Final Results & Notice of AGM

RNS Number : 2678Q

Surface Transforms PLC

29 August 2014

 



29 August 2014

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 2014.

The Company's Annual Report and Accounts for the year ended 31 May 2014, together with a notice convening the Company's Annual General Meeting at Cantor Fitzgerald's office at One Churchill Place, Canary Wharf, London, E14 5RB, at 11.00am on 30 September 2014 will be posted to shareholders in due course. Copies of the Annual Report and Accounts will be available on the Company's website: www.surfacetransforms.com as from this posting date.

Highlights

·      Revenues increased by £214k to £1.3 million (2013: £1.1 million)

·      Gross margin during the year decreased to 56.2% (2013: 74.0%) as a result of the sale of more products with a lower gross margin compared to the previous year

·      EBITDA loss (including tax credit, and exceptionals) of -£583k (2013 loss of -£497k )

·      Loss before taxation and exceptional items of -£842k (2013: -£712k)

·      Loss per share reduced to -1.65p (2013: -1.71p)

·      Completed a placing in November 2013 for £327k from both institutional and private investors to further progress the Company's objectives towards 'game changing' new business

·      Cash used in operating activities increased by 28% to £501k to (2013: £392k)

·      Cash position as at 31 May 2014 of £151k (2013: £457k)

·      Significant progress with Tier One Original Equipment Manufacturers on winning 'game changer' contracts

·      Successfully changed retrofit distribution channels - albeit at a slower pace than planned

CHAIRMAN'S STATEMENT

The Company continues to pursue two parallel, complementary but in practice very different strategies. In the short term the retrofit segment is crucial to both short term cash break even and securing road mile experience of the Company's products but ultimate shareholder value will arise from winning a significant - 'game changer' - mainstream contract with one or more OEMs (Original Equipment Manufacturers).

As announced by the Company on 12 June 2014, the year has been marked by disappointment in respect to achieving the first - cash breakeven - but we are satisfied in respect to the second objective, making considerable progress on the work needed to win a major OEM contract.

Whilst sales grew by £214k in the year a reduction in gross profit of £68k (largely the impact of sales mix) and increased research costs of £60k (reflecting increased activity with the OEMs), and reduced other operating income (principally grant income) £72k, offset by an income tax credit of £36k and reduction in exceptional costs of £72k from the prior year are the main reason for the deterioration in EBITDA of £86k.

Revenue growth was driven primarily by the rebound of sales to the major European brake manufacturer customer (who suffered supply chain problems in 2013), a repeat of the license income to the US clutch manufacturer but offset by reduced sales on retrofit road car. The issue in respect of lower retrofit road car sales has been previously described; the appointment of three "big" master distributors was not successful (as their distance from the ultimate customer and need to make an additional margin led to both communication and pricing difficulties).  Consequently, the Company switched to a more direct sales approach (opening its own German sales office and offering web based sales) combined with the appointment of additional distributors who are closer to the track day community. This approach is having a positive impact on the summer 2014 sales season but still slower than planned.

The reduction in gross margin is entirely driven by sales mix. The gross margin within each individual market segment is broadly unchanged between the two years but the impact of the same license income on higher overall sales together with the substitution of higher margin road car sales with lower margin pre form sales has resulted in the reduction in both absolute and percentage gross margin.

Turning to the crucially important game changing OEM contracts:

·      our principal, aerospace customer is in the process of agreeing a new, longer term commercial contract with the Company, and the board is confident that  announcements can be made in the near future.;

·      two well-known UK car manufacturers are testing the company's products with specific models in mind while additionally, new German customers have now begun test programs. Technically the product meets all criteria for friction, noise, vibration and life however a new technical challenge/opportunity (for the whole industry) has arisen as some of the customers are not happy with a particular feature on competitors' products which is a particular challenge for one of our competitors. Surface Transforms believes that it can satisfy this new requirement and is in the process of proving it;

·      the programs are real -model related-, the testing is underway and the company remains confident of the outcome; and

·      additionally - in our chosen automotive market - product cost and lead time reductions are critical differentiators. In particular success in the automotive industry is nearly always a function of cost. We are therefore successfully implementing our programme to halve manufacturing costs and lead times.

Finally, whilst we do not regard them as game changers - we continue to successfully pursue "near OEMs" (i.e. companies who either take existing models and customise them for high performance and/or luxury, and companies who build very specialist vehicles). Individual volumes would be between 10 and 200 cars per year. The marketing activity is bearing fruit as exemplified by the decision this year of BAC-Mono to offer Surface Transforms carbon discs on its option list. This could provide not only shorter term revenues but also generates road mile experience of our products.

