How To Profit From A Successful Year

Transcription

1 Surface Transforms Pc Registered number Annua Report and Financia Statements

2 Contents for the year ending 31 March Highights 3 Chairman s Statement 5 Strategic Report 8 Directors Report 11 Report on Directors Remuneration 13 Statement of Directors Responsibiities 14 Independent Auditor s Report 15 Statement of Tota Comprehensive Income 16 Statement of Financia Position 17 Statement of Changes in Equity 18 Statement of Cash Fows 19 Notes to the Financia Statements 37 Company Information and Advisers 38 Notice of Annua Genera Meeting Annua Report and Financia Statements

3 Highights for the year ended 31 May 2014 Revenues decreased by 0.2m to 1.1 miion (2014: 1.3 miion) Saes to retrofit and near OEM customers increased by 51% to 418k (2014: 276k) Gross margin percentage decreased to 51.1% (2014: 56.2%) refecting the absence of non-recurring icense income in 2015 EBITDA (incuding tax credits and excuding share based payments) oss of 584k (2014: oss of 509k) Loss before taxation of 982k (2014: oss of 842k) Loss per share unchanged at 1.65p (2014: oss per share of 1.65p) Successfu equity pacings raising 1.3m to further progress the Company s objectives towards game changing new business 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 actua: 217k) in the near future Significant progress with Tier One Origina Equipment Manufacturers (OEMs) on winning game changer contracts, incuding the award of a 1.3m per annum aerospace pre-production contract Subsequent to year end awarded quaity certification for both automotive (TS 16949) and aerospace (AS 9100) industries. Both certificates are prerequisite standards to suppy our products into their respective industries Severa new senior appointments made in the year which strengthen the management team Continuing progress on suppy chain security, reducing ead time and costs abeit sowed down by discussions on oca authority grants which are taking onger than panned 2 Surface Transforms Pc Annua Report and Financia Statements

4 Chairman s Statement for the year ended 31 May 2014 Whist the resuts for the financia year were beow expectations, the period has been one of rea strategic progress on the cruciay important game changing contracts and the shorter term road car markets revenues were impacted by a temporary breakdown of a furnace in May 2015 which has been investigated, understood and temporariy rectified. A permanent ong term soution has been agreed with a furnace manufacturer to resove an underying unreiabiity issue in this furnace at a cost of 160k. This work wi take pace in January In the meantime the aerospace and road car saes previous shortfa has aready been recovered and race car saes wi 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 capita equipment utiisation. Gross profit fe in the year to 545k (2014: 716k) as a resut of two unreated issues: the shortfa in saes referred to above; and the absence of non-recurring icense income. There were no significant changes in gross margin percentages at the customer eve. The reduction in gross margin was partiay offset by increases in grant income to 114k (2014: 66k). The combination of this gross margin reduction, grant income increase and a sma 31k increase in administrative expenses to 1,599k in 2015 (2014: 1,568k) combined to increase the EBITDA oss (incuding tax credits and excuding share based payments) to 584k (2014: 509k). However at this stage of the Company s deveopment, the crucia issue is revenue growth. In this regard, the Company is pursuing two parae, compementary but in practice, different revenue strategies: in the short term, retrofit and near OEM s are important to both demonstrating rea road mieage experience and achieving break even. The Company fits retrofit products to road cars aready in service repacing both iron discs and competitor discs. Near OEMs are defined as car assembers who take existing modes, pre-registration and customise them for higher performance and/or uxury, as we as companies who buid very speciaist vehices. Individua near OEM saes voumes are typicay between 10 and 200 cars per year; and the onger term game changing OEM contracts on cars generay costing more than 50,000 where the mode voumes (on which contracts are based) are typicay between 500 and 5,000 cars per year. These potentia customers are typicay we known internationa brands. In respect of product saes to our retrofit and near OEM customers it is particuary peasing to note that saes have grown in the year by 51% to 418k ( 276k 2014) Despite the shortfa from the May furnace probem, the Company has achieved saes due to three factors: in mid-2013 the Company switched channe poicy from three wordwide master distributors to a more direct saes approach (incuding opening its own German saes office) combined with the appointment of additiona distributors who are coser to the track day community. This has opened up a whoe set of new customer reationships, particuary with German near OEM s, a proportion of which have been converted to saes; saes have grown within the existing customer base, notaby to BAC Mono and Koenigsegg; and the Company s superior product reputation for better track performance (against the existing competitor) is becoming increasingy known within the track car community and is therefore assisting retrofit saes. Sef-evidenty, the Company aso uses the favourabe retrofit product comments, and virtuay zero defect fied issues in its saes campaigns with the game changing OEM customers. 3 Surface Transforms Pc Annua Report and Financia Statements

