Half-yearly Report
11 February 2009
Surface Transforms plc
(the "Company")
Half-yearly results for the six months ended 30 November 2008
Surface Transforms plc, manufacturers of carbon fibre reinforced ceramic (CFRC)
materials, announces its half-yearly financial report for the six months ended
30 November 2008.
Financial and business highlights:
* Turnover £398,409 (30 November 2007: £205,997);
* Outstanding Order Bank currently stands at £[324,428];
* Losses after tax £396,718 (30 November 2007: £213,956)
* Cash at 30 November 2008 was £724,903 equivalent to approximately 3.8 pence
per share (31 May 2008: £1,112,719 equivalent to 5.8 pence per share)
Commenting, Kevin D'Silva, Chairman, said:
"Revenues in the second half of the financial year ending May 2009 are expected
to be lower than our internal budgets and, therefore, full year revenues,
although higher than the previous year, will be below market expectations. In
addition, despite the recent cost reduction measures, the loss for the current
year is now expected to be higher than 2007/08 and market expectations.
"The board recognises that trading conditions for the Company's non-aerospace
customers will continue to be challenging over the next 18 months. However, our
focus will be on achieving new business wins in the aerospace markets, some of
which have already occurred in December 2008 with more expected. In addition,
some significant operating milestones have been achieved especially in the area
of unit cost reduction. Lower unit cost of manufacture, a reduced annual
overhead base of £200,000 and improved business in Aerospace are expected,
collectively, to deliver a marked reduction in operating losses and improved
cash flows in the 2009/10 financial year.
"Whilst forecasting with any degree of accuracy is difficult in the current
economic conditions the board remains completely focused on achieving its goals
and is cautiously optimistic that the business is capable of breaking even, in
cash terms, at an operational level, in the financial year ended 31 May 2010. "
ENQUIRIES:
Surface Transforms plc
Geoff Hall Tel: 0151 356 2141
Kevin Johnson
John East & Partners Limited
Simon Clements Tel: 020 7628 2200
Redmayne Bentley (Private Client Broker)
Lucy Clapham Tel: 01943 886600
Simon Flather
For further Company details visit www.surface-transforms.com, click on Armshare
CHAIRMAN'S STATEMENT
During the six months ending 30 November 2008, the Company achieved its
internal budgeted financial targets. Revenues were £398,409 (2007: £205,997)
and losses after tax were £396,718 (2007: £213,956). The higher losses during
this period were budgeted and arose due to higher overheads. These were
instigated in early 2008 in order to bring forward the achievement of certain
operating milestones by the year ended 31 December 2008.
The key achievements for the six month period were:
* In September 2008, the award of a £300,000-£400,000 per annum, multi year
contract with Movit GmbH a leading supplier of aftermarket, high
performance brakes in Europe. This followed the award of a four year
contract of a similar value to supply brake carbon pre-forms to one of
Europe's leading automotive brake system suppliers.
* In October 2008, the achievement of ISO 9001 qualification - essential for
doing business in the aerospace sectors and with some of the larger,
prospective automotive OEM clients
* In November 2008, the completion of the CVIST manufacturing project for
carbon infiltration of brake discs. This has provided the business with the
capability of a further 20 per cent. reduction in manufacturing costs of an
automotive brake disc.
* In early December 2008 the award of a further £100,000 order from MBDA,
Europe's leading missile supplier, for the supply of carbon ceramic rocket
components. The current market for such components is growing.
There were, however, some disappointments resulting from the sharp decline in
global business confidence that commenced in October 2008. These were:
* the trading climate within the high performance automotive brake sector,
one of the three end user markets we serve, has deteriorated significantly;
and
* we currently expect that revenues from two of our three main automotive
clients will not meet contracted levels in the second half of the financial
year and we do not expect a full recovery in these levels until calendar
2010.
In December 2008, the Company took steps to reduce its annual operational cost
base by 14 per cent. The annualised cost reduction will be approx £200,000 per
annum. and certain of these reductions have commenced. The full effect of this
cost reduction will be felt partly in the second half of this financial year
but fully in the 2009/2010 year commencing on 1 June 2009.
