Surface Transforms : Unaudited interims for the 6 m/e 30 November 2019

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Surface Transforms PLC - SCE Unaudited interims for the 6 m/e 30 November 2019 Released 07:00 28-Feb-2020

RNS Number : 4226E

Surface Transforms PLC

28 February 2020

The information communicated within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

28 February 2020

Surface Transforms plc.

('Surface Transforms' or the 'Company')

Unaudited interim results for the six months ended 30 November 2019

Surface Transforms (AIM: SCE) manufacturers of carbon fibre reinforced ceramic materials, announces its unaudited interim results for the six months ended 30 November 2019.

As previously reported, the Company has changed its accounting year-end date to 31 December. To assist with the transition this six-month statement also includes certain unaudited results for the seven months to 31 December 2019. The full audited results and report for the seven-month period to 31 December 2019 will be issued on 30 March 2020.

Financial highlights (seven months ended 31 December 2019)

· Revenue increased 183% to £1,451k (7 months to 31 December 2018: £512k).

· Gross profit increased to £868k, representing a gross margin of 60%

· Cash at 31 December 2019 was £770k (31December 2018: £319k)

Financial highlights (six months ended 30 November 2019)

· Revenue increased 102% to £1,029k (H1-2018: £509k)· Gross profit in the six month period increased 95% to £630k (H1-2018: £322k)· Loss before and after tax in the six month period decreased to £1,302k (H1-2018: £1,509k)

· Capital expenditure on property, plant and equipment of £582k (H1-2018: £144k)mainly related to the installation of Production OEM Cell One

· Inventory at 30 November 2019 was £1,120k (31 May 2019: £1,162k)

Sales and Operational highlights

· Secured an €11.8m contract over seven years from major German automotive OEM 5 with start of production ('SOP') in October 2021. Discussions continue regarding follow on business

· Further SOP delays of contracts with British automotive customer OEM 6

· Won and delivered a £400k contract with OEM 1, another British automotive customer. Discussions continue regarding follow on business

· Continued progress on testing for OEM 3

· Received full regulatory approval from the Environmental Agency for the Knowsley site

Financial Review

Revenue in the seven months to 31 December 2019 increased to £1,451k (seven months to 31 December 2018: £512k) in part due to the £400k order from OEM 1, whilst the Company is also pleased to report increases in near OEM sales, which we believe to be sustainable. Sales for the six months to November 2019 were £1,029k (H1-2018: £509k). The high sales in December 2019 reflected the production catch up situation on near OEM and aftermarket sales as the prior months of September and November had been devoted to the OEM 1 order.

Gross profit in the seven months to 31 December 2019 increased to £868k whilst for six months period to 30 November 2019, increased to £630k (H1-2018: £322k). Gross profit margin was 61% (H1-2018: 63%)but is expected to improve in 2020 as OEM Production Cell One cost reductions come on stream.

The Company has adopted IFRS 16 in the period, capitalising operating leases. The major lease for the Company is the rent on the Knowsley site; all other leases are minimal. The major impact of IFRS 16 on the Company's financial statements, is on the Balance Sheet creating right of use assets totalling £1.5m together with corresponding liabilities. The impact on the Income Statement is to exchange a reduction in the rent (hitherto treated as an expense) for an increase in interest and depreciation. In the six months to 30 November 2019 this added a net £29k to the loss for the year before and after tax. These IFRS 16 adjustments have no impact on cash. To facilitate comparison, the 2018 comparatives have been restated to reflect the impact of IFRS 16 had it been applied in that period as well.

Administrative expenses rose by £134k to £864k (H1-2018: £730k) largely driven by above budget plant repair costs of £66k, certification and consultancy costs of £45k to achieve environmental agency approval together with the introduction of IFRS 16. The certification costs will not recur.

Research expenses increased to £1,294k (H1-2018: £1,068k)of which the major elements were significant increases in the number of prototypes being tested along with development of the furnace process in support of cost reduction.

