Half Yearly Financial Results

RNS Number : 7547B

Surface Transforms PLC

24 February 2011

 



24 February 2011

Surface Transforms plc

(the "Company")

Half-yearly financial results for the six months ended 30 November 2010

Surface Transforms plc, manufacturers of carbon fibre reinforced ceramic (CFRC) materials, announces its half-yearly financial results for the six months ended 30 November 2010.

Financial and business highlights:

·     Turnover £288,554 (2009: £254,776);

·     Outstanding order book currently stands at £405,645 all for delivery before 31 May 2011;

·     Losses before tax £558,191 (2009: £485,188)

·     Losses after tax £458,191 (2009: £274,117); 

·     Fundraising of £1,189,000 net of expenses in November 2010 at 17 pence per share; and

·     Cash at 30 November 2010 was £1,217,405 equivalent to approximately 3.8 pence per share (2009: £645,601 equivalent to 2.7 pence per share).

Commenting, Kevin D'Silva, Chairman said:

"This financial year we expect increased revenues arising largely from new business wins in the automotive brake industry. Predicting revenue increases continues to be difficult as our clients are dependent on contract wins with automotive original equipment manufacturers (OEMs). 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.

However, as a result of delays in securing new automotive brake disc contracts, we now expect this year's sales growth to be lower than previously anticipated. Operating costs, reflecting higher development costs during the year are expected to lead to increased losses. There is also the possibility R&D tax credits may not be as high as in previous years.

Looking ahead, beyond the end of the current financial year to May 2011, we anticipate increased revenues from the automotive sector in Europe; the defence automotive market in the US and the possible commencement of supply of aircraft brake discs."

For enquiries, please contact:

Surface Transforms plc
Kevin Johnson	0151 356 2141
Kevin D'Silva	07802 306 956
Seymour Pierce Limited (Nomad & Broker)	020 7107 8000
Guy Peters / David Foreman - Corporate Finance
Paul Jewell / David Banks - Corporate Broking

For further Company details visit www.surface-transforms.com.

CHAIRMAN'S STATEMENT

In the six month period to 30 November 2010 the Company achieved increased revenues of £288,554 (2009: £254,776). Losses before taxation for the period were higher at £558,191 (2009: £485,188), an increase of £73,003. Losses after taxation for the period were also higher at £458,191 (2009: £274,117).

Highlights for the 6 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. Due to the nature of development projects of this type, it is difficult to predict timetables and success thresholds. Nevertheless, both parties are focused on completing the test programme and, should the Company's carbon ceramic product pass all test criteria, moving towards commercial supply.

In addition to its business with Mov'it Gmbh, the Company's European distributor of ceramic brake discs in the automotive aftermarket, the Company is working with three global automotive brake companies. These companies are first tier suppliers of brake systems to the motor industry and have commenced bidding to supply ceramic brake systems on a number of car platforms using Surface Transforms technology.

During November, 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 as well as to finance working capital.

Development costs in the period have been substantially higher than the first half of the previous financial year due to higher costs associated with new testing work needed for the automotive brake evaluation programmes.

Financial Review

In the 6 month period to 30 November 2010 revenues were £288,554 (2009: £254,776). Whilst the increase in revenues was small, this was achieved with no sales of development discs to the US for the development of a next generation military vehicle, compared to high levels in both the first and second half of the financial year ended 31 May 2010. These revenues have been replaced by sales to commercial automotive clients. We do not expect to sell any new discs to the US military development project until 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 and consequently there have been no replacement disc sales.

Revenues in our first half year are normally lower than in the second period, principally because defence business and automotive revenues are usually much higher early in the calendar year and Spring, in advance of the main racing season. This year is not expected to be an exception.

At 23 February 2011 the order book, representing confirmed orders for delivery before the Company's financial year end was £405,645.

Inventories at 30 November 2010 were £363,065 (2009: £218,129). This is a planned increase to enable the Company to satisfy anticipated orders during the six months to 31 May 2011.