In May 2008, in the light of materially improving orders and the imminent
awards of two new automotive brake contracts, the board had decided to increase
overheads to accelerate the milestones it wished to achieve this year within
the manufacturing and engineering parts of the business. These milestones have
been accomplished and the cost reductions executed last month do not affect
achievement of these goals.
We now expect that full year revenues are likely to be lower than market
expectations but will be considerably higher than the previous year. The full
effect of the cost reduction now provides the Company with a realistic
opportunity to break even in cash flow terms at much lower levels of revenue.
Financial review
In the six months ended 30 November 2008, revenues were £398,409 (2007: £
205,997). This represents a 93.4 per cent. increase on the same period in the
2007/8 financial year with sales of automotive brake discs accounting for the
majority of the increase.
As at 2 February 2009 the outstanding order book had increased to £324,428 (30
November 2008: £161,000) of which £73,388 relates to the 2009/10 financial
year.
Loss after taxation, for the six month period was £396,718 (2007: £213,956).
Loss per share was 2.08p (2007: 1.28 p)
Shareholder Funds at 30 November 2008, were £1,419,219 (2007: £2,129,137), this
included cash balances of £724,903 (2007: £1,592,785).
The Company has no bank borrowings.
The charge relating to Share Based Payments under IFRS 20 amounts to £43,098 in
the period under review. The charge for the full year to 31 May 2009 is
expected to amount to approximately £94,000. These are non cash costs.
People
With effect from 1 January 2009 Mr Julio Faria has decided to step down from
the board to pursue his other business interests. Julio founded the Surface
Transforms business together with Professor David Clark, in 1992 when they
purchased the intellectual property from the former ICI plc. We wish Julio well
for the future.
Outlook
The outlook for new business in two of our markets, Aircraft Braking and Rocket
Components, is still encouraging although trading conditions in the automotive
high performance braking sector have deteriorated significantly since October
2008.
Revenues in the second half of the financial year ending May 2009 are expected
to be lower than our internal budgets and, therefore, full year revenues,
although higher than the previous year, will be below market expectations. In
addition, despite the recent cost reduction measures, the loss for the current
year is now expected to be higher than 2007/08 and market expectations.
The board recognises that trading conditions for the Company's non-aerospace
customers will continue to be challenging over the next 18 months. However, our
focus will be on achieving new business wins in the aerospace markets, some of
which have already occurred in December 2008 with more expected. In addition,
some significant operating milestones have been achieved especially in the area
of unit cost reduction. Lower unit cost of manufacture, a reduced annual
overhead base of £200,000 and improved business in Aerospace are expected,
collectively, to deliver a marked reduction in operating losses and improved
cash flows in the 2009/10 financial year.
Whilst forecasting with any degree of accuracy is difficult in the current
economic conditions the board remains completely focused on achieving its goals
and is cautiously optimistic that the business is capable of breaking even, in
cash terms, at an operational level, in the financial year ended 31 May 2010.
Finally, I would like to thank everyone at the Company for their dedication and
continued hard work throughout the period.
Kevin D'Silva
Chairman
11 February 2009
CHIEF EXECUTIVE'S REPORT
In the six months ended 30 November 2008, 82 per cent. of the revenues were
derived from automotive applications. Geographically, 80 per cent. of revenues
have arisen from customers based in Continental Europe.
In the period, the Company had ten aerospace and automotive clients and four of
these customers (three automotive and one aerospace) were purchasing products
under multi-year supply contracts.
Aerospace
Aircraft Brake Systems
Development work continued with a second US brake system supplier that covers
both commercial and military aircraft principally in the USA.
Rocket Components
The Company's proprietary technology is able to deliver high performance,
affordable carbon ceramic rocket propulsion components. There are two principal
clients, one of which being MBDA, followed up its earlier award of a £150,000
three year development contract with a further £100,000 order for rocket
components in December 2008.
These contracts and orders are essentially developmental in nature and once
completed and, if successful, should become standard components of missile and
rocket motor designs. The carbon ceramic material has considerable economic and
reduced weight advantages when compared with the materials currently in use.
