Surface Transforms plc

("Surface Transforms" or the "Company")

Preliminary Results and

Notice of Annual General Meeting

Surface Transforms (AIM:SCE) is pleased to announce its preliminary results for the year ended 31 December 2021. The Company's Annual Report and Accounts for the year ended 31 December 2021, together with a notice convening the Company's Annual General Meeting ("AGM") are expected to be posted to shareholders in early May 2022 from which time they will also be available on the Company's website www.surfacetransforms.com. The AGM will be held at the offices of finnCap at 1 Bartholomew Close, London, EC1A 7BL on Thursday 30 June at 10.00 a.m.

Financial highlights

·    Revenues improved 21% to £2.4m (2020: £2.0m)

·    Gross margin was 65% (2020: 67%)

·    Net research costs of £3.4m (2020: £2.5m) after capitalising £0.3m (2020: £0.1m) of gross expenditure

·    Other administrative expenses increased by £0.5m to £2.4m (2020: £1.9m)

·    Loss before taxation was £4.6m (2020: £2.9m)

·    Research costs partially offset by accrued R&D tax credit of £0.7m (2020: £0.6m)

·    Loss per share of 2.08p (2020: 1.54p)

·    Cash used in operating activities increased by £2.7m to £3.7m (2020: £1.0m)

·    Cash at 31 December 2021 was £13.0m (2020: £1.1m). Of this, £3.0m was in the form of an irrevocable letter of credit for furnaces, giving an available cash balance of £10.0m

·    Capital expenditure in the year was £3.9m (2020: £0.6m)

·    Cash tax credits of £0.6m received in the period against an accrual of £0.6m

·    During the year the Company successfully raised £19.1m net of fees in a significantly over-subscribed placing, subscription, and open offer. In addition, the Company received a £1m loan from the Combined Local Authorities and CBILS support in the form of asset finance totalling £0.3m

Customer and Operational highlights

·    Increased order book by £70m (lifetime value) to £115m at end of the year

·    Added a new major customer - US based OEM 10 - to growing portfolio of customers

·    Post balance sheet date, significantly increased the order book to over £180m (lifetime value) following extended £70m order with existing customer OEM 8

·    Demonstrated the ability to win "carry over" business with existing customers OEM 6 and OEM 5

·    Progressively implemented new production capacity to reach current revenue capacity of £20m p.a.

·    Adopted new manufacturing strategy that will provide more capacity than originally planned at less cost, in a shorter time, and having a lower carbon footprint

·    Procured new capital equipment for installation in early 2023 to increase revenue capacity to £50m p.a.

Board Changes

·    Strengthened the Board with the appointments of Matthew Taylor and Julia Woodhouse as new independent non-executive directors with substantial experience in the global automotive industry

·    After 17 years on the Board, Kevin D'Silva retired with effect from 12 April 2021

Chairman's Statement

The twelve months to December 2021 saw continuing game-changing market success. The Company won £70m (lifetime value) of new orders in the year, added one of the largest car companies in the world (OEM 10) to its customer portfolio and demonstrated its ability to win additional contracts with existing customers; OEM 6 (£35m lifetime value order) and OEM 5 (£5m lifetime value order). Post the year end, the Company added more than £70m to the order book on existing programmes with OEM 8.

The task in 2022 is to turn these game-changing orders into profitable sales. Consequently, the other major focus in 2021 was the installation and commissioning of the multiple furnaces and machine tools delivered in 2020 - originally described as OEM production cell one - to provide sales capacity of £20m p.a.. This task was not without its difficulties, leading to production issues towards the year end that have been resolved in the new year.

To fund further additional capacity, the Company raised £19.1m (net of expenses) in the year to build what was originally described as OEM production cell 2, raising total site capacity to £35m p.a.. However, as the speed of our commercial success accelerated, the Company fundamentally revised its manufacturing strategy and as described in detail below was able to order equipment that would provide capacity for £50m p.a. sales when commissioned in 2023, at no extra cost and with a lower carbon footprint. The site currently has sufficient space to accommodate further equipment, that will be ordered in due course, to bring overall sales potential to £75m p.a..