5 Chairman s Statement for the year ended 31 May 2014 Turning to the cruciay important game changing OEM contracts: the Company announced on 25 September 2014 the award of a pre-production contract with an internationa aerospace suppier. A recent review with the customer has confirmed that the saes forecasts and timings as previousy announced are sti on target a positive impact in the current financia year and mature voumes of 1.3m per year from the 2017/18 financia year onwards; additionay on 20 Juy 2015 the Company announced that the same aerospace customer has incuded the Company s product on a US Department of Defence technoogy demonstrator for the repacement of a mainstream heicopter. This customer continues to test our products on civiian ight aircraft; on 27 August 2015 the Company provided an update to sharehoders on progress with automotive game changing contracts as foows: a review meeting between a British vehice OEM, a major tier one internationa brake manufacturer, and Surface Transforms has concuded that the product testing has been successfu in achieving the vehice manufacturer s requirements. A three parties agreed to progress to on-car vaidation which is underway; in parae, the Company has progressed through a very detaied audit process with a premium German car manufacturer which is a crucia part of their new product introduction for new suppiers. Our customer has now entered the product vaidation phase of the programme; and further work aso continues on three other automotive game changing programmes; whist the programmes are taking onger to compete there are currenty no technica impediments. In terms of adoption schedues, it is aways difficut to predict when they wi happen as the timing is not within the Company s contro; however the Board is confident that they wi be abe to make positive announcements regarding this during the remainder of 2015 and eary The testing is taking onger than envisaged but there have been no unresoved setbacks, the products performing as expected, demonstrating superiority over competitor products on heat dissipation and robustness. The Company sti has five serious customer test programmes and remains confident of the eventua outcome. In the automotive market, suppy chain security, product cost and ead time reductions are critica differentiators. In particuar, success in the automotive industry is neary aways a function of cost. We are therefore successfuy impementing our programme to have manufacturing costs and ead times in the next 2 to 3 years, thereby aso improving suppy chain security. As expained in our recent fundraisings, the new factory with its associated capita equipment investment is a crucia eement in these cost reduction pans. The Company has competed negotiations with furnace manufacturers and is in a position to issue purchase orders, however the grant negotiations with oca authorities are taking onger than expected. Finaising the grant funding is the ony impediment to being abe to announce the ocation of the new factory, whose capacity and processes wi suppement the existing Eesmere Port faciity. Whist discussions are ongoing, the Company is optimistic that suitabe grant funding wi be obtained. Finay the Company has made a number of senior management appointments over the past 18 months, a reporting to the CEO in Finance, Saes, Operations and Quaity. The Board is deighted with the appointments and has aready seen the impact in the day to day running of the Company. David Bundred Chairman 29 September Surface Transforms Pc Annua Report and Financia Statements

6 Strategic Report for the year ended 31 May 2014 Operationa review and principa activity Surface Transforms is a UK based deveoper and manufacturer of carbon ceramic products for the brakes market. In these industries our products are ightweight, extremey durabe and highy refined. They offer better heat dissipation and materia strength; resuting in superior wear ife, improved brake pad wear ife 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 ife. Our strategy is to firsty estabish we engineered products which to se into the automotive retrofit market. Athough this retrofit market is reativey sma it aows the Company to generate revenues with the goa of reaching cash breakeven and more importanty reduces the product and suppier risks for the main part of our strategy, which is to work cosey with major Tier 1 suppiers and OEMs and introduce our products into these arge voume markets. The key features of our business mode are as foows: we engineer, deveop and manufacture carbon ceramic brake products, which deiver high technica performance for the brakes market opportunities, which we estimate to be, utimatey, a 1 biion per annum market. our product technoogy offers highy desirabe technica advantages over our competitors and our process technoogy offers a highy competitive ow cost manufacturing route making our products price competitive with good margins. to se a new disruptive product technoogy the risks need to be managed. These risks are addressed in partnership with Tier 1 system suppiers and OEMs and through adoption of our products in the retrofit and niche vehice car manufacturers. we have a growing body of technica data which has been vaidated by our strategic partners/customers to support product adoption in the key game changing voume markets. we have deveoped our manufacturing capabiity in terms of operating systems and suppy chain management achieving both automotive and aerospace quaity standards (TS16949 and AS9100); and we have a manufacturing capacity improvement pan which wi be impemented over the next 2 years. Deivering our objectives: Product engineering and saes have expanded in the retrofit and niche vehice markets. We continue to offer retrofit products for Porsches, Ferraris and Nissan GTR s and vehice manufacturers/tuners with growing demand and brand recognition in the market pace. In addition our tactica objectives reating to the key automotive market differentiators are progressing: Product the major chaenge of wet endurance has been overcome, ensuring we can achieve to our customer s requirements. This improvement now aows work to begin on specifying the service ife diagnostic too for use by OEMs during service intervas for vehices; Quaity in August we announced that the Company had competed its automotive quaity certification (T16949) achieving another major miestone for the business. The cost of quaity certification has been identified as an area for cost savings. These cost savings are independent of the cost reduction programme, which when eiminated wi substantiay improve the Company s financia performance. Reducing the cost of quaity is progressing with savings expected to be made during the next financia year; Suppy chain security our pans to increase capacity and improve the robustness of our suppy chain are progressing as mentioned in the chairman s statement abeit deayed by the need for grant support; and Cost our cost reduction programme has seen the competion of a series of projects focussing on operationa efficiency, seeing our standard manufacturing cost reduced by 10% during the year. The cost reduction woud have been greater however cost increases in the suppy chain have occurred. These cost increases reinforce the need to compete our suppy chain robustness programme. There remains significant cost savings sti to be achieved, however 70% of these cost reduction programme are inked to the current capita investment pan. 5 Surface Transforms Pc Annua Report and Financia Statements