Losses after taxation were £458,191 (2009: £274,117).  There are two main reasons for the increased losses: (i) an increase in research and development costs of £142,000 which was not funded by clients. These were incurred to evaluate brake discs for a number of new car platforms and (ii) a £111,000 unexpected reduction in R&D tax credits. Hitherto, annual tax credits of approximately £200,000 have been received by the Company to cover R&D activity. These funds are normally received in full during the first half of our financial year. In late November 2010, HMRC paid the Company £100,000 on account but also randomly selected the Company for audit, completion of which is not expected before April 2011.

Looking ahead we cannot yet forecast the outcome of the HMRC audit but we do expect to receive further R&D tax credits in the second half of the financial year. Development costs, not funded by customers, are expected to continue to be higher than in 2010 in the current financial year, but we estimate that this expenditure will fall back to more historic levels in the financial year ended 31 May 2012.     

Net cash outflow from operating activities was £369,616 (2009: £149,232).

Loss per share was 1.87 pence (2009: loss 1.26 pence).

The Company had a cash balance of £1,271,405 at 30 November 2010 (31 May 2010: £414,513)

Shareholder funds were £1,856,223 (31 May 2010: £1,079,133).

Shareholders

The Placing and Open Offer added two new institutional funds to our shareholder register and this is welcome news. We were pleased to be able to make the Open Offer to all shareholders, in spite of the higher costs associated with such a procedure, because it allowed all of our shareholders, both institutional and private, to have the opportunity to participate in this fundraising. The Open Offer raised 16% of the total funds received.

Outlook

This financial year we expect increased revenues arising largely from new business wins in the automotive brake industry. Predicting revenue increases continues to be difficult as our clients are dependent on contract wins with automotive original equipment manufacturers (OEMs). 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.

However, as a result of delays in securing new automotive brake disc contracts, we now expect this year's sales growth to be lower than previously anticipated. Operating costs, reflecting higher development costs during the year are expected to lead to increased losses. There is also the possibility R&D tax credits may not be as high as in previous years.

Looking ahead, beyond the end of the current financial year to May 2011, we anticipate increased revenues from the automotive sector in Europe; the defence automotive market in the US and the possible commencement of supply of aircraft brake discs.

K D'Silva

24 February 2011

CHIEF EXECUTIVE'S REPORT

The economic recovery from the global recession within the automotive market continues, but can be characterised as slow and fragile, resulting in a high degree of uncertainty. The Company's main long term supply contracts for carbon ceramic products continue to recover and improve slowly in line with market conditions. Predicting the timing of a full recovery is currently being hampered by the high degree of uncertainty in the global economy.

The new development program for the next generation military vehicle which generated significant new sales during last year is now in the field testing stage. During this phase, demand for development discs is very limited, and indeed, there have been no sales to this client during the first half of the financial year.  The performance of our carbon ceramic products is understood to be acceptable with testing set to continue until 2012.  The continued recovery in our long term supply contracts and additional new development business with tier 1 brake system suppliers has offset the loss in sales from the US military development program.

We continue to work to win new business in the aerospace and defence markets.  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 conducted a series of brake disc trials with this client and this agreement formalises the business relationship between the two companies. Whilst it is always very difficult to predict the adoption of new technologies, particularly in the aerospace market, the focus by both parties is on completing the test programme and, should our carbon ceramic product pass all test criteria, move towards commercial supply. 

The Company's activities in the defence sector continue with trials being conducted by MBDA.  Should these tests be successful, the development work will move into a funded exploitation phase with the target of commercialising the Company's proprietary carbon ceramic technology.

In addition to winning new business, the Company continues to progress with its £2.1 million, three year collaborative R&D project, supported by the Technology Strategy Board (TSB).  Partners include Faiveley Transport, Alcon Components, Bentley Motor Cars, Federal-Mogul Friction Products and the University of Loughborough.  The programme has entered its second year and is showing promising results both technically and commercially. Faiveley Transport, which is looking to develop a carbon ceramic rail brake, and Alcon Components, an auto brake systems supplier, are both actively seeking to exploit the Company's products. 

