SURFACE TRANSFORMS PLC — Earnings Release 2013

Aug 1, 2013

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RNS Number : 6438K

Surface Transforms PLC

01 August 2013

1 August 2013

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 2013.

The Company's Annual Report and Accounts for the year ended 31 May 2013, together with a notice convening the Company's Annual General Meeting at Cantor Fitzgerald's office at 1 America square, 17 Crosswall, London, EC4N 3LS at 11.00am on 24 September 2013 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 6% to £ 1.1 million (2012: £1.0 million).

·      Improved gross margin during the year of 74% (2012: 63%) including income from sale of certain technology rights.

·      Loss before taxation and exceptional items of £640k (2012: £638k).

·      Cash used in operating activities increased by 65% to £392k (2012: £237k).

·      Cash position as at 31 May 2013 of £457k (2012: £547k).

·      Equity fundraising completed during the year raising £504k before related expenses.

·      Signing of a $1 million technology contract over 12 months with a major clutch and transmission manufacturer.

·      Launching the company's STCC brand, website and retail products for automotive carbon ceramic brakes.

·      Significant technical progress on the Company's aircraft braking development programme.

·      New CVI furnace installed increasing production capacity threefold

CHAIRMAN'S STATEMENT

It is pleasing to report significant strategic commercial progress at Surface Transforms, albeit progress which is not easily seen in the financial results of the past year.

The results are consistent with the announcement we made on 6 March 2013, profit (including R&D tax credit) and cash in line with expectations but with turnover being lower than anticipated a year ago. Nonetheless the Company is still targeting cash break even in the current financial year ending 31 May 2014.

From a trading perspective, the year was one of significant highs and lows. We were particularly pleased by the $1m technology transfer agreement signed with a major US clutch and transmission manufacturer but this good news was partially offset by both our German distribution partner, Mov'It going into administration, and a significant supply disruption elsewhere in the European supply chain of our main preform discs customer. The net result was that turnover from "product" customers actually fell in the year by £ 242k.

Nonetheless these two particular trading problems are behind us, Mov'It is now trading again as a wholly owned subsidiary of Schuler GmbH and orders from the European brake manufacture who buys the company's preform discs are now back at FY11/12 levels. Moreover good progress is being made with both new and on-going "game changer" customers who should lead to volume production in due course.

The strategy of Surface Transforms is unchanged:

·      The Company will realise shareholder value both through product sales, and sales and licensing of its technology.

·      The Company's resources are focussed in mainstream automotive, specialised vehicles and aerospace markets. However, whilst there is no on-going resource allocation, we will react to funded opportunities in other markets as they arise. Clutch manufacture and our small sales into the rocket engine market fall into this category.

·      In automotive our "go to market" strategy is a continuum of retrofit → super cars (near OEM- Original Equipment Manufacturer) → limited editions → option list → mainstream adoption.

·      In our chosen markets, product cost and lead time are critical differentiators. In particular, success in the automotive market is nearly always a function of cost. We are therefore targeting to halve our manufacturing costs and lead times over the next two years.

·      Distributor partners are a key element of our work on retrofit and "near OEM" markets but the company will not delegate the responsibility of sales and marketing solely to distributors, instead being either involved inside the partners company or taking direct responsibility.

Against these core strategic objectives we can specifically report:

·      Testing continues on the potential aerospace contract. A key technical objective has been reached but a minor - previously resolved - problem has reappeared. The Company is confident it can successfully resolve this particular issue and is particularly encouraged by the active participation of the customer in the project. The potential customer wants this project to succeed! The sales from this project will not materially contribute to target break even in FY13/14 but are expected to make a significant contribution in FY14/15.

·      A major UK vehicle manufacturer continues to test the Company's products.

·      A new (for the Company) brake manufacturer is now testing the company's product. This is a significant potential new customer for the Company.

·      A recent revision to the US DOD (Department of Defence) project priorities appears to have resuscitated a military project previously believed to be dead. The Company is in discussion with the OEM to understand the reality of this potentially significant new development.

·      The Company is in new discussions with a number of German "near OEM" car manufactures.

·      The Company continues to make good progress on the target of halving production costs and lead times in the next two years.