7 Strategic Report for the year ended 31 May 2014 In terms of the deveopment of aircraft brakes we continue our targeted strategy of working with an internationa aircraft brake system suppier on an excusive basis. Having progressed with the technica deveopment on the US Miitary programme, our work is focused on competing the required pre-production miestones as part of the agreed schedue to start commercia suppy in Achieving the aerospace quaity standard of AS9100 is a major part of this and we were peased to announce the award of this certification in June In terms of the arger market of ight commercia aircraft, as previousy mentioned, the current situation is as foows: the technica requirements in this market are ess demanding than the US Miitary programme and feasibiity testing has been successfuy competed; our customer is keen to cose out the US miitary programme before starting the adoption of our products in this market; and there are many ight aircraft patforms and vaidation testing and product sign off is required for each patform. The ead-time for vaidation and product sign off is significanty faster than the US miitary programme. Our activities continue to expand beyond the initia US miitary programme and ight commercia aircraft into the heicopter market. Our customer has identified carbon ceramic brakes for use in future generations of heicopters. The first order has been received for demonstrator parts to be presented and evauated by the aircraft manufacturer and US Department of Defence. This programme further strengthens the Company s future saes pipeine, abeit new programmes on future generation miitary contracts take a ong time to mature. As this report highights, we have seen a significant increase in engineering work reating to the game changing opportunities. To support the game changer opportunities we have increased our engineering resources significanty. We are peased with the progress and resuts 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 beieves that with the anticipated saes growth in the retrofit and niche vehice markets aongside the game changer programmes we wi achieve cash breakeven in Aongside these core business activities the Company has aso: competed two equity fundraisings in the year from both institutiona and private investors totaing 1.3m to further progress the Company s objectives towards game changing new business; and continued to suppy automotive race products to a goba major brake manufacturer. We anticipate the eve of saes from these activities to continue during the next financia year, but start to decrease during Financia review In the year ended 31 May 2015, revenues were 1.1m (2014: 1.3 miion) which was sighty beow our expectations due to operationa issued occurring in May Gross margin weakened during the year to 51.1% (2014: 56.2%) due to the sae of more products at a ower gross margin compared to prior year. Losses after taxation increased by 13.5% to 765k (2014: 674k) due to the decrease in overa gross margin, additiona costs due to continued investment in operationa and engineering staff, whie 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 operationa issue in May Net cash used in operating activities increased by 25.6% to 559k from 445k in the prior year, mainy due to increased osses after tax, offset by R&D tax credit received of 217k. The Company had a cash baance of 829k at 31 May 2015 (2014: 151k). Loss per share was 1.65 pence (2014: oss 1.65 pence). 6 Surface Transforms Pc Annua Report and Financia Statements

8 Strategic Report for the year ended 31 May 2014 Key performance indicators The Directors continue to monitor the business internay with a number of performance indicators: order intake, saes output, profitabiity and manufacturing cost of automotive discs. A set of business miestones is aso updated monitored and reviewed as part of the monthy board meeting. The Company produces an annua business pan and fu monthy forecasts detaiing saes, profitabiity and cash fow to hep monitor anaysis performed above business performance going forward. These are detaied in the Financia Review above. Management meetings are hed on a weeky basis, a senior managers attend and discuss production, engineering, financia and quaity issues. Risks and uncertainties As in previous years the principa risk faced by the Company is considered to be the speed at which our customers and potentia customers adopt the new carbon ceramic product technoogy. Indications are that there is a strong desire from our strategic aerospace partner and from a number of voume automotive OEMs to incorporate the Company s product in their respective patforms. This risk is constanty assessed by reguar customer review meetings. In terms of uncertainties product saes continues to grow in the retrofit and niche vehice markets with an increasing number of distributors and niche vehices. This uncertainty is constanty assessed by reguar customer meeting and monitoring the eve 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 cimate, particuary within the automotive sector. In summary, the Company has seen significant progress in its automotive and aircraft game changing projects and is increasing its saes in the retrofit and niche vehice markets. The furnace breakdown has been addressed and we are in the process of recovering ost saes from the furnace breakdown. Further progress on automotive game changers is expected during 2015 and Directors and staff We woud ike to thank a our coeagues, management and staff aike, for their hard work and dedication over the past year. Outook Surface Transforms continues to deveop and is progressing we its game changing opportunities. The Board expects continuing saes growth and is confident of making further announcements during the year. David Bundred Chairman Kevin Johnson Chief Executive 29 September Surface Transforms Pc Annua Report and Financia Statements

