Surface Transforms conditionally raises gross proceeds of £18 million through successful placing

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 5.30 p.m. on 19 January 2021, the Bookbuild has closed and the Company has conditionally raised gross proceeds of £18.0 million, through the successful placing of 35,750,000 Placing Shares and 250,000 Subscription Shares at the Issue Price of 50 pence per Ordinary Share.

The Placing Shares and Subscription Shares represent approximately 23.2 per cent. of the Company’s Existing Ordinary Shares. The Issue Price represents a discount of approximately 5.7% to the closing price on 5 January 2021 following the Company’s Trading Update announced on that date, and 11.0 per cent. to the volume weighted average price of 56.3263 pence per Ordinary Share for the period from 5 to 19 January 2021 being the period following the Company’s last Trading Update to the date of the Launch Announcement.  The Issue Price also represents a discount of approximately 17.0 per cent. to the closing mid-market price per Ordinary Share of 60.5 pence on 19 January, being the date of 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 4,000,000 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 38.72957975 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. The Placing is not conditional on the Open Offer proceeding or on any minimum take-up under the Open Offer.

Reasons for the Fundraising and use of proceeds

As set out in the Launch Announcement, the Company is very pleased with recent discussions and progress made with other new OEMs to build upon its current contract expected revenue pipeline of £43 million¹. Since the start of the financial year, no new nominations have been made but should one or more be awarded to Surface Transforms, the Board considers that they would likely be material.

With regard to potential contracts, OEM 8 and OEM 9 operate quite differently to Surface Transforms’ other existing OEM customers, including requiring a more compressed 12-15 month (not 24 month) period between contract award and start of production.  Given the compressed start of production timelines required by OEM 8 and OEM 9, the Board consider it sensible to build capacity ahead of any such contract awards. 

It is possible that neither OEM 8 nor OEM 9 will award any new contract to the Company.  However, continued progress with OEM 1, OEM 3 (also covering OEM 4), OEM 6 and three new potential OEM customers are progressing well with numerous new vehicle launches being targeted for 2024. Indeed, the prospective contract pipeline has the potential to utilise the entire production capacity of Knowsley by 2024.  Accordingly, the Board are confident that production capacity of a new OEM Production Cell Two will be required in due course, regardless of new contracts being awarded by either or both OEM 8 or OEM 9 to the Company.

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

Use of proceeds

Net proceeds of the Placing and Subscription are circa £17.0 million.  The construction cost of OEM Production Cell Two is approximately £9.2 million. A further £0.7 million is to be allocated for machinery improvements to OEM Production Cell One.

Forecast increased production will require additional investment in working capital. The balance of the net proceeds will therefore be allocated for future general working capital requirements  and together with the Open Offer, to the extent it is taken up, provide further working capital headroom, as well as the flexibility to respond quickly to other opportunities or requirements that present themselves, such as incremental capital expenditure improvements and ad hoc projects.

Related Party Transactions

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

DirectorExisting beneficial interest in Ordinary Shares%Subscription Shares subscribed forInterest in Ordinary Shares after Placing and Subscription Admission%Open Offer Shares to be applied forInterest in Ordinary Shares after Admission4%4
David Bundred11,310,0250.8%50,0001,360,0250.7%1,360,0250.7%
Kevin Johnson991,3080.6%991,3080.5%       991,3080.5%
Richard Gledhill214,813,3469.6%200,00015,013,3467.9%15,013,3467.7%
Kevin D’Silva31,260,3150.8%1,260,3150.7%    1,260,3150.6%
Michael Cunningham120,0000.1%120,0000.1%       120,0000.1%

1 Including 516,122 Ordinary Shares held in SIPPs of connected parties

2 Held as to 11,670,628 Ordinary Shares through his investment vehicle Group-14 LTD 

3 Held in his SIPPs

4Assuming Open Offer applications in total for the full number of Open Offer Shares available

David Bundred, Chairman of the Company and Richard Gledhill, non-executive director of the Company, and/or persons connected with each of them have conditionally subscribed for an aggregate of 250,000 Subscription Shares, which constitutes a related party transaction under the AIM Rules.

Mr. Richard Sneller, as a substantial shareholder of the Company, is subscribing for 4,133,786 Placing Shares, which constitutes a related party transaction under the AIM Rules for Companies.