The Board is aware that shareholders would like to see more frequent announcements of progress but, apart from the commercial and competitive sensitivity of much of our work, the reality is that testing new products, notably endurance testing, is characterised by "no news being good news".

Nonetheless we are pleased to advise:

·      we have more "game changer" customers testing our products than this time last year;

·      that all the strategic projects (both old and new) are progressing - not without setbacks on the way - but continuously getting nearer to the goal of approval;

·      that whilst these strategic  contracts are essential for ultimate shareholder value they are not needed to achieve cash break even in FY13/14;

·      we have widened our retrofit and aftermarket product range in the last year;

·      the customer spread within the sales forecast for FY13/14 is more broadly based than was the case at the start of this financial year; and

·      the sales forecast to achieve EBITDA and cash break-even is unchanged at approximately  £1.9 million .

Consequently your Board still believes that FY13/14 break-even is a realistic target and that the company can achieve one or more of its target OEM strategic contacts in the next twelve months.

FINANCIAL REVIEW

In the year ended 31 May 2013, revenues were £1.1 million (2012: £1.0 million) which was in line with our expectations. Gross margin also improved during the year to 74% (2012: 63%) due to the successful implementation of our cost reduction programme and the income received from the sale of intellectual property services, although these achievements were in part offset by the sale of more products of a lower gross margin compared to prior year. 

Losses after taxation increased by 22% to £580k (2012: £477k) after an exceptional charge of £72k -mainly due to increased contribution of £152k from sales, reduced payroll costs of £51k offset by increased net research costs expensed of £88k and lower other operating income of £60k and income tax credit of £29k and, together with a higher financial expense (net) of £43k. The increase in research costs was a consequence of our decision to concentrate R&D efforts on the continued development of our technologies and products in our core markets.

Looking ahead, our R&D tax credit advisers, Baker Tilly, have advised us we should continue to receive tax credits of between £150k to £160k per annum based on the continued current levels of research activity. 

At 31 May 2013, inventory was £357k (2012: £404k). This decrease was as a result of increased trading activity and utilisation of stock during the last month to support our projected increase in sales to the motor racing market during FY 2013/14.

The Board has continued to address the Company's production constraints and has completed the purchase of a new CVI furnace during the year increasing production capacity threefold.

Net cash used in operating activities increased by a significant 65% to £392k from £237k last year, mainly due to increased losses after tax (as above), offset by R&D tax credit received and lower working capital levels at FY 2013 year end.

The Company had a cash balance of £457k at 31 May 2013 (2012: £547k).

Loss per share was 1.71 pence (2012: loss 1.50 pence).

CHIEF EXECUTIVE'S REPORT

The Company has maintained its focus this year on its strategic medium term "game changing" projects' and has made progress both in the automotive and aircraft brakes market. 

In terms of the automotive market, we have continued to develop the Company's business capabilities in the form of:-

·      Enhanced brake system knowledge and expertise through working closely with a number of OEMs and tier 1 system suppliers.   The Company sees these relationships becoming stronger;

·      Enhancing our manufacturing capacity in the form of the new Chemical Vapour Infiltration (CVI) furnace.  This new furnace increases our manufacturing capacity three fold and is now contributing to output;

·      Continuing our manufacturing cost reduction programme to enable the Company to now offer a competitively priced brake disc to the main OEM market.  The Company is on track to deliver a 50% reduction in manufacturing cost with the completion of the current programme in two years time;

·      Developing the Company's plan to reduce manufacturing lead-time through the development of new processing capabilities.  Suitable process technology has been identified and trials have been completed with satisfactory results.  To continue this development the Company is in discussions regarding expansion plans with local enterprise authorities relating to facilities, incentives and grants with detailed planning underway. However the construction and new equipment contracts will only be signed in parallel with both the sales contract win and raising the second stage finance required to complete a new factory.

In terms of the aircraft brakes market, we have taken a further significant technological step closer to commercialising the Company's proprietary carbon ceramic technology with the resolution of a major outstanding technical requirement. There is still technical work to be completed relating to a recurring minor technical issue,   which we are confident can be addressed successfully.

