Final Results and Notice of AGM

RNS Number : 3005K

Surface Transforms PLC

20 August 2012

 

20August 2012

Surface Transforms plc

("Surface Transforms" or the "Company")

Final Results and Notice of Annual General Meeting

Surface Transforms (AIM: SCE) is pleased to announce its final results for the year ended 31 May 2012.  The Company's Annual Report and Accounts for the year ended 31 May 2012, together with a notice convening the Company's Annual General Meeting at Seymour Pierce's office at 20 Old Bailey, London, EC4M 7EN at 11:00am on 30 October 2012 have been posted to shareholders.  Copies of the Annual Report and Accounts are available on the Company's website: www.surface-transforms.com. 

Highlights

·     Revenue increased by 16% to £1.0 million (2011: £863k)

·     Improved gross margin during the year of 63% (2011: 60%)

·     Loss before taxation reduced to £637k (2011: £974k)

·     Cash used in operating activities fell by 75% to £237k (2011: £959k)

·     Cash position as at 31 May 2012 of £547k (2011: £615k)

·     January 2012, Company entered into 3 year supply agreement with key client, Alcon Components Ltd with expected revenues of £2.5 million over contract term

·     Additional new orders in the supercar market cumulatively worth £100k p.a. when production of those models commences in FY 2013/14

·     Ongoing testing by mainstream automotive vehicle OEM's and an internationally renowned aerospace brake system supplier

Chairman's Statement

It gives me great pleasure to report both financial and operational progress for Surface Transforms during the past year.

Financial progress is reflected in the headline results for the year ended 31 May 2012, in particular, a 16% increase in revenues to £1.0 million (2011: £863k) whilst improving gross margins to 63% (2011: 60%) and a 35% reduction in losses before taxation of £637k (2011: £974k).

Operational progress can be demonstrated against our immediate strategic objectives:

·     mainstream volume acceptance of carbon ceramic brakes in the volume road car market which will be the result of a process with four (overlapping) stages. In particular, our objectives are to gain:

o  adoption in the retrofit market by both converters from iron discs to carbon ceramic and from switching from competitor carbon ceramic products as a result of superior performance;

o  adoption as standard fitment by super car manufacturers, and whilst often individually small, are collectively significant in terms of engineering learning and short term cash flow;

o  adoption by the volume road car manufacturers for either standard fitment on limited edition models or options on the high performance volume cars; and

o  adoption as standard fitment on high performance cars.  This remains our ultimate objective but the Board recognise this is unlikely to be achieved in the next 24 months;

·     success in the automotive industry is nearly always a function of cost.  The Board has set the objective of providing a ceramic brake rotor product at half the current manufacturing cost, progressively, by FY 2014/15. Resultant lower selling prices should provide opportunities in new road car segments and we are optimistic that our products will prove very competitive when compared to those of our competitors;

·     acceptance within the aerospace market which the Board continues to view as offering a significant longer term contribution to  shareholder value (albeit lower volumes than road car); the target segment is the lighter (but actually higher volume) aeroplanes rather than heavier aircraft currently using carbon brakes; and

However, our immediate objective remains achieving cash break even in FY 2012/13 for which, the Board considers revenues of £1.9 million would need to be generated.

Against these objectives it is encouraging to report continuing improved sales.  Distributors are key to penetrating the after-market and our relationships with our two key partners - Alcon (in UK and Asia) and Mov'It (in UK and Europe) - continue to evolve. In the supercar market Surface Transforms recently won orders with Kepler Motors, Gumpert and Hennessey Performance to add to our existing customer base.

It is also particularly pleasing to report that certain volume road car manufacturers are now testing SurfaceTransforms' products for adoption on limited edition versions. We are confident that one or more of these projects will, in time lead to adoption on a project.

In aerospace our development activities continue to progress, with commercialisation of new technology always slower in aerospace than automotive. Our long term contract with a development partner has focused on the commercialisation of ceramic brakes in two markets:

1.    replacement of metallic friction brakes in the small commercial aircraft industry providing improved brake performance and weight saving; and

2.    applications requiring static brake friction performance.

In respect of cost, the Board is particularly pleased with progress in this area. Surface Transforms has clear plans for both further cost reduction and also the streamlining of production processes to reduce lead times and therefore working capital, in particular, inventory. These targeted improvements require capital expenditure and Surface Transforms is engaged in advanced discussions with local enterprise authorities to support the Company's targeted expansion with incentives and grants.