Unicorn Asset Management Limited, as a substantial shareholder of the Company, is subscribing for 1,035,715 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 2,755,958 Placing Shares, which constitutes a related party transaction under the AIM Rules for Companies.

Accordingly, Kevin Johnson, Michael Cunningham and Kevin D’Silva 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 Kevin D’Silva consider that the terms of the Directors’ Participation is fair and reasonable insofar as Shareholders are concerned.

In the case of participation by Mr. Richard Sneller, Unicorn Asset Management Limited 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 participation in the Placing by Mr. Richard Sneller, Unicorn Asset Management Limited and Canaccord Genuity Wealth Management Limited is 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 Open Offer 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 4:00 p.m. on 25 January 2021. Interested parties can register for the presentation at https://zoom.us/webinar/register/WN_7OKl7yGVTFaK-e_y89aTbg 

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.  Responses to questions from the live presentation will be published at the earliest opportunity on the Company’s website.

General Meeting

The Fundraising is conditional upon, inter alia, the passing of the Resolutions. The General Meeting will be held at Image Business Park, Acornfield Road, Knowsley Industrial Estate, Liverpool, L33 7UF at 10.00 a.m. on 8 February 2021. 

Pursuant to the Stay at Home Order introduced by the UK Government on 6 January 2021 to manage the Covid-19 virus (coronavirus), public gatherings of more than two people and non-essential travel are currently prohibited. The Company will therefore convene the General Meeting with the minimum quorum of two Shareholders necessary to conduct the meeting, being the Company’s Chief Executive, Kevin Johnson (acting as Chairman) and the Company’s Finance Director, Michael Cunningham.  All other Shareholders must not seek to attend the General Meeting in person.

Irrevocable commitments

The Directors (or persons connected with the Directors within the meaning of sections 252 – 255 of the Act), who in aggregate hold 18,494,994 Ordinary Shares, representing approximately 11.9 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.

Expected timetable of principal events 
  
Record Date for the Open OfferClose of Business on 19 January 2021
Publication of Circular and Application Form20 January 2021
Ex entitlement date for the Open Offer8.00 a.m. on 21 January 2021
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 21 January 2021
Recommended latest time for requesting withdrawal of Open Offer Entitlements and Excess CREST Open Offer Entitlements from CREST4.30 p.m. on 1 February 2021
Latest time for depositing Open Offer Entitlements and Excess CREST Open Offer Entitlements in to CREST3.00 p.m. on 2 February 2021
Latest time and date for splitting of Application Forms (to satisfy bona fide market claims only)3.00 p.m. on 3 February 2021
Latest time and date for receipt of proxy forms for General Meeting10:00 a.m. on 4 February 2021
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 5 February 2021
Announce result of Open Offerby 8 February 2021
General Meeting10:00 a.m. on 8 February 2021
First Admission and commencement of dealings in EIS/VCT Placing Shares8.00 a.m. on 9 February 2021
CREST members’ accounts credited in respect of EIS/VCT Placing Shares in uncertificated formas soon as possible after8.00 a.m. on 9 February 2021
Second Admission and commencement of dealings in Placing Shares (excluding EIS/VCT Placing Shares), Subscription Shares and Open Offer Shares8.00 a.m. on 10 February 2021
CREST members’ accounts credited in respect of Placing Shares (excluding EIS/VCT Placing Shares), Subscription Shares and Open Offer Shares in uncertificated formas soon as possible after8.00 a.m. on 10 February 2021
Dispatch of definitive share certificates for the Open Offer Shares in certificated form17 February 2021

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 4,000,000 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 4,000,000 Open Offer Shares issued pursuant to the Open Offer.

The Directors believe that upon First Admission, the gross assets of the Company will exceed the maximum limit set out within the qualifying rules for EIS and VCT.  Accordingly, the Open Offer Shares will not rank as “eligible shares” for the purposes of EIS, nor will they be capable of being a “qualifying holding” for the purposes of investment by VCTs.

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 Second Admission and becoming and being declared otherwise unconditional in all respects; and

iv.           Second Admission becoming effective on or before 8.00 a.m. on 10 February 2021 (or such later date and/or time as the Company, Zeus Capital and finnCap may agree, being no later than 26 February 2021).

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 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 38.72957975 Existing Ordinary Shares held 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 and fully paid, 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 Second 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 Second Admission will become effective and that dealings will commence at 8.00 a.m. on 10 February 2021.

