Result of Placing, Open Offer Launch & GM Notice

29 September 2022

THIS ANNOUNCEMENT, AND THE INFORMATION CONTAINED HEREIN, IS NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO OR FROM THE UNITED STATES, AUSTRALIA, NEW ZEALAND, CANADA, JAPAN, THE REPUBLIC OF SOUTH AFRICA, THE REPUBLIC OF IRELAND OR ANY OTHER JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO DO SO.

THE INFORMATION CONTAINED WITHIN THIS ANNOUNCEMENT IS DEEMED BY THE COMPANY TO CONSTITUTE INSIDE INFORMATION STIPULATED UNDER THE MARKET ABUSE REGULATION (EU) NO. 596/2014 AS IT FORMS PART OF THE DOMESTIC LAW OF THE UNITED KINGDOM BY VIRTUE OF THE EUROPEAN UNION (WITHDRAWAL) ACT 2018 (AS AMENDED) ("MAR").  UPON THE PUBLICATION OF THIS ANNOUNCEMENT VIA THE REGULATORY INFORMATION SERVICE, THIS INSIDE INFORMATION IS NOW CONSIDERED TO BE IN THE PUBLIC DOMAIN. 

Surface Transforms plc.

("Surface Transforms" or the "Company")

Result of Placing and Subscription

Launch of Open Offer

Notice of General Meeting

Surface Transforms (AIM: SCE), manufacturers of carbon fibre reinforced ceramic automotive brake discs, is pleased to announce that further to the Company's announcement released at approximately 5.03 p.m. on 28 September 2022 ("Launch Announcement"), the Bookbuild has closed and the Company has conditionally raised gross proceeds of £16.0 million, through the successful placing of 39,400,000 Placing Shares and 600,000 Subscription Shares at the Issue Price of 40 pence per Ordinary Share.

The Placing Shares and Subscription Shares represent approximately 20.5 per cent. of the Company's Existing Ordinary Shares. The Issue Price represents a discount of approximately 14.0 per cent. to the closing mid-market price per Ordinary Share of 46.5 pence on 27 September 2022, being the last Business Day prior to the Launch Announcement.

In addition to the Placing and Subscription, the Company intends to provide all Qualifying Shareholders with the opportunity to subscribe for an aggregate of up to 7,500,000 Open Offer Shares at the Issue Price, to raise up to approximately £3.0 million (before expenses), on the basis of 1 Open Offer Share for every 26.04748813 Existing Ordinary Shares held on the Record Date. Qualifying Shareholders subscribing for their full entitlement under the Open Offer may also request additional Open Offer Shares through an excess application facility (the "Excess Application Facility").

The Placing, Subscription and Open Offer are conditional upon, inter alia, the passing of the Resolutions at the General Meeting and upon the Placing Agreement becoming unconditional in all respects (save for the condition relating to Admission) in relation to the Placing and Open Offer and Admission in relation to Subscription. The Placing is not conditional on the Open Offer proceeding or on any minimum take-up under the Open Offer.

David Bundred, Chairman of Surface Transforms commented:

"I would like to take this opportunity to both thank existing shareholders for the continuing support and to welcome new shareholders to the exciting Surface Transforms journey. This funding provides the foundation to meet the capacity needs of our growing customer base for the immediate future whilst also providing a significant step forward for Surface Transforms being able to generate levels of free cash flow that will provide us significant financial flexibility when choosing how to fund future stages of this journey."

Reasons for the Fundraising

As set out in the Launch Announcement, the Company is very pleased with recent discussions and progress made with several OEMs to build upon its current contract expected revenue pipeline of £190 million¹. The Company has recently had a new contract awarded by OEM 9 for £13 million and expects to announce another new contract in 2022.

Upon completion of Phase 2 of the manufacturing expansion, the current Knowsley facility will have a revenue capacity of £50 million p.a., which provides sufficient capacity for the currently contracted revenue but with no additional resilience or flexibility to manufacture discs for new contracts. As set out above, Phase 3.1, at a cost of £10 million, will increase the revenue capacity of the current Knowsley facility to £75 million² p.a.

