Preliminary Results and Notice of AGM

RNS Number : 6840A
Surface Transforms PLC
30 September 2015
 

 

Surface Transforms plc

("Surface Transforms" or the "Company")

 

Preliminary Results and

Notice of Annual General Meeting

 

Surface Transforms (AIM: SCE) is pleased to announce its preliminary results for the year ended 31 May 2015. The Company's Annual Report and Accounts for the year ended 31 May 2015, together with a notice convening the Company's Annual General Meeting at Royal-Overseas League, Over-Seas House, London, SW1A 1LR on Tuesday 24 November 2015 at 11.00 am 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 decreased by £0.2m to £1.1 million (2014: £1.3 million)

·     Sales to retrofit and near OEM customers increased by 51% to £418k (2014: £276k)

·     Gross margin percentage decreased to 51.1% (2014: 56.2%)  reflecting the absence of non-recurring license income in 2015

·     EBITDA (including tax credits and excluding share based payments) loss of £584k  (2014: loss of £509k)

·     Loss before taxation of £982k (2014: loss of £842k).

·     Loss per share unchanged at 1.65p (2014: loss per share of 1.65p)

·     Successful equity placings raising £1.3m to further progress the Company's objectives towards 'game changing' new business

·     Net cash used in operating activities increased by 25.6% to £559k (2014: £445k)

·     Cash position as at 31 May 2015 of £829k (2014: £151k).  The Company anticipates receiving an R&D tax credit in excess of £200k (2014 actual: £217k) in the near future

·     Significant progress with Tier One Original Equipment Manufacturers (OEMs) on winning 'game changer' contracts, including the award of a £1.3m per annum aerospace pre-production contract

·     Subsequent to year end awarded quality certification for both automotive (TS 16949) and aerospace (AS 9100) industries. Both certificates are prerequisite standards to supply our products into their respective industries

·     Several new senior appointments made in the year which strengthen the management team

·     Continuing progress on supply chain security, reducing lead time and costs albeit slowed down by discussions on local authority grants which are taking longer than planned.

 



 

Chairman's Statement

Whilst the results for the financial year were below expectations, the period has been one of real strategic progress on the crucially important game changing contracts and the shorter term road car markets.

2015 revenues were impacted by a temporary breakdown of a furnace in May 2015 which has been investigated, understood and temporarily rectified. A permanent long term solution has been agreed with a furnace manufacturer to resolve an underlying unreliability issue in this furnace at a cost of £160k. This work will take place in January 2016. In the meantime the aerospace and road car sales previous shortfall has already been recovered and race car sales will be back on track over the next few months. As part of this recovery the Company has adopted a new factory shift pattern that has improved our capital equipment utilisation.

Gross profit fell in the year to £545k (2014: £716k) as a result of two unrelated issues:

·     the shortfall in sales referred to above; and

·     the absence of non-recurring license income

There were no significant changes in gross margin percentages at the customer level.

The reduction in gross margin was partially offset by increases in grant income to £114k (2014: £66k). The combination of this gross margin reduction, grant income increase and a small £31k increase in administrative expenses to £1,599k in 2015 (2014: £1,568k) combined to increase the EBITDA loss (including tax credits and excluding share based payments) to £584k (2014: £509k)

However at this stage of the Company's development, the crucial issue is revenue growth. In this regard, the Company is pursuing two parallel, complementary but in practice, different revenue strategies:

·     in the short term, retrofit and "near OEM's" are important to demonstrating both real road mileage experience and achieving break even. The Company fits retrofit products to road cars already in service replacing both iron discs and competitor discs. "Near OEMs" are defined as car assemblers who take existing models, pre-registration and customise them for higher performance and/or luxury, as well as companies who build very specialist vehicles. Individual "near OEM" sales volumes are typically between 10 and 200 cars per year; and

·     the longer term game changing OEM contracts on cars generally costing more than £50,000 where the model volumes (on which contracts are based) are typically between 500 and 5,000 cars per year. These potential customers are typically well known international brands.