9 Directors Report for the year ended 31 May 2014 The Directors present their annua report and the audited financia statements. Directors and Directors interests The Directors who hed office during the year were as foows: D Bundred* (Chairman) Dr K Johnson (Chief Executive) K D Siva* R D Gedhi* *denotes non-executive Director. The Directors who hed office at the end of the financia year had the foowing interests in the ordinary shares of the Company according to the register of Directors interests: % of issued Number of 0.01 ordinary shares share capita Interest at Interest at at end of year end of year start of year K D Siva 1.55% 826, ,203 R D Gedhi 16.55% 8,801,977 8,801,977 Dr K Johnson 0.23% 124, ,000 D Bundred 1.05% 560, ,824 According to the register of Directors interests, no rights to subscribe for shares in or debentures of the Company were granted to any of the Directors or their immediate famiies, or exercised by them during the financia year, except as discosed in the report on Directors remuneration on pages 11 and 12. The Directors benefited from quaifying third party indemnity provisions in pace during the financia year and at the date of this report. Substantia sharehoders In addition to the Directors interests noted above, the Directors are aware of the foowing who were interested in 3% or more of the Company s equity as at 29 May 2015: Number of % of issued Registered hoding ordinary shares share capita Hargreave Hae 8,220, % J M Finn & Co 2,180, % WH Ireand 2,139, % Maunby Investment Manager 2,043, % Barcays Weath 1,996, % Dr Richard Emsie 1,828, % 8 Surface Transforms Pc Annua Report and Financia Statements

10 Directors Report for the year ended 31 May 2014 Corporate governance The Directors recognise the importance of sound corporate governance and confirm that athough compiance with the UK Corporate Governance Code is not compusory for AIM companies, the Company is foowing the guideines of the QCA Corporate Governance Code (as devised by the QCA in consutation with a number of significant institutiona sma company investors) to the extent appropriate and practica for a Company of its nature and size. The Board has appointed an Audit Committee whose primary roe is to review the Company s interim and annua financia statements before submission to the Board for approva. The Board has aso appointed a Remuneration Committee, which is responsibe for reviewing executive remuneration and performance. The Remuneration Committee is made up of three non-executive Directors, David Bundred, Kevin D Siva and Richard Gedhi. The Audit Committee is made up of the same three non-executive Directors. Detais of the Remuneration Committee are discosed in the report on Directors remuneration on pages 11 and 12. Going concern The financia statements have been prepared on a going concern basis which the Directors beieve to be appropriate. The Company incurred a net oss of 765k during the year however the Directors are satisfied, based on detaied cash fow projections and after the consideration of reasonabe sensitivities, that sufficient cash is avaiabe to meet the Company s needs as they fa due for the foreseeabe future and at east 12 months from the date of signing the accounts. The detaied cash fow assumptions are based on the Company s annua budget, prepared and approved by the Board, which refects a number of key assumptions incuding; revenue growth, underpinned by current pipeine; customer compiance with payment terms; other receipts of a vaue 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 ikey to affect future deveopment, performance and position are set out in the Chairman s statement on pages 3 and 4 and the Strategic report on pages 5 to 7. In addition, note 19 to the financia statements incudes the Company s objectives, poicies and processes for managing its capita; its financia risk management objectives; detais of its financia instruments and its exposures to credit risk and iquidity risk. The Directors beieve that the Company is we paced to manage its business risks successfuy despite the current uncertain economic outook. After making enquiries, the Directors have a reasonabe expectation that the Company has adequate resources to continue in operationa existence for the foreseeabe future. Accordingy, they continue to adopt the going concern basis in preparing the annua report and accounts. Principa activity The principa activity of the Company is to design, manufacture and se carbon fibre components. The majority of the Company s staff are empoyed in research activities which are concentrated on the ongoing identification of new products and appications for carbon fibre reinforced ceramic friction and non-friction materias. Resut for the year and proposed dividend The oss for the year after taxation amounted to 765k (2014: 674k). The Directors do not recommend the payment of a dividend (2014: ni). Discosure of information to auditor The Directors who hed office at the date of approva of this Directors report confirm that, so far as they are each aware, there is no reevant audit information of which the Company s auditor are unaware; and each Director has taken a the steps that he ought to have taken as a Director to make himsef aware of any reevant audit information and to estabish that the Company s auditor is aware of that information. 9 Surface Transforms Pc Annua Report and Financia Statements

11 Directors Report for the year ended 31 May 2014 Strategic report The information required by schedue 7 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Reguations 2008 has been incuded in the separate Strategic Report in accordance with section 414C(11) of the Companies Act 2006 (Strategic Report and Directors Report) Reguations Auditor KPMG LLP resigned as auditor on 28 May 2015 and Baker Tiy UK Audit LLP was appointed. Baker Tiy UK Audit LLP has indicated its wiingness to continue in office. Ordinary resoutions to re-appoint Baker Tiy UK Audit LLP, whose name wi change on 26 October 2015 to RSM UK Audit LLP, as auditor and to authorise the directors to agree their audit fee, wi be proposed at the forthcoming annua genera meeting. By order of the board D Bundred Chairman 29 September 2015 Unit 4 Oympic Park Pooe Ha Road Eesmere Port Cheshire CH66 1ST 10 Surface Transforms Pc Annua Report and Financia Statements

