Surface Transforms successfully raises gross proceeds of £6.5 million

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 5.30pm on 1 May 2024, the Bookbuild has closed and the Company has conditionally raised gross proceeds of £6.5 million, through the successful placing of 58,727,744 Firm Placing Shares, 569,422,256 Conditional Placing Shares and 21,850,000 Subscription Shares at the Issue Price of 1 pence per Ordinary Share.

The Firm Placing Shares, Conditional Placing Shares and Subscription Shares represent approximately 185 per cent. of the Company’s Existing Ordinary Shares. The Issue Price represents a discount of approximately 66 per cent. to the closing mid-market price per Ordinary Share of 2.9 pence on 30 April 2024, 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 200,000,000 Open Offer Shares at the Issue Price, to raise up to approximately £2.0 million (before expenses), on the basis of 1 Open Offer Share for every 1.760363190 Existing Ordinary Shares held on the Record Date. The Board has discretion to increase the size of the Open Offer up to an aggregate of 300,000,000 Open Offer Shares. 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 Firm Placing will be effected by way of a cashbox placing of new Ordinary Shares for non-cash consideration. The Firm Placing and Subscription are conditional upon the Placing Agreement becoming unconditional in all respects (save for the condition relating to Firm Placing Admission) in relation to the Firm Placing and Firm Placing Admission. The Conditional Placing and the 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. The Conditional Placing is not conditional on the Open Offer proceeding or on any minimum take-up under the Open Offer.

Shareholders should note that the Conditional Placing and Open Offer are conditional, inter alia, on the passing of the Resolutions. Failure to approve the Resolutions would therefore prevent the Company from raising funds pursuant to the Conditional Placing and Open Offer, and only part of the net proceeds would be received by the Company. This would require the Company to seek urgent alternate financing that may or may not be available and, if available, may or may not be on worse terms than the Fundraising. The Directors believe that the Resolutions to be proposed at the General Meeting are in the best interests of the Company and Shareholders as a whole and unanimously recommend that Shareholders vote in favour of the Resolutions.

David Bundred, Chairman of Surface Transforms commented:

“The Board obviously regrets the circumstances that have led to this distressed fund raising and completely understands the frustration and anger of shareholders. The Board is however now confident the combination of this £6.5m Placing, the £2m Open Offer and the £13m local authority loan is sufficient for working capital and capital expenditure needs over the next few years.

I would like to thank those institutional shareholders, new and old, who have participated in this Placing for their support. We trust that the Open Offer offers smaller shareholders the opportunity to participate and ameliorate  dilution  through the Open Offer.”

Background to and reasons for the Fundraising

Surface Transforms has announced a Placing and Subscription raising gross proceeds of £6.5 million, together with an Open Offer to raise up to £2.0 million (before expenses), subject to the Board’s discretion to increase the size of the Open Offer. The net proceeds of the Fundraising will be used for immediate working capital requirements and to support existing operations and the manufacturing scale-up.

It is important to note that Surface Transforms already has a secured and prospective customer pipeline for approximately £700 million¹ of sales, of which approximately £390 million² is contracted. Over the next three years (and potentially beyond), Surface Transforms expect to be able to sell as many discs as it can manufacture. Related to which, the Board continues to target increasing factory capacity to £75 million³ sales per annum over the next few years with a medium-term target of £150 million³ per annum. However, and as recent trading statements released by the Company have shown, improving manufacturing resilience is at least as important as the capacity scale-up, and operational management, led by the Company’s Chief Executive, Kevin Johnson and new Chief Operating Officer, Stephen Easton, are addressing this.

The Company raised £11.0 million (gross) in Q4-2023 with the expectation that the net proceeds of that fundraising (together with the £13.2 million Loan Facility entered into in December 2023) and estimated future operating cash inflows, would be sufficient to deliver an expanded plant capable of delivering the medium-term target of £150 million³ sales per annum. Due to a combination of factors, which are described further in the Launch Announcement, this is not currently the case, and the Company requires the net proceeds from the Fundraising for short-term working capital purposes, which once resolved, will mean the medium-term opportunity can once again be fully focused upon and delivered.

The Board is acutely aware of shareholder frustrations with the need for this Fundraising, not least given the proximity to the previous equity fundraise completed by the Company in Q4-2023, but the Directors do therefore want to remind Shareholders of:

–              the automotive market drivers and recent progress with the Company’s OEM customers;

–              the Company’s manufacturing strategy including progress on installing new capacity; and

–              how such drivers and progress translate into recent and forecast revenues.

1.        Based on the Directors’ expectations of existing customer contracts and their understanding of the relevant OEM’s production plan and estimated demand for discs.

2.        Based on the Directors’ expectations and their understanding of the relevant OEM’s production plan and estimated demand for discs and it takes into account the expected lifetime revenue from the Company’s contract with OEM which is anticipated to be entered into following the Company’s recent nomination as OEM 10’s tier one supplier of a carbon ceramic brake discs.

3.        Based on the Directors’ estimates of sales proceeds from expected production volumes.

Related Party and PDMR Transactions

The Directors’ and certain PDMRs, interests as at today and following completion of the Fundraising are as follows:

^{1 Including 2,052,626 Ordinary Shares held in nominee accounts and ISAs of connected parties}

^{2 Assuming Open Offer applications in total for £2.0 million of Open Offer Shares at the Issue Price}

^{3 Stephen Easton is the non-Board Chief Operating Officer and a PDMR of the Company}

The Directors and/or persons connected with each of them have conditionally subscribed for an aggregate of 20,350,000 Subscription Shares, which constitutes a related party transaction under the AIM Rules. Stephen Easton, a PDMR, has also conditionally subscribed for 1,500,000 Subscription Shares.

All of the Directors have agreed to participate in the Subscription, subscribing for in aggregate 20,350,000 Subscription Shares (the “Directors’ Participation”), which constitutes a related party transaction under the AIM Rules. As there are no independent Directors to provide a fair and reasonable statement because all of the Directors are participating in the Subscription, Zeus (in its capacity as nominated adviser for the purposes of the AIM Rules) considers the Directors’ Participation to be fair and reasonable insofar as Shareholders are concerned.

Canaccord, as a substantial shareholder of the Company, is also subscribing for Placing Shares, which constitutes a related party transaction under the AIM Rules for Companies.

In the case of participation by  Canaccord, 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 consider that the terms of the participation in the Placing by Canaccord is fair and reasonable insofar as Shareholders are concerned.

Firm Placing Admission

The Firm Placing Shares will, when issued, rank pari passu in all respects with the existing Ordinary Shares then in issue. Application will be made for the 58,727,744 Firm Placing Shares and 21,850,000 Subscription Shares to be admitted to trading on AIM and dealings are expected to commence at 8.00 a.m. on 7 May 2024. Following the Firm Placing Admission, the total number of voting rights in the Company will be 432,650,382 and Shareholders may use this figure as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change to their interest in, the Company under the FCA’s Disclosure Guidance and Transparency Rules.

Conditional Placing Admission

The Conditional Placing Shares will, when issued, rank pari passu in all respects with the existing Ordinary Shares then in issue. Application will be made for the 569,422,256 Conditional Placing Shares to be admitted to trading on AIM and dealings are expected to commence at 8.00 a.m. on 24 May 2024.

Posting of Circular

The Company expects to post a Circular to Shareholders tomorrow, 3 May 2024, 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 12.00 noon on 9 May 2024. Interested parties can register for the presentation at https://us06web.zoom.us/webinar/register/WN_mUnp-l2KTomKBRFgUhFEow

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 11.00 a.m. on 23 May 2024.