywide continuous improvement
objectives across all functions.
· Health and Safety - maintain and improve our health and safety
record. We have an excellent health and safety record which we will continue
to maintain.
· Quality - continue to have excellent in-service quality. Improving
quality is a never-ending process, therefore our primarily focus is on
continuous improvement and reducing the internal cost of quality.
· Environmental - protect and improve our environment. Our products
make a fantastic contribution to reducing CO2 emissions in use, significantly
reducing brake dust pollution, and over the lifetime of the car reducing the
carbon footprint. Our internal goals are aimed on reducing our manufacturing
environmental footprint.
· Customer supply performance - maintaining our performance as a good
supplier. As we enter series supply with our OEM customers a key objective is
to deliver good supplier performance.
· Capacity improvements - ensure we have the manufacturing capacity and
manufacturing resilience in line with our customer requirements. We have a
manufacturing strategy which will deliver £50m of capacity revenue during
2022 and 2023.
· Productivity and cost reduction - perpetual improvement of our
productivity through cost reduction. We have halved the cost to manufacture
over the last ten years and have a programme to repeat this success going
forward to maintain good margins and support our customers to achieve their
pricing goals.
· Supply chain performance - Improve the sustainability and
productivity of our supply chain, including but not limited to, our ethical
standards. As with any manufacturing process we are only as good as our supply
chain. We have improvement plans with our existing suppliers and are adding
new suppliers to our approved supplier list.
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,
Surface Transforms successfully raised funds to support the Company's current
and future growth strategy and to meet contracted and expected orders.
The board believes that governance of Surface Transforms is best achieved by
delegation of its authority of 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 and the Company is committed
to paying more than the living wage to all employees. The Company has recently
commenced employee surveys to monitor employee sentiment and is 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 align with 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 and the Company has invited shareholders
and other interested stakeholders to visit the site at a Capital Markets Day
in April 2022;
· 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 maintained an apprentice scheme and
started its own graduate apprentice scheme in September 2022.
The board considers these stakeholders within its strategy discussions, the
performance of the Company, the workforce and in its governance.
Financial Review
Revenue increased in the year to £5.1m against a figure of £2.4m in 2021, an
increase of 116%. This growth has been driven by both increased development
revenues from the contracts already won and from series production into 3 OEM
contracts. Revenue was down on expectations due to several issues, not least
being a delayed start to production by OEM 8 followed by a halt to delivery
because of our own technical problems described in the Chairman's statement.
Gross profit margin dropped to 60% from 65% in 2021. This has been driven by
product mix and by the yield issues encountered in some of our processes. This
deterioration is not expected to be long term and as previously communicated
the new furnaces due on site in early 2023 will improve energy consumption
within the process significantly.
During the year the Company spent significantly more on research and
development activities to deliver robust processes for series delivery. This
product R&D is now mostly complete with future R&D expenditure
earmarked for process and cost improvements. The Company expects R&D
activities to carry on at these levels over the coming years but with the
focus being heavily skewed to process optimisation now that the product is
well understood.
The cash figure for 2021 has been restated due to the reclassification of cash
on deposit as security for an irrevocable letter of credit, disclosed
prominently in last years statutory accounts, being reclassified as current
asset investments. As already disclosed this letter of credit was for a
furnace and stage payments related to its delivery.
Gross cash at the year-end was £14.9m (2021(Restated): £10.0m). Included in
the 2021 cash figure was £3.0m of cash deposits related to security for an
irrevocable letter of credit which have been restated and which was satisfied
during the year, consequently no liability currently exists under any letters
of credit. Total loans amounted to £1.2m (2021: £1.8m) giving a net cash
position of £13.7m (2021(restated): £8.2m).
Administrative expenses were £3.4m an increase of 38% on the prior year
figure of £2.4m. The increase in expenses were driven by the rapid expansion
of the workforce in preparation for the delivery of series production.
During the year the Company was again supported by shareholders with a
fundraise of £17m after fees to support the future growth of the Company and
to give prospective customers the confidence in the Company's ability to
expand it's capacity. Indeed this confidence lead to the award of a £100m
contract with OEM 10 almost immediately following the fundraise.