Strategic Report

FINANCIAL REVIEW

In the year ended 31 May 2014, revenues were £1.3m (2013: £1.1 million) which was in line with our expectations. Gross margin weakened during the year to 56.2% (2013: 74.0%) due to the sale of more products of a lower gross margin compared to prior year. 

Losses after taxation increased by 16% to £674k (2013: £580k) -made up of the drop in overall gross margin of £68k, increased investment in engineering and development in line with the Company's strategy towards progressing its "game changing" opportunities of £60k and reduced other operating income (principally grant income) £72k, offset by a decrease in income tax credit of £36k and reduction of exceptional item expenses of £72k compared to the prior year.

Looking ahead, our R&D tax credit advisers, Baker Tilly, have advised that we should continue to receive tax credits of between £175k to £200k per annum based on the continued current levels of research activity. 

At 31 May 2014, inventory was £271k (2013: £357k). This decrease was as a result of utilisation of stock during the year to support our automotive sales and also relates to the timing of delivery to the motor racing market during the last couple of months of FY2013/14.

Net cash used in operating activities increased by 28% to £501k from £392k last year, mainly due to increased losses after tax (as above), offset by R&D tax credit received of £168k and lower working capital levels at the 2014 year end.

The Company had a cash balance of £151k at 31 May 2014 (2013: £457k).

Loss per share was 1.65p pence (2013: loss 1.71 pence).

OPERATIONAL REVIEW

Surface Transforms is a UK based developer and manufacturer of carbon ceramic products for the automotive and aircraft brakes markets.  In these industries our products are lightweight, extremely durable and offer better handling, improved refinement and superior wear life compared to typical automotive iron brakes and for the aerospace industry they offer weight reduction and superior wear life. Our strategy is to firstly establish well engineered products which we sell into the automotive retrofit market. Although this retrofit market is relatively small it allows the Company to generate revenues with the goal of reaching 'cash breakeven' and more importantly reduces the product and supplier risks for the main part of our strategy, which is to work closely with major Tier 1 suppliers and OEMs in the automotive and aerospace markets and introduce our products into these large main stream markets.

The key features of our business model are as follows:

·      We engineer and develop carbon ceramic brake products, which deliver high technical performance for both automotive and aerospace brake market opportunities, estimated to, ultimately, be a £1 billion per annum market.

·      Our product technology offers technical advantages over our competitors and our process technology offers a highly competitive low cost manufacturing route making our products price competitive with good margins.

·      To sell a new disruptive product technology the risks need to be managed. These risks are addressed in partnership with Tier 1 system suppliers and OEMs.

o  We have a growing body of technical data to support product adoption.

o  We are developing our manufacturing capability in terms of operating systems, manufacturing capacity and supply chain management using automotive and aerospace quality standards (TS16949 and AS9100).

·      Our products are protected by a high level of intellectual property through a combination of patents and company process know how.

Delivering our objectives:

Product development and engineering has progressed, and we continue to design retrofit products for Porsches, Ferraris, Nissan GTR and tuning companies and are pleased to report no further technical issues in the field have been reported.  In addition the automotive OEM market has identified a technical requirement which the Company is addressing.  The technical requirement relates to the industry rather than to the Company and therefore offers the Company the opportunity to gain an important competitive advantage in the market place.  Our test results have shown that our product can deliver the technical requirements and development work is ongoing to build up the product and process data in partnership with the Tier 1 and OEMs on the 'game changing' programmes.  

Our cost reduction programme continues to advance. Last year's introduction of the new CVI plant not only provided much needed additional capacity, but it is now delivering the planned manufacturing cost savings.  Our plan to halve the manufacture cost is based on a series of engineering projects which are prioritised according to the needs of the business.   Some projects require just engineering time; however others require both engineering time and capital investment similar to the new CVI plant mentioned above.  The plan to deliver the full cost reduction programme will also deliver the customer requirements for security of supply, manufacturing capacity and lead time.  The company has continued to maintain discussions regarding expansion plans with local enterprise authorises relating to facilities, incentives and grants with detailed planning underway.  As previously stated the construction and new equipment contracts will only be signed in parallel with both tangible 'game changer' programme progress and raising the second stage finance required to complete a new factory.  The company intends to progress all of these projects during the next 12 months.