Cash at 31 December 2019 was £770k (December 2018: £319k),to which can be added £425k customer payments received in the first week of January; the corresponding cash balance at the end of the half-year was £81k (31 May 2019: £1,925k). Both periods were impacted by a combination of extended customer credit terms and subsequent late payment. The significant cash inflow in December and January reflected payment of these overdue sums and December receipt of the R&D tax credit. Inventory reduction was less than planned in 2019 but is expected to reduce further during 2020.

Loss per share was 0.96p (H1-2018: 1.24p).

Progress with potential OEM Customers

The Company continues to test products with customers as described in previous announcements and still expects to make further contract announcements during 2020:

OEM 5:In the period the Company was notified of its selection as a tier one supplier of a carbon ceramic disc to the major German automotive Company OEM 5. The selection is to be the sole supplier of the brake disc option on one axle of a new model. Lifetime revenue on this car is estimated to be €11.8m commencing late 2021. Annual revenue is estimated to be €2.0m per year before tapering off during 2026.

In addition, whilst this selection is the first with German OEM 5 the commercial understanding embraces the opportunity to be selected for further multiple platforms in the customer's portfolio over time - pricing has been agreed providing a link between increasing volumes and decreasing unit prices. These potential awards could generate revenues of many times the value of this first contract.

The customer is now completing the system integration tasks required to bring the car into production. This work is proceeding to plan.

OEM 6: Notwithstanding recent customer announcements on the SOP of future models relevant to Surface Transforms, the Company is maintaining guidance on overall timing of Company revenues. On the first contract we won with them in 2017 the customer now expects to enter production in the summer of 2020; however this delay had been anticipated by the Company and is already reflected in the Company's previously announced assumptions and revenue guidance.

Similarly the customer has announced SOP delays on the second car on which Surface Transforms is a nominated supplier from the fourth quarter of 2021 to the second half of 2022. Again, the Company had previously included a general overall delay contingency to provide against any such risk.

OEM 1:In the period the Company both received and delivered a £400k order for carbon ceramic discs on a track car to a major high performance British automotive Company.

The Company is in discussions with the customer on further opportunities.

OEM 3: Work continues on the product enhancements to meet the customer's unique environmental test. Progress has been good with particular focus on ensuring that a capable production process matches the development activities. The Company is now in discussions on whether this enhanced product is sufficiently advanced for approval by OEM 3 for nomination on particular future programmes, in parallel to continuing further process improvement to widen the potential for nominations.

Other OEMs. The Company continues constructive discussions with a number of other OEMs, some of whom are now testing our product for the first time.

Knowsley Facility

OEM Production Cell One:All the new furnaces have now demonstrated functional capability and, indeed, some are being used to contribute to Small Volume Cell production output, thereby taking advantage of superior technology and lower production costs. The key task over the next few months is to demonstrate full systems integration of all the machines in the cell.

Environmental permits: The Company has now received full regulatory approval from the Environmental Agency for all technologies, including furnaces, on the Knowsley site.

2019 production surge: The success in delivering the £400k order for OEM 1 in a very limited period was a significant achievement by the, relatively new, operations team. Apart from the obvious customer relationship and financial benefits arising from this order, the 'production surge' was a very valuable learning experience for us in respect to both the Company's internal processes and supply chain. Where weaknesses were exposed, remedial actions have either been addressed or are in advanced stages of consideration.

Cost reductions: The Company continues to see continuous reduction in manufacturing cost as a crucial key ingredient of future success in the automotive industry. When OEM Production Cell One goes live in 2020, the Company will have achieved its original plan to halve production costs. The Company will not rest on this milestone with further cost reduction initiatives under active consideration.

Outlook

There are no changes to overall revenue guidance. Whilst OEM 6 has announced a number of changes to SOP on important cars for the Company, these changes had been broadly anticipated in internal forecasts.

The Board continues to expect gross margin percentages and overheads to be in line with previous guidance. However, the adoption of IFRS 16 will increase previously stated forecast losses by approximately £48k in 2020, £44k in 2021, and £39k in 2022. These IFRS 16 adjustments have no impact on cash.

Summary

Surface Transforms continues its journey from a development company to a mainstream volume automotive supplier with a site capable of revenues of £50m per year in a market that could ultimately reach £2 billion.