Throughout the year our environmental, social and governance obligations were at the forefront of our thinking. We are proud that our products assist in reducing both engine emissions (from lower weight) and brake pad dust emissions, that we received the highest grade possible in a recent Environmental Agency review and - consistent with our desire to be "best-in-class" employer - reached the target of three years without a reportable accident.

Progress on Customers:

OEM 8: The Company won its original order on a variant of a key model in the customer's range in September 2020. The start of production (SOP) of the car has been delayed, originally planned for mid-2021 it is now forecast for spring 2022. Nonetheless the market response to this car has exceeded all order expectations. This inevitably stressed the capacity of all the supply chain and extensive discussions took place in the year between the customer and all relevant suppliers to find a collective response. The result has been a revised production plan and new contracts which means that we have now agreed to commit capacity of £20m p.a. - compared with the original requirement of £9m p.a. in 2024. The ramp up to these higher numbers will occur through 2023. Inevitably, as we must provide the infrastructure for this higher demand, this has had the paradox of increasing costs in 2022 in exchange for higher profits thereafter.

Given the customer focus on and resource allocation to this model, little work has been done on the follow-on models described during the fundraising. This does not however mean that these opportunities no longer exist.

OEM 6: This UK customer was one of the first mainstream contracts won by the Company in 2017 for a hyper performance car. The development of this car has been problematic with extensive delays. However, it is encouraging to report that the car entered production in late 2021 and deliveries continue to be made in 2022. In December 2021 the Company announced that it had been awarded a £45m lifetime value contract, as tier 1 sole source supplier, standard fit on both axles of two forthcoming models. We were particularly pleased that this again demonstrated that we have been able to win additional business from existing customers on essentially the same product - known as "carry-over" in the automotive industry. This ability is crucial to the ongoing commercial development of Surface Transforms.

OEM 10: This US based customer is one of the largest automotive manufacturers in the world. In August 2021 the Company announced that it had been selected to be the tier one sole supplier of the carbon ceramic brake disc as standard fit on both axles of a new edition to an existing internal combustion engine car. The previous model already uses carbon ceramic discs and thus the Company's brake disc is replacing the existing supplier. The lifetime revenue on this specific contract is estimated to be approximately £20 million commencing mid 2024.

OEM 5: This existing German automotive manufacturer announced its first contract award to the Company in July 2019. The SOP of the car has been delayed by Covid disruption but is now expected in early 2023. In September 2021 the Company won a further carry-over contract for £5m on a facelift to an existing internal combustion engine model with start of production in Q1 2024; the Company's brake discs will be fitted as an option to the front axle.

OEM 3: This customer (who is part of a group of OEMs based in Germany) has been tasked with the development of a second source carbon ceramic disc supplier.  The customer has a unique and destructive environmental test that has challenged the Company for the last 5 years.  It is encouraging to report that, in the year the Company believes it has now designed a suitable product which meets all OEM 3's requirements.  The test results have been supplied to the customer for review and confirmation of product suitability.  With this work complete no further testing is planned.  We now bring OEM 3 in line with the Company policy of capacity planning and sales guidance based solely on firm programme sourcing activities and/or nominations. Currently we have no programmes incorporated in our capacity planning models for OEM 3 and will work with the customer to understand their future sourcing activities. 

OEM 9: This is a new "disruptor" entrant to the automotive market. The potential of a contract award with this customer was a feature of the February 2021 fundraising. The customer's programme however has been significantly delayed and beset with technical difficulties, unrelated to our involvement. Albeit delayed, their programme appears to be back on track and the Company hopes to see an award in 2022.

Koenigsegg: The Company continues to supply to Koenigsegg on its Jesko model and expects SOP on the Gemera in 2023. Relationships are excellent and discussions continue with regard to future models.

Retrofit and Near OEM:  Retrofit describes end use drivers who swap out either iron discs or competitor products for Surface Transforms carbon ceramic discs. Near OEM encompasses the large number of very niche car manufacturers producing between a handful and 100 cars per year. The retrofit and near OEM customers have been the bedrock of the Company over the last ten years but will never be able to match the scale of the mainstream manufactures described above. The Company had good order intake in the year but the production difficulties at year-end constrained sales.  These arrears were being progressively reduced in Q1 2022.