12 Report on Directors Remuneration for the year ended 31 May 2014 Poicy on executive Directors remuneration The Remuneration Committee comprises of David Bundred, Kevin D Siva and Richard Gedhi. The Remuneration Committee is responsibe for reviewing and determining the Company s poicy on executive remuneration (incuding the grant of options under the Share Option Scheme). Executive remuneration packages are designed to ensure the Company s executive Directors and senior executives are fairy rewarded for their individua contributions to the Company. Fees for non-executive Directors The fees for non-executive Directors are determined by the Board. The non-executive Directors are not invoved in the decisions about their own remuneration. Directors remuneration Set out beow is a summary of the fees and emouments received by a Directors for the year or, where appicabe, period of office: Saary Fees 2015 Saary Fees 2014 Executive directors Dr K Johnson 94,220 94,220 90,329 90,329 94,220 94,220 90,329 90,329 Non-executive directors K D Siva 16,550 16,550 16,550 16,550 R D Gedhi 18,000 18,000 18,000 18,000 D Bundred 27,000 27,000 27,000 27,000 16,550 45,000 61,550 16,550 45,000 61, ,770 45, , ,879 45, ,879 With the exception of Dr K Johnson, none of the Directors received pension contributions in respect of their office. In addition to the emouments received, as stated above, Dr K Johnson received 21,000 (2014: 21,000) in respect of pension contributions. Directors interests Detais of any contracts in which a Director has a materia interest are discosed in note 17. None of the Directors received any remuneration or benefits under ong term incentive schemes. 11 Surface Transforms Pc Annua Report and Financia Statements

13 Report on Directors Remuneration for the year ended 31 May 2014 Share options The Company operates a share incentive scheme. A options are granted at the discretion of the Board. The number of options granted, date of grant, exercise price and exercise periods under the scheme are set out beow. None of the Directors exercised options during the year. Directors options outstanding and the options which were granted, surrendered and expired during the year are as foows: Number of Share Hoding options Hoding on Granted expired, on Date of 1 June during waived 31 May Exercise Director Grant 2014 the year or apsed 2015 Price Exercise Period Expiry Date Dr K Johnson 18/04/ , , /04/10-18/04/17 18/04/2017 Dr K Johnson 30/06/ , , /06/11-30/06/18 30/06/2018 Dr K Johnson 22/09/ , , /09/11-22/09/18 22/09/2018 Dr K Johnson 01/03/ , , /03/13-01/03/20 01/03/2020 Dr K Johnson 15/03/ , , /02/15-15/03/22 15/02/2022 KA D Siva 18/04/ ,000 50, /04/10-18/04/17 17/04/2017 D Bundred 17/10/ , , /10/14-17/10/21 17/10/2021 D Bundred 17/10/ , , /10/14-17/10/21 17/10/2021 D Bundred 17/10/ , , /10/14-17/10/21 17/10/2021 1,894,707 1,894,707 The market price of the shares at 31 May 2015 was 12.5 pence and during the year varied from pence to 7.25 pence. By order of the board D Bundred Chairman 29 September 2015 Unit 4 Oympic Park Pooe Ha Road Eesmere Port Cheshire CH66 1ST 12 Surface Transforms Pc Annua Report and Financia Statements

14 Statement of Directors Responsibiities for the year ended 31 May 2014 The directors are responsibe for preparing the Strategic Report and the Directors Report and the financia statements in accordance with appicabe aw and reguations. Company aw requires the directors to prepare financia statements for each financia year. Under that aw the directors have eected to prepare the financia statements of the company in accordance with Internationa Financia Reporting Standards ( IFRS ) as adopted by the European Union ( EU ). The financia statements are required by aw and IFRS as adopted by the EU to present fairy the financia position and performance of the company. The Companies Act 2006 provides in reation to such financia statements that references in the reevant part of that Act to financia statements giving a true and fair view are references to their achieving a fair presentation. Under company aw the directors must not approve the financia statements uness they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or oss of the company for that period. In preparing the financia statements, the directors are required to: (a) seect suitabe accounting poicies and then appy them consistenty; (b) make judgements and accounting estimates that are reasonabe and prudent; (c) state whether they have been prepared in accordance with IFRS as adopted by the EU; (d) prepare the financia statements on the going concern basis uness it is inappropriate to presume that the company wi continue in business. The directors are responsibe for keeping adequate accounting records that are sufficient to show and expain the company s transactions and discose with reasonabe accuracy at any time the financia position of the company and enabe them to ensure that the financia statements compy with the Companies Act They are aso responsibe for safeguarding the assets of the company and hence for taking reasonabe steps for the prevention and detection of fraud and other irreguarities. The directors are responsibe for the maintenance and integrity of the corporate and financia information incuded on the Surface Transforms Pc website. Legisation in the United Kingdom governing the preparation and dissemination of financia statements may differ from egisation in other jurisdictions. 13 Surface Transforms Pc Annua Report and Financia Statements