In parallel to these important activities the Company has faced a sometimes rewarding but in the main challenging trading environment throughout the year:

·      Continuing to accumulate significant on car service miles; allowing the Company to identify, trouble shoot and resolve a technical issue relating to the carbon ceramic brake system beyond just technical development of the carbon ceramic disc.

·      As noted in the Chairman's statement, managing a situation which saw Mov'It GmbH enter into administration at the start of January 2013 and emerge under new ownership in May 2013.   This resulted in a significant drop in sales for the financial year.  With Mov'It GmbH now under new ownership and having undergone restructuring we expect trading and sales returning to previous levels in the key European automotive market of Germany.  To mitigate such risks in the future, we intend to position a salesman in Germany which will also enable us to work more closely with both the wider automotive market and Mov'It;

·      Temporary gap in sales for carbon fibres preforms emerged in the first half of the financial year.  Our main European customer suffered a major supply chain problem which prevented it from servicing the market.  This issue was rectified in the first quarter of 2013 and sales have returned to previous levels with a strong order book in place as we enter the financial year 2013-14.

·      Signing of a $1 million contract with a major US clutch and transmission manufacturer.  The agreement relates to the transfer of one of Surface Transforms' in-house developed process technologies, a technology which is only one stage of ST's multi-stage production process for carbon-ceramic brake disc components, and includes the sale of specialist equipment and an option to purchase further process technology and equipment worth approximately US$1.5 million.  A five year licence is included in the agreement, commencing 2018, should they choose to manufacture and sell carbon ceramic components using Surface Transforms' process technology.  The global manufacturer will not manufacture or sell carbon ceramic products using the Company's process technology prior to 2018.

We have expanded the automotive retrofit product range beyond the Nissan GTR, to Porsche and Ferrari. Sales opportunities for these product extensions will be seen in the current financial year 2013-14.

·      Sales for the supply of carbon ceramic discs which are then integrated into our brake system supplier distributors own upgrade kits have continued.  The three key distributors continue to be important to the Company's commercial objectives of achieving cash break even and building market reputation and pedigree. Additionally however, Surface Transforms Engineering has designed and launched its own retail products for Nissan, Porsche and Ferrari and launched the STCC new brand and website.  Sales growth for these products is expected in the financial year 2013-14.

·      To strengthen our commercial position with the development of STCC retail disc assembly kits we have begun to expand our distributor network to include independent Nissan, Porsche and Ferrari tuners in the UK.  During 2013 we plan to continue adding new distributors across the rest of the world.

Alongside these activities the Company has:-

·      Completed a placing and open offer in February 2013 for £504k before expenses from both institutional and private investors to further progress the company's objectives towards 'game changing' new business;

·      Appointed a Sales Director with Automotive experience - Greg Harris joined the management team in October 2012. With a career spanning GKN, Prodrive and Aston Martin Motorsport he is focused on capturing some of the game changing projects ;and

·      Commenced the establishment of a world class manufacturing facility to TS16949 standards through total quality management and continuous improvement.  Craig Cartmell has been appointed as the Continuous Improvement Manager and has over 20 years experience.

In summary the Company has seen its automotive and carbon fibre preform sales slower than expected but has offset this in terms of profits with new licence income.  These sales issues are now resolved and the Company's current contracts and sales order bank provide a realistic base to reach its target of cash breakeven (approximately £1.9 million) this year and allow it continues to focus on a number of exciting growth opportunity across both automotive and aircraft brake markets.

DIRECTOR'S & STAFF

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

OUTLOOK

Surface Transforms continues to develop and is clearly progressing the commercialisation of its technology.  The Board expects continuing sales growth and has the objective of becoming cash break even in the current financial year ending 31 May 2014.