Progress on Operations:

Revised Manufacturing Strategy: The Company's original plan to equip the Knowsley factory was to build a series of 5 modular, relatively independent but identical production cells being built at roughly one cell every 18 months. However, the combination of the pace of our market success, practical constraints on accelerating this plan and the desire to make a step change in our carbon footprint led to a significant change in strategy announced in September 2021. The Company will no longer build separate production cells but now approaches the site capacity as a plant wide "single production" line concept. Thus, rather than build the originally envisaged production cell two the Company split the equipment purchasing process between furnaces and machine tools and ordered a smaller number of more efficient larger furnaces. The effect has been to raise the planned mid 2023 site capacity from the fundraising projection of £35m p.a. to £50m p.a. at no extra cost whilst achieving a major reduction in forecast carbon emissions.

Plant commissioning: The change in manufacturing strategy has had little impact on the commissioning of what was originally described as production cell one, aimed at providing a site revenue capacity of £20m by Q4 2021. All the machines were delivered in 2020 and were progressively commissioned in 2021, leading to the planned start of volume production in Q4. The task has been complex and arduous and not without difficulties. To some degree, every furnace and machine tool had "snagging" problems but, under volume production stress, there was a particularly problematic furnace that caused major production disruption in November and December. However, the issues on this furnace were resolved post balance sheet date and have not returned. We have cleared all significant customer arrears by this report date.

We will continue to increase output through the year as our major customer OEM 8 ramps up production. Continuing production difficulties are inevitable with this scale of growth but we are confident that our team has both the skills and scale to deal with them as they arise.

The Company has the order book to reach profitability in 2022. Continuing to successfully commission the new plant remains our key short-term task to achieve our profitability objective.

Cost reduction: The Company continues to see ongoing reduction in manufacturing costs as a prerequisite for participation in the automotive industry. The final commissioning of production cell one concluded the first phase of the plan that has halved production cost in five years. The Company has now embarked on a second plan to repeat this success.

Gas and energy costs: The Company has fixed price energy and gas contracts and thus the major worldwide increase in these costs had no impact in 2021 and will have minimal impact in 2022 as our contract completes in May 2023. Without action, a tripling in energy costs would reduce gross margin percentage by around five percentage points.  Fortunately, by 2023, this is likely to be offset by a number of energy efficiency projects that are already underway on the existing furnaces. Additionally, our new furnaces are significantly more efficient than our existing furnaces which, combined, will offset the current range of anticipated commodity increases. Therefore, we are not forecasting gross margin percentage deterioration in 2023 or beyond from this source.

Covid: Covid has been a constant background presence throughout the period. However, our staff have been outstanding in the flexibility they have shown with how they work in this environment, both working from home together with the discipline they have shown in maintaining Covid disciplines in the factory. Thus, the Covid problem has been contained, albeit it did not help with our production issues at the year end.

Brexit: The major impact of Brexit has been in transport difficulties between the UK and Continental Europe. What used to take days can now take weeks. However, as with Covid, our staff have responded with different working methods even if adding cost and inventory to our dealings with Continental Europe. Not unreasonably our customers see these costs and extra inventory as our problem, but it does not seem to be affecting our ability to win new business in Germany.

Recruitment: In preparation for the significant 2022 sales increase, the Company virtually doubled its workforce in the year and is continuing to heavily recruit in 2022. Whilst there are always issues in recruiting very specific skills, the programme has been a success and we are pleased both with the quality of applicants and the skills and enthusiasm of our new colleagues.

Russia: The Company can advise that it has no sales activity in Russia, no obvious Russian shareholders and no subsidiaries or associates in the country. However our fixed price gas contract is with a Russian company. Against the current political and economic background, the Company has been exploring its options and has concluded that it cannot escape the contract. Nonetheless the Company has however served notice to its supplier, ensuring that no automatic renewals can occur. In the meantime, the contract will remain in place until it ends in May 2023.

Environment, Social and Governance:

Environment: The Company continues to prioritise the actions required to further extend our ESG investment credentials. Our products reduce carbon emissions on internal combustion engine vehicles through reduced vehicle weight; a benefit that is needed even more on heavier, faster accelerating electric vehicles and thus our technology is particularly assisting the transition to electric vehicles. Our products also reduce emissions by significantly extending product life, contrasted with its iron alternative. Additionally, carbon ceramic brake discs significantly reduce brake pad particles being released into the atmosphere and watercourses. Finally, our end-of-life disc product acts as a carbon sink as the aluminium bell can be recycled and carbon and silicon are almost the only remaining elements at the end of the product's life.

