Surface Transforms : Half-year Financial Report

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

13 September 2021

Surface Transforms plc

("Surface Transforms" or "the Company")

Half-year financial results for the six months ended 30 June 2021

Surface Transforms (AIM: SCE) manufacturers of carbon fibre reinforced ceramic brake discs, announces its half-year financial results for the six months ended 30 June 2021.

Financial highlights:

• Revenue increased by 34% to £1.2m (H1-2020:£0.9m)
• Cash at 30 June 2021 was £17.2m (H1-2020:£2.0m)
• Gross profit increased by 27% at £0.7m (H1-2020:£0.6m)
• Total administrative expenses rose by 35% to £2.9m (H1-2020:£2.1m) as a result of increased customer testing costs, headcount and depreciation in anticipation of the commissioning of Production Cell One
• Loss before tax increased to £1.9m (H1-2020:£1.2m)
• Capital expenditure on property, plant and equipment was £0.8m (H1-2020:£0.3m) to which a further £3.7m of capital equipment purchase orders were contracted in the period
• Successfully raised £19m of new equity (after fees) in a heavily over-subscribed fund raise

Sales and Operational Highlights:

• Series production commenced for the Aston Martin Valkyrie
• Post balance sheet date, contract wins announced with a new customer, now described as OEM 10, of £20m and a follow-on order with an existing customer, OEM 5, of €5m
• Bringing our overall lifetime value, OEM order book to circa £70m sales
• Good progress on both commercial discussions and ongoing successful product testing with several other new and existing customers
• Production Cell One will be ready for the ramp up in sales forecast in Q4-2021
• Significant revision to the Company's manufacturing strategy which, inter-alia, is expected to: save £10m in the subsequent equipping of the Knowsley site; provide £50m of annual sales capacity in early 2023, an increase of £15m from previous capacity forecast (without new capital expenditure); and reduce our projected carbon footprint
• Strengthened the Board with the addition of two independent non-executive directors

Outlook

The Company now expects to enter a period of high growth, partially, but not solely based on a lifetime value OEM order book of circa £70m. Indeed, we repeat the statement made by the Chief Executive in the manufacturing strategy announcement of 1 September "at

the time of the fundraising we said that we thought there could be sufficient demand to fill the Knowsley factory by 2025 (£75m sales), albeit these projections are still uncontracted…we have now concluded that we may want this capacity by 2024."

However, the immediate 2021 outlook is driven by the background combination of customer start of production dates ("SOP") and the subsequent "ramp" of production from SOP to mature manufacturing volumes. In neither case can we be totally certain of the customers' projections. It is not uncommon for SOP dates to be delayed and the ramp varies both by customer and is specific to each individual customer circumstances.

These uncertainties are impacting our view of the outlook for 2021. Sales in the last quarter are dominated by the forecast SOP for OEM 8. As described below the SOP of our model derivative has slipped into Q1 2022, but as the customer's supply chain will always require our parts before the customer's SOP, the impact on Surface Transforms in the final months of this year is unclear. Discussions are continuing; however, in the extreme position of parts not being required until Q1 2022, this would shift approximately £2m of budgeted 2021 sales to a future date.

In contrast to these short-term uncertainties, the forecast for 2022 has become more robust. There are no major forecast SOPs in the year and the issue of the ramp for OEM 8 is offset by the commercial success of the car, demonstrated by the customer's higher than originally forecast order book. Nonetheless, using our policy that we only provide guidance based on firm contract awards we make no changes here and now to our 2022 revenue expectations.

However, we reiterate our previous statements, that we expect to be profitable in 2022.

Summary

The Company continues to announce contract wins with new and existing customers and is working on a significant number of unannounced projects. All these customer R&D projects are either going to plan or exceeding expectations.

