REG - Surface Transforms - Year end results and Notice of AGM
28/06/2024 07:00
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RNS Number : 2245U Surface Transforms PLC 28 June 2024
Surface Transforms plc
("Surface Transforms" or the "Company")
Full year results for year ended 31 December 2023 and Notice of AGM
Surface Transforms (AIM:SCE), manufacturers of carbon fibre reinforced ceramic
automotive brake discs, is pleased to announce its audited results for the
twelve months ended 31 December 2023.
Financial highlights
· Revenues grew 81% to £7.3m (2022 restated £4.0m), following
change to revenue recognition criteria
· Gross margin 57% (2022 Restated: 64%), reduction due to higher
temporary outsourcing
· Net research costs of £9.7m (2022: £5.6m)
· £9.2m non-cash impairment of tangible assets (£3.0m) and
Intangible assets (£6.2m)
· Loss after taxation, including £9.2m impairment, was £19.6m
(2022 Restated: £5.3m)
· Loss per share of 7.92p (2022 Restated: 2.58p)
· Cash used in operating activities £10.3m (2022: £6.5m)
· Cash at 31 December 2023 of £6.1m (2022: £14.9m)
· £10.1m equity placing and open offer to support ongoing working
capital needs in the year and £8.8m net of fees further equity raised post
balance sheet
· £13.2m loan secured to fund future capital investment
Customer highlights
· Increased order book by £100m (lifetime value) to £390m at the
end of the year
· Further demonstrated the ability to win "carry over" business
with existing customer OEM 10
· 5 contracts in multi-year revenue generation phase
· Customers have been critical but supportive in response to our
production difficulties
Operational highlights
· Continuing operational problems restricted sales throughout the
year albeit quarter- on - quarter growth in output
· Resultant extensive program of technical, personnel and process
changes in the year to reduce equipment down time and scrap rates
· Capital investments of £9.1m (2022: £8.4m) in the year
· Capacity constraints progressively reduced
· Focus now on improving process capability of all operations
Senior Management Changes
· Post balance sheet, in April 2024, David Bundred announced his
intention to retire as Chairman
· Isabelle Maddock joined the board as CFO on 4 September 2023
· Stephen Easton appointed COO on 4 September 2023
· Michael Cunningham resigned from the Board as CFO on 31 May 2023
Other
· Awarded London Stock Exchange "Green Economy Mark" in the year
Posting of Annual Report and Notice of Annual General Meeting:
The Company's Annual Report and Accounts for the year ended 31 December 2023,
together with a notice convening the Company's Annual General Meeting ("AGM")
will be posted to shareholders today and will be available on the Company's
website www.surfacetransforms.com (http://www.surfacetransforms.com) .
The AGM will be held at 1 Paternoster Square, London, EC4M 7DX on 23 July 2024
at 11.00 a.m.
Chairman's Statement
After many years of product development, leading to our £390m order book,
2023 was dominated by the challenge of converting that hard won order book
into consistent volume production. Progress was made, sales have grown in each
quarter, we were awarded a significant carry over contract in the year, but
the overall operational progress simply was not good enough.
As a result, the Company had to seek fresh equity funding both in 2023 and in
May 2024, and in parallel negotiated a £13.2m loan ringfenced for capital
expenditure. The pricing of the funding and resultant market capitalisation
has impacted the annual review of asset valuation and led to a subsequent,
non-cash, asset impairment. The Board obviously regrets the circumstances that
have led to these distressed equity raisings and completely understands the
frustration and anger of shareholders over the subsequent dilution. The Board
believes the combination of these equity fundraisings and local authority loan
is sufficient for working capital and capital expenditure needs.
Sales Progress
The Company is growing; 81% year on year revenue growth. The central issue in
2023 was that there was sufficient demand for twice the level of the H2
output; we had originally forecast that we would satisfy this demand, but
production issues meant we could not.
Progress on Operations
Surface Transforms is not sales constrained. The inability to achieve
production targets, a recurring theme of 2023, has therefore been a continuing
key frustration. We are in a learning curve, involving numerous interrelated
but separate technical problems. That learning curve has proved to be both
steeper and longer than we expected.
There were three broad reasons for these continuing 2023 problems, the delays
in installing notional capacity, the inability to achieve the target output
from this notional capacity and the personnel learning curve.
· New capacity installation delays: the Company entered 2023
without adequate capacity to meet demand and spent the year closing the
capacity gap with £5.8m of fixed asset capital expenditure in the year.
The background is well known to shareholders. We ordered our Phase 1 £20m
p.a. sales capacity in 2020, and phase 2 (£50m p.a.) in 2021. For both
phases, we believed that 2 years was sufficient lead time for both the
suppliers and the Company. Additionally, we assumed, that the projected demand
for 2023 would not exceed £20m.
In the event the plant has taken 3 years, not 2, to build and commission, and
the speed of our commercial success exceeded our most optimistic assumptions.
The subsequent lack of capacity impacts the Company in two ways. Firstly, we
had underlying demand for £30m sales in 2023, that we could not satisfy,
requiring careful customer management. However, the immediate 2023 problem was
that without the headroom of spare capacity, a single point of failure (down
time or scrap) on a single machine became a total factory bottleneck.
The Phase 2 £50m sales capacity was progressively installed during the year
and into 2024. With one exception, the £50m notional capacity has been
achieved in the first half of 2024, albeit with work required on process
capability to achieve all the notional capacity. The outstanding item from
this £50m programme is one furnace that is now expected to be installed at
the end of the year.
However the growth in demand continues and the installed capacity increase
will soon be thereafter be overtaken by the next step change in demand,
requiring the next part of the phase 2 capacity increase to £75m. This
increase to £75m sales is planned for commissioning in H2 2025, with
equipment being ordered in 2024. That task is underway and is in line with
plan.
In summary we had planned to take 2 years to install our £50m capacity but
will have taken over 3 years. The 2024 capacity task is therefore twofold;
completing this phase to £50m p.a capacity increase whilst, at the same time,
ordering the plant for our £75m p.a sales factory, thus competing Phase 2. We
expect to have balanced short-term demand and capacity by the end of 2024 and
will maintain this resilience thereafter.
· Process capability, and scrap: the issue of lack of capacity was
compounded by the inability, in some sub processes to achieve the planned
output from this notional capacity. As the Company scaled production,
technical (and some tooling) issues emerged with the capital equipment that
were not apparent during the development phase resulting in excessive down
time and scrap. Running furnaces 24/7 is a different challenge to running them
occasionally producing prototype volumes.
The central problem was excessive variability in some production processes -
known as process capability. The effect was high levels of rejected product
scrap. Improving process capability is a well-known technique in volume
manufacture, requiring detailed analysis of input and output variables. This
programme started in the year with, reduced scrap results already seen in
2024.
· New personnel and procedures: we always knew that setting up a
volume production site required new skills and operational procedures not
previously needed in a prototype factory. Not everybody in our original team,
at all levels, was able to transition from prototype to volume production.
To this end the Company made two significant senior management appointments in
Q3 2023, with Isabelle Maddock joining us as Chief Financial Officer and
Stephen Easton as Chief Operating Officer. In turn, both Isabelle and Stephen
have subsequently made further appointments in their own departments. In
particular, over the last few months, operations have been significantly
re-organised, at all levels, involving both new and existing personnel, with,
for example a fundamentally different approach to the type of furnace
technicians and maintenance personnel we needed.
We have also instigated a step change in internal training, ranging from CNC
programming for operators to a Manchester University executive degree
programme for managers. We have always been proud of being a "learning"
company, (27% of our workforce are graduate level) but nonetheless have now
stepped up a gear in that area.
In parallel, the Company has undertaken a deep review of the organisational
procedures of operational planning, maintenance, quality, and supplier
development. Unsurprisingly all show the potential for significant improvement
with work on these projects, under the new leadership, now well advanced.
Progress with customers
Given the operational background the key commercial task in 2023 was to ensure
that we kept customers fully informed, including realistic expectations of
what they could expect. The customer's response has been what we would have
hoped; they have reiterated that they want to buy our product and expect us to
fix our operational problems. They have been, rightly, critical but have also
offered technical support. We remain in continuous dialogue.
