Final Results and Notice of Annual General Meeting

RNS Number : 7592L

Surface Transforms PLC

05 August 2011

 

5 August 2011

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 2011.  The Company's Annual Report and Accounts for the year ended 31 May 2011, together with a notice convening the Company's Annual General Meeting at the Company's offices at Ellesmere Port at 12:00 noon on 14 October 2011 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 7.3% to £863,439  (2010: £804,800)

·     Losses after taxation £870,961 (2010: £536,019)

·     Cash position as at 31 May 2011 of £615,145 (2010: £414,513)

·     Order book plus contracted sales for delivery by 31 May 2012 of £568,000 (2010: £521,996)

·     Fundraising of £1.2 million net of expenses, in November 2010 at 17 pence per share.

·     In March 2011 the Company entered into a forward contractual supply agreement with 
one of its main clients, Mov'IT International. The contract expires on 31 December 2014 and provides for the sale of ceramic brake discs with a minimum value of approximately £2.7m (€3.1 million) over the contract term.

·     During October 2010, the Company signed a Development Agreement with a major US 
manufacturer of wheels and brake systems for the aircraft industry.

Enquiries:

Surface Transforms Plc	[phone]
Kevin Johnson
Geoff Hall
Seymour Pierce Ltd	[phone]
Guy Peters / David Foreman - Corporate Finance
Paul Jewell / David Banks - Corporate Broking

Chairman's Statement

In the year ended 31 May 2011 the Company achieved a 7.3% increase in revenues to £863,439 (2010: £804,800). These revenue levels although higher than last year were lower than expected or budgeted.  Losses before taxation for the period were higher at £973,888 (2010: £747,091). Losses after taxation for the period were also higher at £870,961 (2010: £536,019).

Highlights for the 12 month period were:

During October 2010, the Company signed a Development Agreement with a major US manufacturer of wheels and brake systems for the aircraft industry. Over the past 24 months, the Company has undertaken a series of brake disc trials with this client and this agreement formalises the business relationship between the two companies. This is initially a development agreement and due to the nature of projects of this type, it is difficult to predict timetables and success thresholds. Nevertheless, both parties are focused on completing the development test programmes and, should the Company's carbon ceramic product pass all test criteria, the business will move to commercial supply.

During March 2011 the Company entered into a new supply agreement with one of its main clients, Mov'IT International. This contract expires on 31 December 2014 and provides for the sale of ceramic brake discs with a minimum value of approximately £2.7 million (€3.1 million) over the contract term.

Development costs were substantially higher than the previous year due to increased costs associated with new testing work which was not funded by the customer, but which was necessary for automotive and aircraft brake evaluation programmes. The Board anticipates that such costs will be considerably reduced in the coming financial year.

In March 2011 we commenced a new level of commercial partnership with Alcon Components Ltd, an existing client, for the supply of carbon ceramic brake discs for selected ranges of high performance cars for both road and track use. The first application is the supply of ceramic brake discs for the Nissan GTR for their Asian markets and distributors. Alcon is one of the premier UK based brake systems suppliers to both the automotive OEM and aftermarket.

During November 2010, the Company raised £1.19 million, net of expenses, by way of a Placing and Open Offer to shareholders. The new ordinary shares were issued at 17 pence per share. The additional funds have and will be used to increase production capacity and tooling and reduce the direct cost of manufacturing carbon ceramic discs as well as to support ongoing working capital.

FINANCIAL REVIEW

In the year ended 31 May 2011 revenues were £863,439 (2010: £804,800). This 7.3% increase in revenues, although lower than expected, was achieved with no sales of discs to the US brake system supplier for the development of a next generation military vehicle. Such sales, at approximately £250,000, were significant during the financial year ended 31 May 2010. These revenues have been replaced by sales to commercial automotive clients. The board does not anticipate selling any further discs to the US military development project until late 2012, by which time we hope that the brake trials will have been completed satisfactorily. It is our understanding that our ceramic discs have performed well to date during testing; there have been no breakages or failures, which is very encouraging but consequently there have been no replacement disc sales.

The order book and contracted sales for the year ending 31 May 2012 amounts to £568,000 (31 May 2010: £521,996).  The contracted sales, expected to be in excess of £280,000, relate to a three year, forward contractual supply agreement the Company entered into in March 2011 with one of its main clients, Mov'IT International.  

Losses after taxation were £870,961 (2010: £ 536,019).  There are two main reasons for the increased losses: (i) an increase in research and development costs which was not funded by clients. These were incurred to evaluate brake discs for a number of new car platforms and for an aircraft brake and (ii) an unexpected reduction in R&D tax credits of £108,000. Hitherto, annual tax credits of approximately £200,000 have been received by the Company to cover R&D activity. 