Alcon have begun marketing the Company's carbon ceramic product to its customers by purchasing and equipping a Nissan GTR to showcase and demonstrate the carbon ceramic product's capabilities both directly and at trade events.  These new commercial activities are expected to generate sales during 2011.  Technical progress has also been encouraging with test results showing potential improvements in the Company's carbon ceramic technology which are of interest to Bentley Motor Cars. The grant also contributes approximately £150,000 per annum to support the Company's activities.

Operations

Affordability is a key requirement 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.  Investment in both process technology and testing support for the increased number of opportunities the Company is addressing has lead to a short term increase in development costs.  We expect development costs to reduce and return to historic levels during 2012 as the commercial opportunities mature and benefits from the process technology are realised.

Kevin Johnson

Chief Executive

24 February 2011

SURFACE TRANSFORMS PLC

CONDENSED CONSOLIDATED HALF YEARLY INCOME STATEMENT

for THE six months ended 30 November 2010 

			Six Months		Six Months
			Ended		Ended		Year Ended
			30-Nov		30-Nov		31-May
	Note		2010		2009		2010
			£		£		£
Revenue			288,554		254,776		804,800
Cost of sales			(106,499)		(112,128)		(358,537)
Gross profit			182,055		142,648		446,263
Administrative expenses:
Before research costs			(368,405)		(359,630)		(698,791)
Research costs			(470,960)		(328,700)		(670,201)
Total administrative expenses			(839,365)		(688,330)		(1,368,992)
Other operating income			100,836		61,270		177,589
Operating loss			(556,474)		(484,412)		(745,140)
Financial income			80		218		339
Financial expenses			(1,797)		(994)		(2,289)
Loss before tax			(558,191)		(485,188)		(747,090)
Taxation	2		100,000		211,071		211,071
Loss for the period			(458,191)		(274,117)		(536,019)
Other comprehensive income for the period			-		-		-
Total comprehensive income for the period			(458,191)		(274,117)		(536,019)
Loss per ordinary share
Basic and diluted	3		(1.87p)		(1.26p)		(2.33p)

SURFACE TRANSFORMS PLC

CONDENSED CONSOLIDATED HALF YEARLY BALANCE SHEET

AS AT 30 NOVEMBER 2010

	As at		As at		As at
	30-Nov		30-Nov		31-May
	2010		2009		2010
	£		£		£
Non-current assets
Property, plant and equipment	325,112		366,239		355,909
Total non current assets	325,112		366,239		355,909
Current assets
Inventories	363,065		218,129		203,041
Trade and other receivables	331,014		256,319		450,416
Cash and cash equivalents	1,217,405		645,601		414,513
Total current assets	1,911,484		1,120,049		1,067,970
Total assets	2,236,596		1,486,288		1,423,879
Current liabilities
Other interest bearing loans and borrowings	(17,419)		(14,438)		(20,614)
Trade and other payables	(359,728)		(240,435)		(313,902)
Total current liabilities	(377,147)		(254,873)		(334,516)
Non-current Liabilities
Other interest bearing loans and borrowings	(3,226)		(10,977)		(10,230)
Total liabilities	(380,373)		(265,850)		(344,746)
Net assets	1,856,223		1,220,438		1,079,133
Equity
Share capital	318,854		235,473		243,474
Share premium account	7,305,201		6,121,493		6,191,943
Other reserves	463,885		463,885		463,885
Retained deficit	(6,231,717)		(5,600,413)		(5,820,169)
Total equity attributable to equity shareholders of the company	1,856,223		1,220,438		1,079,133