Crucially, the customers continue to support us. Indeed OEM 10 awarded us a
carry-over £100m contract in October 2023. We do not take this support for
granted and whilst the threat to existing contracts now seems under control,
the real proof of our ongoing relationship will be the continuing ability to
convert the prospective contract pipeline ("PCP") into firm orders. Customers
will want to see firm operational progress before making future commitments.
Looking beyond 2024 we have contracted demand that enables us to reach up to
£75m sales per annum within the next 4 - 5 years. Our PCP is in addition to
this and is dominated by carryover business from our existing customers, and
the Company's ambition remains generating revenues of £100m per annum within
the next 5 years.
Beyond these major customers, we are continuing to widen our customer base
including the very small niche vehicle builders (we describe them as "Near
OEMs") as they provide both a very attractive return on the investment
required, offer a degree of flexibility in our operational planning and have
only a marginal impact on capacity in a market segment that is growing and
larger than we previously believed.
Trading Update and Outlook
The Board's expectation of 2024 and 2025 financial performance are unchanged
from those described in the recent fund raising, albeit now at the lower end
of that described range. And as we note in our going concern statement below,
at the current time we need to recognise a material uncertainty in our sales
forecast. As described in the fundraising circular dated 3 May 2024, the first
half of 2024 is expected to be one of consolidation as capacity is installed
and the process capability work maintains momentum, with growth accelerating
in the second half. Almost all the single point of failure capacity
bottlenecks have now been dealt with.
In relation to which, significant progress was made in Q1 on reducing scrap
and expanding capacity; this continued into Q2. However, April and May were
impacted by operational supply chains caused by our working capital
constraints in Q2 (now, since early June, fully resolved by the fund raising).
The Company will be reporting the output for H1 FY24 before the Annual General
Meeting on 23 July.
To reiterate the comments above, the problematic furnace , the cost of which
has been fully impaired has neither had nor is expected to have an impact on
overall production output and the team has a longer term solution that avoids
the need for this furnace at all.
The Company's ambition remains generating revenue of £100m sales per year
within the next five years.
Summary
The last twelve months have been, arguably, the most difficult in the history
of the Company. The operational underperformance was a particular
disappointment leading to the need for an unplanned cash injection. As
previously stated, the Board obviously regrets the circumstances that have led
to this distressed fund raising and completely understands the frustration and
anger of shareholders over the subsequent dilution.
However, it is important to remind ourselves that the Company's long-term
sales and profit potential is unchanged. Our product works, is wanted by the
marketplace, there is still only one other worldwide competitor, the market is
likely to be demand constrained for at least the next 5 years, and we are
continuing to install capacity that will, eventually, reach £150m sales. The
Board would not be building this capacity without anticipating the detail of
how we will fill it.
The central immediate need remains that of resolving the twin problems of
installing the capacity and then achieving the output from this notional
capacity. Last year we made progress yet there is still much work to be done,
further progress has been made in 2024 year to date and that continuing
progress will be maintained.
Finally, I want to take the opportunity to thank employees for their valiant
work during a tough year and of course to thank all shareholders for their
support of our recent equity fundraisings.
Financial Review
Prior Year Re-statement - Revenue Recognition for System Integration Services:
We have reassessed our interpretation of revenue recognition for multi-year
service integration contracts under IFRS 15. This has resulted in changes to
the criteria upon which revenue is recognised for certain engineering,
testing, and tooling services. Previously, revenue had been recognised by a
careful assessment of these services over time based on the stage of
completion for each contract, using detailed project information. This
approach which aimed to reflect a fair representation of revenue earned,
aligned with management's previous interpretation of IFRS 15.
However, since we have been unable to adequately evidence the right to payment
for incomplete performance obligations, the criteria for recognising revenue
has been revised to only recognise revenue at a point in time being either
upon completion of system integration by the OEM or when control is passed
over for the contracted services.
Impact of prior year:
Based on this new interpretation management determined there to be a material
difference in how the Company has previously recognised revenue. To comply
with IAS 8 the Company is retrospectively applying this new interpretation and
adjusting prior year audited financial statements. The prior year revenue
related to these services amounts to a cumulative decrease of £1.4million,
with £1.1m impacting 2022 and £0.3m impacting 2021.
These adjustments have also impacted other financial statement line items,
such as cost of sales, contract receivables and contract fulfilment assets, as
detailed in Note 30. The Company now expects to recognise more revenue for
these services in future periods as system integrations are completed by the
OEMs as detailed in Note 3.
Revenue
Revenue increased 81% to £7.3m in 2023, driven by increasing customer in
series production contracts.
Revenue expectations fell short notably stemming from the production
challenges which took a considerable amount of research and development to
overcome, impacting timelines, revenue, overhead costs and cashflow. In
response, the Company has made a number of significant technical, personnel
and procedural changes improving machinery output, operational planning,
maintenance, quality, and supplier development to enable a continuous
evolution of the technology for more effective future scaling.
Gross margin
Gross profit margin decreased to 57% due to product mix and process
outsourcing which will continue in 2024 whilst some of our larger pieces of
equipment are installed and commissioned.
Overheads
Administrative expenses rose 59% to £5.4 million in 2023, compared to £3.4
million in 2022. In addition, £9.2m of impairments and £0.5m of other non-
recurring costs are discussed below.
Excluding the impairments and other non-recurring costs, underlying
administrative expenses increased by £2.0 million, primarily driven by the
addition of 54 new personnel to support series production. The Company was
staffed to meet the forecast demand that was not met due to the operational
problems. Accordingly future growth, beyond actual achieved 2023 revenues will
not result in further proportional overhead increases.
Our commitment to research and development continues to fuel our growth, yet
expenditure in the year was unusually high rising, after capitalisation, by
£4.0 million to £9.7 million (2022: £5.6m) during the period. The R&D
spend was focussed on process development, reflecting the considerable
technical spend in the year fixing the manufacturing problems. This spend is
reducing as the problems are being resolved.
Looking ahead, R&D expenditure is anticipated to stabilise at a more
sustainable level following the significant investments made in 2023. The
valuable insights and improvements gained from this past year's R&D
efforts will inform future strategies.
Research will continue to focus on:
• Exploring new techniques to enhance efficiency
and product quality
• Optimising production processes
• Identifying ways to utilise better materials,
and lower costs
This focus on continuous improvement through process and cost optimisation
will remain a core strategy for the future.
Other non-recurring costs
As well as the unusually high incidence of R&D in 2023 management have
identified £0.5 million of non- recurring costs that were incurred in the
first half of the year due to a temporary lapse in our fixed-price energy
contract. The Company has secured fixed energy prices until March 2025, and
the practice of fixed-term contracts is expected to continue, management view
this as an exceptional item albeit for reporting purposes it is within
overhead.
Impairment
At the balance sheet date the Company recognised £9.2m of asset impairment.
As reported in the Chairman's report we identified that a particular furnace
is not performing to contracted specification. We have resolved the issue
operationally, using other furnaces and external supply but hold the supplier
responsible for the failure. We are pursuing potential contractual and legal
remedies yet the outcome remains uncertain. As a result of the furnace's
inoperability, an impairment of £3.0 million has been recognised in the
Statement of Comprehensive Income for the year. This figure reduces the value
of the asset to the best estimate of its recoverable amount. We have not
recorded an asset in relation to any potential legal recovery as we do not
currently meet the recognition criteria for a contingent asset under IAS 37.
IAS 36 requires us to assess the recoverable amount of our assets annually and
whenever there is an indication of impairment. To apply IAS 36 the Company has
necessarily included the recent fundraises as one market assessment indication
along with the risk inherent in the company. Management's discounted cash flow
model assumed no expansion capital expenditure or growth beyond current
capacity and applied a pre-tax discount rate of 14% based on our determination
of our weighted average cost of capital. This initially demonstrated no
impairment as the discounted cash flows exceeded the carrying value of assets.
In order to address the combined challenges of cash flow forecasting risk in a
scale up company and the potential gap between implied market value and
carrying value, we have reassessed the carrying value of our assets. The final
impairment test applied a pre-tax discount rate of 22% to reflect a further
risk premium of 8%. This resulted in a recoverable amount lower than the
carrying value, and an impairment charge of £6.2 million, with £5.2 million
allocated to capitalised development costs and £1.0 million allocated to
software and right-of-use assets.
