Surface Transforms Regulatory News (SCE)

28 September 2020

Surface Transforms plc.

("Surface Transforms" or "the Company")

Half-year financial results for the six months ended 30 June 2020

Surface Transforms (AIM:SCE) manufacturers of carbon fibre reinforced ceramic materials, is pleased to announce its half-year financial results for the six months ended 30 June 2020.

Financial highlights:

Sales and Operational Highlights: 

Outlook

Despite the Covid 19 lockdown, trading has been better than expected. As a result, the Company reiterates that it now anticipates current FY 20 revenues will be approximately £2.0m.

The OEM 8 contract win increases sales expectations by over £3m in 2021 and £8m in 2022 (and the following two years). As recently announced, given this contract as well as the expectation of further, as yet unspecified, contract awards, the Company is investing in manufacturing support headcount and other costs over the next three years, which will progressively add approximately £2m to annual overheads in 2022 and thereafter.

Consequently, the Company reiterates that it is now forecasting positive profits after tax (including receipt of the R&D tax credit), a year earlier than previously announced, in 2021 and positive operating profit, before interest and tax, in 2022.

The Company continues to expect to announce further contract awards over the next six months.

Summary

During the period the Company accelerated its progress to becoming a profitable mainstream automotive supplier of carbon ceramic brake discs. This continued progress was achieved against the most difficult economic and operational conditions in recent memory.

Finally, I would like to conclude by recording the Board's appreciation of the outstanding contribution by all members of the team, particularly in the context of the Covid 19 pandemic. Thank You!

David Bundred

Chairman 

For enquiries, please contact:

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

Financial Review

Revenue in the period increased to £902k despite the Covid 19 pandemic occurring within the period. The growth was fuelled primarily by increased retrofit sales, which held up strongly during the pandemic. OEM sales were also higher in the period and near OEM sales broadly flat compared with the six months to June 2019.

Gross profit increased to £590k (H1-2019: £343k) and gross margin was 65.4% (H1-2019: 58.8%). The increase in margin was due to both better labour productivity and purchasing of raw materials, and is sustainable. Whilst future selling prices will fall, as volumes increase, this will be offset by further production efficiencies being generated as OEM Production Cell One becomes fully operational.

Administrative expenses rose by £173k to £928k (H1-2019: £755k) due in large part to some increased salary costs.

Research expenses increased by £149k to £1,212k (H1-2019: £1,063k) reflecting an increase in the number of customer projects.

The R&D tax credit reduced by £412k to £276k (H1-2019: £688k) following a change in accounting policy in 2019. Previously, the tax credit was recognised when received, but is now accrued in the year to which the tax credit relates. This transition led to the inclusion of two tax credits in the prior period. It had no impact on the quantum or timing of the cash receipt. As Surface Transforms advances into profitability, it is worth noting that the Group has substantial tax losses carried forward.

Within the statement of financial position, property, plant and equipment increased by a net £70k to £5,588k (December 2019: £5,518k) being capital expenditure of £277k in OEM Production Cell One offset by increased depreciation of £207k. Receivables fell by £368k to £950k partially reflecting the reversal of late customer payments noted in our financial results for the seven month period ended 31 December 2019. Within this June 2020 total, trade debtors were £185k and the provision for R&D tax credit was £596k, of which £334k was received in September 2020. Inventories fell by £85k to £921k (December 2019: £1,006k). Notwithstanding this welcome reduction, the Company still suffers from minimum order quantities on key input materials, disproportionate to historic sales levels; thus as sales increase, inventories should not rise at the same rate and the ratio of inventory to sales is therefore expected to improve.

The Company had also taken advantage of HMRC support on PAYE time to pay to improve cash flow during the coronavirus outbreak. At the balance sheet date, Surface Transforms had authorised excess PAYE payments of £246k due. These were settled in full in July.

In the period, the Company raised £2,206k after fees in an over-subscribed equity placing and open offer.

Progress with potential OEM customers

Surface Transforms is undertaking testing on a number of projects for OEMs, including for both existing customers and others who have not tested our products before. The Company believes that it is not commercially appropriate to provide further details of these projects in advance of contract award, but does note that whilst the Covid 19 lockdown has impacted almost all project timings and start of production (SOP), the implications of which have previously been disclosed, the tests are validating the superior performance of Surface Transforms' discs across a range of key measures.

Consequently, the Company continues to expect that it will be able to announce further contract awards over the next six months.

Progress on Operations

Over the past three years the Company has invested over £6m to increase capacity from circa £4m sales, in what we describe as the small volume production cell (SVP) to an overall site capacity of circa £20m sales by building what we describe as OEM Production Cell One. The site has a footprint that will facilitate duplications of OEM Production Cell One, with the overall potential, in Knowsley and with further investment, of approximately 100,000 discs. The operational task has therefore been, and continues to be, to improve productivity and repeatability in SVP - the initial learning curve - whilst installing and bringing OEM Production Cell One into full operation thus providing the capacity required for the already awarded OEM contracts that commence in early 2021.

