Surface Transforms plc. ("Surface Transforms" or "the Company") Half-year financial results for the six months ended 30 November 2017

Transcription

1 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. 27 February 2018 Surface Transforms plc. ("Surface Transforms" or "the Company") Half-year financial results for the six months 30 November 2017 Surface Transforms (AIM:SCE) manufacturers of carbon fibre reinforced ceramic materials, announces its half-year financial results for the six months 30 November Financial highlights: Revenue increased to 524k (H1-2016: 327k) Loss before and after tax increased to 1,294k (H1-2016: 976k) Cash at 30 November 2017 was 3,275k (31 May 2017: 1,532k) Successful equity placing raising 3,439k (net of expenses) in the period Capital expenditure on property, plant and equipment of 684k (H1-2016: 680k) mainly related to the installation of Production OEM cell 1 Inventory of 735k (31 May 2017: 507k) Sales and Operational Highlights: Small Volume Production (SVP) cell is in steady state production Continuing progress on installation of Production OEM cell 1 including purchase of the ceramic infiltration furnaces (albeit post period end cash transaction) Start of production (SOP) on the Aston Martin Valkyrie project scheduled for early Additional demand from Aston Martin (mainly relating to dealer spares) has added an additional 1m of revenue to the programme Testing to satisfy OEM Three road car requirements continues with only one product test yet to be completed; the Company still believes it can meet the customer s requirements and expects to conclude this testing when required during this year As previously notified OEM Three and Five will conduct their VDA 6.3 quality processes audit after the conclusion of the product testing Whilst the Company successfully completed OEM Three s testing requirements for its racetrack car, they have changed the racetrack cars requirements, that necessitates a redesign (and therefore re-test) of the carbon ceramic disc. Management therefore consider it unlikely this product will be launched in the current race season Near OEM sales were flat in the period, however the Company now expects further growth in this market in the next two years, particularly in the specialist US conversion segment A project plan received from the Company s target airframe customer indicates a delayed SOP of the upgraded aircraft to January This reduces revenues by approximately 1.4m over the two financial years FY 2019 and FY 2020; programme and financial offset discussions are continuing Financial Review: The increase in revenue from FY 2016 has been delivered primarily from additional sales of aftermarket products, with sales to near OEM customers flat. Development revenues have been low in the first half of the year but are expected to increase in the second half as development income from the Aston Martin project begins in earnest. Revenue of 524k were 50k less than notified in the trading update issue on 20 November This reflects a supply chain disruption in the last week of the trading period that was quickly rectified in the second half trading period and has no impact on the expected year end numbers.

2 Gross profit increased to 286k (H1-2016: 201k) and gross profit margin was 55% (H1-2016: 61%), the movement being a function of product mix, with aftermarket kits having lower margin than development income. Administrative expenses rose by 115k to 547k (H1-2016: 432k) primarily due to increased costs of the new site combined with upgrades to the IT infrastructure in the business and increased headcount. Research expenses rose to 1,033k (H1-2016: 750k) due to continuing focus on delivering final product to target OEM customers. The increase was primarily due to additional salaries to increase the available resource for these intensive programs. An R&D tax credit of 464k (H1-2016: 356k) was received in the last week of January 2018 outside the trading period reported. Total loss for the period was therefore 1,294k (H1-2016: 976k). Cash at the end of the half-year was 3,275k (31 May 2017: 1,532k). In the period 3,439k of new share capital was raised of which 684k (H k) was exp in the period on capital equipment relating to OEM cell 1. 23,750,460 of new shares were issued at a price of 15.5p each which increased share premium by 3.2m. Loss per share was 1.17p (H1 2016: 1.08p). Outlook The Company continues to expect year-end sales to be in line with management expectations. Research expenditure will continue at its current higher level and the increased site costs reflect the on-going higher costs of the new site. These increased costs are already reflected in existing Company budgets and the Company expects to finish the year with a loss in line with budget. The Company s projections indicate that there is sufficient cash to reach the point of operational cash generation in FY Progress with potential OEM Customers The key metric for the Company continues to be the advancement of the game changing contracts where the current status is as follows: Automotive Aston Martin Valkyrie: SOP remains early 2019 and the inclusion of contracted dealers spares demand has added 200k to FY 2019 projections and 800k in FY This initial spares demand is firm and continuing on-going demand is expected thereafter, although the quantum of the future demand is difficult to forecast as much depends on the mix between track use and road use by the owners. The Company also continues to believe that there is potential to win further models beyond the Valkyrie but it is too early to begin detailed discussions. German OEM Three: There are two projects underway for this customer volume road car and the specialist racetrack car. In respect to the road car, there remains only one outstanding test to be completed, even though completion of this test has been outstanding for some time. As part of the process the Company has been making a number of parallel changes to the product that have now been combined into a series of near final discs. The Company continues to believe that tangible engineering progress has been achieved and that the testing will be completed in time for 2018 selection on the Customer s next product launch.