15 Independent Auditor s Report to the members of Surface Transforms Pc We have audited the financia statements on pages 15 to 36. The financia reporting framework that has been appied in their preparation is appicabe aw and Internationa Financia Reporting Standards (IFRSs) as adopted by the European Union. This report is made soey to the company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fuest extent permitted by aw, we do not accept or assume responsibiity to anyone other than the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibiities of Directors and auditor As more fuy expained in the Directors Responsibiities Statement on page 13, the directors are responsibe for the preparation of the financia statements and for being satisfied that they give a true and fair view. Our responsibiity is to audit and express an opinion on the financia statements in accordance with appicabe aw and Internationa Standards on Auditing (UK and Ireand). Those standards require us to compy with the Auditing Practices Board s (APB s) Ethica Standards for Auditors. Scope of the audit of the financia statements A description of the scope of an audit of financia statements is provided on the Financia Reporting Counci s website at Opinion on financia statements In our opinion the financia statements: give a true and fair view of the state of the company s affairs as at 31 May 2015 and of its oss for the year then ended; have been propery prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the provisions of the Companies Act Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and Directors Report for the financia year for which the financia statements are prepared is consistent with the financia statements. Matters on which we are required to report by exception We have nothing to report in respect of the foowing matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the financia statements are not in agreement with the accounting records and returns; or certain discosures of directors remuneration specified by aw are not made; or we have not received a the information and expanations we require for our audit. Graham Bond FCA (Senior Statutory Auditor) for and on behaf of Baker Tiy UK Audit LLP, Statutory Auditor 3 Hardman Street Manchester M3 3HF 29 September Surface Transforms Pc Annua Report and Financia Statements

16 Statement of Tota Comprehensive Income Note Revenue 2 1,066 1,273 Cost of saes (521) (557) Gross profit Administrative expenses: Before research costs (666) (613) Research costs (933) (955) Tota administrative expenses 3 (1,599) (1,568) Other operating income Operating oss (940) (786) Financia expenses 6 (42) (56) Loss before tax (982) (842) Taxation Loss for the year after tax 15 (765) (674) Other comprehensive income Tota comprehensive oss for the year attributabe to members (765) (674) Loss per ordinary share Basic and diuted 18 (1.65p) (1.65p) A amounts reate to continuing activities. The notes on pages 19 to 36 form part of these financia statements. 15 Surface Transforms Pc Annua Report and Financia Statements

17 Statement of Financia Position at 31 May Note Non-current assets Property, pant and equipment Current assets Inventories Trade and other receivabes Cash and cash equivaents , Tota assets 1,996 1,462 Current iabiities Other interest bearing oans and borrowings 11 (9) (9) Trade and other payabes 12 (379) (395) (388) (404) Non Current iabiities Other interest bearing oans and borrowings 11 (409) (418) Tota iabiities (797) (822) Net assets 1, Equity Share capita Share premium 15 9,186 7,995 Capita reserve Retained oss (8,983) (8,242) Tota equity attributabe to equity sharehoders of the Company 1, These financia statements were approved by the board of Directors on 29 September 2015 and were signed on its behaf by: D Bundred Chairman Dr K Johnson Director Company Registered Number The notes on pages 19 to 36 form part of these financia statements Surface Transforms Pc Annua Report and Financia Statements 2015

18 Statement of Changes in Equity For the year to 31 May 2014 Share Share premium Capita Retained capita account reserve oss Tota Baance at 31 May , (7,586) 969 Comprehensive income for the year Loss for the year (674) (674) Tota comprehensive income for the year (674) (674) Transactions with owners, recorded directy to equity Shares issued in the year Cost of issue written off to share premium (13) (13) Equity setted share based payment transactions Tota contributions by and distributions to the owners Baance at 31 May , (8,242) 640 For the year to 31 May 2015 Share Share premium Capita Retained capita account reserve oss Tota Baance at 31 May , (8,242) 640 Comprehensive income for the year Loss for the year (765) (765) Tota comprehensive income for the year (765) (765) Transactions with owners, recorded directy to equity Shares issued in the year 109 1,308 1,417 Cost of issue written off to share premium (117) (117) Equity setted share based payments Tota contributions by and distributions to the owners 109 1, ,324 Baance at 31 May , (8,983) 1,199 The notes on pages 19 to 36 form part of these financia statements. 17 Surface Transforms Pc Annua Report and Financia Statements

19 Statement of Cash Fows Note Cash fows from operating activities Loss before tax for the year (765) (674) Adjusted for: Depreciation charge Loss on disposa of property, pant and equipment 10 Equity setted share-based payment expenses Financia expense Taxation (217) (168) (801) (667) Changes in working capita (Increase)/decrease in inventories (46) 86 Decrease/(increase) in trade and other receivabes 87 (128) (Decrease)/increase in trade and other payabes (16) 96 (776) (613) Taxation received Net cash used in operating activities (559) (445) Cash fows from investing activities Acquisition of property, pant and equipment 8 (12) (63) Proceeds from disposa of property, pant and equipment 41 Net cash used in investing activities (12) (22) Cash fows from financing activities Proceeds from issue of share capita, net of expenses 1, Proceeds from new oan 400 Payment of finance ease iabiities (9) (6) Repayment of borrowings (504) Interest paid 6 (42) (56) Net cash generated from financing activities 1, Net increase/(decrease) in cash and cash equivaents 678 (306) Cash and cash equivaents at the beginning of the period Cash and cash equivaents at the end of the period The notes on pages 19 to 36 form part of these financia statements. 18 Surface Transforms Pc Annua Report and Financia Statements