 

In respect of product sales to our retrofit and near OEM customers it is particularly pleasing to note that sales have grown in the year by 51% to £418k (£276k 2014) Despite the shortfall from the May furnace problem, the Company has achieved sales due to three factors

·     in mid-2013 the Company switched channel policy from three worldwide master distributors to a more direct sales approach (including opening its own German sales office) combined with the appointment of additional distributors who are closer to the track day community.  This has opened up a whole set of new customer relationships, particularly with German "near OEM's", a proportion of which have been converted to sales;

·     sales have grown within the existing customer base, notably to BAC Mono and Koenigsegg; and

·     the Company's superior product reputation for better track performance (against the existing competitor) is becoming increasingly known within the track car community and is therefore assisting retrofit sales. Self-evidently, the Company also uses the favourable retrofit product comments, and virtually zero defect field issues in its sales campaigns with the game changing OEM customers.

Turning to the crucially important game changing OEM contracts:

·     the Company announced on 25 September 2014 the award of a pre-production contract with an international aerospace supplier. A recent review with the customer has confirmed that the sales forecasts and timings as previously announced are still on target - a positive impact in the current financial year and mature volumes of £1.3m per year from the 2017/18 financial year onwards;

·     additionally on 20 July 2015 the Company announced that the same aerospace customer has included the Company's product on a US Department of Defence technology demonstrator for the replacement of a mainstream helicopter. This customer continues to test our products on civilian light aircraft;

·     on 27 August 2015 the Company provided an update to shareholders on progress with automotive game changing contracts as follows:

a review meeting between a British vehicle OEM, a major tier one international brake manufacturer, and Surface Transforms has concluded that the product testing has been successful in achieving the vehicle manufacturer's requirements. All three parties agreed to progress to on-car validation which is underway;

in parallel, the Company has progressed through a very detailed audit process with a premium German car manufacturer which is a crucial part of their new product introduction for new suppliers. Our customer has now entered the product validation phase of the programme; and

further work also continues on three other automotive game changing programmes; whilst the programmes are taking longer to complete there are currently no technical impediments. 

 



 

In terms of adoption schedules, it is always difficult to predict when they will happen as the timing is not within the Company's control; however the Board is confident that they will be able to make positive announcements regarding this during the remainder of 2015 and early 2016.

The testing is taking longer than envisaged but there have been no unresolved setbacks, the products performing as expected, demonstrating superiority over competitor products on heat dissipation and robustness. The Company still has five serious customer test programmes and remains confident of the eventual outcome.

In the automotive market, supply chain security, 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 in the next 2 to 3 years, thereby also improving supply chain security. As explained in our recent fundraisings, the new factory with its associated capital equipment investment is a crucial element in these cost reduction plans. The Company has completed negotiations with furnace manufacturers and is in a position to issue purchase orders, however the grant negotiations with local authorities are taking longer than expected. Finalising the grant funding is the only impediment to being able to announce the location of the new factory, whose capacity and processes will supplement the existing Ellesmere Port facility. Whilst discussions are ongoing, the Company is optimistic that suitable grant funding will be obtained.

Finally the Company has made a number of senior management appointments over the past 18 months, all reporting to the CEO - in Finance, Sales, Operations and Quality. The Board is delighted with the appointments and has already seen the impact in the day to day running of the Company.

Strategic Report

 

Operational Review and Principal Activity

Surface Transforms is a UK based developer and manufacturer of carbon ceramic products for the brakes market. In these industries our products are lightweight, extremely durable and highly refined.  They offer better heat dissipation and material strength; resulting in superior wear life, improved brake pad wear life and weight reduction compared to our competitor's carbon ceramic products in the automotive industry and for the aerospace industry they offer weight reduction, improved brake performance and superior wear life.

Our strategy is to firstly establish well engineered products which to 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 and introduce our products into these large volume markets.

The key features of our business model are as follows:

·     we engineer, develop and manufacture carbon ceramic brake products, which deliver high technical performance for the brakes market opportunities, which we estimate to be, ultimately, a £1 billion per annum market.

·     our product technology offers highly desirable 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 and through adoption of our products in the retrofit and niche vehicle car manufacturers.

·     we have a growing body of technical data which has been validated by our strategic partners/customers to support product adoption in the key 'game changing' volume markets.

·     we have developed our manufacturing capability in terms of operating systems and supply chain management achieving both automotive and aerospace quality standards (TS16949 and AS9100); and

·     we have a manufacturing capacity improvement plan which will be implemented over the next 2 years.

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



 

Delivering our objectives:

Product engineering and sales have expanded in the retrofit and niche vehicle markets. We continue to offer retrofit products for Porsches, Ferraris and Nissan GTR's and vehicle manufacturers/tuners with growing demand and brand recognition in the market place.