3 Aerospace Testing had been completed for the racetrack car but the customer has, for reasons outside the Company s control, changed the size of a key adjacent component that requires Surface Transforms to offer up a reduced size disc. This smaller size requires testing and therefore it seems unlikely that the Surface Transforms product will be introduced in the current race season. British OEM Two and German OEM Four: These are sister companies of OEM 3 and will follow the engineering release of the technology into the Group by OEM Three. German OEM Five: has repeated its wish to use the Company s products, the customer having completed some testing but with further testing remaining. None of the testing is considered onerous by the Board and our products have passed equivalent tests in other development programmes. The Company has now received a project plan from the airframe manufacture building the target aircraft, indicating a start of production of the upgraded aircraft in January This is a further delay from the previously notified January 2019 date (and two years from the original January 2018 date); it has the effect of reducing total revenue by approximately 500k in FY 2019 and 900k in FY The Board however remain optimistic that some of these lost revenues will be offset by development income in what is now effectively a re-certification programme - as the Company s production processes, and raw material suppliers have changed, the product will require a full re-certification. In line with normal aerospace military practice this process will be customer funded with reasonable profit margins. Knowsley Facility As a reminder the footprint of the Knowsley facility has the potential for anticipated output of 100,000 discs in five replica cells plus the Small Volume Production (SVP) cell. The current planning and finance availability is focused on SVP and the first of these cells. Small Volume Production Cell: This cell effectively transferred from Ellesmere Port - can now be considered steady state albeit with continuing potential for improvement in daily flow rate, establishment of lean manufacturing disciplines, and reduction in the high inventory levels. The Aston Martin contract will be produced in the SVP cell. OEM Cell 1: All the key technology furnaces are under final test either in Knowsley or at the suppliers premises. In the last six months, the Company has purchased and is currently installing and testing the ceramic infiltration furnaces, the final piece of the furnace jigsaw. With all the furnaces and services in place, the only outstanding items are the machine tools, which are off the shelf with short lead times. The Company expects to achieve pre production capability and volume capacity in the current calendar year to facilitate off tool samples, the key criteria for entering the volume production stage. VDA 6.3 Quality Requirement: This is the audit process used by the German OEMs to calibrate the Company s conformance to quality processes. Both German OEM Three and German OEM Five have told the Company that they will undertake the audit when the product testing is complete which is currently expected to be around mid-year. IATF 16949:2016: In parallel to German OEM activity, the British automotive manufacturers have launched an upgrade of their quality standard (previously TS 16949) which now broadly replicates the German VDA standards. All British automotive companies have to achieve this standard by September The Surface Transforms audit of this transition is in two phases - March 2018 and May As the processes and procedures are almost identical to VDA requirements, the Company expects to pass this audit.

4 Summary Surface Transforms continues its journey from a development company to a mainstream volume automotive supplier with a site capable of production volumes of 100,000 discs, revenues of 50m and firm and repeatable orders. The past six months has, overall, been one of steady progress rather than major breakthroughs. In this respect the testing on the OEM Three product and the slow but sure installation of the new furnaces in the OEM cell typify the frustrating pace but nonetheless continuing progress, whereas the size of the additional Aston Martin spares order hints at the revenue potential from this marketplace. The Board expects to continue this progress with news of conclusion of the German OEM Three testing and further detail on SOP with German OEM Five. The Board expect trading for the full year will be in line with current management expectations. However I cannot conclude without recording the Board s appreciation of the outstanding contribution by all members of staff. Thank You! David Bundred Chairman 27 February For enquiries, please contact: Surface Transforms plc. Kevin Johnson, CEO Michael Cunningham CFO David Bundred, Chairman Cantor Fitzgerald Europe (Nomad & Joint-Broker) David Foreman / Richard Salmond (Corporate Finance) Alex Pollen (Sales) finncap Ltd (Joint-Broker) Ed Frisby / Giles Rolls (Corporate Finance) Stephen Norcross / Richard Chambers (Corporate Broking) For further Company details, visit Statement of Total Comprehensive Income For the six months 30 November 2017

5 30-Nov Nov 2016 Year 31-May 2017 (audited) Note Revenue Cost of sales (238) (126) (274) Gross profit Administrative expenses: Before research costs (547) (432) (1,045) Research costs (1,033) (750) (1,916) Total administrative expenses (1,580) (1,182) (2,961) Other operating income Operating loss (1,294) (981) (2,533) Financial income Financial expenses Loss before tax (1,294) (976) (2,528) Taxation Loss for the period after tax (1,294) (976) (2,172) Total comprehensive loss for the period attributable to members (1,294) (976) (2,172) Loss per ordinary share Basic and diluted 3 (1.17) (1.08p) (2.41p) EBITDA (including tax credits and excluding share-based payments*) (1,107) (874) (640) * EBITDA numbers, including that for the year 31 May 2017, are unaudited Statement of Financial Position