Following the budget announcements, the Company is pleased with the
improvement in the R&D tax regime for smaller companies. The impact is
that the Company will have a tax credit in the coming year that is similar to
previous years. The Company had previously guided that the tax credit would be
minimal.
Loss before taxation was £6.0m (2021: £4.6m) leading to a loss per share of
2.34p (2021: 2.08p).
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 has
assessed the results against these KPI's and believe that solid progress has
been made against the Company's targets.
In addition to these financial metrics the board assesses the performance of
the Company against 6 business development KPI's:
· Contracted models;
· Lifetime contract value;
· Carry over contracts won;
· Average contract life;
· Contracts in series production;
· Contracted OEMs; and
· Prospective contract pipeline.
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 1,000 days 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 an A grade score 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 through
regular reviews throughout the year an effective risk register of the issues
that may affect the strategy of the Company or the delivery of its aims.
The principal short-term risk is the execution risks associated with ramping
production to series volumes. This is being managed on a daily basis by a team
comprised of senior leads within the production team. Whilst issues have been
encountered regarding furnace reliability the team are focussed on identifying
these issues rapidly and resolving them. In addition, the team are focussed on
creating excess capacity in order to mitigate the risks when furnace and
equipment failures occur. Significant Capex has been committed to this subject
and by mid-year 2023 there should be no processes that do not have adequate
levels of resilience.
There is also a risk to customer Start of Production (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.
The Company has an exposure to exchange risk however this is partially
mitigated through natural hedging activities. The contracts for OEM 6, 7, 8
and 10 have 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.
Events after the reporting period
The Company has signed heads of terms over a new property with the intention
to double the potential capacity of the Company to £150m.
Directors and staff
Directors: In April the Company announced the appointment of Ian Cleminson as
an independent non-executive director.
Ian joins the board from Innospec Inc, an international speciality chemical
business employing 2100 personnel in 25 countries and with a turnover of $1.5
billion, where he is the current Executive Vice President and CFO. Innospec is
a $2.5 billion NASDAQ listed company.
In August Richard Gledhill announced his retirement from the board after 13
years to be effective from October.
In December Michael Cunningham announced his resignation from the board.
Michael will continue with the Company to effect a managed handover and leave
on 31 May 2023. The Board is at an advanced stage of a search for Michael's
successor and an announcement is expected to be made in the near future.
Management Team: The Company continued its policy of strengthening
management as the Company matures and the managerial needs evolve.
Managerial roles as at 31 December 2022 Managerial roles as at 31 December 2021
Male Female Male Female
Directors 5 1 5 1
Senior managers 4 2 3 2
9 3 8 2
Outlook
Achieving forecast revenue and profitability targets in 2023 remain our key
goals.
With the technical issues now resolved, and demand remaining strong. the board
remains confident that the Company will be profitable in Q2 2023 and
thereafter. We can now deliver the strong demand. However, given the issues
experienced in Q1 2023, and the ongoing production ramp in Q2, we communicated
to the market, on 3 April 2023 that, notwithstanding ongoing profitability, it
is premature to assume that we can catch up these delayed sales.
In respect to cash we have modelled our cash flows on this most pessimistic
assumption, that the sales lost in H1 are lost for the year and confirm that
we still have sufficient cash to maintain the momentum of our capital
expenditure programme.