FINANCIAL REVIEW

In the year ended 31 May 2012, revenues were £1.0 million (2011: £863k) which was in line with our expectations. Gross margin also improved during the year to 63% (2011: 60%) due to the successful implementation of our cost reduction programme, although these achievements were in part offset by the sale of more products of a lower gross margin compared to prior year. 

Losses after taxation fell by 45% to £477k (2011: £871k) mainly due to increased contribution of £111k from sales, reduced net research costs expensed of £190k and payroll costs of £64k, together with a higher income tax credit of £58k. The reduction in research costs was a consequence of the Board's decision to decline further unpaid development activity and instead concentrate R&D efforts on the continued development of our technologies and products.

Looking ahead, our R&D tax credit advisers, Baker Tilly, has advised us we should continue to receive tax credits of £100k to £130k per annum based on forecast research activity. 

At 31 May 2012, inventory was £403k (2011: £304k). This increase was required to support our projected increase in sales to the motor racing market during FY 2012/13.

The Board has continued to address the Company's production constraints and has purchased a new CVI furnace during the year, financed by a three year term loan of £285k.

Net cash used in operating activities reduced by a significant 75% to £237k from £959k last year, mainly due to reduced losses after tax (as above) and a decrease in trade receivables of £262k due to sales being generated more evenly during the second half of this year compared to 2011.

The Company had a cash balance of £547k at 31 May 2012 (2011: £615k).

Loss per share was 1.50 pence (2011: loss 3.09 pence).

Chief Executive's Report

The Company is pleased to report increased revenues and reduced losses in line with our expectations. The increased revenues were generated from additional repeat sales of our automotive products, particularly from our contract with a leading global performance brake system supplier for products for the automotive racing markets.

Surface Transforms has seen significant improvements in both recognition and reputation of its high performance carbon ceramic brakes.  These improvements are essential for future sales growth in the automotive retrofit market and are also strategically important to achieve volume car manufacturers' acceptance and approval.  The objective in the current financial year is to resolve the inevitable technical anomalies arising from first exposure to serious road mileage and thereafter extend the product range.

Surface Transforms has been developing Porsche after-market disc replacement kits in partnership with its distributors.  The Porsche after-market is a significant target market and these product extensions are expected to be launched during the summer and autumn of 2012 and will generate additional revenues to the Company in FY 2012/13 and beyond. We expect sales in Europe, Asia and North America through a US distributor with whom contract negotiations are underway for this important North American market.

In terms of operational improvements, our cost reduction programme has progressed well and in line with the Board's expectations.  Manufacturing costs have been reduced by 18% but due to supply chain lead times, there is always a time lag between implementation and this cost being fully reflected in both the accounts and contract wins. Consequently, the improvement in gross margin reflected in the accounts actually understates the achievements in this area over the past twelve months.

During the next financial year, we are targeting a further 15% cost reduction, 5% of which is linked to the capital investment we have made in a new CVIST furnace.  The CVI process is the Company's current capacity bottleneck and one of the most expensive parts of the manufacturing process.  The new CVIST furnace will be commissioned in the autumn and is expected to more than triple our manufacturing capacity.

The Company's strategic cost saving and lead time reduction plan has identified significant further possible improvements but these will up to three years to implement fully.  Once completed however, Surface Transforms expects to have a manufacturing plant that can produce a cost effective product with capacity and lead time acceptable for volume road car manufacture.

To assist in achieving these ambitions, the Company has received a Eureka Eurostar grant focused on reducing the cost and time to machine a carbon ceramic disc. The programme began in November 2011 and will be completed over the next two years.

DIRECTORS & STAFF

We would like to thank all our colleagues, management and staff alike, for their hard work and dedication over the past year.

OUTLOOK

Surface Transforms continues to develop and is clearly progressing the commercialisation of its technology.  The Board expects continuing sales growth and has the objective of being cash break even in the current financial year ending 31 May 2013.

David Bundred

Chairman

Kevin Johnson

Chief Executive

Statement of Total Comprehensive Income

for the year ended 31 May 2012

			2012	2011
			£'000's	£'000's
Revenue			1,001	863
Cost of sales			(369)	(342)
Gross profit			632	521
Administrative expenses:
Before research costs			(639)	(712)
Research costs			(806)	(997)
Total administrative expenses			(1,445)	(1,709)
Other operating income			198	215
Operating loss			(615)	(973)
Financial income			4	2
Financial expenses			(27)	(3)
Loss before tax			(637)	(974)
Taxation			161	103
Loss for the year after tax			(477)	(871)
Other comprehensive income			-	-
Total comprehensive income for the year			(477)	(871)
Loss per ordinary share
Basic and diluted			(1.50p)	(3.09p)

All amounts relate to continuing activities.