David Bundred                                                                                                     Kevin Johnson

Chairman                                                                                                               Chief Executive

Statement of Total Comprehensive Income

For the year ended 31 May 2013

			Note	2013	2012
				£'000	£'000
Revenue				1,059	1,001
Cost of sales				(275)	(369)
Gross profit				784	632
Administrative expenses:
Before research costs				(601)	(638)
Research costs				(895)	(807)
Total administrative expenses				(1,496)	(1,445)
Other operating income				138	198
Operating loss				(574)	(615)
Financial income				2	4
Financial expenses				(68)	(27)
Loss before tax and exceptional item				(640)	(638)
Exceptional item			2	(72)	-
Loss before tax				(712)	(638)
Taxation				132	161
Loss for the year after tax				(580)	(477)
Other comprehensive income				-	-
Total comprehensive loss for the year				(580)	(477)
Loss per ordinary share
Basic and diluted				(1.71p)	(1.50p)

All amounts relate to continuing activities.

Statement of Changes in Equity

For the year to 31 May 2013	Share Capital	Share premium account	Capital reserve	Retained earnings	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
Costs of issue written off to share premium	-	(63)	-	-	(63)
Equity settled share based payment transactions	-	-	-	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

For the year to 31 May 2012	Share Capital	Share premium account	Capital reserve	Retained earnings	Total
	£'000	£'000	£'000	£'000	£'000
Balance at 31 May 2011	319	7,305	464	(6,598)	1,490
Comprehensive income for the year
Loss for the year	-	-	-	(477)	(477)
Total comprehensive income for the year	-	-	-	(477)	(477)
Transactions with owners, recorded directly to equity
Equity settled share based payment transactions	-	-	-	41	41
Total contributions by and distributions to the owners	-	-	-	41	41
Balance at 31 May 2012	319	7,305	464	(7,034)	1,054

Balance Sheet

at 31 May 2013

		2013	2013	2012	2012
		£'000	£'000	£'000	£'000
Non-current assets
Property, plant and equipment			665		288
Current assets
Inventories		357		404
Trade and other receivables		326		357
Cash and cash equivalents		457		547
			1,140		1,308
Total assets			1,805		1,596
Current liabilities
Other interest bearing loans and borrowings		(198)		(89)
Trade and other payables		(299)		(298)
		(497)		(387)
Non Current liabilities
Other interest bearing loans and borrowings		(339)		(155)
Total liabilities			(836)		(542)
Net assets			969		1,054
Equity
Share capital			384		319
Share premium			7,707		7,305
Capital reserve			464		464
Retained loss			(7,586)		(7,034)
Total equity attributable to equity shareholders of the Company			969		1,054

Cash flow statement

for the year ended 31 May 2013

		2013		2012
		£'000		£'000
Cash flows from operating activities
Loss for the year		(580)		(477)
Adjusted for:
Depreciation charge		83		67
Loss on sale of property, plant and equipment		-		1
Equity settled share-based payment expenses		28		41
Financial income		(2)		(4)
Financial expense		68		27
Taxation		(132)		(161)
		(535)		(506)
Changes in working capital
Increase in inventories		46		(99)
Decrease in trade and other receivables		31		247
Decrease in trade and other payables		-		(17)
		(458)		(375)
Interest received		2		4
Interest paid		(68)		(27)
Taxation received		132		161
Net cash used in operating activities		(392)		(237)
Cash flows from investing activities
Acquisition of property, plant and equipment		(460)		(65)
Net cash used in investing activities		(460)		(65)
Cash flows from financing activities
Proceeds from issue of share capital		468		-
Proceeds from new loan		437		285
Payment of finance lease		(4)		-
Repayment of borrowings		(139)		(51)
Net cash from financing activities		762		234
Net decrease in cash and cash equivalents		(90)		(68)
Cash and cash equivalents at the beginning of the period		547		615
Cash and cash equivalents at the end of the period		457		547

NOTES TO THE ACCOUNTS

1          Basis of preparation

The financial information set out above for the years ended 31 May 2013 and 2012 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 2012 have been delivered to the Registrar of Companies and those for 2013 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:-	2013	2012
#    Restructure of Sales department and costs incurred	£'000 72	£'000  -

Enquiries:

Surface Transforms plc

Dr. Kevin Johnson, CEO	+44 151 356 2141
David Bundred, Chairman	+44 7785 388 848

Cantor Fitzgerald

David Foreman (Corporate Finance)	+44 207 894 7684
Paul Jewell (Corporate Brokering)	+44 207 894 7000

This information is provided by RNS

The company news service from the London Stock Exchange

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