On behalf of the board
David
Bundred
Dr Kevin Johnson
Chairman
Chief Executive
Statement of Total Comprehensive Income
For the year ended 31 December 2022
Year to 31 December Year to 31 December
2022 2021
£'000 £'000
Revenue 5,121 2,369
Cost of Sales (2,039) (821)
Gross Profit 3,082 1,548
60% 65%
Other Income 36 24
Total Income 3,118 1,572
Administrative Expenses:
Before research and development costs (3,365) (2,432)
Research and development costs (5,625) (3,405)
Total administrative expenses (8,990) (5,837)
Other operating income
Operating loss before non-recurring items (5,872 ) (4,265)
Non-recurring items 0 (180)
Operating loss after non-recurring items (5,872) (4,444)
Financial Income 6 -
Financial Expenses (180) (134)
Loss before tax (6,046) (4,579)
Taxation 1,264 627
Loss for the year after tax (4,782) (3,952)
Other comprehensive income
Total comprehensive loss for the year attributable to members (4,782) (3,952)
Loss per ordinary share
Basic and diluted (2.34)p (2.08)p
Statement of Financial Position
at 31 December 2022
As At 31 December As At 31 December
2022 2022 2021 2021
Restated Note 1
£'000 £'000 £'000 £'000
Non-current Assets
Property, plant and equipment 15,188 9,403
Intangibles 2,237 577
17,425 9,980
Current assets
Inventories 3,376 1,338
Trade and other receivables 1,051 376
Other receivables 3,400 1,714
Current asset investments - 3,007
Cash and cash equivalents 14,924 9,959
22,750 16,394
Total assets 40,175 26,374
Current liabilities
Other interest-bearing loans and borrowings (211) (325)
Lease liabilities (295) (279)
Trade and other payables (3,710) (1,990)
(4,216) (2,594)
Non-current liabilities
Government grants (188) (200)
Lease liabilities (1,335) (1,449)
Other interest-bearing loans and borrowings (887) (1,239)
Total liabilities (6,626) (5,482)
Net assets 33,551 20,892
Equity
Share capital 2,406 1,952
Share premium 58,215 41,446
Capital reserve 464 464
Retained loss (27,534) (22,970)
Total equity attributable to equity shareholders of the company 33,551 20,892
Statement of Changes in Equity
For the year ended 31 December 2022
Share capital Share premium account Capital reserve Retained Loss Total
£'000 £'000 £'000 £'000 £'000
Balance as at 31 Dec 2021 1,952 41,446 464 (22,970) 20,892
Comprehensive income for the year
Loss for the period - - - (4,782) (4,780)
Total comprehensive income for the year - - - (4,782) (4,780)
Transactions with owners, recorded directly to equity
Shares issued in the period 450 17,536 - - 17,986
Share options exercised 5 61 - - 66
Cost of issue off to share premium (828) - - (828)
Equity settled share based payment transactions - - - 216 216
Total contributions by and distributions to the owners 455 16,769 - 216 17,440
Balance at 31 Dec 2022 2,407 58,215 464 (27,536) 33,550
For the year to 31 Dec 2021
Share capital Share premium account Capital reserve Retained Loss Total
£'000 £'000 £'000 £'000 £'000
Balance as at 31 Dec 2020 1,549 22,779 464 (19,114) 5,678
Comprehensive income for the year
Loss for the period - - - (3,952) (3,952)
Total comprehensive income for the year - - - (3,952) (3,952)
Transactions with owners, recorded directly to equity
Shares issued in the period 400 19,600 - - 20,000
Share options exercised 3 38 - - 41
Cost of issue off to share premium (971) - - (971)
Equity settled share based payment transactions - - - 96 96
Total contributions by and distributions to the owners 403 18,667 - 96 19,166
Balance at 31 Dec 2021 1,952 41,446 464 (22,970) 20,892
Statement of Cash Flows
For the year ended 31 December 2022
12m to 31st December 12m to 31st December
2022 2021
Restated Note 1
£'000 £'000
Cash flow from operating activities
Loss after tax for the year (4,782) (3,952)
Adjusted for:
Depreciation and amortisation charge 969 671
Disposal of fixed assets - 6
Non-Government Grant amortisation (12) -
Equity settled share-based payment expenses 216 96
Foreign exchange (gains)/losses (345) 24
Financial expense 180 134
Financial income (6) -
Taxation (1,264) (627)
(5,044) (3,648)
Changes in working capital
Decrease/(increase) in inventories (2,038) (763)
Decrease/(increase) in trade and other receivables (1,805) (962)
Increase/(decrease) in trade and other payables 1,720 1,070
(7,167) (4,303)
Taxation received 709 577
Net cash used in operating activities (6,458) (3,726)
Cash flows from investing activities
Acquisition of tangible and intangible assets (8,351) (3,949)
Cash transfer (to)/ from current asset investments 3,007 (3,007)
Interest received 6 -
Proceeds from disposal of property, plant and equipment - 2
Net cash used in investing activities (5,337) (6,954)
Cash flows from financing activities
Proceeds from issue of share capital, net of expenses 18,051 20,041
Costs for issue of share capital (828) (971)
Payment of finance lease liabilities (153) (156)
Proceeds from long term loans - 1,000
Payments of long term loans (473) (175)
Interest paid (180) (134)
Net cash generated from financing activities 16,417 19,605
Net (decrease)/increase in cash and cash equivalents 4,620 8,925
Foreign exchange losses 345 (24)
Cash and cash equivalents at the beginning of the period 9,959 1,058
Cash and cash equivalents at the end of the period (Restated) 14,924 9,959
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 2022 has been
extracted from the Company's audited financial statements which were approved
by the Board of Directors on 14 April 2023 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 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 UK
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.