20 Notes to the Financia Statements 1 Accounting poicies Surface Transforms Pc (the Company) is a Company incorporated and domicied in the UK, functiona currency being stering. The financia statements have been presented in stering and rounded to the nearest 000. The registered office of business is Unit 4, Oympic Park, Eesmere Port, Cheshire CH66 1ST. Surface Transforms is a UK based deveoper and manufacturer of carbon ceramic products for the brakes market. Surface Transforms Pc has four dormant subsidiary companies that are excuded from these financia statements on the basis of materiaity and that they do not currenty trade. These are; ST Aerospace Ltd., ST Automotive Ceramic Ltd.ST Defence Ltd and ST Racing Ltd. Statement of compiance The financia statements have been prepared in accordance with Internationa Financia Reporting Standards ( IFRSs ) as adopted by the EU. The financia statements were approved by the board on 29 September Basis of preparation The financia statements have been prepared in accordance with appicabe accounting standards and under the historica cost convention. The accounting poicies set out beow have, uness otherwise stated, been appied consistenty to a periods presented in these financia statements. Going concern The financia statements have been prepared on a going concern basis which the Directors beieve to be appropriate. The Company incurred a net oss of 765k during the year however the Directors are satisfied, based on detaied cash fow projections and after the consideration of reasonabe sensitivities, that sufficient cash is avaiabe to meet the Company s needs as they fa due for the foreseeabe future and at east 12 months from the date of signing the accounts. The detaied cash fow assumptions are based on the company s annua budget, prepared and approved by the Board, which refects a number of key assumptions incuding; revenue growth, underpinned by current pipeine; customer compiance with payment terms; other receipts of a vaue 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 ikey to affect future deveopment, performance and position are set out in the Chairman s statement on pages 3 and 4 and the Strategic report on pages 5 to 7. In addition, note 19 to the financia statements incudes the Company s objectives, poicies and processes for managing its capita; its financia risk management objectives; detais of its financia instruments and its exposures to credit risk and iquidity risk. The Directors beieve that the Company is we paced to manage its business risks successfuy despite the current uncertain economic outook. After making enquiries, the Directors have a reasonabe expectation that the Company has adequate resources to continue in operationa existence for the foreseeabe future. Accordingy, they continue to adopt the going concern basis in preparing the annua report and accounts. Share based payments The share option programme aows empoyees to acquire shares of the Company. The fair vaue is measured at grant date and spread over the period during which the empoyees and Directors become unconditionay entited to the options. The fair vaue of the options granted is measured using an option pricing mode, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to refect the actua number of share options that are expected to vest except where forfeiture is ony due to share prices not achieving the threshod for vesting. 19 Surface Transforms Pc Annua Report and Financia Statements

21 Notes to the Financia Statements 1 Accounting poicies continued Property, pant and equipment Property, pant and equipment are stated at cost ess accumuated depreciation and accumuated impairment osses. Where parts of an item of property, pant and equipment have different usefu ives, they are accounted for as separate items of property, pant and equipment. Leases in which the Company assumes substantiay a the risks and rewards of ownership of the eased asset are cassified as finance eases. Leased assets acquired by way of finance ease are stated at an amount equa to the ower of their fair vaue and the present vaue of the minimum ease payments at inception of the ease, ess accumuated depreciation and ess accumuated impairment osses. Lease payments are accounted for as described beow. Depreciation is charged to the statement of tota comprehensive income on a straight-ine basis over the estimated usefu ives of each part of an item of property, pant and equipment. The estimated usefu ives are as foows: Pant and machinery 12.5%-20% per annum Fixtures and fittings 15% per annum Leasehod improvements Over ife of ease Depreciation methods and usefu ives are reviewed at each baance sheet date. Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange ruing at the date of the transaction. Monetary assets and iabiities denominated in foreign currencies are transated to the functiona currency at the foreign exchange rate ruing at the baance sheet date and the gains or osses on transation are incuded in the income statement. Leases Operating ease payments Payments made under operating eases are recognised in the income statement on a straight-ine basis over the term of the ease. Lease incentives received are recognised in the income statement as an integra part of the tota ease expense. Finance ease payments Minimum ease payments are apportioned between the finance charge and the reduction of the outstanding iabiity. The finance charge is aocated to each period during the ease term so as to produce a constant periodic rate of interest on the remaining baance of the iabiity. Government grants Revenue grants are credited to the statement of tota comprehensive income, and incuded within other operating income, so as to match them with expenditure to which they reate. Post retirement benefits The Company does not operate a pension scheme, but does contribute to specific empoyees persona pension schemes. The amount charged to the profit and oss account represents the contributions payabe to empoyees persona pension schemes during the accounting year. 20 Surface Transforms Pc Annua Report and Financia Statements