Overseas Shareholders

The Open Offer Shares have not been and are not intended to be registered or qualified for sale in any jurisdiction other than the United Kingdom. Accordingly, unless otherwise determined by the Company and effected by the Company in a lawful manner, the Application Form will not be sent to Shareholders with registered addresses in any jurisdiction other than the United Kingdom since to do so would require compliance with the relevant securities laws of that jurisdiction. The Company reserves the right to treat as invalid any application or purported application for Open Offer Shares which appears to the Company or its agents or professional advisers to have been executed, effected or despatched in a manner which may involve a breach of the laws or regulations of any jurisdiction or if the Company or its agents or professional advisers believe that the same may violate applicable legal or regulatory requirements or if it provides an address for delivery of share certificates for Open Offer Shares, or in the case of a credit of Open Offer Shares in CREST, to a CREST member whose registered address would not be in the UK.

Notwithstanding the foregoing and any other provision of the Circular or the Application Form, the Company reserves the right to permit any Qualifying Shareholder to apply for Open Offer Shares if the Company, in its sole and absolute discretion, is satisfied that the transaction in question is exempt from, or not subject to, the legislation or regulations giving rise to the restrictions in question.

This Announcement and the Circular together with the accompanying Application Form, in the case of Qualifying non-CREST Shareholders, contains the terms and conditions of the Open Offer.

If a Qualifying Shareholder does not wish to apply for Open Offer Shares he should not complete or return the Application Form or send a USE message through CREST.

 Qualifying non-CREST Shareholders

If you are a Qualifying non-CREST Shareholder you will receive an Application Form which gives details of your Open Offer Entitlement (as shown by the number of the Open Offer Shares allocated to you). If you wish to apply for Open Offer Shares under the Open Offer you should complete the Application Form in accordance with the procedure for application set out in the Circular and on the Application Form itself. The completed Application Form, accompanied by full payment, should be returned by post to Link Group, Corporate Actions, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU so as to arrive as soon as possible and in any event no later than 11.00 a.m. on 5 February 2021.

Qualifying CREST Shareholders

Application will be made for the Open Offer Shares of Qualifying CREST Shareholders to be admitted to CREST. It is expected that the Open Offer Shares will be admitted to CREST on 10 February 2021. Applications through the CREST system may only be made by the Qualifying CREST Shareholder originally entitled or by a person entitled by virtue of a bona fide market claim. If you are a Qualifying CREST Shareholder, no Application Form will be sent to you but you will receive credits to your appropriate stock account in CREST in respect of your Open Offer Entitlements. You should refer to the procedure for application set out in the Circular. The relevant CREST instruction must have settled by no later than 11.00 a.m. on 5 February 2021.

Action to be taken

Open Offer

Qualifying non-CREST Shareholders wishing to apply for Open Offer Shares must complete the Application Form in accordance with the instructions set out in the Circular (Terms and Conditions of the Open Offer) and on the Application Form and return it with the appropriate payment to Link Group, Corporate Actions, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU, so as to arrive no later than 11.00 a.m. on 5 February 2021.

If you do not wish to apply for any Open Offer Shares under the Open Offer, you should not complete or return the Application Form. If you are a Qualifying CREST Shareholder, no Application Form will be sent to you. Qualifying CREST Shareholders will have Open Offer Entitlements and Excess CREST Open Offer Entitlements credited to their stock accounts in CREST. You should refer to the procedure for application set out in the Circular (Terms and Conditions of the Open Offer). The relevant CREST instructions must have settled in accordance with the instructions in the Circular by no later than 11.00 a.m. on 5 February 2021.

Qualifying CREST Shareholders who are CREST sponsored members should refer to their CREST sponsors regarding the action to be taken in connection with this Announcement, the Circular and the Open Offer.

David Bundred, Chairman of Surface Transforms commented:

“We are delighted with the success of this Placing which now enables us to proceed with building OEM Production Cell Two and thus removing this impediment in winning target business with OEM 8 and OEM 9. In addition, it is most encouraging to welcome a number of new institutional investors, as well as receiving significant ongoing support from our existing institutional shareholders.

We are also pleased to be announcing the Open Offer, again demonstrating our determination that our smaller, early stage, retail investors should continue to have the opportunity to participate in the increasing success of the Company as we mature.”

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