Looking ahead our R&D tax credit advisers, Baker Tilly, expect tax credits to continue to be received by the Company and within a range of £150,000 to £170,000.  Research costs, not funded by customers, are expected to fall back sharply to more historic levels in the financial year ending 31 May 2012.

The Company has taken additional steps to reduce its cost base and savings of approximately £170,000 p.a for the year commencing 1 June 2011 should be achieved.    

Loss per share was 3.09 pence (2010: loss 2.33 pence).

The Company had a cash balance of £615,145 at 31 May 2011 (31 May 2010: £414,513)

Shareholders funds were £1,489,607 (31 May 2010: £1,079,133).

DIRECTORS & STAFF

Professor David Clark, one of the four founders of the Company in 1992, will not be seeking re election as a non executive director at the AGM in October this year. David is one of the UK's leading and most respected scientists in carbon fibre and carbon ceramic technology and he is an adviser to a number of institutions on this subject including the Ministry of Defence. He co-founded the Company as a spin out from ICI where he had been a director in charge of Development and New Technologies. We shall miss his regular counsel at the board but we shall continue to have access to his advice.

Dr. Geoff Gould has reached retirement age and has recently reduced his executive status from full time to part time and he intends to retire fully this year. Geoff is responsible for sales to the aircraft brake and rocket motor markets and joined in 2001 from Honeywell where he was a senior executive in the carbon fibre business. I am pleased, however, that we shall continue to have access to his experience and counsel on a consultancy basis whenever required going forward.

With the retirement of David and Geoff during 2011, the Company is very fortunate that David Bundred has today agreed to join the board as a Non Executive director. David is a chartered engineer and has had a senior and very successful career at some of the UK's leading industrial businesses. His commercial experience is highly relevant to the aircraft and automotive brake markets that the Company addresses. During a 24 year career at Lucas his appointments included General Manager of the Brake Controls and the Truck Brakes Divisions and between 1993 -1999 he was a Divisional Managing Director and latterly Chief Operating Officer of Lucas Aerospace. Until he retired in 2005, he was CEO of TMD Friction Group GmbH in Germany, a large, global supplier of brake pads to the automobile industry.

I would like to thank all my colleagues, management and staff alike, for their hard work and dedication over the past year. It is a credit to all staff that the Company has again maintained its ISO 9001 accreditation.

OUTLOOK

The 2011 financial year was disappointing for management as we had expected revenues to be much higher together with lower development costs. Nevertheless, the sales achievement should not be underestimated given difficult market conditions generally, but also as the growth was achieved in spite of there being no sales to the next generation military project in the USA. Surface Transforms is one of only two worldwide suppliers of ceramic brake discs and, in light of broader demand for such brake systems, we expect further expansion of our business despite the difficulties in forecasting.

We have consistently striven to reduce our sales break even levels with lower overheads; increased productivity and programmes to reduce unit product costs. Current estimates indicate that cash breakeven occurs at approx £1.5 million of revenues given the current product mix.

I said last year that the challenges facing management had moved from technology based issues to operating matters relating to the management of working capital, production and the investment in additional process capacity to accommodate the expected growth in revenues. These challenges continue and we have commenced on process capacity expansion as a priority with detailed discussions currently ongoing with selected suppliers.

Looking ahead to May 2012, although the euro-zone economy appears fraught with challenges we do not expect that the banking and sovereign debt problems will materially affect our automotive clients in Sweden, Germany and the European racing industry. The deficit reduction programmes of the main European economies have slowed defence spending and so our rocket motor development revenues are expected to remain subdued.

We anticipate lower losses for both the first half and also for the full year compared to 2010/11. We are focussed on the business achieving cash breakeven as soon as possible and believe that increasing the revenues from our existing customer base will take us to that target. The high performance and race automotive sector in Europe is expected to dominate our revenue profile in 2012 and there is the possibility that the supply of ceramic brake components to the aircraft sector in the USA may commence in late calendar 2012.

K D'Silva

5 August 2011

Chief Executive's Report

The Company expected higher revenues from the automotive market in terms of development programmes and increased market demand, and to maintain development sales revenue from its aerospace and defence components clients.  It is always difficult predicting the adoption curve of new technologies and the anticipated demand from the automotive market, although growing, was slower than expected and the revenues from the aerospace and defence markets below expectations.