Our task however is to ensure that these environmental benefits are not lost in the manufacturing process, including our supply chain through excessive energy usage. Our environmental focus is therefore in this area. In the year the Company restarted the previously halted Combined Heat and Power Plant (CHP) project, albeit progress was slower than planned as resource was more focussed on plant commissioning. The task is to both recirculate the wasted heat and use the waste gases from our furnaces to generate our own power. During the year we also installed extensive energy monitoring equipment on all furnaces and machines and will be reporting the summary total carbon footprint data in future reports.

Whilst our focus is on energy consumption however, this is not our sole environmental action area. For example, as part of our determination to be a good neighbour we are going beyond Environmental Agency (EA) requirements on emissions reduction, containment, and monitoring. We are pleased that the EA recognised our work in this area by giving the Company an "A" grade score in the recent EA review of the Knowsley site.

Social: We believe that our prime social goal is the provision of well-paid employment in one of the most disadvantaged areas in the country. For example, the Company has adopted the policy of exceeding the living wage for all employees and there are few companies now doubling employment on the Knowsley Industrial Park. Within this overall objective we are additionally delighted to be part of the local apprenticeship scheme and starting our own graduate training scheme in 2022.

The Company sets high standards for the health and safety of its employees and in January 2022 reached three years without a single reportable accident - a most gratifying achievement given the dangerous processes and cutting machines in the factory.

Our suppliers are primarily based in the UK and EEC area which provides some comfort on our expectations of their compliance with the social aspect of our ESG policy. Nonetheless we have started a programme of checking the work they are doing on both environmental and social activities.

Finally, combining both environmental and social goals, the Company sought the award of ISO 45001 in the year, the international standard for health and safety, which was awarded in March 2021.

Governance: The Company adheres to the QCA corporate governance code and in the year completed a self-assessment on compliance. The self-assessment saw the Company broadly compliant with the code except for the need to improve independence and diversity of non-executive directors. This issue was addressed by the recruitment of two new independent non-executive directors; the Company now believes itself to be fully compliant.

Summary:

The Company continues its journey to profitability in 2022 and remains confident that this objective will be achieved whilst maintaining our commitment to our environmental and social goals. The year, and indeed the months since balance sheet date have been a period of considerable market success with several significant contract wins. We want the coming year to match that sales success with operational success and remain confident in our ability to achieve both.

David Bundred

Chairman

1 April 2022

Strategic Report

Operational review and principal activity

Surface Transforms 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 original equipment manufacturers (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%, extending product and service life, consistent performance, environmentally friendly through reducing both CO2 emissions and brake pad dust, reducing the total cost of ownership, corrosion free and are highly desirable.

Our strategy is to be a profitable, series production supplier of carbon ceramic brake discs to the large volume OEM automotive market.   To achieve this, we work directly with OEMs and closely with Tier One suppliers to meet the customers' requirements on product, price, quality, capacity and security of supply.

In addition, we supply carbon ceramic brake discs to small volume vehicle manufacturing and retrofit high performance kits for performance cars.

The key features of our business model are as follows:

·    Support our customer across key geographical markets, achieving contract awards to multiple OEMs with products for multiple models with multiyear supply agreements

·    Engineer market leading carbon ceramic brake products, which deliver best in class performance for the luxury and performance brakes markets, which we estimate to be a circa £2 billion market

·    Build manufacturing capacity revenue of circa £50m p.a., with the footprint available to reach circa £75m capacity revenue p.a. with future investment

·    Operate lean manufacturing processes, enabling the Company to produce products that are competitively priced with good margins

·    Be a 'Quality Company' with a culture that lives and breathes its world-class business processes and management systems.  We surpass the automotive quality standards (IATF16949), and thus, have the confidence that we are able to pass all customer audits, as evidenced by recent contract wins

·    Protect the environment by minimising the environmental impacts arising from our activities, products and services and be committed to continuous improvement of our environmental performance

·    Support and manage our supply chain which can deliver to our customers' requirements on product, price, quality, capacity and security of supply

Succeeding in these activities generates highly desirable, environmentally friendly, world leading quality products, which are price competitive and profitable to the business.