It's important to note that the impaired development assets continue to
generate revenue aligned with our contracted order book with a lifetime value
of £390 million. As a consequence of this impairment, future amortisation
expense related to these assets will no longer be amortised on a systematic
basis over each contract's useful life, thus reducing future amortisation
expense.
A reconciliation of the above impairments is detailed in Note 4 to the
accounting statements.
Exceptional costs
The Company recognised £0.4m of other non- recurring exceptional costs in the
year relating to restructuring costs.
Net loss
Net loss in the year (after taxation) after impairments and other
non-recurring and exceptional costs was £19.6m (2022 Restated: £5.3m).
Expected tax credit similar to previous years due to R&D tax regime. The
increase in net loss was driven by significant levels of spend on research and
development, production challenges and high defects, growth in workforce in
readiness for increased volumes and lower than expected revenues.
Cash Flow
Gross cash at the year end was £6.1m (2022: £14.9m). Supported by £10.1m
fundraising to facilitate working capital growth, supplier and customer
confidence.
Balance Sheet
Capital investment in the period amounted to £5.8m (2022: £8.4m), with an
impairment of £3.0m recognised against a furnace reflecting its best
estimated recoverable amount. A further £6.2m impairment charge resulted in a
£5.2 million reduction in the carrying value of capitalised development costs
and a £1.0 million reduction in software and right-of-use assets. This
impairment reflects the results of an impairment test using a pre-tax 22%
discount rate.
Revenue grew in the period, leading to a £0.5 million increase in trade and
other receivables, a £0.6 million increase in contract fulfilment assets, and
a £1.1 million rise in inventory. Contract fulfilment assets are described in
note 1 of the notes to the financial statements.
Equity
During the year, the Company successfully raised £10.1 million in equity
funding (net of fees) to support working capital requirements and fulfil
orders. Shareholder contributions, including the exercise of 1,120,000
employee share options, totalled £10.5 million net of fees for the year.
Despite this after the net loss of £19.6m, net assets decreased by £9.1m.
Loans
In December 2023, the Company secured a £13.2 million loan from the LCR UDF
Limited partnership. This loan originates from Liverpool city region's Urban
Development Fund, which is part-funded by the European Regional Development
Fund (ERDF). The loan will be used to invest in new manufacturing facilities,
thereby increasing our production capacity. It is solely for capital purposes
and can be drawn down for eligible capital projects over the next 24 months
until 31 December 2025. Similar to a revolving credit facility, the loan
liability will only be recognised once funds are drawn down. No funds had been
drawn down as at 31 December 2023 accordingly no financial asset or liability
at 31 December 2023 has been recognised.
Going Concern
The continued operation of the Company as a going concern is dependent on our
ability to successfully navigate the upcoming scale-up phase. Two key areas of
material uncertainty have been identified:
1. Scaling Up Production: Successfully ramping up production to meet the
demands of our major OEM contracts is essential to our financial viability.
This process presents inherent risks, and any unforeseen challenges could
delay our ability to deliver on these contracts. Such delays could necessitate
additional cash injections to bridge any funding gaps.
2. Maintaining Financial Flexibility: Our current cash reserves provide
us with a runway to achieve our goals. However, there is a risk that we may
exhaust this cash headroom before achieving profitability. This scenario could
lead to a breach of our loan covenants, potentially jeopardising our access to
future funding.
The Directors acknowledge the existence of a material uncertainty related to
the Company's ability to continue as a going concern. This uncertainty arises
from challenges associated with yield improvement and necessary investments
during the scale-up phase to meet production targets for the 12 OEM contracts.
The duration and extent of these challenges could significantly impact
operational performance, particularly sales and EBITDA generation, which are
crucial for transitioning the Company from a loss-making entity to a cash-
generating business.
The Directors have modelled a management high case, base case and low case
scenarios. Performance since the balance sheet date has demonstrated strong
growth on prior year, yet short of management expectations for the base case
forecast at the time of writing this report.
Additional disclosures are given in note 1 to the financial statements to
provide an understanding of the forecast scenarios bank facilities, and cash.
The Company cannot be assured that it will not exhaust its cash headroom or
breach its covenants and that there is therefore a material uncertainty over
the going concern of the Company. The challenges are described in detail in
this report along with mitigating actions to address them.
Yield challenges have significantly impacted the Company's profitability.
Lower yields not only limit the number of saleable discs, reducing revenue,
but also inflate manufacturing costs due to disc scrappage before the final
stage. This directly affects our profit margins.
Management has proactively addressed this issue. Recent months have seen
several successful upgrades to the manufacturing process, leading to a
significant reduction in scrappage rates. We are committed to long-term
efficiency and scalability. While strategically investing in process
optimisation might temporarily delay reaching desired production levels and
impact cash flow in the short term, it will ultimately establish a more robust
and sustainable operation, well-positioned to meet future demand.
Our ongoing investment to expand production capacity carries the potential for
delays or exceeding initial funding estimates. As our manufacturing strategy
relies heavily on capital and working capital expenditure, any unforeseen
issues with existing equipment during production ramp- up, challenges with new
equipment installation, or delays in equipment investment or arrival could
affect our ability to meet production targets or limit our internally
generated funding from operations.
To mitigate these risks, we leverage a dedicated Project Management Office
(PMO) with expertise in executing complex projects on time. The PMO
proactively identifies and manages long lead times for equipment within the
program. Additionally, we prioritise talent through proactive recruitment,
retention, and development programs, including graduate and apprenticeship
initiatives under the guidance of seasoned PMO professionals. These
initiatives foster career progression, knowledge continuity, and succession
planning. While we are confident that our manufacturing plans incorporate
sufficient contingencies to fulfill existing, future, and prospective
contracts, inherent uncertainties could still impact our ability to achieve
these goals within the anticipated timeframe.
Achieving our strategic goals hinges on effective planning, robust project
management, and access to timely management information. While we have growth
plans in place, executing them can put significant strain on our management,
operational, financial, and personnel resources.
Recognising this potential challenge, we are actively taking steps to mitigate
it. We are implementing a rigorous prioritisation framework within our phased
approach to growth. This ensures we focus on the most critical initiatives
along the critical path, ensuring efficient resource allocation. Additionally,
we have proactively addressed resource constraints by:
· Scaling our team: We have recruited experienced engineers and
professionals to bolster our technical expertise. We're also investing in
training and development programs to upskill existing operators and create
future team leaders.
· Investing in technology: We view software applications supporting
manufacturing, maintenance, and project management as a continuous value-add
process. Ongoing investment in these tools streamlines operations and empowers
our team.
Management believes the Company has the ability to meet future demand due to
the ongoing investments in capacity, people, software and process
optimisation. However, there can be no guarantee that recent improvements in
yield can be maintained or improved at levels in line with management
expectations, particularly as production volumes are increasing, and there can
be no guarantee that the increase in production capacity is effected at the
pace planned for. For these reasons the Company cannot be assured that it will
not exhaust its cash headroom or breach its covenants, and that there is
therefore a material uncertainty over the going concern of the Company.
Notwithstanding the material uncertainty, after due consideration the
Directors have a reasonable expectation that the Company has sufficient
resources to continue in operational existence for the period of 12 months
from the date of approval of these financial statements. Accordingly, the
financial statements continue to be prepared on the going concern basis. The
circumstances noted above indicate the existence of a material uncertainty
which may cast significant doubt over the ability of the Company to continue
as a going concern. The financial statements do not contain the adjustments
that would arise if the Company were unable to continue as a going concern.