Automotive
The Company's SystemST brake disc product is now on 28 car platforms and such
cars are typically priced in excess of €90,000 per car.
There are three main clients all based in Europe: (i) Koenigsegg Automotive: a
supercar manufacturer based in Sweden; (ii) Movit Gmbh: a European supplier of
the aftermarket for steel and ceramic brake systems; and (iii) an un-named
global manufacturer of brake systems that purchases the Company's carbon fibre
brake discs for the race car industry.
Two of these three clients have signed multi year supply contracts each valued
at £300,000-£400,000 per annum. During the six month period under review sales
to these clients have met management expectations. However, given the sharp
deterioration in the global economic environment since October 2008, the board
believes sales of brake discs to these clients in the second half of the
current financial year will be lower than management expectations. The
Directors do not anticipate a return to the previous sales levels for these
customers for up to a further 12 months.
SystemST brake discs are being evaluated by a number of new car manufacturers
in Europe and although it is difficult to predict when these will be completed
it is encouraging to see that the current sterling exchange rate has provided
the Company with a further competitive advantage.
Production and technology
ISO 9001 accreditation was achieved during October 2008. This award is
essential to conducting business in the aerospace industries and with some of
the larger, prospective automotive OEM clients. The completion of the CVIST
development project has meant that the Company no longer has to rely on
subcontracted carbon-carbon deposition suppliers for an important part of its
manufacturing process. The capacity of the CVIST plant is approximately 1,000
to 1,500 automotive brake discs per annum, roughly three times the current
sales volumes, and it also processes aerospace components.
Additional capacity can be achieved through further investment. As a result of
the further investment the Directors anticipate the direct cost of a standard
automotive brake disc could be reduced by a further 20 per cent. To date, the
total investment in the CVIST process has been approximately £300,000 and 66
per cent. of this expenditure was provided by grants from the UK North West
Development Agency
Operations
The 14 per cent reduction in annual operating overheads that was implemented in
December makes it possible for the Company to become profitable on considerably
lower levels of turnover than had originally been envisaged. This now places
the Company in a position where it has a realistic opportunity to break even in
cash flow terms on revenues of approximately £1.3 million per annum
Dr Kevin Johnson
Chief Executive
11 February 2009
SURFACE TRANSFORMS PLC
INCOME STATEMENT
for THE six months ended 30 November 2008
(Unaudited) (Unaudited) (Audited)
Six Months Six Months Year
Ended Ended ended
30-Nov 30-Nov 31-May
Note 2008 2007 2008
£ £ £
Revenue 398,409 205,997 508,111
Cost of sales (202,243) (103,663) (252,874)
Gross profit 196,166 102,334 255,237
Administrative expenses:
Before research costs (452,453) (318,677) (678,078)
Research costs (397,948) (312,314) (615,617)
Total administrative expenses (850,401) (630,991) (1,293,695)
Other operating income 87,791 125,682 220,652
Operating loss (566,444) (402,975) (817,806)
Financial income 18,882 32,625 67,347
Loss before tax (547,562) (370,350) (750,459)
Taxation 2 150,844 156,394 156,394
Loss for the period (396,718) (213,956) (594,065)
Loss per ordinary share
Basic and diluted 3 (2.08p) (1.28p) (3.33p)
SURFACE TRANSFORMS PLC
BALANCE SHEET
AS AT 30 NOVEMBER 2008
(Unaudited) (Unaudited) (Audited)
As at As at As at
30-Nov 30-Nov 31-May
2008 2007 2008
£ £ £
Non current assets
Intangible assets - 777 -
Property Plant and Equipment 390,094 334,828 382,975
Total non current assets 390,094 335,605 382,975
Current assets
Inventories 297,354 221,988 258,874
Trade and Other Receivables 297,423 257,039 292,923
Cash and cash equivalents 724,903 1,592,785 1,112,719