In addition our tactical objectives relating to the key automotive market differentiators are progressing:

·     Product - the major challenge of wet endurance has been overcome, ensuring we can achieve to our customer's requirements.  This improvement now allows work to begin on specifying the service life diagnostic tool for use by OEMs during service intervals for vehicles;

·     Quality - in August we announced that the Company had completed its automotive quality certification (T16949) achieving another major milestone for the business.  The cost of quality certification has been identified as an area for cost savings.  These cost savings are independent of the cost reduction programme, which when eliminated will substantially improve the Company's financial performance.   Reducing the cost of quality is progressing with savings expected to be made during the next financial year;

·     Supply chain security - our plans to increase capacity and improve the robustness of our supply chain are progressing as mentioned in the chairman's statement albeit delayed by the need for grant support; and

·     Cost - our cost reduction programme has seen the completion of a series of projects focussing on operational efficiency, seeing our standard manufacturing cost reduced by 10% during the year.  The cost reduction would have been greater however cost increases in the supply chain have occurred.  These cost increases reinforce the need to complete our supply chain robustness programme.  There remains significant cost savings still to be achieved, however 70% of these cost reduction programme are linked to the current capital investment plan.

 

In terms of the development of aircraft brakes we continue our targeted strategy of working with an international aircraft brake system supplier on an exclusive basis. Having progressed with the technical development on the US Military programme, our work is focused on completing the required pre-production milestones as part of the agreed schedule to start commercial supply in 2017.  Achieving the aerospace quality standard of AS9100 is a major part of this and we were pleased to announce the award of this certification in June 2015.

In terms of the larger market of light commercial aircraft, as previously mentioned, the current situation is as follows:

·     the technical requirements in this market are less demanding than the US Military programme and feasibility testing has been successfully completed;

·     our customer is keen to close out the US military programme  before starting the adoption of our products in this market; and 

·     there are many light aircraft platforms and validation testing and product sign off is required for each platform.  The lead-time for validation and product sign off is significantly faster than the US military programme.



 

Our activities continue to expand beyond the initial US military programme and light commercial aircraft into the helicopter market.  Our customer has identified carbon ceramic brakes for use in future generations of helicopters.  The first order has been received for demonstrator parts to be presented and evaluated by the aircraft manufacturer and US Department of Defence.  This programme further strengthens the Company's future sales pipeline, albeit new programmes on future generation military contracts take a long time to mature.

As this report highlights, we have seen a significant increase in engineering work relating to the 'game changing' opportunities.  To support the 'game changer' opportunities we have increased our engineering resources significantly.  We are pleased with the progress and results that have been generated by the expanded team and expect to see further progress going forward.  The increase in engineering resource has however pushed back the objective of reaching 'cash breakeven'.   The Company believes that with the anticipated sales growth in the retrofit and niche vehicle markets alongside the 'game changer' programmes we will achieve cash breakeven in 2017.

Alongside these core business activities the Company has also:

·     completed two equity fundraisings in the year from both institutional and private investors totalling £1.3m to further progress the Company's objectives towards 'game changing' new business; and

·     continued to supply automotive race products to a global major brake manufacturer.  We anticipate the level of sales from these activities to continue during the next financial year, but start to decrease during 2016.

Financial Review

In the year ended 31 May 2015, revenues were £1.1m (2014: £1.3 million) which was slightly below our expectations due to the operational issues (discussed above) in May 2015. Gross margin weakened during the year to 51.1% (2014: 56.2%) due to the sale of more products at a lower gross margin compared to prior year. 

Losses after taxation increased by 13.5% to £765k (2014: £674k) due to the decrease in overall gross margin, additional costs due to continued investment in operational and engineering staff,  while being offset by  increases in grant income and income tax credit.

At 31 May 2015, inventory was £317k (2014: £271k). This increase was due in part due to an increase of work in progress, due to the operational issue in May 2015.

Net cash used in operating activities increased by 25.6% to £559k from £445k in the prior year, mainly due to increased losses after tax, offset by R&D tax credit received of £217k.

The Company had a cash balance of £829k at 31 May 2015 (2014: £151k).

Loss per share was 1.65 pence (2014: loss 1.65 pence).



 

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. A set of business milestones is also updated monitored and reviewed as part of the monthly board meeting.

The Company produces an annual business plan and full monthly forecasts detailing sales, profitability and cash flow to help monitor analysis performed above business performance going forward. These are detailed in the Financial Review above.