Statement of Total Comprehensive Income
Year ended Year ended
31 December 2023 31 December
£'000 2022
Note £'000
(Restated)
Revenue 3 7,312 4,045
Cost of Sales (3,137) (1,448)
Gross Profit 4,175 2,597
57% 64%
Other Income 16 36
Gross profit after other income 4,191 2,633
Administrative Expenses:
Before research and development costs (5,439) (3,365)
Research and development costs (9,676) (5,625)
Impairment of fixed assets (9,238) -
Total administrative expenses (24,353) (8,990)
Operating loss before exceptional items 4 (20,162) (6,357)
Exceptional items 5 (389) -
Operating loss after exceptional items (20,551) (6,357)
Financial Income 9 5 6
Financial Expenses 8 (176) (180)
Loss before tax (20,722) (6,531)
Taxation 10 1,163 1,264
Loss for the year after tax (19,559) (5,267)
Total comprehensive loss for the year attributable to members (19,559) (5,267)
Loss per ordinary share
(7.92)p (2.58)p
Basic and diluted 26
Statement of Financial Position
At 31 December 2023
As at As at
31 December 31 December
2023 2022
Note £'000 (Restated)
£'000
Non-current Assets
Property, plant and equipment 11 16,017 15,188
Intangibles 12 - 2,237
Total non-current assets 16,017 17,425
Current assets
Inventories 13 4,469 3,376
Trade receivables 14 1,702 1,051
Other receivables 14 1,161 1,276
Tax receivable 14 1,196 1,206
Contract fulfillment asset 1,342 693
Cash and cash equivalents 6,064 14,924
Total current assets 15,934 22,526
Total assets 31,951 39,951
Current liabilities
Other interest-bearing borrowings 15 (211) (211)
Lease liabilities 15 (357) (295)
Trade and other payables 16 (5,649) (4,220)
Total current Liabilities (6,217) (4,726)
Non-current liabilities
Government grants 27 (174) (188)
Lease liabilities 15 (1,429) (1,335)
Other interest-bearing borrowings 15 (404) (887)
Total non-current liabilities (2,007) (2,410)
Total liabilities (8,224) (7,136)
Net assets 23,727 32,815
Equity
Share capital 18 3,521 2,406
Share premium 67,370 58,215
Capital reserve 464 464
Retained loss (47,628) (28,270)
Total equity attributable to equity shareholders of the Company 23,727 32,815
Statement of Changes in Equity
For the year ended 31 December 2023
Share Share Capital Retained
capital premium reserve Loss Total
Balance as at 31 December 2022 as originally stated 2,406 58,215 464 (27,534) 33,551
Impact of restatement - - - (736) (736)
Balance as at 31 December 2022 as restated 2,406 58,215 464 (28,270) 32,815
Comprehensive income for the year
Loss for the period - - - (19,559) (19,559)
Total comprehensive income for the year - - - (19,559) (19,559)
Transactions with owners, recorded directly to equity
Shares issued in the period 1,104 9,921 - - 11,025
Share options exercised 11 159 - - 170
Cost of issue to share premium - (925) - - (925)
Equity settled share based payment transactions - - - 201 201
Total contributions by and distributions to the owners 1,115 9,155 - 201 10,471
Balance as at 31 December 2023 3,521 67,370 464 (47,628) 23,727
For the year ended 31 December 2022 (Restated)
Share capital Share premium Capital reserve Retained Loss
Total
Balance as at 31 December 2021 as originally stated 1,952 41,446 464 (22,968) 20,894
Impact of restatement - - - (251) (251)
Balance as at 31/12/21 as restated 1,952 41,446 464 (23,219) 20,643
Comprehensive income for the year
Loss for the period - - - (5,267) (5,267)
Total comprehensive income for the year - - - (5,267) (5,267)
Transactions with owners, recorded directly to equity
Shares issued in the period 449 17,536 - - 17,985
Share options exercised 5 61 - - 66
Cost of issue to share premium - (828) - - (828)
Equity settled share based payment transactions - - - 216 216
Total contributions by and distributions to the owners 454 16,769 - 216 17,439
Balance as at 31 December 2022 as restated 2,406 58,215 464 (28,270) 32,815
Statement of Cash Flows
For the year ended 31 December 2023
Year ended Year ended
31 December 2023 31 December
£'000 2022
£'000
(Restated)
Cash flow from operating activities
Loss after tax for the year (19,559) (5,267)
Adjusted for:
Depreciation and amortisation charge 1,262 969
Disposal of fixed assets 6 -
Impairment of assets 9,238 -
Non-government grant amortisation (13) (12)
Equity settled share-based payment expenses 201 216
Foreign exchange (gains)/losses 54 (345)
Financial expense 176 180
Financial income (5) (6)
Taxation (1,163) (1,264)
(9,803) (5,529)
Changes in working capital
Increase in inventories (1,093) (2,038)
Increase in trade and other receivables (537) (974)
Increase in Contract Fulfillment Asset (649) (693)
Increase in trade and other payables 649 2,068
(11,433) (7,166)
Taxation received
1,172 709
Net cash used in operating activities (10,261) (6,457)
Cash flows from investing activities
Acquisition of tangible assets (4,769) (8,281)
Acquisition of intangible assets (3,279) (70)
Cash transfer (to)/from current asset investments - 3,007
Interest received 5 6
Net cash used in investing activities (8,043) (5,338)
Cash flows from financing activities
Proceeds from issue of share capital 11,195 18,050
Costs for issue of share capital (925) (828)
Payment of finance lease liabilities (356) (153)
Payments of interest bearing borrowings (240) (473)
Interest paid (176) (180)
Net cash generated from financing activities 9,498 16,416
Net (decrease)/increase in cash and cash equivalents (8,806) 4,621
Foreign exchange losses (54) 345
Cash and cash equivalents at the beginning of the period 14,924 9,958
Cash and cash equivalents at the end of the period 6,064 14,924
Notes to the Financial Statements
3. Revenue by geographical destination
2023 2022
£'000 (Restated)
£'000
United Kingdom 845 1,623
Germany 492 349
Sweden 168 354
Netherlands 583 1
Rest of Europe 117 341
United States of America 5,006 1,177
Rest of World 102 200
7,312 4,045
System Integration Services (Not Applicable): While our accounting policies
mention system integration services, we did not recognise any revenue related
to these services in fiscal year 2023 or 2022. Therefore, all revenue
recognised in the current and prior year pertains solely to the sale of goods
category. This approach ensures transparency and accurately reflects the
nature of our current business activities.
The table below presents the transaction price allocated to the remaining
performance obligations for our system integration services, as required by
IFRS 15.120. These obligations represent unperformed services that we will
deliver to customers in the future and for which we will recognise revenue
upon completion of system integration by the OEM or when control is passed
over for the contracted services. The table provides a breakdown of the
estimated recognition of the transaction price by year, reflecting the
expected timing of revenue recognition.
2024 2025 2026 Total
As at 31 December 2023: £'000 £'000 Onwards £'000
£'000
Total transaction price allocated to the remaining performance obligations
2,437 486 - 2,923
2023 2024 2025 Total
As at 31 December 2022: £'000 £'000 Onwards £'000
£'000
Total transaction price allocated to the remaining performance obligations
- 2,437 - 2,437
4. Operating loss and auditor's remuneration
12 months to 12 months to
31 December 31 December
2023 2022
£'000 (Restated)
£'000
Operating loss is stated after charging
Loss on disposal of property plant and equipment 6 0
Depreciation of property plant and equipment 1,189 865
Impairments (see 4.2 below) 9,238 -
Amortisation of Intangible assets 73 104
Research costs expensed as incurred (see 4.1 below) 9,676 5,625
Exchange losses/(gains) 54 (345)
after crediting
Government grants 13 36
Auditors remuneration
12 months to 12 months to
31 December 31 December
2023 2022
£'000 £'000
Fees payable to the Company auditor for the audit of the financial statements 170 78
Total 170 78
Fees payable to the Company auditor for other services
80 -
Financial due diligence for debt financing arrangement
80 -
4.1 Research costs expensed in the year rose by £4.1
million to £9.7 million during the period. R & D spend was focused on
process development more than product, reflecting the considerable technical
spend in the year fixing the manufacturing problems.
4.2 Impairments
IAS 36 requires us to assess the recoverable amount of our assets annually and
whenever there is an indication of impairment.
The Company operates as a single Cash-Generating Unit (CGU) for impairment
testing under IAS 36. Its cash inflows and value in use are best assessed at
the entire company level due to its singular Business, it has
no separate operating segments with independent cash flows, all revenue and
cash flows stem from the Company's core activities. This approach provides a
more meaningful impairment assessment compared to individual asset testing or
further grouping.
To apply IAS 36 the Company has necessarily included the recent fundraises as
one market assessment indication along with the risk inherent in the Company.