Total current assets 1,319,680 2,071,812 1,664,516
Total assets 1,709,774 2,407,417 2,047,491
Current liabilities
Trade and other payables (290,555) (278,280) (274,652)
Total liabilities (290,555) (278,280) (274,652)
Net assets 1,419,219 2,129,137 1,772,839
Equity
Share capital 190,308 190,308 190,308
Share premium account 5,749,952 5,751,198 5,749,952
Other reserves 463,885 463,885 463,885
Retained Earnings (4,984,926) (4,276,254) (4,631,306)
Total equity attributable to equity 1,419,219 2,129,137 1,772,839
shareholders of the company
SURFACE TRANSFORMS PLC
Cash flow statement
for THE six months ended 30 November 2008
(Unaudited) (Unaudited) (Audited)
Six Months Six Months Year
Ended Ended ended
30-Nov 30-Nov 31-May
2008 2007 2008
£ £ £
Cash flows from operating activities
Loss for the period (396,718) (213,956) (594,065)
Adjusted for:
Depreciation charge 35,128 19,984 49,079
Amortisation charge - - 1,886
Equity settled share-based payment expenses 43,098 31,552 56,609
Financial income (18,882) (32,625) (67,347)
Taxation (150,844) (156,394) (156,394)
(488,218) (351,439) (710,232)
Changes in working capital
Increase in inventories (38,480) (9,807) (46,693)
(Increase)/decrease in trade and other (4,500) 32,537 (3,347)
receivables
Increase in trade and other payables 15,903 19,269 15,641
(515,295) (309,440) (744,631)
Finance income received 18,882 32,625 67,347
Taxation received 150,844 156,394 156,394
Net cash used in operating activities (345,569) (120,421) (520,890)
Cash flows from investing activities
Acquisition of property, plant and equipment (42,247) (64,248) (142,599)
Net cash used in investing activities (42,247) (64,248) (142,599)
Cash flows from financing activities
Proceeds from issue of share capital - 898,483 897,237
Net cash from financing activities - 898,483 897,237
Net (decrease)/increase in cash and cash (387,816) 713,814 233,748
equivalents
Cash and cash equivalents at the beginning 1,112,719 878,971 878,971
of the period
Cash and cash equivalents at the end of the 724,903 1,592,785 1,112,719
period
SURFACE TRANSFORMS PLC
STATEMENT OF CHANGES IN EQUITY
At 30 November 2008
Unaudited six months to 30 Share Share Capital Profit and Total
November 2008 Capital premium reserve loss
account account
£ £ £ £ £
Credit in relation to share - - - 43,098 43,098
based payments
Net income recognised directly - - - 43,098 43,098
to equity
Loss for the period - - - (396,718) (396,718)
Total recognised income and - - - (353,620) (353,620)
expense
Opening shareholders funds at 1 90,308 5,749,952 463,885 (4,631,306) 1,772,839
June 2008
Closing shareholders funds at 190,308 5,749,952 463,885 (4,984,926) 1,419,219
30 November 2008
Unaudited six months to 30 Share Share Capital Profit and Total
November 2007 Capital premium reserve loss
account account
£ £ £ £ £
Credit in relation to share - - - 31,552 31,552
based payments
Net income recognised directly - - - 31,552 31,552
to equity
Loss for the period - - - (213,956) (213,956)
Issue of New Shares 50,000 848,483 - - 898,483
Total recognised income and 50,000 848,483 - (182,404) 716,079
expense
Opening shareholders funds at 1 140,308 4,902,715 463,885 (4,093,850) 1,413,058
June 2007
Closing shareholders funds at 190,308 5,751,198 463,885 (4,276,254) 2,129,137
30 November 2007
Audited Year Ended 31 May 2008 Share Share Capital Profit and Total
Capital premium reserve loss
account account
£ £ £ £ £
Credit in relation to share - - - 56,609 56,609
based payments
Net income recognised directly - - - 56,609 56,609
to equity
Loss for the year - - - (594,065) (594,065)
Issue of new shares 50,000 847,237 - - 897,237
Total recognised income and 50,000 847,237 - (537,456) 359,781
expense
Opening shareholders funds at 1 140,308 4,902,715 463,885 (4,093,850) 1,413,058
June 2007
Closing shareholders funds at 190,308 5,749,952 463,885 (4,631,306) 1,772,839
31 May 2008
SURFACE TRANSFORMS PLC
NOTES
1 Accounting Policies
Basis of preparation
The interim financial statements are the responsibility of the Directors and
were authorised and approved by the Board of Directors for issuance on 11
February 2009.