SURFACE TRANSFORMS PLC

CONDENSED CONSOLIDATED HALF YEARLY STATEMENT OF Cash flowS

for THE six months ended 30 November 2010

	Six Months Ended		Six Months Ended		Year ended
	30-Nov		30-Nov		31-May
	2010		2009		2010
	£		£		£
Cash flows from operating activities
Loss for the period	(458,191)		(274,117)		(536,019)
Adjusted for:
Depreciation charge	36,728		35,138		70,904
Equity settled share-based payment expenses	46,642		51,326		93,472
Financial income	(80)		(218)		(339)
Financial expense	1,797		994		2,289
Taxation	(100,000)		(211,071)		(211,071)
	(473,104)		(397,948)		(580,764)
Changes in working capital
(Increase)/decrease in inventories	(160,024)		10,122		25,210
Decrease/(increase) in trade and other receivables	119,403		(43,468)		(237,565)
Increase in trade and other payables	45,826		71,767		145,233
	(467,899)		(359,527)		(647,886)
Finance income received	80		218		339
Finance expense paid	(1,797)		(994)		(2,289)
Taxation received	100,000		211,071		211,071
Net cash used in operating activities	(369,616)		(149,232)		(438,765)
Cash flows from investing activities
Acquisition of property, plant and equipment	(5,931)		(18,929)		(44,365)
Net cash used in investing activities	(5,931)		(18,929)		(44,365)
Cash flows from financing activities
Proceeds from issue of share capital	1,188,638		416,706		495,157
Proceeds from new finance lease	-		-		13,123
Payment of finance lease liabilities	(10,199)		(7,219)		(14,912)
Net cash from financing activities	1,178,439		409,487		493,368
Net increase in cash and cash equivalents	802,892		241,326		10,238
Cash and cash equivalents at the beginning of the period	414,513		404,275		404,275
Cash and cash equivalents at the end of the period	1,217,405		645,601		414,513

SURFACE TRANSFORMS PLC

CONDENSED CONSOLIDATED HALF YEAR STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS TO 30 NOVEMBER 2010

		Share Capital	Share premium account	Capital reserve	Retained earnings	Total
For the six months to 30 November 2010
		£	£	£	£	£
Balance at 31 May 2010		243,474	6,191,943	463,885	(5,820,169)	1,079,133
Loss for the period		-	-	-	(458,191)	(458,191)
Total comprehensive income for the period		243,474	6,191,943	463,885	(6,278,360)	620,942
Transactions with owners, recorded directly to equity
Shares issued in the period		75,380	1,113,258	-	-	1,188,638
Equity settled share based payments		-	-	-	46,643	46,643
Total contributions by and distributions to the owners		75,380	1,113,258	-	46,643	1,235,281
Balance at 30 November 2010		318,854	7,305,201	463,885	(6,231,717)	1,856,223
		Share Capital	Share premium account	Capital reserve	Retained earnings	Total
For the six months to 30 November 2009
		£	£	£	£	£
Balance at 31 May 2009		190,308	5,749,952	463,885	(5,377,622)	1,026,523
Loss for the period		-	-	-	(274,117)	(274,117)
Total comprehensive income for the period		190,308	5,749,952	463,885	(5,651,739)	752,406
Transactions with owners, recorded directly to equity
Shares issued in the period		45,165	371,541	-	-	416,706
Equity settled share based payments		-	-	-	51,326	51,326
Total contributions by and distributions to the owners		45,165	371,541	-	51,326	468,032
Balance at 30 November 2009		235,473	6,121,493	463,885	(5,600,413)	1,220,438
		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

SURFACE TRANSFORMS PLC

NOTES

1.         Accounting policies

The interim financial statements are the responsibility of the Directors and were authorised and approved by the Board of Directors for issuance on 24 February 2011.

Basis of preparation

In the condensed consolidated half-yearly financial statements, the term 'Company' refers to Surface Transforms plc, a company incorporated in the United Kingdom.  These condensed consolidated half-yearly financial statements comprise the Company and its subsidiaries as detailed in note 6 (together referred to as 'the Group' or 'Surface Transforms').  The financial statements of the Group for the year ended 30 November 2010 are available from the Company's registered office at Unit 4, Olympic Park, Poole Hall Road, Ellesmere Port, Cheshire, CH66 1ST.

These 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 2010.

The comparative figures for the financial year ended 31 May 2010 are not the Company's statutory accounts for that financial year. Those accounts 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 498 (2) or (3) of the Companies Act 2006.

The accounting policies and presentation used in the preparation of these condensed consolidated half-yearly financial statements are consistent with those used in the preparation of the Company's published financial statements for the year ended 31 May 2010.