The Board maintains previous guidance that, with the recent awards of multi year, multi million revenue contracts, the Company will reach break-even EBITDA (including the tax credit) in H2 2020, positive EBITDA (including the tax credit) in 2021 and profit before tax in 2022.

In 2020 we expect to build on this foundation by winning further contracts, completing the system integration of OEM Production Cell One and begin delivering both production and development parts on the new contracts.

Finally, may I conclude by recording the Board's appreciation of the outstanding contribution by all members of staff. Thank You!

David Bundred

Chairman

For enquiries, please contact:

Surface Transforms plc.

Kevin Johnson, CEO [phone]

Michael Cunningham CFO

David Bundred, Chairman

Cantor Fitzgerald Europe (Nomad & Joint-Broker) [phone]

David Foreman / Michael Boot / Adam Dawes (Corporate Finance)

Caspar Shand-Kydd / Maisie Atkinson (Sales)

finnCap Ltd (Joint-Broker) [phone]

Ed Frisby / Giles Rolls (Corporate Finance)

Richard Chambers (Corporate Broking)

For further Company details, visitwww.surfacetransforms.com

Statement of Total Comprehensive Income

			RESTATED	RESTATED
	Six Months	Seven Months	Six Months	Year
	Ended	Ended	Ended	Ended
	30-Nov-19	31-Dec-19	30-Nov-18	31-May-19
	£'000	£'000	£'000	£'000
	Unaudited	Unaudited	Unaudited	Unaudited
Revenue	1,029	1,451	509	1,002
Cost of Sales	(399)	(583)	(187)	(385)
Gross Profit	630	868	322	617
Administrative Expenses:
Before research and development costs	(864)	(1,063)	(730)	(1,514)
Research and development costs	(1,294)	(1,502)	(1,055)	(2,039)
Total administrative expenses	(2,158)	(2,566)	(1,785)	(3,553)
Other operating income
Operating loss before non recurring items	(1,528)	(1,698)	(1,463)	(2,936)
Non-recurring items	0	0	(3)	0
Financial Income	1	1	1	2
Financial Expenses	(49)	(63)	(44)	(96)
Loss before tax	(1,576)	(1,760)	(1,509)	(3,030)
Taxation	274	443	0	921
Loss for the year after tax	(1,302)	(1,317)	(1,509)	(2,109)
Total comprehensive loss for the year attributable to members	(1,302)	(1,317)	(1,509)	(2,109)
Loss per ordinary share
Basic and diluted	(0.96)p	(0.97)p	(1.24)p	(1.68)p

Statement of Financial Position

			RESTATED	RESTATED
	Six Months	Seven Months	Six Months	Year
	Ended	Ended	Ended	Ended
	30-Nov-19	31-Dec-19	30-Nov-18	31-May-19
	£'000	£'000	£'000	£'000
	Unaudited	Unaudited	Unaudited	Unaudited
Non-current Assets
Property, plant and equipment	4,356	4,336	4,069	3,921
Right of use assets	1,190	1,182	1,290	1,239
Intangibles	173	175	218	202
	5,719	5,694	5,577	5,362
Current assets
Inventories	1,120	1,006	1,062	1,162
Trade and other receivables	1,787	1,317	619	895
Cash and cash equivalents	81	770	745	1,925
	2,988	3,093	2,426	3,982
Total assets	8,707	8,787	8,003	9,344
Current liabilities
Other interest bearing loans and borrowings	(68)	(118)	(65)	(88)
Loans associated with right of use assets	(138)	(138)	(137)	(137)
Trade and other payables	(934)	(1,028)	(478)	(584)
	(1,140)	(1,284)	(680)	(809)
Non-current liabilities
Government Grants	(200)	(200)	(200)	(200)
Liabilities associated with right of use assets	(1,218)	(1,207)	(1,274)	(1,244)
Other interest bearing loans and borrowings	(531)	(476)	(357)	(270)
Total liabilities	(1,949)	(1,883)	(1,831)	(1,714)
Net assets	5,618	5,618	5,493	6,822
Equity
Share capital	1,361	1,361	1,230	1,360
Share premium	20,712	20,712	18,972	20,704
Capital reserve	464	464	464	464
Retained loss	(16,918)	(16,917)	(15,175)	(15,706)
Total equity attributable to equity shareholders of the company	5,618	5,620	5,490	6,822