In line with OEM requirements for quality and continuous improvement the Company has the objective of becoming a certified automotive and aerospace supplier.  These certifications are TS 16949 for the automotive industry and AS 9100 for the aerospace industry.  We have implemented a new quality system and operating procedures which will see the Company become a certified TS 16949 supplier during the next 6 to 12 months.  In adopting these industry recognised quality practices the Company has assessed the cost of quality within the business and believes substantial savings can be made.   This work is therefore not only important in terms of aligning ourselves with our industry partners but also in reaching 'cash breakeven'.

In terms of the development of aircraft brakes we continue our targeted strategy of working with a specific aircraft brake system supplier on an exclusive basis for particular military and light commercial aircraft.  The work has expanded from the initial programme of a specific US military aircraft into developing systems for light commercial aircraft.   The technical requirements for the military aircraft are very demanding and both companies have been working to resolve the remaining technical issues and believe this is achievable.  All the technical data has been submitted for review by the Aerospace OEM and their feedback is expected soon, so as to allow the two companies to determine how to progress the programme to commercialisation. The new programme for light commercial aircraft has successfully completed its feasibility testing and will now progress into the different small aircraft platforms for validation testing and product sign off.  The product technology is now understood for this market but similar to the automotive market each aircraft requires engineering approval.  The market is therefore more diverse but much larger than the single military aircraft and the key driver for this market is life cycle costs reduction. 

Finally the objective of 'cash breakeven' through automotive retrofit sale has not yet been achieved. The change in our route to market from a small number of key distributors to many direct sales contact and the introduction of a German sales office is bearing fruit and we expect to see sales growth return during the next financial year.  This new approach has the advantage of being able to reduce the end user price without the Company losing gross margin, reduces the Company's sales risk by not being dependent on key distributors and enables the Company to build its brand and reputation within the automotive community.

Alongside these core business objectives the Company has also:

·      Completed a placing in November 2013 for £327k from both institutional and private investors to further progress the Company's objectives towards 'game changing' new business;

·      Delivered the technology transfer agreement worth $1 million with a major US clutch and transmission manufacturer. The agreement related to the transfer of one of Surface Transforms' in-house developed process technologies, a technology which is only one stage of Surface Transforms' multi-stage production process for carbon-ceramic brake disc components, and included the sale of specialist equipment;

·      Significant growth in its automotive race products with a global major European brake manufacturer.  We anticipate the level of sales from these activities to continue to grow, but at a much slower rate during 2014 and 2015.

Key performance indicators

The Directors continue to monitor the business internally with a number of performance indicators: order intake, sales output, profitability and manufacturing cost of automotive discs. The Company revised its performance targets during the year in each of these areas - please see Chairman's statement for more details:

·    Turnover £1.3m (2013: £1.1 million)

·    Losses after taxation and exceptional items £674k (2013: £580k)

The Company produces an annual business plan and full monthly forecasts detailing sales, profitability and cash flow to help monitor business performance going forward.

Key risks and uncertainties

As in previous years the principal risk faced by the Company is considered to be the speed at which our customers and potential customers adopt the new ceramic disc technology. Indications in the automotive market are that the technology continues to be well received and is being adopted by an increasing number of vehicles. This risk is constantly assessed by monitoring the level of enquiries and orders for both the Company and industry wide. In addition the Company faces the continuing uncertainty created by the current economic climate, particularly within the automotive sector.

In summary the Company has seen good progress in its automotive and aircraft 'game changing' projects and increasing sales driven principally by products for the major European brake supplier.  The drop in sales in the retrofit market was disappointing but the actions taken during the year will generate retrofit sales growth and it is through this delivery that our objective of short term 'cash break even' can be achieved.

DIRECTORS AND 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 progressing well its 'game changing' opportunities. The Board expects continuing sales growth and is confident of making further announcements during the year.

David Bundred                                                                                                     Kevin Johnson

Chairman                                                                                                               Chief Executive

Statement of Total Comprehensive Income

For the year ended 31 May 2014

			2014	2013
			£'000	£'000
Revenue			1,273	1,059
Cost of sales			(557)	(275)
Gross profit			716	784
Administrative expenses:
Before research costs			(613)	(601)
Research costs			(955)	(895)
Total administrative expenses			(1,568)	(1,496)
Other operating income			66	138
Operating loss			(786)	(574)
Financial income			-	2
Financial expenses			(56)	(68)
Loss before tax and exceptional item			(842)	(640)
Exceptional item			-	(72)
Loss before tax			(842)	(712)
Taxation			168	132
Loss for the year after tax			(674)	(580)
Other comprehensive income			-	-
Total comprehensive loss for the year			(674)	(580)
Loss per ordinary share
Basic and diluted			(1.65p)	(1.71p)
All amounts relate to continuing activities.