Prior year adjustments
The directors, having reviewed the prior year accounts have identified the
misclassification of cash deposits held for security against a letter of
credit as cash in the 2021 statements. The directors have therefore restated
the balance sheet in 2021 to show £3m of cash and cash equivalents as current
asset investments. In addition, the statement of cash flows has been restated
to show this restatement within cash flows from investing activities.
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
£4,782k 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 until the end of
April 2024. 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.
3. Segment 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
2022 2021
£'000 £'000
United Kingdom 1,623 894
Germany 349 188
Sweden 354 129
Rest of Europe 341 136
United States of America 2,254 831
Rest of World 200 191
5,121 2,369
4. Operating loss and auditors remuneration
Year to 2022 Year to2021
£'000 £'000
Operating loss is stated after charging
Loss on disposal of property plant and equipment - 6
Depreciation of property plant and equipment 865 601
Amortisation of Intangible assets 104 71
Research costs expensed as incurred 5,625 3,405
Exchange losses/(gains) (345) 24
after crediting
Government grants 24 12
Auditors remuneration
Amounts receivable by auditors and their associates in respect of:
Year to 31st December
2022 2021
£'000 £'000
Fees payable to the company auditor for the audit of the financial statements 78 60
Total 78 60
5. Staff numbers and costs
The average number of persons employed by the Company (including Directors)
during the year, analysed by category, was as follows:
Year to 31st December
2022 2021
Directors 6 6
Other employees 90 59
96 65
At the year end the Company employed 118 people.
The aggregate payroll of these persons was as follows:
Year to 31st December Year to 31st December
2022 2021
£'000 £'000
Wages and salaries 3,552 2,428
Social security costs 436 257
Other pension costs 196 164
Share based compensation - 96
4,184 2,945
6. Taxation
Year to 31st December
2022 2021
£'000 £'000
Analysis of credit in year
UK corporation tax
Adjustment in respect of prior years - R&D tax allowances 59 (23)
R&D tax allowance for current year 1,205 650
Total income tax credit 1,264 627
Year to 31st December
2022 2021
£'000 £'000
Reconciliation of effective tax rate
Loss for year (4,782) (3,952)
Total income tax credit (1,264) (627)
Loss excluding income tax (6,047) (4,579)
Current tax at average rate of 19% (1,148) (870)
Effects of:
Non-deductible expenses 1 1
Change in unrecognised timing differences
Current year losses for which no deferred tax recognised 1,148 869
R&D tax allowance for current year (1,205) (650)
Adjustment in respect of prior years - R&D tax allowances (59) 23
Income tax credit (1,264) (627)
Following the 2023 spring budget the government have announced that the regime
for R&D tax credits will be higher than that announced in the 2022
November autumn statement. Consequently, as the Company expects to satisfy the
R&D intensive threshold in 2023 the level of support will be advantageous
to the Company.
The main rate of corporation tax will rise to 25% from April 2023 however the
Company expects that before it's carried forward losses are exhausted it
expects to have in place patents that will deliver patent box tax relief.