6 As at 30 November 2017 As at As at As at 30-Nov Nov May 2017 Non-current assets Property, plant and equipment (audited) ,962 1,242 2,415 Intangibles Total non-current assets 3,098 1,242 2,551 Current assets Inventories Trade and other receivables 510 1, Cash and cash equivalents 3,275 2,698 1,532 Total current assets 4,520 4,654 2,404 Total assets 7,618 5,896 4,955 Current liabilities Other interest-bearing loans and (2) (18) (12) borrowings Trade and other payables (1,024) (845) (685) Total current liabilities (1,026) (863) (697) Non-current liabilities Other interest-bearing loans and (294) - (352) borrowings Government Grants (196) - - Total liabilities (1,516) (863) (1,049) Net assets 6,102 5,033 3,906 Equity capital 1, premium 17,592 14,370 14,390 Capital reserve Retained loss (13,094) (10,702) (11,851) Total equity attributable to equity shareholders of the Company 6,102 5,033 3,906 Statement of Cash Flow

7 For the six months to 30 November 2017 Six Months Ended Six Months Ended Year 30-Nov 30-Nov 31-May (audited) Cash flows from operating activities Loss after tax for the period (1,294) (976) (2,172) Adjusted for: Profit on disposal of property, plant and equipment Depreciation charge Equity settled share-based payment expenses Financial expenses Financial income - (4) (5) Taxation - - (356) (1,106) (874) (2,300) Changes in working capital (Increase)/decease in inventories (228) (193) 63 (Increase)/decrease in trade and other receivables (145) (221) 579 (Decrease)/increase in trade and other payables 339 (99) 82 (34) (1,387) (1,576) Taxation received Net cash used in operating activities (1,140) (1,387) (1,220) Cash flows from investing activities Acquisition of property, plant and equipment (684) (680) (2,075) Proceeds from disposal of property, plant and equipment Capital Government Grants Received Net cash used in investing activities (629) (680) (2,048) Cash flows from financing activities Proceeds from issue of share capital, net of expenses 3, Payment of finance lease liabilities (10) - (10) Proceeds from other loans Interest paid - (23) - Net cash from/(used in) financing activities 3,512 (12) 23 Net increase/(decrease) in cash and cash equivalents 1,743 (2,079) (3,245) Cash and cash equivalents at the beginning of the 1,532 4,777 4,777 period Cash and cash equivalents at the end of the period 3,275 2,698 1,532 Statement of Changes in Equity

8 For the six months to 30 November 2017 For the six months to 30 November 2017 capital premium account Capital reserve Retained loss Total Balance at 31 May , (11,851) 3,906 Loss for the period (1,294) (1,294) Total comprehensive income for the period (1,294) (1,294) Transactions with owners, recorded directly to equity s issued in the year 214 3, ,439 Equity settled share-based payments Total contributions by and distributions to the owners 214 3, ,490 Balance at 30 November ,117 17, (13,094) 6,102 For the six months to 30 November 2016 Capital premium account Capital reserve Retained deficit Total Balance at 31 May , (9,767) 5,957 Loss for the period (976) (976) Total comprehensive income for the period (976) (976) Transactions with owners, recorded directly to equity s issued in the year Equity settled share based payments Total contributions by and distributions to the owners Balance at 30 November , (10,702) 5,033 For the year to 31 May 2017 Capital premium account Capital reserve Retained deficit Total Balance at 31 May , (9,767) 5,957 Loss for the year (2,172) (2,172) Total comprehensive income for the year (2,172) (2,172) Transactions with owners, recorded directly to equity s issued in the year Cost of issue written off to share premium Equity settled share-based payments Total contributions by and distributions to the owners Balance at 31 May , (11,851) 3,906 SURFACE TRANSFORMS PLC

9 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 27 February 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 May. These interim condensed financial statements are for the six months to 30 November They have not been prepared in accordance with IAS 34, Interim Financial Reporting which 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 30 November 2017, which are not audited, do not comprise statutory accounts within the meaning of section 435 of the Companies Act Full audited accounts of the Company in respect of the year 31 May 2017, 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 30 November 2017 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 May 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

10 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 May Seasonality of operations The Company expects to revert to the historic norm of unequal split of sales between the two halves of the year with higher sales in the second half of the year. Going concern The financial statements have been prepared on a going concern basis which the Directors believe to be appropriate. Whilst the Group incurred a net loss of 1,294k 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 Year 30-Nov 30-Nov 31-May (audited) UK Corporation tax Current tax on income for the period Research and development tax repayment 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 Year 30-Nov 30-Nov 31-May (audited) Pence Pence Pence Loss per share: Basic and diluted (1.17) (1.08) (2.41)

11 Loss per ordinary share is based on the Company s loss for the financial period of 1,294k (30 November 2016: 976k loss; 31 May 2017: 2,172k loss). The weighted average number of shares used in the basic calculation is 110,071,506(31 May 2017: 90,145,921; 30 November 2016: 90,106,740). 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 int purpose of the end user. Revenue by geographical destination is analysed as follows: 30 Nov Nov 2016 Year 31 May 2017 (audited) United Kingdom Rest of Europe United States of America Rest of World