22 Notes to the Financia Statements 1 Accounting poicies continued Research and deveopment expenditure Expenditure on research activities is recognised in the statement of tota comprehensive income as an expense as incurred. Expenditure arising from the Company s deveopment is recognised ony if a of the foowing conditions are met an asset is created that can be identified: it is probabe that the asset created wi generate future economic benefits; the deveopment cost of the asset can be measured reiaby; the Company has the intention to compete the asset and the abiity and intention to use or se it; the product or process is technicay and commerciay feasibe; and sufficient resources are avaiabe to compete the deveopment and to either se or use the asset. Expenditure is ony capitaised if there is a probabiity by the customer for the programme to proceed to fu scae commercia saes. This woud normay be refected in a firm purchase order and/or production contract, and a decision by their Board that the underying car programme wi go into production. Where these criteria have not been achieved, deveopment expenditure is recognised in the statement of tota comprehensive income in the period in which it is incurred. Inventories Inventories are stated at the ower of cost and net reaisabe vaue. In determining the cost of raw materias and consumabes the purchase price is used. For work in progress, cost is taken as production cost, which incudes an appropriate proportion of attributabe overheads. Taxation The charge for taxation is based on the oss for the year and takes into account taxation deferred or acceerated arising from temporary differences between the carrying amounts of certain items for taxation and for accounting purposes. Deferred taxation is provided for in fu at the tax rate which is expected to appy to the period when the deferred taxation is expected to be reaised, incuding on tax osses carried forward. Deferred taxation assets are recognised ony to the extent that it is probabe that future taxabe profits wi be avaiabe against which the temporary differences can be utiised. Research and deveopment tax credits, which are typicay received in the Autumn, are recognised on a cash received basis as a reduction in the current tax payabe as this is when the tax credit is considered recoverabe as the associated uncertainties have been eiminated. Cash and cash equivaents Cash and cash equivaents comprise cash on hand, demand deposits hed on ca with banks, and other short term highy iquid investments with origina maturities of three months or ess that are readiy convertibe to a known amount of cash and are subject to an insignificant risk of changes in vaue. Revenue Revenue comprises income derived from the suppy of carbon fibre materias during the course of the year. Revenue is recognised on transfer to the customer of significant risks and rewards of ownership, generay this wi be when goods are despatched to the customer. Turnover excudes vaue added taxes. 21 Surface Transforms Pc Annua Report and Financia Statements

23 Notes to the Financia Statements 1 Accounting poicies continued Critica accounting estimates and judgements The preparation of financia statements in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the appication of poicies and reported amounts of assets and iabiities, income and expenses. The estimates and associated assumptions are based on historica experience and various other factors that are beieved to be reasonabe under the circumstances, the resuts of which form the basis of making the judgements about carrying vaues of assets and iabiities that are not aready apparent from other sources. Actua resuts may differ from these estimates. The estimates and assumptions which have a significant risk of causing a materia adjustment to carrying amount of assets and iabiities within the next financia year are discussed beow: Impairment of property, pant and equipment Property, pant and equipment are reviewed annuay for impairment if events or changes in circumstances, such as changes in technoogy, indicate that the carrying amount of an asset is not recoverabe. Provision to write inventories down to net reaisabe vaue The Company makes provisions for obsoescence based on historica experiences and management estimates of future events. Actua outcome coud vary significanty from these estimates. Research and deveopment expenditure The Board considers the definitions of research and deveopment costs as outined in IAS 38: Intangibe assets when determining the correct treatment of costs incurred. Where such expenditure is technicay and commerciay feasibe, the Company intends and has the technica abiity and sufficient resources to compete deveopment, future economic benefits are probabe and if the Company can measure reiaby the expenditure attributabe to the intangibe asset it is treated as deveopment expenditure and capitaised on the statement of financia position. In considering whether an item of expenditure meets these criteria, the Board appies judgement. During the year a such expenditure has been expensed to the statement of tota comprehensive income on the grounds that it reates to feasibiity studies to identify new appications for the technoogy or methods of improving the production process. As the technica feasibiity of this work is unknown at the time the costs are incurred, none meet the criteria for capitaisation during the current or previous year. Deferred tax Management judgement is required to determine the amount of tax assets that can be recognised, based upon the ikey timing and eve of future taxabe profits together with an assessment of the effect of future tax panning strategies. Further information regarding the eve of unrecognised deferred tax is incuded in note 13. Going concern Management judgement is appied at each reporting date in assessing the ongoing appicabiity of the going concern assumption and the current year s assessment of which has been incuded within the going concern section above. Segmenta reporting The Board has reviewed the requirements of IFRS 8 Operating Segments, incuding consideration of what resuts and information the Chief Executive (the Chief Operating Decision Maker) reviews reguary to assess performance and aocate resources, and concuded that a revenue fas under a singe business segment. The Directors consider the business does not have separate divisiona segments as defined under IFRS 8. The Chief Executive assesses the commercia performance of the business based upon a singe set of revenues, margins, operating costs and assets. 22 Surface Transforms Pc Annua Report and Financia Statements