AUTOMOTIVE - HIGH PERFORMANCE AND RACE CAR BRAKE SYSTEMS

The revenues from our automotive clients increased significantly in the year, more than enough to compensate for the previous year's sales of carbon ceramic product to the US brake system supplier for the development of the next generation military vehicle (sales in excess of £250,000 which was non-recurring), and for the fall in aerospace and defence component development revenues. Whilst total sales grew by 7.3%, this was below the Board's expectations.

Feedback from the US brake system supplier for the development of the next generation military vehicle has been very positive with the Company's products performing well.  There have been no issues to date, which is very encouraging.

Revenues with Koenigsegg and the North American aftermarket have continued and the Company's revenue growth has been strong, especially in sales to the European aftermarket with our European distribution partner Mov'IT. The Company was pleased to sign a new supply agreement with Mov'IT in March 2011.  The new agreement covers the period to 31 December 2014 and provides for minimum sales to Mov'IT of approximately £2.7 million (€3.1 million) over the term.

Secondly, revenues in the racing market also grew with the Company's products being recognised as world class by our customer, a leading global brake system supplier.

The Company is focused on winning new business and in early 2011 began a commercial partnership with Alcon Components Ltd, a leading UK based performance brake system supplier to both automotive OEM's and the aftermarket.  The first commercial application to come out of the partnership is a new ceramic brake upgrade kit for the Nissan GTR for Alcon's Asian market. The Company believes as the partnership develops, further systems will be produced and commercialised.

Alcon Components Ltd is also a member of the Company's collaborative R&D project, funded by the Technology Strategy Board.  The project continues to progress on track with promising results which are of interest to both the automotive partners Alcon and Bentley Motor Cars and rail partner Faiveley Transport. 

AEROSPACE AND DEFENCE BRAKE DISCS AND COMPONENTS

The Company has worked on a number of development programs in these markets. The development with a US brake system supplier for a carbon ceramic brake disc continues with the signing of a development agreement in October 2010.  Our client's initial focus had been on the delivery of a new technology solution for one particular application, although they believe the technology can be applied to other applications which they currently supply and have therefore broadened the scope of the development.  To support the development the customer has agreed to fund the future development activities and the first of such orders has now been received. Both companies are committed to completing the technical development and achieving a commercial solution as quickly as possible.

Surface Transforms carbon ceramic technology is uniquely positioned to deliver affordable, high performance (in terms of extended life and reduced mass) rocket components.

We have successfully completed the final year of a three year development programme with MBDA, a world leading missile manufacturer jointly owned by BAE Systems, EADS and Finmecanica and sponsored by the UK and French Ministries of Defence. The objective of the programme was to evaluate our proprietary carbon ceramic technology for its use in rocket component applications.  The development work delivered very promising results in terms of material characteristic and cost to manufacture, confirming its potential use as affordable, high performance rocket components. MBDA have also identified a number of potential rocket components the technology could be applied too.  Similarly the development program with Microturbo, one of the world leaders in gas turbine applications for missile propulsion has delivered encouraging results during its first year of a planned two year programme. 

In the current environment of government deficit reduction programmes, the effect on the MoD and its suppliers is to add a high degree of uncertainty to development funds, making the future of both of these promising programmes unclear.  Consequently revenues were lower than expected this year and we anticipate this situation will remain uncertain until at least the early part of next year.

OPERATIONS

Affordability and supply capability are the key requirements for our customers. The current economic backdrop has seen significant price increases from some of the Company's suppliers. The Company is working to minimise these cost pressures both through the supply chain and within the Company's process technology, with some success. These activities, coupled with a significant increase in automotive development testing necessary for our automotive customers this year, led to much higher development costs than the Company had anticipated. Now complete, the Board is confident these costs will be greatly reduced in this new financial year. 

With the growth in the automotive market expected to continue, the company has established a capacity expansion plan which will address the key bottlenecks through process improvement and additional process plant.

PEOPLE

The Company continues to have a strong and focused senior management team who have supported the business constantly during the year, showing tremendous commitment to driving the Company forward to achieving it goals.

I would like to thank all my colleagues for their dedication and hard work during the year.

Kevin Johnson

Chief Executive

5 August 2011

Statement of Total Comprehensive Income

for the year ended 31 May 2011

				2011	2010
				£	£
Revenue				863,439	804,800
Cost of sales				(342,654)	(358,537)
Gross profit				520,785	446,263
Administrative expenses:
Before research costs				(711,902)	(698,791)
Research costs				(996,880)	(670,201)
Total administrative expenses				(1,708,782)	(1,368,992)
Other operating income				215,364	177,589
Operating loss				(972,633)	(745,140)
Financial income				2,124	339
Financial expenses				(3,379)	(2,289)
Loss before tax				(973,888)	(747,090)
Taxation				102,927	211,071
Loss for the year after tax				(870,961)	(536,019)
Other comprehensive income				-	-
Total comprehensive income for the year				(870,961)	(536,019)
Loss per ordinary share
Basic and diluted				(3.09p)	(2.33p)

All amounts relate to continuing activities.

