Surface Transforms raises £16.0m through placing & subscription

Surface Transforms, carbon ceramic brakes

Surface Transforms plc (LON:SCE), manufacturers of carbon fibre reinforced ceramic automotive brake discs, has announced that further to the Company’s announcement released at approximately 5.03 p.m. on 28 September 2022, 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:

Phase 3.1£10 million
Phase 3.2£30 million
Working capital (to support revenue growth)£10 million
£50 million

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:

DirectorExisting beneficial interest in Ordinary Shares% of current share capitalSubscription Shares subscribed forOpen Offer Shares to be applied forOrdinary Shares after Placing and Subscription% of Enlarged Share Capital3
       
David Bundred11,360,0250.70%37,5001,397,5250.58%
Kevin Johnson991,3080.51%991,3080.41%
Michael Cunningham170,0000.09%170,0000.07%
Richard Gledhill215,013,3467.69%15,013,3466.18%
Matthew Taylor55,0000.03%375,000430,0000.18%
Julia Woodhouse125,000125,0000.05%
Ian Cleminson102,0530.05%62,500164,5530.07%

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.

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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.

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 Surface Transforms, 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.

Expected timetable of principal events
Record Date for the Open Offerclose of business on 27 September 2022
Publication of Circular and Application Form29 September 2022
Ex entitlement date for the Open Offer8.00 a.m. on 30 September 2022
Open Offer Entitlements and Excess CREST Open Offer Entitlements credited to stock accounts of Qualifying CREST Shareholdersas soon as possible after8.00 a.m. on 3 October 2022
Recommended latest time for requesting withdrawal of Open Offer Entitlements and Excess CREST Open Offer Entitlements from CREST4.30 p.m. on 11 October 2022
Latest time for depositing Open Offer Entitlements and Excess CREST Open Offer Entitlements in to CREST3.00 p.m. on 12 October 2022
Latest time and date for splitting of Application Forms (to satisfy bona fide market claims only)3.00 p.m. on 13 October 2022
Latest time and date for receipt of proxy forms for General Meeting9.30 a.m. on 17 October 2022
Latest time and date for receipt of completed Application Forms and payment in full under the Open Offer and settlement of relevant
CREST instructions (as appropriate)
11.00 a.m. on 17 October 2022
Announce result of Open Offerby 19 October 2022
General Meeting9.30 a.m. on 19 October 2022
Announcement of the results of the General Meeting                                                   19 October 2022
Admission and commencement of dealings in Placing Shares, Subscription Shares and Open Offer Shares8.00 a.m. on 20 October 2022
CREST members’ accounts credited in respect of Placing Shares, Subscription Shares and Open Offer Shares in uncertificated formas soon as possible after8.00 a.m. on 20 October 2022
Dispatch of definitive share certificates for the Open Offer Shares in certificated form27 October 2022

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.

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