Management meetings are held on a weekly basis, all senior managers attend and discuss production, engineering, financial and quality issues.

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 carbon ceramic product technology. Indications are that there is a strong desire from our strategic aerospace partner and from a number of volume automotive OEMs to incorporate the Company's product in their respective platforms. This risk is constantly assessed by regular customer review meetings.

In terms of uncertainties product sales continues to grow in the retrofit and niche vehicle markets with an increasing number of distributors and niche vehicles. This uncertainty is constantly assessed by regular customer meeting and monitoring the level of enquiries and orders for both the company's products 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 significant progress in its automotive and aircraft 'game changing' projects and is increasing its sales in the retrofit and niche vehicle markets.  The furnace breakdown has been addressed and we are in the process of recovering lost sales from the furnace breakdown. Further progress on automotive 'game changers' is expected during 2015 and 2016.

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 2015




2015

2014




£'000

£'000

Revenue



1,066

1,273

Cost of sales



(521)

(557)




________

________

Gross profit



545

716






Administrative expenses:





Before research costs



(666)

(613)

Research costs



(933)

(955)




________

________

Total administrative expenses



(1,599)

(1,568)




________

________

Other operating income



114

66




________

________

Operating loss



(940)

 

(786)






Financial expenses



(42)

(56)




________

________











Loss before tax



(982)

(842)

Taxation



217

168




________

________

Loss for the year after tax



(765)

(674)






Other comprehensive income



-

-




________

________

Total comprehensive loss for the year attributable to members



(765)

(674)




________

________

Loss per ordinary share





Basic and diluted



(1.65p)

(1.65p)




________

________

 



 

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

301

-

-

340

Cost of issue written off to share premium

-

(13)

-

-

(13)

Equity settled share based payment transactions

-

-

-

18

18

Total contributions by and distributions to the owners

39

288

-

18

345

Balance at 31 May 2014

423

7,995

464

(8,242)

640


________

________

________

________

________







For the year to 31 May 2015

 

Share capital

Share premium account

Capital reserve

Retained loss

Total


£'000

£'000

£'000

£'000

£'000

Balance at 31 May 2014

423

7,995

464

(8,242)

640







Comprehensive income for the year






Loss for the year

-

-

-

(765)

(765)


________

________

________

________

________

Total comprehensive income for the year

-

-

-

(765)

(765)


________

________

________

________

________

Transactions with owners, recorded directly to equity






Shares issued in the year

109

1,308

-

-

1,417

Cost of issue written off to share premium

-

(117)

-

-

(117)

Equity settled share based payments

-

-

-

24

24


________

________

________

________

________

Total contributions by and distributions to the owners

109

1,191

-

24

1,324


________

________

________

________

________

Balance at 31 May 2015

532

9,186

464

(8,983)

1,199







 

Statement of Financial Position

at 31 May 2015



2015

2015

2014

2014



£'000

£'000

£'000

£'000

Non-current assets






Property, plant and equipment



483


586







Current assets






Inventories


317


271


Trade and other receivables


367


454


Cash and cash equivalents


829


151




_______


_______





1,513


876




_______


_______

Total assets

 



1,996


1,462

Current liabilities






Other interest bearing loans and borrowings


(9)


(9)


Trade and other payables


(379)


(395)




_______


_______




(388)


(404)








Non-current liabilities






Other interest bearing loans and borrowings


(409)


(418)




_______


_______














Total liabilities



(797)


(822)




_______


_______

Net assets



1,199


640




_______


_______

Equity






Share capital



532


423

Share premium



9,186


7,995

Capital reserve



464


464

Retained loss



(8,983)


(8,242)




_______


_______

Total equity attributable to equity shareholders of the Company



1,199


640




_______


_______

 



 

Statement of Cash Flows

for the year ended 31 May 2015

 




2015

2014




£'000

£'000

Cash flows from operating activities





Loss for the year



(765)

(674)

Adjusted for:





Depreciation charge



115

91

Loss on disposal of property, plant and equipment



-

10

Equity settled share-based payment expenses



24

18

Financial expense



42

56

Taxation



(217)

(168)




(801)

(667)






Changes in working capital





(Increase)/decrease in inventories



(46)

86

Decrease/(increase) in trade and other receivables



87

(128)

(Decrease)/increase in trade and other payables



(16)

96




(776)

(613)






Taxation received



217

168

Net cash used in operating activities



(559)

(445)






Cash flows from investing activities





Acquisition of property, plant and equipment



(12)