Segmental reporting

IFRS 8 "Operating Segments" requires that the segments should be reported on the same basis as the internal reporting information that is provided to, and regularly reviewed by, the chief operating decision-maker, whom the Group has identified as the Managing Director.

The Board has reviewed the requirements of IFRS 8, including consideration of what results and information the Managing Director reviews regularly to assess performance and allocate resources, and concluded that, as under IAS 14, all revenue falls under a single business segment.

The Directors consider that the Group does not have separate divisional segments as defined under IFRS 8. The CEO assesses the commercial performance of the business based upon consolidated revenues, margins, operating costs and assets are reviewed at a consolidated level.

Other standards, amendments and interpretations

During the period, the Group has adopted the following new standards, amendments to standards and interpretations issued under IFRS which are mandatory for accounting periods beginning on or after 1 January 2009, but which have no material effect on the Group's results or equity.

Amendments to:

IFRS 2 "Share based payment: Vesting conditions and cancellations"

Estimates

The preparation of half-yearly financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these condensed consolidated half-yearly financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 May 2009.

Seasonality of operations

The Directors anticipate that the business will return to its normal historical trend with activity in the second half of this financial year being considerably higher than that of the first half. This trend is due to a number of key contracts normally maturing in the second half of the financial year.

Going concern

The financial statements have been prepared on a going concern basis which the Directors believe to be appropriate.  Whilst the Company incurred a net loss of £274,117 during the period, the Directors are satisfied, based on detailed cash flow projections, that sufficient cash is available to meet the Company's liabilities as and when 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

	Six months ended	Six months ended	Six months ended
	30-Nov	30-Nov	30-Nov
	2010	2009	2008
	£	£	£
UK Corporation tax
Current tax on income for the period	-	-	-
Research and development tax repayment	100,000	211,071	150,845
	100,000	211,071	150,845

The research and development tax repayment received in the six months ended 30 November 2010 represents a payment on account from HMRC, unlike in previous years when the full claim had been settled by the half year. The Directors anticipate that the balance of the funds due will be received before 31 May 2011.

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

	Six months ended	Six months ended	Year ended
	30 November	30 November	31 May
	2010	2009	2010
	Pence	Pence	Pence
Loss per ordinary share:
Basic and diluted	(1.87)	(1.26)	(2.33)

Loss per ordinary share is based on the Company's loss for the financial period of £458,191 (30 November 2009: £274,117; 31 May 2010: £536,019). The weighted average number of shares used in the basic calculation is 24,553,287 (30 November 2009: 21,745,632; 31 May 2010: 23,012,231). 

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.         Segment reporting

 Due to the start up nature of the business the Group is currently focussed on building revenue streams from a variety of markets.  As there is only one manufacturing facility and this has capacity above and beyond the current levels of trade there is no requirement to allocate resources to or discriminate between specific markets or products.  As a result the Group's chief operating decision maker, the CEO, reviews performance information for the Group as a whole and does not allocate resources based on products or markets.   In addition, all products manufactured by the company are produced using similar processes.

Having considered this information in conjunction with the requirements of IFRS 8, as at the reporting date the board of directors have concluded that the Group has only one reportable segment, that being the manufacture and sale of carbon ceramic products.

	Total
Period ended 30 November 2010	£
Segment revenues	288,554
Operating expenses	(845,028)
Results from operating activities	(556,474)
Net finance costs	(1,717)
Loss before tax	(558,191)
Assets
Segment assets	1,856,223
	Total
Period ended 30 November 2009	£
Segment revenues	254,776
Operating expenses	(739,188)
Results from operating activities	(484,412)
Net finance costs	(776)
Loss before tax	(485,188)
Assets
Segment assets	1,220,438

5.         Dividends

The Directors are not proposing the payment of a dividend in respect of the six months ended 30 November 2010.

6.         Subsidiary companies

The following subsidiary companies were incorporated by Surface Transforms Plc on 8 May 2009.

None of these companies have traded since their incorporation.

ST Aerospace Limited

ST Automotive Ceramic Limited

ST Defence Limited

ST Racing Limited

7.         Copies of results

Copies of the half-yearly financial results are 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.

 

END

 

 

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