Furthermore, our products and processes are protected by a high level of intellectual property through deep, complex process knowhow and a product which cannot be reverse engineered.

Delivering our objectives:

Automotive OEMs

The continued progress on building capacity for our game changing contracts provides a clear path to achieving its strategic objective of profitability and cash generation.  Coupled with this, the continued success of winning additional 'carry over' contracts and new major OEM customer contracts has significantly strengthened the revenue growth curve for the Company over the coming years.

The Company also continues its successful engineering development objectives in anticipation of further contract awards for both 'carry over' customer contracts and new customer contracts during 2022 and beyond.

The Company's internal activities are therefore focused on supporting series supply for these contracts and on Company-wide continuous improvement objectives across all functions.

·     Health and Safety - maintain and improve our health and safety record. We have an excellent health and safety record which we will continue to maintain

·     Quality - continue to have excellent in-service quality. Improving quality is a never-ending process, therefore our primarily focus is on continuous improvement and reducing the internal cost of quality

·     Environmental - protect and improve our environment. Our products make a fantastic contribution to reducing CO2 emissions in use, significantly reducing brake dust pollution, and over the lifetime of the car reducing the carbon footprint. Our internal goals are aimed on reducing our manufacturing environmental footprint

·    Customer supply performance - maintaining our performance as a good supplier. As we enter series supply with our OEM customers a key objective is to deliver good supplier performance

·    Capacity improvements - ensure we have the manufacturing capacity and manufacturing resilience in line with our customer requirements. We have a manufacturing strategy which will deliver £50m of capacity revenue during 2022 and 2023

·    Productivity and cost reduction - perpetual improvement of our productivity through cost reduction. We have halved the cost to manufacture over the last five years and have a programme to repeat this success going forward to maintain good margins and support our customers to achieve their pricing goals

·    Supply chain performance - improve the resilience and productivity of our supply chain. As with any manufacturing process we are only as good as our supply chain.  We have improvement plans with our existing suppliers and are adding new suppliers to our approved supplier list

Section 172 statement

In accordance with the requirements of section 172 of the Companies Act. The board believes that during the year it has acted in a way that they consider, in good faith, would most likely lead to the success of the Company in the long term and to the benefit of all stakeholder groups. During the year, Surface Transforms successfully raised funds to support the Company's current and future growth strategy and to meet contracted and expected orders.

The board believes that governance of Surface Transforms is best achieved by delegation of its authority of the executive management of Surface Transforms to the CEO. The board regularly monitors the delegation of authority, updating regularly whilst retaining responsibility.

The board has identified 6 key stakeholder groups and engages with them to foster strong relations and to act fairly between them:

·    Customers: Surface Transforms engages with customers throughout the development process, building strong collaborative environments for long term mutual benefit. This is highlighted by carry over contract awards from existing customers and meets the Company's strategic aims of growing our customer base;

·    Employees: Our employees are critical to the success of Surface Transforms, and we engage through an environment of openness and inclusivity and trying to create a sense of ownership. All employees receive some share options after a qualifying period of employment. The Company has recently commenced employee surveys to monitor employee sentiment and along with the appointment of our new HR executive are placing a higher focus on employee recruitment and retention. In addition, with the current stresses on the workforce the Company has made available counselling services for employees. These actions align with the Company's aim to be an employer of choice within the Knowsley area;

·    Government and regulators: The Company is committed to engaging with all relevant government organisations and ensuring adherence to all statutory requirements. The Company has a strong working relationship with the environmental agency and regularly enters dialogue as to the fulfilment of our responsibilities;

·    Investors and shareholders: The board gives opportunities for both institutional and retail investors to meet with the Company and to see the progress of the Company. During the year the Company has held a number of webcasts allowing investors to question the board on progress and on our strategy. The Company has engaged one to one with advisors and investors on environmental, social and governance (ESG) issues with a view to improving the Company's performance in this area and the Company has invited shareholders and other interested stakeholders to visit the site at Capital Markets Days in April and July 2022;

·    Partners and suppliers: The Company engages collaboratively with its partners and behaves in a responsible manner and expects partners to act ethically and in a responsible manner. The Company aims to build long term collaborative relationships and has signed long term contracts with suppliers for material supply, giving certainty to their businesses; and

·    Society: The Company engages on social media and welcomes engagement with the wider public. In addition, the Company is conscious of its position as a growing employer within the Knowsley area, an area of recognised social disadvantage. To this end the Company has maintained an apprentice scheme and will be starting its own graduate apprentice scheme in September 2022.