The hard, detailed work of commissioning Cell One has continued, and the cell will be ready for production when needed to satisfy the budgeted ramp up of sales. Additionally, as part of the process for installing Cell Two, the Company has reviewed and subsequently adopted a new manufacturing strategy which will lead to the change from the Knowsley plant's modular plan to a single site, single production line concept. The implementation of this plan will provide £50m of annualised sales capacity in 2023 and if needed and with further capital expenditure, £75m of annualised sales capacity in 2024, shorter lead times with lower cash need and reduced projected carbon footprint.

There are some short term 2021 outlook concerns over the precise SOP date for the OEM 8 model and the shape of its subsequent production ramp, but these concerns cover a short period in the context of a sales opportunity that is increasing in size with the customer.

The Company continues to ascribe the highest priority to underpinning its strong Environmental, Social and Governance credentials. In the period, actions included strengthening the Board, incorporating a reduced carbon footprint as a key criterion for furnace selection, installing emission measuring equipment that exceeds regulatory requirements, increasing employment in a deprived area of the country and continuing to build our relationship with the local community.

The regulatory discussions and lobbying to include brake dust regulations in the new Euro 7 regulations accelerated in the period. There are no certainties to this process, but enhanced brake dust regulations would be beneficial to all carbon ceramic ("CC") disc suppliers.

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

David Bundred

Chairman

For enquiries, please contact:

Surface Transforms plc.

[phone]

David Bundred, Chairman

Kevin Johnson, CEO

Michael Cunningham CFO

Zeus Capital Limited (Nominated Advisor and Joint Broker) [phone]

David Foreman / Dan Bate / Jordan Warburton (Corporate Finance) Dominic King (Corporate Broking)

finnCap Ltd (Joint-Broker)

[phone]

Ed Frisby / Abigail Kelly (Corporate Finance)

Richard Chambers/Barney Hayward (ECM)

About Surface Transforms

Surface Transforms plc. (AIM:SCE) develop and produce carbon‐ceramic material automotive brake discs. The Company is the UK's only manufacturer of carbon‐ceramic brake discs, and only one of two mainstream carbon ceramic brake disc companies in the world, serving customers that include major OEMs in the global automotive markets.

The Company utilises its proprietary next generation Carbon Ceramic Technology to create lightweight brake discs for high‐performance road and track applications for both internal combustion engine and electric vehicles. While competitor carbon‐ceramic brake discs use discontinuous chopped carbon fibre, Surface Transforms interweaves continuous carbon fibre to form a 3D matrix, producing a stronger and more durable product with improved heat conductivity compared to competitor products; this reduces the brake system operating temperature, resulting in lighter and longer life components with superior brake performance. These benefits are in addition to the benefits of all carbon‐ceramic brake discs vs. iron brake discs: weight savings of up to 70%, longer product life, consistent performance, reduced brake pad dust and corrosion free.

For additional information please visit www.surfacetransforms.com

Financial Review:

Revenue in the six months ended 30 June 2021 increased to £1,207k (H1-2020:£902k) ahead of expectations, mainly reflecting higher than forecast invoicing of prototype parts and engineering services to OEM customers.

Gross profit increased to £747k (H1-2020:£590k) and gross margin was 62% (H1-2020:65%). Gross margin percentage reduced slightly but is expected to recover in the second half of the year as we see both the cost savings from the use of the new furnaces and volume purchasing effects from series production.

Administrative expenses before R&D costs, rose £353k to £1,281k (H1-2020:£928k) driven by both increased headcount and staff costs (£263k) and an increase in depreciation of £90k. Both increases are in anticipation of the commissioning of Production Cell One and were forecast at the time of the fundraising. Headcount rose by 22 staff in the six-month period and the Company expects to recruit a further 12 staff in the second half of the year.

Research expenses increased £395k to £1,607k (H1-2020:£1,212k). This increase reflects the significant growth in testing activity on new projects, including off-site test houses and prototypes for testing, where there is no customer contribution.