Given the expected required ramp up in production, coupled with the lead time of c.18 months to ensure the factory is operational, the Board consider it appropriate to have the funds to build capacity ahead of any further future contract awards. Indeed, the Board believe committed plans for future capacity expansion are crucial to the Company's ability to win further contracts.

Whilst it is possible that no OEMs will award any new contract to the Company, based on dealings with OEMs to date and managements understanding of the OEMs' production plans, the Directors are of the opinion that there is ongoing positive progress with multiple OEM customers, both for new contracts and carry over contracts, that necessitate planning for the future. Accordingly, the Board are confident that production capacity provided by Phase 3.1 and 3.2 will be required, noting that the combined revenue capability of the existing and new Knowsley factories will be £150 million² p.a.. Putting this in context, the Company's combined current OEM contracts and prospective contract pipeline total £590 million¹, and assuming an average contract term of five years, provides an annual equivalent revenue requirement, should all the prospective contract pipeline be formally awarded, to approximately £118 million annual revenue; this significantly exceeds the maximum revenue capacity of £75 million² of the existing Knowsley site.

¹ This is based on the Directors' expectations and their understanding of the relevant OEM's production plan and estimated demand for discs.

2 Based on management's estimates of sales proceeds from expected production volumes.

Use of proceeds

The total cost of Phases 3.1 and 3.2 is expected to be c.£50 million, comprising:

This will be financed partially from net proceeds of the Placing and Subscription of c.£15.2 million, whilst c.£25 million required expenditure will be funded by proceeds from the Open Offer and future operating cash flows.  The balance, if required, will likely be financed from a combination of sources, including from local authority funding, UK Export finance, asset financing, operational cash flows or another form of financing.

Related Party Transactions

The Directors' interests as at today and following completion of the Fundraising are as follows:

¹   Including 681,865 Ordinary Shares held in nominee accounts and ISAs of connected parties

²   Held as to 11,470,678 Ordinary Shares through his investment vehicle Group-14 LTD and 1,675,511 Ordinary Shares in SIPPs and ISAs of connected parties

³   Assuming Open Offer applications in total for the full number of Open Offer Shares available

David Bundred, Chairman of the Company, Matthew Taylor, Julia Woodhouse and Ian Cleminson, each a non-executive director of the Company, and/or persons connected with each of them have conditionally subscribed for an aggregate of 600,000 Subscription Shares, which constitutes a related party transaction under the AIM Rules.

Accordingly, Kevin Johnson, Michael Cunningham and Richard Gledhill are considered to be independent directors of the Company for the purposes of AIM Rule 13. Having consulted with the Company's nominated adviser, Kevin Johnson, Michael Cunningham and Richard Gledhill consider that the terms of the Directors' participation is fair and reasonable insofar as Shareholders are concerned.

Mr. Richard Sneller, as a substantial shareholder of the Company, is subscribing for 6,250,000 Placing Shares, which constitutes a related party transaction under the AIM Rules for Companies.

Canaccord Genuity Wealth Management Limited, as a substantial shareholder of the Company, is subscribing for 4,826,417 Placing Shares, which constitutes a related party transaction under the AIM Rules for Companies.

In the case of participation by Mr. Richard Sneller and Canaccord Genuity Wealth Management Limited, all the Directors are considered to be independent for the purposes of AIM Rule 13. Having consulted with the Company's nominated adviser, the Directors also consider that the terms of the participations in the Placing by Mr. Richard Sneller and Canaccord Genuity Wealth Management Limited are fair and reasonable insofar as Shareholders are concerned.

Posting of Circular

The Company will post a Circular to Shareholders later today, containing a Notice of General Meeting, proxy form and full details of the Open Offer including the Application Form. The Circular will also be available on the Company's website at www.surfacetransforms.co.uk.

Investor presentation

The Company will provide a live presentation to investors and any other interested parties on via Hardman & Co's platform at 10.15 a.m. on Monday 3 October 2022. Interested parties can register for the presentation at https://us06web.zoom.us/webinar/register/WN_i_3DuhFcQtaQ-IKBOiGs_Q.

Surface Transforms is committed to ensuring that there are appropriate communication structures for all its Shareholders. Questions can be submitted in advance as well as during the event via the "Ask a Question" function. Although management may not be in a position to answer every question received, they will address the most prominent ones within the confines of information already disclosed to the market. 

General Meeting

The Fundraising is conditional upon, inter alia, the passing of the Resolutions. The General Meeting will be held at the offices of Gateley Plc, Ship Canal House, 98 King Street, Manchester, M2 4WU at 9.30 a.m. on 19 October 2022.

Irrevocable commitments

The Directors (or persons connected with the Directors within the meaning of sections 252 - 255 of the Act), who in aggregate hold 17,691,732 Ordinary Shares, representing approximately 9.1 per cent. of the Existing Ordinary Shares of the Company, have irrevocably undertaken to vote in favour of the Resolutions at the General Meeting and not to subscribe for any of the Open Offer Shares.

Open Offer

In order to provide all Qualifying Shareholders with an opportunity to participate, the Company is conducting an Open Offer providing those shareholders the opportunity to subscribe at the Issue Price for an aggregate of 7,500,000 Open Offer Shares. This allows Qualifying Shareholders to participate on a pre-emptive basis whilst providing the Company with the flexibility to raise additional equity capital to further improve its financial position.

Qualifying Shareholders are being offered the opportunity to apply for additional Open Offer Shares in excess of their pro rata entitlements to the extent that other Qualifying Shareholders do not take up their entitlements in full. Qualifying Shareholders with nil basic entitlement will still be eligible to apply for Open Offer Shares under the Excess Application Facility. In the event applications exceed the maximum number of Open Offer Shares available, the Company will decide on the basis for allocation. The Open Offer Shares will not be placed subject to clawback nor have they been underwritten. Consequently, there may be fewer than 7,500,000 Open Offer Shares issued pursuant to the Open Offer.

The Open Offer is conditional, amongst other things, on the following:

i.              approval of the Resolutions at the General Meeting;

ii.            completion of the Placing;

iii.           the Placing Agreement not being terminated prior to Admission and becoming and being declared otherwise unconditional in all respects (save for the condition relating to Admission); and

iv.           Admission becoming effective on or before 8.00 a.m. on 20 October 2022 (or such later date and/or time as the Company, Zeus and finnCap may agree, being no later than 31 October 2022).

Open Offer Entitlement

On, and subject to the terms and conditions of the Open Offer, the Company invites Qualifying Shareholders to apply for their Open Offer Entitlement (as defined in the Circular) of Open Offer Shares at the Issue Price. Each Qualifying Shareholder's Open Offer Entitlement has been calculated on the following basis:

1 Open Offer Share for every 26.04748813 Existing Ordinary Shares held by the Qualifying Shareholder at the Record Date

Open Offer Entitlements will be rounded down to the nearest whole number of Ordinary Shares.

Excess Application Facility

Qualifying Shareholders are also invited to apply for additional Open Offer Shares (up to the total number of Open Offer Shares available to Qualifying Shareholders under the Open Offer) pursuant to an Excess Application Facility. Any Open Offer Shares not issued to a Qualifying Shareholder pursuant to their Open Offer Entitlement will be apportioned between those Qualifying Shareholders who have applied under the Excess Application Facility at the sole discretion of the Board, provided that no Qualifying Shareholder shall be required to subscribe for more Open Offer Shares than he or she has specified on the Application Form or through CREST. Qualifying Shareholders with nil basic entitlement will still be eligible to apply for Open Offer Shares under the Excess Application Facility.

The Open Offer Shares will, when issued, be fully paid and rank pari passu in all respects with the Ordinary Shares in issue at that time, including the right to receive all dividends and other distributions declared, made or paid after the date of Admission.

Qualifying Shareholders should note that the Open Offer is not a 'rights issue'. Invitations to apply under the Open Offer are not transferable unless to satisfy bona fide market claims. Qualifying non-CREST Shareholders should be aware that the Application Form is not a negotiable document and cannot be traded. Qualifying Shareholders should also be aware that in the Open Offer, unlike in a rights issue, any Open Offer Shares not applied for will not be sold in the market nor will they be placed for the benefit of Qualifying Shareholders who do not apply for Open Offer Shares under the Open Offer.

Settlement and dealings

Application will be made to the London Stock Exchange for admission of the Open Offer Shares. It is expected that Admission will become effective and that dealings will commence at 8.00 a.m. on 20 October 2022.

Important information

This announcement is for information purposes only and does not itself constitute an offer or invitation to underwrite, subscribe for or otherwise acquire or dispose of any securities in the Company and does not constitute investment advice.

Neither this announcement nor any copy of it may be taken or transmitted, published or distributed, directly or indirectly, in or into the United States of America, its territories and possessions, any state of the United States and the District of Columbia (the "United States"), Australia, New Zealand, Canada, Japan, the Republic of South Africa or the Republic of Ireland or to any persons in any of those jurisdictions or any other jurisdiction where to do so would constitute a violation of the relevant securities laws of such jurisdiction. Any failure to comply with this restriction may constitute a violation of the securities laws of the United States, Australia, New Zealand, Canada, Japan, the Republic of South Africa or the Republic of Ireland. The distribution of this announcement in other jurisdictions may be restricted by law and persons into whose possession this announcement comes should inform themselves about, and observe any such restrictions.

Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. Neither this announcement nor any part of it nor the fact of its distribution shall form the basis of or be relied on in connection with or act as an inducement to enter into any contract or commitment whatsoever.

In particular, the Placing Shares have not been and will not be registered under the US Securities Act, or under the securities laws or with any securities regulatory authority of any state or other jurisdiction of the United States, and accordingly the Placing Shares may not be offered, sold, pledged or transferred, directly or indirectly, in, into or within the United States except pursuant to an exemption from the registration requirements of the US Securities Act and the securities laws of any relevant state or other jurisdiction of the United States. There is no intention to register any portion of the Placing in the United States or to conduct a public offering of securities in the United States or elsewhere.

Zeus is authorised and regulated in the United Kingdom by the FCA and is acting as nominated adviser and Joint Broker to the Company in respect of the Placing. finnCap is authorised and regulated in the United Kingdom by the FCA and is acting as Joint Broker to the Company in respect of the Placing. Each of Zeus and finnCap is acting for the Company and for no-one else in connection with the Placing, and will not be treating any other person as its client in relation thereto, and will not be responsible for providing the regulatory protections afforded to its customers nor for providing advice in connection with the Placing or any other matters referred to herein and apart from the responsibilities and liabilities (if any) imposed on Zeus or finnCap, as the case may be, by FSMA, any liability therefor is expressly disclaimed. Any other person in receipt of this announcement should seek their own independent legal, investment and tax advice as they see fit.

Forward-looking statements

This announcement contains statements about the Company that are or may be deemed to be "forward-looking statements".

All statements, other than statements of historical facts, included in this announcement may be forward-looking statements. Without limitation, any statements preceded or followed by, or that include, the words "targets", "plans", "believes", "expects", "aims", "intends", "will", "may", "should", "anticipates", "estimates", "projects", "would", "could", "continue" or words or terms of similar substance or the negative thereof, are forward-looking statements. Forward-looking statements include, without limitation, statements relating to the following: (i) future capital expenditures, expenses, revenues, earnings, synergies, economic performance, indebtedness, financial condition, dividend policy, losses and future prospects and (ii) business and management strategies and the expansion and growth of the operations of the Company.

These forward-looking statements are not guarantees of future performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of any such person, or industry results, to be materially different from any results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on numerous assumptions regarding the present and future business strategies of such persons and the environment in which each will operate in the future. Investors should not place undue reliance on such forward-looking statements and, save as is required by law or regulation (including to meet the requirements of the AIM Rules for Companies, the FSMA and/or MAR), does not undertake any obligation to update publicly or revise any forward-looking statements (including to reflect any change in expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based). All subsequent oral or written forward-looking statements attributed to the Company or any persons acting on its behalf are expressly qualified in their entirety by the cautionary statement above. All forward-looking statements contained in this announcement are based on information available to the Directors at the date of this announcement, unless some other time is specified in relation to them, and the posting or receipt of this announcement shall not give rise to any implication that there has been no change in the facts set forth herein since such date.

The person responsible for arranging the release of this announcement on behalf of the Company is Michael Cunningham, CFO.

Unless expressly defined in this announcement, capitalised terms shall have the meanings as defined in the Launch Announcement.

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