Statement of Cash Flow

			RESTATED	RESTATED
	Six Months	Seven Months	Six Months	Year
	Ended	Ended	Ended	Ended
	30-Nov-19	31-Dec-19	30-Nov-18	31-May-19
	£'000	£'000	£'000	£'000
	Unaudited	Unaudited	Unaudited	Unaudited
Cash flow from operating activities
Loss after tax for the year	(1,302)	(1,317)	(1,509)	(2,109)
Adjusted for:
Profit on disposal of property plant and equipment	0	0	0	0
Depreciation and amortisation charge	239	290	209	442
Equity settled share-based payment expenses	91	106	80	146
Financial expense	49	63	44	96
Financial income	(1)	(1)	(1)	(2)
Taxation	0	(443)	0	(921)
	(924)	(1,302)	(1,178)	(2,348)
Changes in working capital
Decrease/(increase) in inventories	42	157	(206)	(307)
Decrease/(increase) in trade and other receivables	(892)	(422)	157	281
Increase/(decrease) in trade and other payables	350	444	(252)	(206)
	(1,424)	(1,123)	(1,479)	(2,580)
Taxation received	0	443	0	521
Net cash used in operating activities	(1,424)	(681)	(1,479)	(2,059)
Cash flows from investing activities
Acquisition of tangible and intangible assets	(597)	(622)	(156)	(175)
Proceeds from disposal of property, plant and equipment	0	0	0	0
Net cash used in investing activities	(597)	(622)	(156)	(175)
Cash flows from financing activities
Proceeds from issue of share capital, net of expenses	9	9	1,466	3,328
Payment of finance lease liabilities	(63)	(53)	(33)	3
Proceeds from long term loans	279	253	66	0
Interest received	1	1	2	2
Interest paid	(49)	(63)	(44)	(96)
Net cash generated from financing activities	177	147	1,457	3,236
Net (decrease)/increase in cash and cash equivalents	(1,844)	(1,155)	(178)	1,002
Cash and cash equivalents at the beginning of the period	1,925	1,925	923	923
Cash and cash equivalents at the end of the period	81	770	745	1,925

Statement of Changes in Equity

	Share capital	Share premium account	Capital reserve	Retained loss	Total
	£'000	£'000	£'000	£'000	£'000
Balance as at 31 May 2019	1,360	20,704	464	(15,707)	6,821
Comprehensive income for the year
Loss for the year				(1,302)	(1,302)
Total comprehensive income for the year	-	-	-	(1,302)	(1,302)
Transactions with owners, recorded directly to equity
Shares issued in the year	1	8			9
Equity settled share based payment transactions				91	91
Total contributions by and distributions to the owners	1	8	-	91	100
Balance at 30 November 2019	1,361	20,712	464	(16,918)	5,618

	Share capital	Share premium account	Capital reserve	Retained loss (Unaudited)	IFRS16 Impact	Restated Retained loss (Unaudited)	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 31 May 2018	1,140	17,596	464	(13,652)	(91)	(13,743)	5,457
Comprehensive income for the year
Loss for the year				(1,482)	(27)	(1,509)	(1,509)
Total comprehensive income for the year	-	-	-	(1,482)	(27)	(1,509)	(1,509)
Transactions with owners, recorded directly to equity
Shares issued in the year	90	1,445					1,535
Cost of issue off to share premium		(69)					(69)
Equity settled share based payment transactions				76		76	76
Total contributions by and distributions to the owners	90	1,376	-	76	-	76	1,542
Balance as at 30 November 2018	1,230	18,972	464	(15,058)	(118)	(15,176)	5,490

	Share capital	Share premium account	Capital reserve	Retained loss (Audited)	IFRS16 Impact	Restated Retained loss (Unaudited)	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 31 May 2018	1,140	17,596	464	(13,652)	(91)	(13,743)	5,457
Comprehensive income for the year
Loss for the year				(2,059)	(50)	(2,109)	(2,109)
Total comprehensive income for the year	-	-	-	(2,059)	(50)	(2,109)	(2,109)
Transactions with owners, recorded directly to equity
Shares issued in the year	213	3,228					3,441
Share options exercised	7	63					70
Cost of issue off to share premium		(183)					(183)
Equity settled share based payment transactions				145		145	145
Total contributions by and distributions to the owners	220	3,108	-	145	-	145	3,473
Balance as at 31 May 2019	1,360	20,704	464	(15,566)	(141)	(15,707)	6,821