The board considers these stakeholders within its strategy discussions, the performance of the Company, the workforce and in its governance.

Financial Review

Revenue increased in the year to £2.4m against £2.0m in 2020, an increase of 23%. This growth has been driven by delivery of OEM parts for the Valkyrie which entered production in the year and the delivery of increased volumes of development parts to our existing contracts.

Gross profit margin dropped slightly in the year to 65% from 67% in 2020. This deterioration has been caused by sales mix due to development work but also reflects the reduction in unit sales price that comes with series production and larger contracts. Retrofit and Near OEM sales were broadly flat in the year.

During the year the Company made minimal use of the government furlough scheme with claims only being made for vulnerable employees having to self-isolate for medical reasons. The Company did however utilise the Coronavirus Business Interruption Loans Scheme (CBILS) to fund capital equipment purchases. This loan is at a lower rate than that usually available to the Company for borrowings.

Other borrowings actioned during the year were the drawdown from the Combined Local Authorities Future Growth Fund of £1m. This loan is again at a rate that would be unavailable to the Company without the support of the Liverpool City Region Authority.

The Company's shareholders again supported the Company with an equity fundraising in January 2021 which raised £19.1m after fees. The funds were raised to finance the delivery of additional capacity and working capital.

Administrative expenses increased by £0.5m to £2.4m (2020 £1.9m). This increase was almost all in salary costs reflecting extra staffing ahead of the capacity requirement for 2022.

Net research expenses were £3.4m an increase of £0.9m on the prior year of £2.5m. These costs were net of capitalisation of £0.3m in the year (2020: £0.1m). This increase was driven by significant material costs utilised in furnace commissioning and product development, in addition much of the recruitment during the year was for engineering roles focussed on development in the short term. Given the size and likelihood of near-term commercial revenues being generated, these costs meet the definition of an asset and for the future economic benefits of such assets to be amortised over the perceived useful economic lives of the asset, namely on a straight-line basis over the life of the contract to which they relate.

Cash at 31 December 2021 was £13.0m (2020: £1.1m). Of this, £3.1m was held as an irrevocable letter of credit in favour of a furnace supplier and covered by delivery milestones. In addition, the Company expects the receipt of an R&D tax credit totalling £0.7m during the coming year (2020: £0.6m).

Loss before taxation was £4.6m (2020: £2.3m) which led to a loss per share of 2.08p (2020: 1.54p)

Key performance indicators

The Directors continue to monitor the business internally with several performance indicators: order intake, sales output, gross margins, profitability, supply chain capacity, health and safety, quality and manufacturing cost of automotive discs. A set of business milestones has been agreed and are discussed as part of the monthly board meeting. The board has assessed the results against these KPI's and believe that solid progress has been made against the Company's targets.

During the year the Company has performed well against KPI's relating to Health and Safety with no reportable accidents during the year and in excess of 1,000 days since the last lost time incident. In addition, the Company measures its environmental impact through its Environmental management framework and through Performance in Environment Agency audits which have resulted in an A grade score during the year.

The Company produces an annual business plan and full monthly forecasts detailing sales, profitability and cash flow to help monitor business performance going forward.

Management meetings are held on a weekly basis, all senior managers attend and discuss production, engineering, financial and quality issues.

Risks and uncertainties

The Company has embedded risk management activities and maintains through regular reviews throughout the year an effective risk register of the issues that may affect the strategy of the Company or the delivery of its aims.

The principal short-term risk is the execution risks associated with bringing the newly purchased furnaces into production. This is being managed by both a project team that has the experience and skills to deliver this type of project as well as pre-delivery testing at the supplier's premises. Regular weekly and monthly reviews are held, and the project's progress is communicated across the Company on a regular basis.