(63)

Proceeds from disposal of property, plant and equipment



-

41

Net cash used in investing activities



(12)

(22)






Cash flows from financing activities





Proceeds from issue of share capital , net of expenses



1,300

327

Proceeds from new loan



-

400

Payment of finance lease liabilities



(9)

(6)

Repayment of borrowings



-

(504)

Interest paid



(42)

(56)

Net cash generated from financing activities



1,249

161






Net increase /(decrease) in cash and cash equivalents



678

(306)

Cash and cash equivalents at the beginning of the period



151

457

Cash and cash equivalents at the end of the period



829

151






 



 

NOTES TO THE ACCOUNTS

 1 Basis of preparation and general information

 

The financial information set out herein does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information for the year ended 31 May 2015 has been extracted from the Company's audited financial statements which were approved by the Board of Directors on 29 September 2015 and which, if adopted by the members at the Annual General Meeting, will be delivered to the Registrar of Companies for England and Wales.

 

The financial information for the year ended 31 May 2014 has been extracted from the Company's audited financial statements which were approved by the Board of Directors on 29 August 2014 and which have been delivered to the Registrar of Companies for England and Wales.

 

The reports of the auditor on both these financial statements were unqualified, did not include any references to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain a statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

 

The information included in this preliminary announcement has been prepared on a going concern basis under the historical cost convention, and in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and the International Financial Reporting Interpretations Committee (IFRIC) interpretations issued by the International Accounting Standards Board ("IASB") that are effective or issued and early adopted as at the date of these financial statements and in accordance with the provisions of the Companies Act 2006.

 

The Company is a public limited company incorporated and domiciled in England & Wales and whose shares are quoted on AIM, a market operated by The London Stock Exchange. The principal activity of the company is the development and manufacturer of carbon ceramic products for the brakes market. The registered office is Unit 4, Olympic Park, Poole Hall Road, Ellesmere Port, Cheshire CH66 1ST.

 

2 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 £765k during the year however the Directors are satisfied, based on detailed cash flow projections and after the consideration of reasonable sensitivities, that sufficient cash is available to meet the Company's needs as they fall due for the foreseeable future and at least 12 months from the date of signing the accounts. The detailed cash flow assumptions are based on the Company's annual budget, prepared and approved by the Board, which reflects a number of key assumptions including; revenue growth, underpinned by current pipeline; customer compliance with payment terms; other receipts of a value and timing consistent with previous years.  Revenues are expected to continue in the forthcoming year.

Further information regarding the Company's business activities, together with the factors likely to affect future development, performance and position are set out in the Chairman's statement and the Strategic report.  The Directors believe that the Company is well placed to manage its business risks successfully despite the current uncertain economic outlook.  After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future.  Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

 

3 Segmental reporting

 

Due to the start up nature of the business the Company is currently focused on building revenue streams from a variety of different markets.  As there is only one manufacturing facility, and as 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 Company's chief operating decision maker, the Chief Executive, reviews performance information for the Company 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 Company has only one reportable segment that being the manufacture and sale of carbon fibre materials and the development of technologies associated with this.

 

The Company considers it offers product technology namely carbon fibre re-enforced ceramic material, which is machined into differing shapes depending on the intended purpose of the end user.

 

Revenue by geographical destination is analysed as follows:


2015

2014


£'000

£'000

United Kingdom

164

129

Rest of Europe

838

657

United States of America

51

465

Rest of World

13

22


             

              


1,066

1,273


             

              




Turnover in the current year comprises £1,066k of product sales (2014: £1,273k) and no sales in relation to the sale of technology (2014: £260k).

 

4 Loss per share

The calculation of basic loss per ordinary share is based on the loss for the financial year divided by the weighted average number of shares in issue during the year.

 

Losses and number of shares used in the calculations of loss per ordinary share are set out below:





Basic






2015

2014

Loss after tax (£)


(765,586)

(674,016)

Weighted average number of shares (No. of shares)


46,449,946

40,730,707

Loss per share (pence)


(1.65p)

(1.65p)



             

             





Surface Transforms plc

Dr. Kevin Johnson, CEO

+44 151 356 2141

David Bundred, Chairman

+44 7785 388 848

 

Cantor Fitzgerald Europe

David Foreman, Michael Reynolds (Corporate Finance)

+44 207 894 7000

David Banks, Tessa Sillars (Corporate Broking)

+44 207 894 7000

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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