Management's discounted cash flow model assumed no expansion capital
expenditure or growth beyond current capacity and applied a pre-tax discount
rate of 14% based on our determination of our weighted average cost of
capital. The model shows growth against assets in use at the balance sheet
date for a period of 2 years to December 2025, after that period, a terminal
growth rate of 2% has been applied to all balances, except tax (as the Company
has a large deferred tax asset which takes 7 years before a full year of tax
is recognised). This initially demonstrated no impairment as the discounted
cash flows exceeded the carrying value of assets. In addition to the
discounted cash flow (DCF) valuation, the Company considered fair value less
costs of disposal (FVLCOD) as an alternative measure of recoverable amount.
This involved referencing recent observable market capitalisation of
comparable assets. While this comparison did not suggest an impairment, it is
acknowledged that it is not a formal business valuation and may not fully
capture the Company's specific circumstances. The DCF valuation was used as
the primary basis for the impairment assessment.
In order to address the combined sensitivities and challenges of cash flow
forecasting risk and the potential gap between implied market value and
carrying value, we have reassessed the pre-tax discount rate.
The Company has determined that the recoverable amount calculations are most
sensitive to changes in revenue and discount rates. To determine the final
recoverable amount, taking on board the sensitivities and challenges described
a Value in Use (VIU) approach was employed, incorporating a pre-tax discount
rate of 22% to reflect a further risk premium of 8%. This resulted in a
recoverable amount lower than the carrying value, and an impairment charge of
£6.2 million, with £5.2 million allocated to capitalised development costs
and £1.0 million allocated to software and right-of-use assets. The
calculation is sensitive to any movement in these assumptions and with regard
to the discount rates a 1% reduction would lead to a £1.2m increase in the
carrying value, whilst a 1% increase leads to a £1m reduction in carrying
value.
The Company also identified an inoperable furnace and the impairment reflects
recoverable amount. No legal recovery asset recognised (IAS 37). In total an
impairment charge of £9,238K has been taken in 2023, the split of impairment
charge by asset is shown below:
Note At Cost Amortisation NBV
Tangible Fixed Assets
Land and Buildings 11 736 - 736
Capital in progress 11 3,060 - 3,060
Intangible Fixed Assets
Software 12 587 (367) 220
Capitalised R&D 12 5,233 (11) 5,222
9,615 (378) 9,238
5. Exceptional items
The Company recognises £389,000 of other non- recurring exceptional costs in
the year relating to restructuring costs.
6. Remuneration of directors
The aggregate amount of emoluments paid to Directors in respect of qualifying
services during the period was
£674,957 (2022: £630,150).
The amounts set out above include remuneration in respect of the highest paid
director of £334,500 (2022: £291,016). Pension contributions of £24,453
(2022: £25,468) were made to a money purchase scheme on behalf of two
directors.
The share transactions and key compensations of management designated as Key
Management Personnel are disclosed in note 20 Related Party Disclosures.
7. 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 31 December
2023 2022
Staff numbers and costs
Directors 6 6
Other employees 141 90
147 96
The aggregate payroll costs of these persons were as follows:
Year to 31 December
2023 2022
£'000 £'000
Wages and salaries 5,684 3,552
Social security costs 687 436
Other pension costs 262 196
6,633 4,184
8. Financial Expenses
Year to 31 December
2023 2022
£'000 £'000
Interest expense in relation to lease liabilities 129 99
Other interest charges 47 81
Total interest expense on financial liabilities measured at amortised cost 176 180
9. Financial Income
Year to 31 December
2023 2022
£'000 £'000
Total Interest Income (5) (6)
10. Taxation
2023 2022
£'000 (Restated)
£'000
Analysis of credit in year
UK corporation tax
Adjustment in respect of prior years - R&D tax allowances 33 (59)
R&D tax allowance for current year (1,196) (1,205)
Total income tax credit (1,163) (1,264)
The tax assessed for the year is lower (2022: lower) than the rate of
corporation tax in the UK of 25% (2022: 19%).
The differences are explained below:
Year to 31 December
2022
2023 (Restated)
£'000 £'000
Reconciliation of effective tax rate
Loss for year (19,559) (5,268)
Total income tax credit (1,163) (1,264)
Loss excluding income tax (20,722) (6,532)
Current tax at average rate of 23.5% (4,870) (1,241)
Effects of:
Non-deductible expenses 1 1
Change in unrecognised timing differences
Current year losses for which no deferred tax recognised 4,869 1,240
R&D tax allowance for current year (1,196) (1,205)
Adjustment in respect of prior years - R&D tax allowances 33 (59)
Income tax credit (1,163) (1,264)
In the Spring Budget 2021, the UK Government announced that from 1 April 2023
the corporation tax rate would increase to 25% (rather than remaining at 19%
previously enacted). This new law was substantively enacted on 24 May 2021.
For the financial year ended 31 December 2023, the current weighted average
tax rate was 23.5%. Deferred taxes as at the reporting date have been measured
using these enacted tax rates.
11. Property, plant and equipment
Land and Buildings Leasehold improvements Plant and machinery Fixtures and Capital in progress Total
£'000 £'000 £'000 fittings £'000 £'000
£'000
Cost
At 31 December 2021 1,934 252 3,916 542 5,616 12,260
Transfers from Capital in
Progress - 12 2,873 5 (2,890) -
Transfers to Intangible assets (65) (65)
Additions - 147 1,285 41 5,241 6,714
At 31 December 2022 1,934 411 8,074 588 7,902 18,909
Transfers from Capital in
Progress - - 1,408 - (1,408) -
Additions - 6 1,634 96 4,101 5,837
Disposals - - (51) (6) - (57)
Impairment (736) - - - (3,060) (3,795)
At 31 December 2023 1,198 417 11,065 678 7,535 20,894
Depreciation
At 31 December 2021 552 141 1,713 450 - 2,856
Charge 142 24 656 43 - 865
At 31 December 2022 694 165 2,369 493 - 3,721
Charge 142 34 953 60 - 1,189
Disposals - - (27) (6) - (32)
At 31 December 2023 836 199 3,295 547 - 4,878
Net book value
At 31 December 2021 1,381 111 2,203 93 5,616 9,403
At 31 December 2022 1,240 246 5,705 95 7,902 15,188
At 31 December 2023 362 218 7,770 131 7,535 16,017
Impairment Loss 2023 (736) - - - (3,060) (3,795)
The carrying value of certain fixed assets has been assessed for impairment.
An impairment loss of £3.8 million has been recognised in the year. Please
see note 4 for further detail.
12. Intangibles
Software Capitalised Total
£'000 R&D £'000
£'000
Cost
At 31 December 2021 332 446 778
Transfers from Capital in Progress 65 0 65
Additions 70 1,629 1,699
At 31 December 2022 467 2,075 2,542
Transfers from Capital in Progress 0 0
Additions 120 3,158 3,278
Impairment (587) (5,233) (5,820)
At 31 December 2023 - - -
Amortisation
At 31 December 2021 199 2 201
Charge for period 97 7 104
At 31 December 2022 296 9 305
Charge for period 71 2 73
Impairment (367) (11) (378)
At 31 December 2023 - - -
Net book value
At 31 December 2021 134 444 577
At 31 December 2022 171 2,066 2,237
At 31 December 2023 - - -
Impairment Loss 220 5,222 5,442
Capitalised R&D assets are primarily development costs for product and are
amortised over the expected volume of the contract. All intangible assets have
been impaired in the year following a value in use assessment. Please see note
4 for further detail.
13. Inventories
Year to 31 December
2023 2022
£'000 £'000
Raw materials and consumables 2,286 2,117
Work in progress 1,187 491
Finished goods 997 768
4,469 3,376
Raw materials, consumables and changes in finished goods and work in progress
recognised as cost of sales in the year amounted to £3,137k (2022 restated:
£1,448k). There is no significant difference between the replacement cost of
work in progress and finished goods and their carrying amounts.
14. Trade and other receivables
Year to 31 December
2023 2022
£'000 (Restated)
£'000
Trade receivables 1,757 1,093
Provision for impairment on trade receivables (55) (42)
Net trade receivables 1,702 1,051
Other receivables 222 837
Prepayments and accrued income 939 439
Contract Assets - -
Total other receivables 1,161 1,276
Tax receivable 1,196 1,206
Trade and other receivables 4,058 3,532
All receivables fall due within one year.