Statement of Changes in Equity

	Share Capital	Share premium account	Capital reserve	Retained earnings	Total
For the year to 31 May 2011
	£	£	£	£	£
Balance at 31 May 2010	243,474	6,191,943	463,885	(5,820,169)	1,079,133
Loss for the year	-	-	-	(870,961)	(870,961)
Total comprehensive income for the year	243,474	6,191,943	463,885	(6,691,130)	208,172
Transactions with owners, recorded directly to equity
Shares issued in the year	75,381	1,112,769	-	-	1,188,150
Equity settled share based payments	-	-	-	93,285	93,285
Total contributions by and distributions to the owners	75,381	1,112,769	-	93,285	1,281,435
Balance at 31 May 2011	318,855	7,304,712	463,885	(6,597,845)	1,489,607
	Share Capital	Share premium account	Capital reserve	Retained earnings	Total
For the year to 31 May 2010
	£	£	£	£	£
Balance at 31 May 2009	190,308	5,749,952	463,885	(5,377,622)	1,026,523
Loss for the year	-	-	-	(536,019)	(536,019)
Total comprehensive income for the year	190,308	5,749,952	463,885	(5,913,641)	490,504
Transactions with owners, recorded directly to equity
Shares issued in the year	53,166	441,991	-	-	495,157
Equity settled share based payments	-	-	-	93,472	93,472
Total contributions by and distributions to the owners	53,166	441,991	-	93,472	588,629
Balance at 31 May 2010	243,474	6,191,943	463,885	(5,820,169)	1,079,133

Balance Sheet

at 31 May 2011

		2011		2010
		£	£	£	£
Non-current assets
Property, plant and equipment			291,388		355,909
Current assets
Inventories		304,251		203,041
Trade and other receivables		604,027		450,416
Cash and cash equivalents		615,145		414,513
			1,523,423		1,067,970
Total Assets			1,814,811		1,423,879
Current Liabilities
Other interest bearing loans and borrowings		(10,230)		(20,614)
Trade and other payables		(314,974)		(313,902)
		(325,204)		(334,516)
Non Current Liabilities
Other interest bearing loans and borrowings		-		(10,230)
Total Liabilities			(325,204)		(344,746)
Net assets			1,489,607		1,079,133
Equity
Share capital			318,855		243,474
Share premium			7,304,712		6,191,943
Capital reserve			463,885		463,885
Retained earnings			(6,597,845)		(5,820,169)
Total equity attributable to equity shareholders of the Company			1,489,607		1,079,133

Cash flow statement

for the year ended 31 May 2011

		2011		2010
		£		£
Cash flows from operating activities
Loss for the year		(870,961)		(536,019)
Adjusted for:
Depreciation charge		72,299		70,904
Equity settled share-based payment expenses		93,285		93,472
Financial income		(2,124)		(339)
Financial expense		3,379		2,289
Taxation		(102,927)		(211,071)
		(1,060,798)		(580,764)
Changes in working capital
Decrease in inventories		(101,210)		25,210
(Increase)/decrease in trade and other receivables		(153,611)		(237,565)
Increase/(decrease) in trade and other payables		1,072		145,233
		(1,060,798)		(647,886)
Finance income received		2,124		339
Financial expense paid		(3,379)		(2,289)
Taxation received		102,927		211,071
Net cash used in operating activities		(959,126)		(438,765)
Cash flows from investing activities
Acquisition of property, plant and equipment		(7,778)		(44,365)
Net cash used in investing activities		(7,778)		(44,365)
Cash flows from financing activities
Proceeds from issue of share capital		1,188,150		495,157
Proceed from new finance lease		-		13,123
Payment of finance lease liabilities		(20,614)		(14,912)
Net cash from financing activities		1,167,536		493,368
Net increase/(decrease) in cash and cash equivalents		200,632		10,238
Cash and cash equivalents at the beginning of the period		414,513		404,275
Cash and cash equivalents at the end of the period		615,145		414,513

NOTES TO THE ACCOUNTS

1.    Basis of preparation

The financial information set out above for the years ended 31 May 2011 and 2010 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 2010 have been delivered to the Registrar of Companies and those for 2011 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.

 

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