Statement of Total Comprehensive Income

For the six months ended 30 June 2020

* Government grants received relate to amounts received under the Coronavirus Job Retention Scheme

Statement of Financial Position

As at 30 June 2020

Statement of Cash Flow

For the six months to 30 June 2020

Statement of Changes in Equity

For the six months ended 30 June 2020

SURFACE TRANSFORMS PLC

NOTES

1. Accounting policies

The interim financial statements are the responsibility of the Directors and were authorised and approved by the Board of Directors for issuance on 28 February 2020.

Basis of preparation

Surface Transforms plc is a public limited liability company incorporated and domiciled in England & Wales. The financial information is presented in Pounds Sterling (£) which is also the functional currency. The Company's accounting reference date is 31 December.

These interim condensed financial statements are for the six months to 30 June 2020 and have been prepared in accordance with IAS 34, 'Interim Financial Reporting' as adopted by the EU. They do not include all the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last consolidated financial statements as at and for the seven month period ended 31 December 2019.

These interim results for the period ended 30 June 2020, which are not audited; do not comprise statutory accounts within the meaning of section 435 of the Companies Act 2006.

Full audited accounts of the Company in respect of the period ended 31 December 2019, which received an unqualified audit opinion and did not contain a statement under section 498(2) or (3) (accounting record or returns inadequate, accounts not agreeing with records and returns or failure to obtain necessary information and explanations) of the Companies Act 2006 have been delivered to the Registrar of Companies.

The accounting policies used in the preparation of the financial information for the six months ended 30 June 2020 are in accordance with the recognition and measurement criteria of IFRS as adopted by the EU and are consistent with those which will be adopted in the annual statutory financial statements for the year ending 31 December 2020.

Revenue recognition

Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer (usually on dispatch of the goods), the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Government grants

Capital grants are initially recognised as deferred income and credited to the statement of total comprehensive income over the life of the asset to which it relates.

Grants received under the Governments Corona virus job retention scheme are recognised in the statement of total comprehensive income on a systematic basis over the period in which the Company recognises the related costs for which the grants are intended to compensate.

Leases and right of use assets

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

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

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

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

Segmental reporting

IFRS 8 "Operating Segments" requires that the segments should be reported on the same basis as the internal reporting information that is provided to, and regularly reviewed by, the chief operating decision-maker, whom the Group has identified as the CEO.

The Board has reviewed the requirements of IFRS 8, including consideration of what results and information the CEO reviews regularly to assess performance and allocate resources, and concluded that all revenue falls under a single business segment.

The Directors consider that the Group does not have separate divisional segments as defined under IFRS 8. The CEO assesses the commercial performance of the business based upon consolidated revenues; margins and operating costs and assets are reviewed at a consolidated level.

Estimates

The preparation of half-yearly financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these condensed consolidated half-yearly financial statements, the significant judgments made by management in applying the Group's accounting policies and the key sources of estimation uncertainty are expected to be the same as those that will be adopted in the annual statutory financial statements for the year ending 31 December 2020.

Going concern

These interim financial statements have been prepared on a going concern basis|. Whilst the Group incurred a net loss of £1,175k during the period, the Group's forecasts and projections, taking into account reasonable possible changes in trading performance, show that the Group has sufficient financial resources, to meet the Group's liabilities as and when they fall due for a period of twelve months from the date of this statement.

2. Taxation

Analysis of credit in the period

The effective rate of tax for the period is lower than the standard rate of corporation tax in the UK of 20 per cent, principally due to losses incurred by the Group.

The significant reduction in tax in the six months to 30 June 2020 is due to the fact that in the six months to 30 June 2019 the Company changed its accounting policy to move from a cash basis for tax to an accruals basis. The £688k in the six months to 30 June 2019 therefore includes both the cash receipt relating to the year ended 30 May 2018 as well as the accrued tax credit for the six month period.

3. Loss per share

Loss per ordinary share is based on the Company's loss for the financial period of £1,175k (30 June 2019: £837k loss; 31 December 2019: £1,317k loss). The weighted average number of shares used in the basic calculation is 140,650,681 (31 December 2019: 136,036,376; 30 June 2019: 130,711,912).

The calculation of diluted loss per ordinary share is identical to that used for the basic loss per ordinary share. This is because the exercise of share options would have the effect of reducing the loss per ordinary share and is therefore not dilutive under the terms of International Accounting Standard 33 "Earnings per share".

4. Segment reporting

The Company considers it offers product technology namely carbon fibre re-enforced ceramic material which is machined into different shapes depending on the intended purpose of the end user.

Revenue by geographical destination is analysed as follows: