Surface Transforms (LON: SCE) has today provided the following trading update for the six months to 30 November 2018.
Revenues for the period were £509k (2017: £524k). The cash balance at 30 November was £744k (2017: £3.3m) to which can be added an expected R&D tax credit in excess of £500k, expected to be received in December 2018.
The Company expects to report its interim results for the six months ended 30 November in February 2019.
Progress with Potential OEM Customers
The Company continues to test products with customers as described in recent announcements and is making particularly good progress with German OEM5. Having reviewed the Company’s quality processes, logistics capability, financial strength and capacity plan, German OEM 5 has approved Surface Transforms as a potential supplier to them. The Company has been informed, “… it is now officially possible for (OEM 5) to place orders under the condition that the development department is happy with the required performance of ST discs”. In respect to engineering approval, test track testing is underway and on schedule. To save later car development time, OEM5 has indicated to Surface Transforms that it intends to approve, at this stage, a pad/disc combination with a new environmentally friendly pad; this new pad requirement is lengthening the test programme and therefore engineering sign off is now expected in early 2019, still within the nomination time frame on the target vehicle.
The work on passing the OEM 3 rig test is also continuing with good progress having been made on understanding the reason for process variability. This work is expected to complete in the first quarter of calendar 2019, consistent with the next round of nomination dates.
Progress with New Capital Equipment
Surface Transforms plc has been awarded the environmental standard ISO 14001 ahead of schedule.
The final furnace for OEM production cell one has successfully completed a number of production runs at the supplier’s premises and will now be dismantled and shipped to Knowsley during the next 8 weeks.
These extensive production trials, in combination with a supplier change on a key component, have had the effect of building significant work-in-progress inventory (approx. £200k increase in the period). This excess will unwind over the next 18 months but, obviously, the recent increase and projected decrease in inventory, impacts both current cash and cash projections.
The other furnaces are either in production or finalising software installation. The Company expects OEM cell one to be operational in in summer 2019.
Outlook
The start of production of British OEM6 had been forecast for the final quarter of the Company’s FY 2018/19. The Board is increasingly concerned of a possible, but not yet certain, three to six months delay to the SOP. The delay, if it happens, would likely reduce FY 2018/19 sales by £500k. As a precaution, the Company has modelled the working capital impact of this as well as a “stress test” of FY 2018/19 sales simply repeating last year’s sales. In both instances the Company has adequate cash headroom. It is additionally worth noting that a delay in SOP does not of course change the medium-term cash projections as this is a limited edition contract for a specific number of cars which have been pre sold, and which, for regulatory reasons need to be produced before December 2020.
Nonetheless, in the light of this, and as a matter of prudence, the Company has revised its FY19 projections based on a delayed scenario of the British OEM 6 limited edition track car, such revenues being deferred to subsequent periods.