The Company uses the expected credit loss (ECL) model under IFRS 9 to assess
credit risk for all receivables. This model considers historical payment
performance, and forward looking factors such as economic forecasts, and
individual customer creditworthiness.
Bad debts amounting to £Nil were written off in the year (Dec 2022; £4k).
Exposure to credit risk arises from the potential of a customer defaulting on
their invoiced sales. The Company closely monitors the credit risk of
customers and offers credit only to those with healthy scores, on- going
credit risk is managed through regular review of ageing analysis. Based on the
current assessment and the Company's strong contractual relationships with
major customers, the estimated ECL for unbilled receivables is currently low.
All trade receivables (billed and unbilled) have been reviewed for expected
credit loss impairment and the expected credit loss (ECL) is estimated to be
£55k (Dec 2022; £43k) and is accounted for under " Provision impairment on
trade receivables".
15. Interest-bearing borrowings and lease liabilities
This note provides information about the contractual terms of the Company's
interest-bearing borrowings and liabilities which are measured at amortised
cost. For more information about the Company's exposure to interest rate and
foreign currency risk see note 22.
Current liabilities
Lease Liabilities 357 295
Interest bearing borrowings 211 211
568 506
Non-current liabilities
Lease Liabilities 1,429 1,335
Interest bearing borrowings 404 887
1,833 2,222
Finance lease liabilities are payable as follows:
Finance lease liabilities are payable
Future minimum Present value of minimum Future minimum Present value of minimum
lease payments lease payments lease payments lease payments
2023 Interest 2023 2022 Interest 2022
£'000 2023 £'000 £'000 2022 £'000
£'000 £'000
Less than one year 475 (119) 357 418 (123) 295
More than one year 1,742 (313) 1,429 2,014 (406) 1,608
2,217 (432) 1,786 2,432 (528) 1,903
Due in 1 year Due in 2-5 years Due in 6-10 years Total Contractual cash flows Carrying amount
£'000 £'000 £'000 £'000 £'000
As at 31 December 2023
Interest bearing borrowings 248 433 - 681 615
Lease liabilities 475 1,145 597 2,217 1,787
Trade and other payables 5,649 - - 5,649 5,649
Total Non-Derivatives 6,372 1,578 597 8,547 8,051
The presentation of hire purchase leases and ROU leases has been changed for
the current year to classify them together. However, due to the immateriality
of the difference in the prior year, the prior year's presentation has not
been restated.
Due in 1 year Due in 2-5 years Total
As at 31 December 2023 £'000 £'000 £'000
Other Borrowings (MSIF Loans) 211 404 614
Due in 1 year Due in 2-5 years Total
As at 31 December 2022 £'000 £'000 £'000
Other Borrowings (MSIF Loans) 211 614 825
MSIF Loans
In March 2021, the Company secured a £1 million loan from River Capital
Management Limited (formerly Alliance Fund Managers Limited) from the
Merseyside Investment Fund (MSIF) supported by the Liverpool City Region
Combined Authority's Flexible Growth Fund programme. As of the 31 December
2023 the Company has a remaining loan balance of £614,000.
Future Loan Funding
In December 2023, the Company secured a £13.2 million funding facility from
the LCR UDF Limited partnership. This loan facility is supported by the
Liverpool city region's Urban Development Fund, which is part-funded by the
European Regional Development Fund (ERDF). The loan will be used to invest in
new manufacturing facilities, thereby increasing our production capacity. It
is solely for capital investment purposes and can be drawn down for eligible
capital projects over the next 24 months until 31 December 2025. There is no
enforceable right to receive cash until a utilisation request is made with
applicable supporting documentation evidencing eligible projects, the loan
liability will only be recognised once funds are drawn down. £Nil had been
drawn down at the period end and no financial liability at 31 December 2023 is
recognised. Future drawdowns will be subject to interest at the EC reference
rate for the period, which as at 1 March 2024 is 5.65%, with a commercial
margin is 6.50% the aggregate interest rate 12.15%.
16. Trade and other payables
12 months to 31 December
2023 2022
£'000 (Restated)
£'000
Trade payables 3,859 2,031
Taxation and social security 357 220
Accruals and deferred income 841 1,404
Contract Liabilities 593 566
5,649 4,220
17. Deferred tax
Difference between accumulated depreciation and amortisation and capital
allowances
4,280 2,646
Tax losses (8,934) (5,955)
Un-recognised deferred tax asset (4,654) (3,309)
The Company has an un-recognised deferred tax asset at 31 December 2023 of
£4,654k (2022; £3,309k) relating principally to tax losses which the Company
can offset against future taxable profits. The Company has recognised a
deferred tax liability of £4,280k as these are recognised as soon as they
arise. The Company anticipates that an equal value of its deferred tax asset
could be utilised against this liability and this has been deferred against
the deferred tax liability.
18. Called up share capital
Allotted called up and fully paid of £0.01 each Number £'000
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
Issue of shares 111,459,405 1,115
At 31 December 2023 352,072,638 3,521
During the year 1,120,000 shares were issued through the exercise of options.
During the year the Company issued 110,339,405 ordinary shares in the Company
in a placing, subscription and open offer taking the total issued share
capital to 352,072,638 and raising a total of £10.1m after fees.
The Company operated a share incentive scheme for the benefit of the Directors
and certain employees. All options were granted at the discretion of the
Board. The scheme granted options to purchase ordinary shares of £0.01 each.
In addition to the Directors' share options certain employees and former
employees have been granted options the details are listed in note 27.
19. Pension scheme
The Company contributes to specific employees' personal pension schemes. The
pension charge for the year represents contributions payable by the Company to
the schemes and amounted to £320k (2022; £341k). During the year two
Directors and several senior managers opted to enter salary exchange
arrangements whereby they sacrificed salary for increased pension
contributions. These arrangements accounted for £232k of the pension
contributions (2022; £178k).
20. Related party disclosures
Transactions with key management personnel
Individuals are designated as Key Management Personnel (KMP) due to their
involvement in planning, directing, controlling, and making crucial decisions
for the Company. Share transactions and Compensation paid to key management
personnel are reported below;
During the year 4 directors acquired 930,608 shares in the Company through an
open market transaction and 5 Directors participated in the placing and
subscription, and the shares acquired in both these events are detailed below:
Pre-employment open market transaction Open Market Transaction Share placing and subscription Acquired in Year
D Bundred n/a 155,101 500,000 655,101
Dr K Johnson n/a - 150,000 150,000
I Cleminson n/a 155,101 - 155,101
J Woodhouse n/a 310,203 100,000 410,203
M Taylor n/a 310,203 500,000 810,203
I Maddock 13,763 - 100,000 113,763
13,763 930,608 1,350,000 2,294,371
Compensation paid to key management personnel in the year is as follows:
Year to 31 December
2023 2022
£'000 £'000
Base salary 751 1,131
Bonuses 86 50
Benefits ( fees, pension) 61 58
Share-based payments 202 216
Termination benefits 30 0
1,129 1,455
21. Net debt
Current liabilities 15 Interest-bearing borrowings and lease liabilities 568 506
Non-current liabilities 15 Interest-bearing borrowings and lease liabilities 1,833 2,222
Total debt 2,401 2,728
Cash (6,064) (14,924)
Net debt (cash) (3,663) (12,196)
As at Cash Other non-cash movements 31 December
1 January Flow £'000 2023
2023 £'000 £'000
£'000
Lease Liabilities (1,489) 534 (831) (1,786)
Interest bearing borrowings (1,239) 258 367 (614)
Liabilities arising from financing activities (2,728) 792 (464) (2,400)
Cash 14,925 (8,807) (54) 6,064
Total net debt 12,197 (8,016) (518) 3,664
As at Cash Other non-cash movements 31 December
1 January Flow £'000 2022
2022 £'000 £'000
£'000
Lease Liabilities (1,579) 189 (99) (1,489)
Interest bearing borrowings (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
The presentation of HP and ROU leases has been changed for the current year to
classify them together. However, due to the immateriality of the difference in
the prior year, the prior year's presentation has not been restated and the
total 2022 liabilities arising from financing activities has not changed.
22. Financial instruments
The Company's policies with regard to financial instruments are set out below.