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

The Company is a public limited liability Group 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 November 2019. They have not been prepared in accordance with IAS 34, Interim Financial Reporting that is not mandatory for UK AIM listed companies, in the preparation of this half-yearly financial report. While the financial information included has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), these interim results do not contain sufficient information to comply with IFRS.

These interim results for the period ended 30 November 2019, 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 year ended 31 May 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 and 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 November 2019 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 2019.

Accounting for Right of Use Assets

IFRS 16 requires the company to capitalise assets to which it has the right of use. Assets are then depreciated and implicit interest charged to the P&L. The company has followed accepted guidance in the preparation of these charges. The impact of the standard is to accelerate the charge to the P&L of the lease liability and to reduce expenses and increase interest and depreciation charges. The only significant right of use asset applicable to the company is the rent payable on the Knowsley facility. The actual rent payable remains as previously expected.

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 which will be adopted in the annual statutory financial statements for the year ending 31 December 2019

Going concern

The financial statements have been prepared on a going concern basis that the Directors believe to be appropriate. Whilst the Group incurred a net loss of £1,298k during the period, the Directors are satisfied that sufficient cash is available to meet the Company's liabilities as and when they fall due for at least 12 months from the date of signing the half yearly report.

2. Taxation

Analysis of credit in the period

	Six months ended	Seven months ended	Six months ended	Year ended
ended
	30-Nov	31-Dec	30-Nov	31-May
	2019	2019	2018	2019
	£'000	£'000	£'000	£'000
(unaudited)	(unaudited)	(unaudited)	(audited)
UK Corporation tax
Current tax on income for the period	-	-	-	-
Research and development tax in respect of prior years	-	123	-	521
Research and development tax allowances for current year	274	320	-	400
	274	443	-	921

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

The potential deferred tax asset relating to losses has not been recognised in the financial statements because it is not possible to assess whether there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

3. Loss per share

	Six months ended	Seven months ended	Restated Six months ended	Restated Year
ended
	30-Nov	31-Dec	30-Nov	31-May
2019	2019	2018	2019
(unaudited)	(unaudited)	(unaudited)	(unaudited)
	Pence	Pence	Pence	Pence
Loss per share:
Basic and diluted	(0.96)	(0.96)	(1.24)	(1.68)

Loss per ordinary share is based on the Company's loss for the financial period of £1,302k (30 November 2018: £1,505k loss; 31 May 2019: £2,100 loss). The weighted average number of shares used in the basic calculation is 136,025,765 (31 May 2019: 125,184,218; 30 November 2018: 121,756,727).

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

Due to the startup nature of the business the Company is currently focused on building revenue streams from a variety of different markets. As there is only one manufacturing facility, and as this has capacity above and beyond the current levels of trade, there is no requirement to allocate resources to or discriminate between specific markets or products. As a result, the Company's chief operating decision maker, the Chief Executive, reviews performance information for the Company as a whole and does not allocate resources based on products or markets. In addition, all products manufactured by the Company are produced using similar processes. Having considered this information in conjunction with the requirements of IFRS 8, as at the reporting date the Board of Directors has concluded that the Company has only one reportable segment that being the manufacture and sale of carbon fibre materials and the development of technologies associated with this.

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

Revenue by geographical destination is analysed as follows:

	Six Months Ended	Seven Months Ended	Restated Six Months Ended	Restated Year Ended
	30-Nov-19	31-Dec-19	30-Nov-18	31-May-19
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
	£'000	£'000	£'000	£'000
United Kingdom	745	963	112	220
Rest of Europe	90	165	168	492
United States of America	163	251	216	269
Rest of World	30	72	12	21
	1,029	1,451	509	1,002

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [e-mail] or visit www.rns.com.

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Unaudited interims for the 6 m/e 30 November 2019 - RNS