7. Called up share capital
Number £'000
Allotted called up and fully paid of £0.01 each
At 31 December 2020 154,918,319 1,549
Issue of shares 40,270,000 403
At 31 December 2021 195,188,319 1,952
Issue of shares 45,424,914 454
At 31 December 2022 240,613,233 2,406
During the year the Company issued 361,175 shares through the exercise of
options.
During the year the Company issued 44,963,739 ordinary shares in the Company
in a placing, subscription and open offer taking the total issued share
capital to 240,613,233 and raising a total of £17.1m after fees.
The Company operates a share incentive scheme for the benefit of the Directors
and certain employees. All options are granted at the discretion of the Board.
The scheme grants options to purchase ordinary shares of £0.01 each.
8. Net debt
As at 1 Jan 2022 (Restated Note 1) Cash Flow Other non-cash movements 31 December 2022
£'000 £'000 £'000 £'000
Lease liabilities (1,579) 189 (99) (1,489)
Long term loans (1,712) 554 (81) (1,239)
Liabilities arising from financing activities (3,291) 743 (180) (2,728)
Cash 9,959 4,621 345 14,925
Total net debt 6,668 5,364 165 12,197
As at 1 Jan 2021 Cash Flow Other non-cash movements 31 Dec 2021 (Restated Note 1)
£'000 £'000 £'000 £'000
Lease liabilities (1,371) 320 (528) (1,579)
Long term loans (446) (862) (404) (1,712)
Liabilities arising from financing activities (1,817) (542) (932) (3,291)
Cash 1,058 8,925 (24) 9,959
Total net debt (759) 8,383 (956) 6,668
9. Ultimate controlling party
The Directors do not consider there to be an ultimate controlling party due to
no individual party owning a majority share in the Company.
10. Loss per ordinary share
The calculation of basic loss per ordinary share is based on the loss for the
financial year divided by the weighted average number of shares in issue
during the year.
Losses and number of shares used in the calculation of loss per ordinary share
are set out below.
12m to 31st December
Basic 2022 2021
Loss after tax (£) (4,780,363) (3,951,292)
Weighted average number of shares (No. of shares) 204,340,456 190,215,345
Loss per share (pence) (2.34p) (2.08p)
The calculation of diluted loss per ordinary share is identical to that used
for the basic loss per ordinary share. This is because the exercise of options
would have the effect of reducing the loss per ordinary share from continuing
operations and is therefore anti-dilutive under the terms of IAS 33.
For enquiries, please contact
Surface Transforms plc +44 151 356 2141
Kevin Johnson, CEO
Michael Cunningham, CFO
David Bundred, Chairman
Zeus (Nomad & Joint Broker) +44 203 829 5000
David Foreman / Dan Bate/ James Edis (Investment Banking)
Dominic King (Corporate Broking)
finnCap Ltd (Joint Broker) +44 20 7220 0500
Ed Frisby/Abigail Kelly (Corporate Finance)
Andrew Burdis/ Barney Hayward (ECM)
About Surface Transforms
Surface Transforms plc. (AIM:SCE) develop and produce carbon‐ceramic
material automotive brake discs. The Company is the UK's only manufacturer of
carbon‐ceramic brake discs, and only one of two mainstream carbon ceramic
brake disc companies in the world, serving customers that include major OEMs
in the global automotive markets.
The Company utilises its proprietary next generation Carbon Ceramic Technology
to create lightweight brake discs for high‐performance road and track
applications for both internal combustion engine and electric vehicles. While
competitor carbon‐ceramic brake discs use discontinuous chopped carbon
fibre, Surface Transforms interweaves continuous carbon fibre to form a 3D
matrix, producing a stronger and more durable product with improved heat
conductivity compared to competitor products; this reduces the brake system
operating temperature, resulting in lighter and longer life components with
superior brake performance. These benefits are in addition to the benefits of
all carbon‐ceramic brake discs vs. iron brake discs: weight savings of up to
70%, longer product life, consistent performance, reduced brake pad dust and
corrosion free.
For additional information please visit www.surfacetransforms.com
(http://www.surfacetransforms.com/)
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