Statement of Changes in Equity

For the year to 31 May 2012	Share Capital	Share premium account	Capital reserve	Retained earnings	Total
	£'000's	£'000's	£'000's	£'000's	£'000's
Balance at 31 May 2011	319	7,305	464	(6,598)	1,490
Loss for the year	-	-	-	(477)	(477)
Total comprehensive income for the year	319	7,305	464	(7,075)	1,013
Transactions with owners, recorded directly to equity
Equity settled share based payments	-	-	-	41	41
Total contributions by and distributions to the owners	-	-	-	41	41
Balance at 31 May 2012	319	7,305	464	(7,033)	1,054

For the year to 31 May 2011	Share Capital	Share premium account	Capital reserve	Retained earnings	Total
	£'000's	£'000's	£'000's	£'000's	£'000's
Balance at 31 May 2010	244	6,192	464	(5,820)	1,079
Loss for the year	-	-	-	(871)	(871)
Total comprehensive income for the year	244	6,192	464	(6,691)	208
Transactions with owners, recorded directly to equity
Shares issued in the year	75	1,113	-	-	1,188
Equity settled share based payments	-	-	-	93	93
Total contributions by and distributions to the owners	75	1,113	-	93	1,281
Balance at 31 May 2011	319	7,305	464	(6,598)	1,490

Balance Sheet

at 31 May 2012

	2012	2012	2011	2011
	£'000's	£'000's	£'000's	£'000's
Non-current assets
Property, plant and equipment		288		291
Current assets
Inventories	404		304
Trade and other receivables	357		604
Cash and cash equivalents	547		615
		1,308		1,523
Total Assets		1,596		1,814
Current Liabilities
Other interest bearing loans and borrowings	(89)		(10)
Trade and other payables	(298)		(315)
	(387)		(325)
Non Current Liabilities
Other interest bearing loans and borrowings	(155)		-
Total Liabilities		(542)		(325)
Net assets		1,054		1,489
Equity
Share capital		319		319
Share premium		7,304		7,304
Capital reserve		464		464
Retained earnings		(7,033)		(6,598)
Total equity attributable to equity shareholders of the Company		1,054		1,489

Cash flow statement

for the year ended 31 May 2012

	2012		2011
	£'000's		£'000's
Cash flows from operating activities
Loss for the year	(477)		(871)
Adjusted for:
Depreciation charge	67		72
Fixed Asset Disposal	1		-
Equity settled share-based payment expenses	41		93
Financial income	(4)		(2)
Financial expense	27		3
Taxation	(161)		(103)
	(506)		(807)
Changes in working capital
Increase in inventories	(99)		(101)
Decrease/(increase) in trade and other receivables	247		(154)
(Decrease)/increase in trade and other payables	(17)		1
	(375)		(1,061)
Finance income received	4		2
Financial expense paid	(27)		(3)
Taxation received	161		103
Net cash used in operating activities	(237)		(959)
Cash flows from investing activities
Acquisition of property, plant and equipment	(65)		(8)
Net cash used in investing activities	(65)		(8)
Cash flows from financing activities
Proceeds from issue of share capital	-		1,188
Proceeds from new loan	285		-
Payment of finance lease/loan liabilities	(51)		(21)
Net cash from financing activities	234		1,167
Net increase in cash and cash equivalents	(68)		200
Cash and cash equivalents at the beginning of the period	615		415
Cash and cash equivalents at the end of the period	547		615

NOTES TO THE ACCOUNTS

1.    Basis of preparation

The financial information set out above for the years ended 31 May 2012 and 2011 does not constitute the Group's statutory accounts within the meaning of Section 434 of the Companies Act 2006 but is derived from those accounts.  Statutory accounts for the year ended 31 May 2011 have been delivered to the Registrar of Companies and those for 2012 will be delivered following the Company's Annual General Meeting.  The auditors have reported on those accounts.  The auditors' reports were unqualified and did not contain statements under s.498 (2) or (3) Companies Act 2006. The results have been prepared using accounting policies consistent with those used in the preparation of the statutory accounts.

Enquiries:

Surface Transforms Plc
Dr. Kevin Johnson, CEO	[phone]
David Bundred, Chairman	[phone]
Seymour Pierce Ltd	[phone]
Guy Peters / David Foreman (Corporate Finance)
David Banks (Corporate Broking)

 

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