The interim financial statements of Surface Transforms PLC for the period ended
30 November 2008 were unaudited and do not comprise statutory accounts within
the meaning of section 240 of the Companies Act 1985.
This interim financial information has been prepared on the basis of
recognition and measurement requirements of adopted IFRSs.
These interim financial statements have not been prepared in accordance with
IAS 34 "Interim Financial Reporting". They do not include all the information
required for full annual financial statements, and should be read in
conjunction with the consolidated financial statements of the Company for the
year ended 31 May 2008.
The comparative figures for the year ended 31 May 2008 are not the Company's
statutory accounts for the financial year. These accounts, which were prepared
under adopted IFRSs, have been reported on by the Company's auditors and
delivered to the registrar of companies. The report of the auditors was (i)
unqualified, (ii) did not include a reference to any matters to which the
auditors drew attention by way of emphasis without qualifying their report, and
(iii) did not contain a statement under Section 237 (2) or (3) of the Companies
Act 1985.
The accounting policies set out below have, unless otherwise stated, been
applied consistently to all periods presented in this interim report.
The financial statements have been prepared in accordance with applicable
accounting standards and under the historical cost accounting rules, modified
to include revaluation to fair value of certain financial instruments described
below.
The accounting policies set out below have, unless otherwise stated, been
applied consistently to all periods presented in these financial statements.
Going concern
The financial statements have been prepared on a going concern basis which the
directors believe to be appropriate. The Company incurred a net loss of £
396,718 during the period however the directors are satisfied, based on
detailed cash flow projections, that sufficient cash is available to meet the
Company's needs as they fall due for at least 12 months from the date of
signing the half yearly report. In addition revenues are expected to continue
to increase in the coming periods resulting in the company becoming profitable
in due course.
2 Taxation
Analysis of credit in the period/year
(Unaudited) (Unaudited) (Audited)
Six months Six months Year ended
ended ended
30-Nov 30-Nov 31-May
2008 2007 2008
£ £ £
UK Corporation tax
Current tax on income
for the period - - -
Research and development
tax repayment 150,844 156,394 156,394
150,844 156,394 156,394
The effective rate of tax for the period/year is lower than the standard rate
of corporation tax in the UK of 28 per cent. principally due to losses incurred
by the Company.
The potential deferred tax asset relating to losses has not been recognised in
the financial statements because it is not possible to assess whether there
will be suitable taxable profits from which the future reversal of the
underlying timing differences can be deducted.
3 Loss per share
(Unaudited) (Unaudited) (Audited)
Six months Six months Year ended
ended ended
30-Nov 30-Nov 31-May
2008 2007 2008
Pence Pence Pence
Loss per ordinary share:
Basic and diluted (2.08) (1.28) (3.33)
Loss per ordinary share is based on the Company's loss for the financial period
of £396,718 (30 November 2007: £213,956; 31 May 2008: £594,065). The weighted
average number of shares used in the basic calculation is 19,030,748
(30 November 2007: 16,708,199; 31 May 2008: 17,828,562).
The calculation of diluted loss per ordinary share is identical to that used
for the basic loss per ordinary share. This is because the exercise of share
options would have the effect of reducing the loss per ordinary share and is
therefore not dilutive under the terms of International Accounting Standard 33
"Earnings per share".
4. Dividends
The directors are not proposing the payment of a dividend in respect of the six
months ended 30 November 2008.
5. Copies of results
Copies of the half-yearly financial results will be sent to shareholders
shortly and will also be available at the Company's registered office, Unit 4,
Olympic Park, Poole Hall Road, Ellesmere Port, Cheshire CH66 1ST and on the
Company's website www.surface-transforms.com.
.
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