Cash at 30 June was £17,197k (December 2020: £1,058k), to which can be added £576k of R&D tax credit received in July. The 30 June 2021 balance reflects the February fundraise of £19m after fees.

The Company has also been awarded a Future Growth Fund loan from the local authority for £1m on favourable commercial terms repayable over 5 years.

Loss per share was 1.03p (H1-2020:0.82p).

Progress with potential OEM customers

Surface Transforms is undertaking testing with several OEMs, including existing customers and those who have not tested our products before. These OEMs wish to control the information flow on both this activity and the subsequent technology and supplier selection. Therefore, we only disclose names after our customers have done so and assign project names or numbers to respect that confidentiality.

In general, all the tests are either going to plan or exceeding expectations.

Electric vehicles: The technical characteristics of our product - notably light weight, significant reduction in brake dust, no brake fade and elimination of galvanic corrosion - are particularly relevant to electric vehicles ("EV") and thus whilst we are delighted that we continue to win contracts on internal combustion engine ("ICE") vehicles it is likely that by 2025 this EV segment will dominate our sales because it is currently dominating our project activity.

OEM 8: The Company won a £27.5m contract with this customer in 2020 and, at that time the customer's plan was standard fit on a new derivative of an EV model in their range. The orders for the car have greatly exceeded the customer's expectations, which in turn is expected to lead to higher volumes for Surface Transforms. The customer is now discussing with suppliers the introduction of CC

brakes through a "performance pack" version of the car. The discussions include seeking significantly higher capacity commitments. Whilst we cannot forecast the outcome of these discussions as the whole supply chain will be constrained by whichever single supplier has the greatest capacity constraint; it is nevertheless an encouraging development.

These changes and subsequent capacity discussions have led to a delay to SOP for our model derivative which is consuming the contingency that we built into the programme launch. These delays may impact current expectations of 2021 sales. If our timing contingency were to be exhausted and there were no sales to OEM 8 in 2021 this would reduce sales by £2m in the current year. We would expect 2022 sales to be higher than previously guided, however until the whole supply chain capacity discussions have concluded we are maintaining previous revenue guidance.

OEM 10: This new customer is a mainstream OEM and one of the largest in the world. It was therefore encouraging to win a £20m contract on an ICE car, forecast to launch in mid-2024. Fitment is standard on both axles of the car.

OEM5: This is a mainstream German OEM. We won our first €11m contract with them in 2019. The contract envisaged further awards as the technology had then been approved for general use across their wider vehicle range. The first potential award, in 2020, was a victim of the Covid resource issue as the planned facelift was cancelled. It is therefore encouraging that we won the first "carry-over" order with this customer, post balance sheet, in August 2021, worth €5m over 5 years starting in 2024. We now regard ourselves as 'back on track' and expect future "carry-over" awards from this customer in the future.

OEM 9: This potential new customer, announced during the fund raise, has delayed the SOP for our target car by one year to mid-2023. The dialogue with the customer is continuing and we expect to make further announcements in 2022. In the meantime, and in accordance with our general policy we have not included potential sales from OEM 9 in our forecasts.

OEM 3: This customer is testing our product for all divisions within their parent company and thus potentially extends to OEM 2 and 4 as well. The customer has a unique environmental test that Surface Transforms has been endeavouring to pass for some time. The Company has made good progress on this project in the period, indeed arguably more progress has been made in the last six months than in the last three years. The Company is currently in discussions with the customer with regard to our recent test results.

Aston Martin Valkyrie: It is most encouraging to report that Aston Martin has now started production with Surface Transforms delivering CC brake discs on this car. Production will continue into mid-2022.

Retrofit and Near OEM: Retrofit sales are fitment of our discs onto already registered cars replacing either the in-situ grey iron, or frequently, our competitor's CC discs. Near OEM sales are to a number of very low volume specialist manufacturers, some of whom make less than ten cars per year. Sales into these segments have been the bedrock of Surface Transforms over the past ten years.