There is also a risk to customer Start of Production (SOP) dates and the speed at which the customers move from initial to mature build rates. It is also normal in the automotive industry that customers do not contract minimum build rates. These risks are managed by continuing dialogue with the customers to ensure early notification of possible changes.

As in previous years another major risk faced by the Company is considered to be the speed at which our customers and potential customers adopt the new carbon ceramic product technology. The contract awards in the period indicate the strengthening desire from a number of volume automotive OEMs to incorporate the Company's product in their respective platforms. This risk is constantly assessed by regular customer review meetings but is now clearly much reduced.

There is a risk of delay on customer production due to hang overs from Covid-19. However, as at the date of publication of this report all of our customers have returned to production and there is a customer focus on short term revenue generation. This leads the directors to believe that this risk is currently low unless a further shutdown should occur. Moreover, the business performance in 2021 demonstrates that the Company has robust procedures in place to continue operations throughout the most severe periods of another Covid-19 outbreak.

Brexit is currently causing delivery delays as a result of paperwork issues, however these issues are only affecting retrofit sales at present. Should the delays not improve before the start of production with OEM 5 then it has always been the Company's intention to expand our German facilities to include a warehouse to hold buffer stock for this contract. This risk is ameliorated by the fact that looking forward to 2024, only 15% of total sales are forecast to be within the EU and, indeed OEM 5 has recently informed us that a portion of their production will be outside the EU.

The Company has an exposure to exchange risk however this is partially mitigated through natural hedging activities. The contracts for OEM 6, 7, 8 and 10 have been negotiated in sterling to mitigate any exchange risk and this is the Company's policy where possible.

In terms of uncertainties, product sales are still expected to grow with future OEM projections now supported by contracts. The Board expects continuing growth with Near OEM customers, but sales growth is expected to be modest in the retrofit market. This uncertainty is constantly assessed by regular customer meetings and monitoring the level of enquiries and orders for both the Company's products and industry wide.

In summary, the Company has made satisfactory progress in its automotive projects and is progressing well with its expansion plans. Please refer to note 21 for information on financial risk management and exposure.

Events after the reporting period

The Company announced the extension of its contract with OEM 8 from a previously reported £27m to £100m.

Directors and staff

Directors: In March 2021, the Company strengthened the Board by the appointment of two new independent non-executive directors, Matthew Taylor and Julia Woodhouse.

Matthew Taylor joins the Board after retiring from his role as CEO of Bekaert SA in 2020. Bekaert SA is a €5billion, 30,000 employees global steel cord business headquartered in Belgium with 45% of its business in automotive. Prior to this role Matthew was CEO of Edwards Vacuum, CEO of JC Bamford, and Global MD of Land Rover following his early career in sales and marketing roles with Ford after a short spell in the Royal Navy.

Julia Woodhouse also joins the Board as non-executive director. Julia spent her executive career with Ford Motor Company where her roles included Director, Global Power Train Purchasing, based in USA and Director, Global Chassis Purchasing, based in Germany. She retired from Ford in 2018 and is currently a non-executive director of Outokumpu a leading global stainless-steel manufacturer based in Helsinki. Julia is also a member of the RICS Standards and Regulations Board.

Following these appointments, after 17 years on the Board Kevin D'Silva retired. The Board wants to thank Kevin for his major role in the very existence of the Company, without his contribution over these years the Company may not even exist and would certainly not be in the shape that it is today.

Management Team:  The Company continued its policy of strengthening management as the Company matures and the managerial needs evolve.

The focus in 2021 continued the task of strengthening the second line management functions and to this end many of the Company's appointments have joined from middle management roles within tier 1 automotive suppliers.

Outlook

After a decade of commercial and development activity the forthcoming 2022 year will finally see this work turn to profitability.

Thereafter and, based solely on orders already awarded, we can be confident of sales growth of more than 20% p.a. from 2023 to 2025 and would hope to increase that growth rate as we win further contracts in that period.

Our guidance gross margin is relatively stable in the planning period as our pricing structure is broadly agreed and as explained above, our exchange rate risks are modest and we will address gas cost increases through more efficient furnace processes.

As with all growing companies our cost base necessarily increases ahead of sales and thus, for example, we are investing £2.5m to our 2022 infrastructure costs in anticipation of the next step change in production in 2023 and beyond. As a result, our forecasts are limited to single digit percentage return on sales (ROS) for operating profit for the next few years but we believe that we could reach 20% ROS by 2024 and 2025.