Statement of Changes in Equity

For the year to 31 May 2014

	Share Capital	Share premium account	Capital reserve	Retained loss	Total
	£'000	£'000	£'000	£'000	£'000
Balance at 31 May 2013	384	7,707	464	(7,586)	969
Comprehensive income for the year
Loss for the year	-	-	-	(674)	(674)
Total comprehensive income for the year	-	-	-	(674)	(674)
Transactions with owners, recorded directly to equity
Shares issued in the year	39	288	-	-	327
Equity settled share based payment transactions	-	-	-	18	18
Total contributions by and distributions to the owners	39	288	464	18	345
Balance at 31 May 2014	423	7,995	464	(8,242)	640

For the year to 31 May 2013

	Share Capital	Share premium account	Capital reserve	Retained loss	Total
	£'000	£'000	£'000	£'000	£'000
Balance at 31 May 2012	319	7,305	464	(7,034)	1,054
Comprehensive income for the year
Loss for the year	-	-	-	(580)	(580)
Total comprehensive income for the year	-	-	-	(580)	(580)
Transactions with owners, recorded directly to equity
Shares issued in the year	65	465	-	-	530
Cost of issue written off to share premium	-	(63)	-	-	(63)
Equity settled share based payments	-	-	-	28	28
Total contributions by and distributions to the owners	65	402	-	28	495
Balance at 31 May 2013	384	7,707	464	(7,586)	969

Balance Sheet

at 31 May 2014

	2014	2014	2013	2013
	£'000	£'000	£'000	£'000
Non-current assets
Property, plant and equipment		586		665
Current assets
Inventories	271		357
Trade and other receivables	454		326
Cash and cash equivalents	151		457
		876		1,140
Total assets		1,462		1,805
Current liabilities
Other interest bearing loans and borrowings	(9)		(198)
Trade and other payables	(395)		(299)
	(404)		(497)
Non Current liabilities
Other interest bearing loans and borrowings	(418)		(339)
Total liabilities		(822)		(836)
Net assets		640		969
Equity
Share capital		423		384
Share premium		7,995		7,707
Capital reserve		464		464
Retained loss		(8,242)		(7,586)
Total equity attributable to equity shareholders of the Company		640		969

Cash flow statement

for the year ended 31 May 2014

			2014	2013
			£'000	£'000
Cash flows from operating activities
Loss for the year			(674)	(580)
Adjusted for:
Depreciation charge			91	83
Loss on sale of property, plant and equipment			10	-
Equity settled share-based payment expenses			18	28
Financial income			-	(2)
Financial expense			56	68
Taxation			(168)	(132)
			(667)	(535)
Changes in working capital
Decrease in inventories			86	46
(Increase)/decrease in trade and other receivables			(128)	31
Increase in trade and other payables			96	-
			(613)	(458)
Interest received			-	2
Interest paid			(56)	(68)
Taxation received			168	132
Net cash used in operating activities			(501)	(392)
Cash flows from investing activities
Acquisition of property, plant and equipment			(63)	(460)
Proceeds from sale of property, plant & equipment			41	-
Net cash used in investing activities			(22)	(460)
Cash flows from financing activities
Proceeds from issue of share capital			327	468
Proceeds from new loan			400	437
Payment of finance lease liabilities			(6)	(4)
Repayment of borrowings			(504)	(139)
Net cash from financing activities			217	762
Net decrease in cash and cash equivalents			(306)	(90)
Cash and cash equivalents at the beginning of the period			457	547
Cash and cash equivalents at the end of the period			151	457

NOTES TO THE ACCOUNTS

1          Basis of preparation

The financial information set out above for the years ended 31 May 2014 and 2013 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 2013 have been delivered to the Registrar of Companies and those for 2014 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.

2          Exceptional item    Exceptional item comprises:-	2014	2013
Restructure of Sales department and costs incurred	£'000 -	£'000  72

Enquiries:

Surface Transforms plc

Dr. Kevin Johnson, CEO	[phone]
David Bundred, Chairman	[phone]

Cantor Fitzgerald Europe

David Foreman, Rick Thompson (Corporate Finance)	[phone]
Paul Jewell, David Banks (Corporate Brokering)	[phone]

 

END

 

 

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