Audit still ‘ongoing’ but Surface Transforms aims to publish final results later this month

Surface Transforms, the specialist brakes manufacturer based in Knowsley, said it aims to publish its accounts for the year ended December 31, 2023, later this month.

The firm, which makes brakes for high performance cars and aircraft, said the audit of its statutory accounts is ongoing, but there are two particular areas that have, and are, contributing to the extended audit timeline.

The company said they are impairments to the carrying value of certain intangible and tangible assets, and revenue recognition, namely relating to revenue generated from engineering, testing and tooling services provided to OEM (original equipment manufacturers) customers during the development phase of the contract.

Surface Transforms said it is important to note that none of these matters impact cash.

In an explanation of the two issues, the company said it has applied a significantly higher discount rate in its assessment of its intangible assets and whether there is any indication of impairment.

This assessment was performed to address the combined challenges of cash flow forecasting risk and the potential gap between implied market value and carrying value and resulted in a recoverable amount lower than the carrying value.

While not yet agreed, the board estimate that £6.2m of non-cash impairments to intangible assets, specifically, capitalised R&D, software and right of use assets, will be recognised in FY23.

The board notes, however, that these assets continue to generate revenue, underpin its £390m order book and the accounting decision has no impact on daily operational performance.

The company’s impairment assessment of its tangible assets has identified that a particular furnace was not performing to contracted specification.

Furthermore, despite a considerable engineering review with the supplier, the board does not now believe a cost-effective solution to improve the performance of this one particular furnace, can be made.

Consequently, and while not yet agreed, the board estimate that £3m of non-cash impairment to tangible assets will be recognised in FY23.

The poor performance of this furnace is not impacting current output due to better than planned output from a complementary furnace, together with some outsourcing.

In terms of revenue recognition, following discussions with the company’s auditors, the board has re-assessed its revenue recognition policy relating to revenue generated from engineering, testing and tooling services performed, together ‘development revenues’.

This will now result in development revenues being recognised on completion of system integration by the OEM or when control is passed over for the contracted services, as opposed to in line with work performed and percentage completed under the current policy.

This change will not impact cash, and while not yet agreed, is expected to transfer approximately £2m in total from FY23 and prior periods into future years.

Surface Transforms said further updates will be made as appropriate.

In April this year the company revealed, in a trading update, that it expects its sales to more than double in 2024, to between £17.5m and £22m, due to a reduction in scrappage and expanding capacity. That compares with the 2023 turnover of £8.3m.

Last month the company angered shareholders by raising a further £8.5m through a ‘distressed’ placing and open offer, to fund short-term working capital.

It came just five months after it raised £11m through investors, and achieved a £13.2m loan from Liverpool City Region Combined Authority.

The company successfully closed the offer in mid December, saying the cash would fund working capital requirements as it geared up for a phased increase in production levels.