The risks arising from the Company's financial assets and liabilities are set
out below along with the policies for their respective management.
Currency risk
The Company transacts business in foreign currencies and therefore incurs some
transaction risk due to potential foreign currency cash balances. At the year
end the Company held a balance of $3k (£2k) and a balance of €109k (£95k).
The Company's exposure to foreign currency risk was as follows, this is based
on the carrying amount for monetary financial instruments.
Sensitivity analysis
A ten per cent strengthening of the pound against the US Dollar and the Euro
at 31 December 2023 would have increased losses by the amounts shown below.
This analysis assumes that all other variables, most notably, interest rates,
remain constant. The analysis is performed on the same basis for December
2022.
US Dollar Euro
£'000 £'000
31 December 2022 12 20
31 December 2023 (35) 44
A ten percent weakening of the pound against the US Dollar and the Euro at 31
December 2023 would have reduced loses by the amounts shown below; on the
basis all other variables remain constant.
US Dollar Euro
£'000 £'000
31 December 2022 (15) (25)
31 December 2023 43 (54)
Price risk
The Company manages price risk associated with large contracts with major
Original Equipment Manufacturers (OEMs). These contracts typically fix the
price per part for the entire manufacturing period, mitigating the risk of
price reductions based on volume fluctuations. However, the Company
acknowledges the potential impact of inflationary pressures on raw material
and labour costs, which could increase the cost of manufacturing. To address
this long-term challenge, the Company has a commenced a capital programme
which invests in technology for scale alongside the pursuit of operational
efficiencies and improved processes. These combined efforts aim to drive down
manufacturing costs over time.
Credit risk
The Company uses the expected credit loss (ECL) model under IFRS 9 to assess
credit risk for all receivables, including unbilled receivables. This model
considers historical payment performance, and forward looking factors such as
economic conditions and forecasts, and individual customer creditworthiness.
The Company operates a closely monitored collection policy. The Company
closely monitors the credit risk of customers and offers credit only to those
with healthy scores.
All sales to retrofit and smaller OEM customers are on a payment before
shipping basis and only OEM's qualify for significant levels of credit. Where
appropriate the Company has in the past and would again secure trade credit
insurance for significant debt. The total credit risk is therefore £1,702k
(2022; £860k).
The aging of trade receivables at the reporting date was:
31 December 31 December
2023 2022
Opening balance 43 36
Amounts written off - (4)
Amounts provided for 12 10
Provision at year end 55 43
There was an amount of £55k (December 2021; £43k) in the allowance for
impairment in respect of trade receivables and unbilled receivables. The
average debtor days are 94 days (2022; 64 days), the average creditor days are
54 days (2022; 31 days).
Liquidity risk
The Company's objective is to maintain a balance between continuity and
flexibility of funding through the use of short- term deposits. The
contractual maturity of all cash, trade and other receivables at the current
and preceding balance sheet date is within one year. The contractual maturity
of trade and other payables at the current and preceding balance sheet date is
within 3 months.
Interest rate risk
At the balance sheet date, the interest rate profile of the Company's
interest-bearing financial instruments was:
2023 2022
£'000 £'000
Fixed rate instruments:
Lease liabilities
Less than one year 358 295
More than one year 1,429 1,335
Total 1,787 1,630
Other Loans and Borrowings
Less than one year 211 211
More than one year 404 887
Total 615 1,098
Sensitivity analysis
A 20% increase in the BOE base rate would result in an increase in interest on
the interest bearing loan of £252k.
£'000
2023 interest at current rate of 2.5% 47
2023 interest at sensitivity rate of 22.5% 299
Increase in interest payments in 2023 252
Capital management
The Company manages it's capital to ensure that it will be able to continue as
a going concern and satisfy it's debt as it falls due whilst also maximising
opportunities to progress the development of the business. The Capital
structure of the Company consists of cash and equity attributable to
shareholders comprising issued capital. The key indicator of capital
management performance used by management is the level of cash available to
the Company.
Financial assets are comprised of £15,934k which consists of cash and trade
receivables.
Financial liabilities are comprised of £8,224k which consists of trade
payables, lease liabilities and current and long-term interest-bearing loans.
23. Right of use assets
Amounts recognised in the income statement
L&B Other Total
£'000 £'000 £'000
Net Carrying value at 1 January 2023 1,240 55 1,294
Additions - 135 135
Depreciation charge for the period (142) (47) (189)
Disposals Net Book Value - (25) (25)
Impairment (736) - (736)
Net Carrying value at 31 December 2023 362 118 479
Net Carrying value at 1 January 2022 1,382 18 1,399
Additions - 63 63
Depreciation charge for the period (142) (26) (168)
Net Carrying value at 31 December 2022 1,240 55 1,294
Amounts Recognised in the Income Statement
December December
2023 2022
£'000 £'000
Interest on Lease liabilities 129 99
Lease Liabilities
December December
2023 2022
£'000 £'000
Current 357 295
Non-Current 1,429 1,335
Total Lease Liabilities 1,786 1,630
December December
2023 2022
£'000 £'000
Total Cash outflow for leases 454 276
December December
2023 2022
£'000 £'000
Within 1 year 475 222
Greater than one year but less than five years 1,145 655
Greater than five years but less than ten years 597 1,085
Greater than ten years but less than fifteen years - -
Total Lease Liabilities 2,217 1,962
24. Capital Commitments
Contracts placed for future capital expenditure as at 31 December 2023 were
£1,406k (2022; £5,791k)
25. 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.
26. 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.
Basic 2023 2022 2022
(Restated) (As Reported)
Loss after tax (£) (19,558,869) (5,266,295) (4,780,363)
Weighted average number of shares (No. of shares) 247,044,609 204,340,456 204,340,456
Loss per share (pence) (7.92p) (2.58p) (2.34p)
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.
Share based payments
The fair value of options granted is measured using the Black-Scholes option
pricing model, taking into account the terms and conditions upon which the
options were granted. Exercise is assumed to occur 3 years from the date of
grant and historically there has been no early exercise of options and so this
has been ignored.
The fair value uses the weighted average share price and a risk free rate of
return of 2.0%.
Due to Company's current state of growth no dividends have been included in
any calculations however this is reviewed annually by the board.
27. Share options
There is a total of 3,668,825 unexpired options held by employees and a total
of 4,200,000 unexpired options held by Directors. The number of options
outstanding under the Company's share option scheme is as follows:
At 31 December At 31 December Date from
Note 2022 Leaver Exercised 2023 Exercise price which exercisable Expiry date
E1 300,000 (300,000) - - £0.1050 25/09/2017 25/09/2024
E1 125,000 (125,000) - - £0.1450 30/09/2018 30/09/2025
U1.0 250,000 - - 250,000 £0.1550 02/10/2018 02/10/2025
E1 1,331,667 - (1,010,000) 321,667 £0.1525 04/01/2018 04/01/2028
U1.1 450,000 - - 450,000 £0.1525 04/01/2018 04/01/2028
E1 1,815,753 - (40,000) 1,775,753 £0.2050 04/07/2018 19/09/2027
E1 265,000 (20,000) - 245,000 £0.1300 05/12/2019 05/12/2029
U1.0 1,910,000 - - 1,910,000 £0.1300 05/12/2019 05/12/2029
E2 140,000 (70,000) (70,000) - £0.1525 28/03/2019 28/03/2029
E1 360,000 - - 360,000 £0.2350 04/12/2021 04/12/2029
E3 210,000 - - 210,000 £0.2600 28/01/2020 28/01/2030
E2 120,000 - - 120,000 £0.4600 20/10/2020 20/10/2030
E5 210,000 - - 210,000 £0.5000 23/02/2021 23/02/2031
E4 40,000 - - 40,000 £0.5000 23/02/2021 23/02/2031
E6 1,110,105 (463,700) - 646,405 £0.5700 10/11/2021 10/11/2031
E4 520,000 (20,000) - 500,000 £0.5700 10/11/2021 10/11/2031
E7 910,000 (80,000) - 830,000 £0.0500 12/07/2022 12/07/2032
Total 10,067,525 (1,078,700) (1,120,000) 7,868,825
EMI approved scheme
All the options below have been granted under the EMI approved scheme. The
options under E2, E3, E5, E6 and E7 below vest on the achievement of specific
performance criteria relating to contract awards, cost targets and revenue
levels.