The operational execution risk of this rate of growth over the period is ever present but the board is fully engaged with management on both the risks and their mitigation - of which keeping both physical capacity and staffing levels ahead of current sales demand, even at the expense of short-term cost increases, is the over-arching priority.

The medium-term outlook is therefore for a Company growing revenue by at least 20% p.a. and achieving 20% ROS.

On behalf of the board

David Bundred                                                                    Dr Kevin Johnson

Chairman                                                                               Chief Executive

Statement of Total Comprehensive Income

For the year ended 31 December 2021

Statement of Financial Position

03769702

at 31 December 2021

Statement of Changes in Equity 

For the year ended 31 December 2021

For the year ended 31 December 2020

Statement of Cash Flows

For the year ended 31 December 2021

Notes to the financial statements

1.   Basis of preparation and general information

The financial information set out herein does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006.

The financial information for the year ended 31 December 2021 has been extracted from the Company's audited financial statements which were approved by the Board of Directors on 1 April 2022 and which, if adopted by the members at the Annual General Meeting, will be delivered to the Registrar of Companies for England and Wales.

The reports of the auditor on these financial statements were unqualified, did not include any references to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain a statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

The information included in this preliminary announcement has been prepared on a going concern basis under the historical cost convention, and in accordance with International Financial Reporting Standards (IFRSs) as adopted by the UK and the International Financial Reporting Committee (IFRIC) interpretations issued by the International Accounting Standards Board (IASB) that are effective or issued and early adopted as at the date of these financial statements and in accordance with the provisions of the Companies Act 2006.

The Company is a public limited company incorporated and domiciled in England & Wales and whose shares are quoted on AIM, a market operated by the London Stock Exchange. The principal activity of the Company is the development and manufacture of carbon ceramic products for the automotive and aerospace brakes markets. The registered office is Image Business Park, Acornfield Road, Knowsley Industrial Estate, Liverpool, L33 7UF.

2.   Going concern

The financial statements have been prepared on a going concern basis which the Directors believe to be appropriate.  The Company incurred a net loss of £3,952k during the period however the Directors are satisfied, based on detailed cash flow projections and after the consideration of reasonable sensitivities, that sufficient cash is available to meet the Company's needs as they fall due for the foreseeable future and at least 12 months from the date of signing the accounts. The detailed cash flow assumptions are based on the company's annual budget, prepared and approved by the Board, which reflects a number of key assumptions including revenue growth, underpinned by current pipeline; customer compliance with payment terms; other receipts of a value and timing consistent with previous years. These forecasts also include the impacts of the Covid situation and the significant post year end fund raise which has increased cash balances.

3.   Segmental reporting

Due to the nature of the business the Company is currently focussed 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 have 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 differing shapes depending on the intended purpose of the end user.

Revenue by geographical destination

4.   Operating loss and auditors' remuneration

5.   Staff numbers and costs

The average number of persons employed by the company (including Directors) during the year, analysed by category, was as follows:

The aggregate payroll of these persons were as follows:

6.   Taxation       

In the Spring Budget 2021, the Government announced that from 1 April 2023 the corporation tax rate will increase to 25% for companies with profits of £250,000 or greater. For companies with profits of £50,000 or less the corporation tax rate will remain at 19%. A tapered rate will be introduced for companies with profits greater than £50,000 and less than £250,000. Since the proposal to increase the corporation tax rates had not been substantively enacted at the balance sheet date, its effects are not included in these financial statements. However, it is likely that the overall effect of the change, had it been substantively enacted by the balance sheet date, would be immaterial.

Details of the unrecognised deferred tax asset are included in note 16.

7.   Called up share capital

During the year 270,000 shares were issued through the exercise of options.

During the year the Company issued 40,000,000 ordinary shares in the Company in a placing, subscription and open offer taking the total issued share capital to 195,188,319 and raising a total of £19.1m after fees.

8.   Net Debt

9.   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.

10.            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:

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.

11.            Post reporting date events

After the reporting date the Company announced the extension of its contract with OEM 8, increasing the contract value from a previously reported £27m to £100m.

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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