E1 - There have been no variations to the terms and conditions, or performance
criteria attached to these share options during the financial year. There are
no performance conditions attached to the options issued other than continued
employment by the Company.
E2 - These options have been granted under the approved scheme. These options
have been granted under the EMI approved scheme. There have been no variations
to the terms and conditions, or performance criteria attached to these share
options during the financial year. For these options there are performance
criteria relating cost and production targets.
E3 - There have been no variations to the terms and conditions, or performance
criteria attached to these share options during the financial year. For these
options there are three performance criteria:
Production cell OEM1 meeting certain production criteria, the company
achieving a certain target cost for the manufacture of a carbon ceramic disc
and the delivery of £5m of revenue in a financial year.
E4 - There are no performance conditions attached to the options issued other
than continuous employment by the Company for a period of 2 years and
continuing employment.
E5 - There have been no variations to the terms and conditions, or performance
criteria attached to these share options during the financial year. For these
options there are three performance criteria:
Achievement of staffing requirements for start of OEM production, ongoing
staff turnover levels below industry average in a 3 year period and the
delivery of £5m of revenue in a financial year.
E6 - There have been no variations to the terms and conditions, or performance
criteria attached to these share options during the financial year. For these
options there are three performance criteria: Achieving a minimum of £20m of
sales in a rolling twelve-month period, achieving a minimum of £5m profit
before tax in a rolling twelve-month period and installing capacity capable of
achieving annual sales of at least £60m.
E7 - There have been no variations to the terms and conditions, or performance
criteria attached to these share options during the financial year. For these
options there are three performance criteria: Achieving a minimum of £20m of
sales in a rolling twelve-month period, achieving a minimum of £5m profit
before tax in a rolling twelve-month period and installing capacity capable of
achieving annual sales of at least £80m.
Unapproved scheme
All the options below have been granted under the unapproved scheme. The
options under U1.1 below vest on the achievement of specific performance
criteria relating to contract awards and revenue levels.
U1.0 - There have been no variations to the terms and conditions, or
performance criteria attached to these share options during the financial
year. There are no performance conditions attached to the options issued other
than continued employment by the Company.
U1.1 - There have been no variations to the terms and conditions, or
performance criteria attached to these share options during the financial
year. For these options there are three performance criteria: The nomination
of a track car, a nomination by a mainstream OEM for a production vehicle
and/or the delivery of £5m of revenue in a financial year.
28. Government grants
Government grants on the statement of financial position at the year end
relate to grants received for capital equipment for use in production. These
grants are to be amortised over the life of the equipment to which they
relate. During the year to December 2023 the Company recognised £13k of
income against the furnaces which have entered production.
29. Post reporting date events
Following the period end, the Company contractually completed lease ownership
of additional property adjacent to the existing factory. The estimated impact
on amortisation expense for the acquired property is expected to be £63,000
annually. The impact on other financial categories is not material.
30. Prior year restatement
This note describes a restatement of prior year revenue related to system
integration services (engineering, testing, and tooling). Previously, revenue
had been recognised by a careful assessment of these services over time based
on the stage of completion for each contract, using detailed project
information. This approach which aimed to reflect a fair representation of
revenue earned, aligned with management's previous interpretation
of IFRS 15. However, since we have been unable to adequately evidence the
right to payment for incomplete performance obligations, the criteria for
recognising revenue has been revised to only recognise revenue at a point in
time being either upon completion of system integration by the OEM or when
control is passed over for the contracted services. To ensure our financial
statements comply with this revised interpretation, we have corrected the
error in prior year revenue for related to these services.
Based on this new interpretation the error in prior year revenue related to
these services amounts to a cumulative decrease of £1.4million, with £1.1m
impacting 2022 and £0.3m impacting 2021.
The restatement of prior year revenue for system integration services has
resulted in a £1.07 million reduction in 2022 revenue. In reversing the
revenue this adjusts the unbilled receivables balance within Other
Receivables, as the revenue cannot be recognised yet, the costs associated
with these contracts are removed from the statement of total comprehensive
income and shown as contract fulfilment assets on the face of the statement of
financial position until such time that control is transferred to the customer
and revenue can be recognised.
The financial statements reflect a change in presenting the tax credit on the
SFP and in note 14. Previously included in "Other Receivables," the tax credit
(FY22 £1,206) is now a separate line item for improved clarity (operating vs.
other receivables). This change is applied retrospectively, restating prior
period amounts in the SFP and note 14. This change is classified as an error
correction under IAS 8. We believe previously the balance was not separately
presented in accordance with the requirements of IAS 1. IAS 8.49(a).
The impact of these restatements are shown in the tables below.
Loss per ordinary share IAS 8.49 (b)
2022 Prior Year Adjustment 2022
(As Reported) (Restated)
Basic
Loss after tax (£) (4,780,363) (485,932) (5,266,295)
Weighted average number of shares (No. of shares) 204,340,456 - 204,340,456
Loss per share (pence) (2.34p) (0.24p) (2.58p)
Statement of Total Comprehensive Income
2022 Prior Year adjustment 2022
(As Reported) £'000 (Restated)
£'000 £'000
Revenue 5,121 (1,077) 4,045
Cost of Sales (2,039) 591 (1,448)
Gross Profit 3,083 (486) 2,597
Gross profit after other income 3,119 (486) 2,633
Operating loss before exceptional items (5,871) (486) (6,357)
Operating loss after exceptional items (5,871) (486) (6,357)
Loss before tax (6,045) (486) (6,531)
Taxation 1,264 - 1,264
Loss for the year after tax (4,781) (486) (5,267)
Total comprehensive loss for the year attributable to members (4,781) (486) (5,267)
Statement of Cash Flows
2022 Prior Year adjustment 2022
(As Reported) £'000 (Restated)
£'000 £'000
Cash flow from operating activities
Loss after tax for the year (4,781) (486) (5,267)
Changes in working capital
Decrease/(increase) in inventories (2,038) - (2,038)
Decrease/(increase) in trade and other receivables (1,805) 831 (974)
Decrease/(increase) in Contract Fulfillment Asset - (693) (693)
Increase/(decrease) in trade and other payables 1,720 348 2,068
(7,167) - (7,167)
Net (decrease)/increase in cash and cash equivalents 4,621 - 4,621
Under the revised interpretation, revenue for the year end 2021 has also been
adjusted down by £0.35m, this has been adjusted on the balance sheet. To
ensure consistency across the financial statements, the net assets on the
balance sheet have been retrospectively adjusted by £0.74 million for both
2022 and 2021. This ensures the 2022 carried-forward net assets reflect all
historical corrections.
Prior Year Restatement
2022 Prior Year adjustment 2022
(As Reported) £'000 (Restated)
£'000 £'000
Current assets
Inventories 3,376 - 3,376
Trade receivables 1,051 - 1,051
Other Receivables 3,401 (919) 1,276
Tax receivable - 1,206 1,206
Contract Fulfillment Asset - 693 693
Cash and cash equivalents 14,924 - 14,924
22,752 (226) 22,526
Total assets 40,177 (226) 39,951
Current liabilities
Trade and other payables (3,710) (510) (4,220)
(4,216) (510) (4,726)
Total liabilities (6,626) (510) (7,136)
Net assets 33,551 (736) 32,815
Equity
Retained loss (27,534) (736) (28,270)
Total equity attributable to equity shareholders of the Company 33,551 (736) 32,815
For further information, please contact:
Surface Transforms plc +44 151 356 2141
David Bundred, Chairman
Kevin Johnson, CEO
Isabelle Maddock, CFO
Zeus (Nominated Adviser and Joint Broker) +44 203 829 5000
David Foreman / James Edis / Ed Beddows (Investment Banking)
Dominic King (Corporate Broking)
Cavendish Capital Markets Ltd (Joint Broker) +44 20 7220 0500
Ed Frisby / Abigail Kelly (Corporate Finance)
Andrew Burdis / Harriet Ward (ECM)
About Surface Transforms
Surface Transforms plc. (AIM:SCE) develops and produces 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.
The Company holds the London Stock exchange's Green Economy Mark
For additional information please visit www.surfacetransforms.com
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