Surface Transforms Regulatory News (SCE)

31 January 2012

Surface Transforms plc

(the "Company")

Half-yearly financial results for the six months ended 30 November 2011

Surface Transforms plc, manufacturers of carbon fibre reinforced ceramic (CFRC) materials, announces its half-yearly financial results for the six months ended 30 November 2011.

Financial and business highlights:

·; Turnover increased to £339,880 (2010: £288,554)

·; Outstanding order book as at 30 November was £373,780 all for delivery before 31 May 2012

·; Losses before tax reduced to £432,706 (2010: £558,191)

·; Losses after tax reduced to £272,586 (2010: £458,191)

·; Cash at 30 November 2011 was £654,121 equivalent to approximately 2.1 pence per share (2010: £1,217,405 equivalent to 3.8 pence per share)

For enquiries, please contact:

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

CHAIRMAN'S STATEMENT

Financial Results

Turnover for the six months ended 30 November, 2011 was £339,880 (2010: £288,554), an increase of 17.8 per cent. Losses after tax for the period were £272,586 (2010: loss £458,191) a considerable improvement of 40 per cent over last year. Cash balances at the period end were £0.65 million (30 Nov 2010: £1.22 million) equating to 2.1 pence per share.

The past six months have been a period of progress for Surface Transforms. The improvement in sales and reduction in losses reflect the combination of ongoing contracts with road car brake manufacturers and the effect of the overhead cost reduction plan implemented in June 2011. Overheads have been reduced in total by £60k mainly through reduced net R&D costs, reflecting both an increased customer contribution to R&D and the end of programmes with high third party costs. There has been no reduction in core R&D capacity and the ongoing number is consistent with the company's ambitions.

The Company has continued to address its production constraints and has purchased a new CVI furnace during the period which has been financed by a three year term loan of £285k.

Market

The progress made has been both strategic as well as financial; a new contractual agreement with the specialist brake manufacturer Alcon Components builds on our existing relationship and complements the ongoing arrangement with Mov'It GmbH, confirming the Company's growing strength in the automotive aftermarket and retrofit market. These sales volumes and relationships are of course valuable in their own right, at the very least contributing to the Company's initial break even profit objective. Additionally there is a long tradition of technology developments in the automotive industry in general, and braking in particular, being pioneered in a combination of the aftermarket, retrofit and/or racing segments - examples include disc brakes, brake servo systems and anti lock brakes.

The Company is also continuing to achieve its testing and development milestones with a major US aerospace brake manufacturer. However there will only be minimal sales contribution this and perhaps also next year. This gestation period is typical of the aerospace industry; test programmes last a number of years, but once successfully completed commonly result in contracts of significant duration.

In contrast with the encouraging news from automotive and aerospace customers, the military and rocket programmes have seen little progress in the last six months. Indeed the Board is concerned that the underlying US Department of Defence special vehicle programmes may themselves be subject to long term delay or even cancellation. There appears little likelihood of improvement in the fundamentals of defence spending in the next few years and we are therefore downgrading our expectations from this market, assuming minimal contribution in the near future.

Internal Operations

The Company has also had a number of successes in its ongoing manufacturing cost reduction programme which the Board are optimistic will lead to improved gross margins next year. As with the success on sales, this success in brake disc cost reduction is both financial and strategic. The financial benefit of these cost reductions is clearly margin improvement in the Company's aftermarket business in the financial year to 31 May 2013; strategically it increases the prospect of winning Original Equipment (OE) orders. Price pressure in the aftermarket segments exists but is not a central contract winning criteria; by contrast, our view is that winning "mainstream" and even high performance car "mainstream" OE contracts requires Surface Transforms to pitch prices at a lower pricing level than is currently achievable. This in turn requires fundamentally lower manufacturing costs than those currently being achieved; the Company has a clear 2 to 3 year plan to get to this position and is on target in the first year of the programme.

Board Changes

After more than five years on the Board of Surface Transforms, Ken Baker has decided to retire and will leave the Board on 31 January 2012. Ken's advice and guidance over the years have been invaluable and the Board has been very fortunate to have worked with such a well regarded and successful individual. The Directors want to take this opportunity to thank Ken for his enormous contribution to the development of the Company during its formative period and offer Ken and his wife all our good wishes for his retirement.

Outlook

Although the order book is technically lower than last year (2010: £405,645) the Company expects to meet its budgeted sales and operating targets for the current financial year ending 31 May 2012. The change in the order book number reflects a change in process from a block order with "call off" to rolling two month firm orders (more accurately call off) against a background master contract with annual agreed numbers. The new process is the norm in the automotive industry.

The Group continues to estimate that, given the current product mix, cash breakeven occurs at approximately £1.7 million and operating profit breakeven at £2.2 million of revenues. The immediate focus continues to be on that objective; however it is encouraging to report that the steps being taken to achieve break even are congruent with the achievement of the product performance and manufacturing cost milestones needed to win mainstream OE automotive and aerospace contracts.

David Bundred

31 January 2012

CHIEF EXECUTIVE'S REPORT

The Company has continued to improve its trading position by addressing both sales in its available markets of the Company's products and implementing an overhead reduction programme. The net effect is an 18% increase in sales and a significant 40% reduction in losses after tax for the six month period ended 30 November 2011.

The Company's objective is to continue this progress during 2012. In terms of sales growth, the Company's long term supply agreement with a leading European global brake system supplier for racing brake parts grew significantly compared to 2010. The growth began in 2011 and has continued since. The Company's initial expectations (set in 2008) of sales up to £400k per annum for this contract will be exceeded during this current financial year.

The relationship between the Company and the specialist brake manufacturer Alcon Components has continued to evolve. Whilst sales to date have been limited, the signing of a new agreement for the supply of carbon ceramic products for the Asia automotive performance aftermarket is expected to substantially improve the commercial trading between us both. This agreement alongside the Mov-It European automotive performance aftermarket agreement enlarges the addressable market for our products, and strategically further advances the Surface Transforms' reputation and creditability in the wider automotive brake market.

Progress on the development of an aircraft brake with a major US aerospace supplier continues. Our customer has broadened the scope of the development to assess the product in other types of aircraft brake application. Whilst it is always very difficult to predict the adoption of new technologies, particularly in the aerospace market, the focus by both parties is on completing the test programme and, should our carbon ceramic products pass all test criteria, move towards commercial supply.

Operations

The Company's overhead cost reduction programme has progressed as planned, reducing our expenditure without impacting our R&D capacity and as a result, contributed to the reduction in operating losses.

The Company is now focused on delivering the increased plant capacity required for our growth plans and driving down the cost to manufacture the product to open up more price sensitive segments of our addressable markets.

The Company's review of manufacturing capacity to meet the overall objective of increasing demand has led to an order being placed for a new CVI furnace due for delivery in the summer of 2012. When commissioned, this new furnace will more than treble capacity in what was previously a bottleneck area of the Company. The Board are optimistic that this increased production capability will enable the Company to then reach its cash and operating profit breakeven level of revenues.

Discussions are underway with key suppliers to review their capacity limits as part of both the wider capacity review and a generic make in/buy out review.

As part of the cost reduction programme, we have partnered with Koenigsegg Cars in Sweden to win a Eureka Eurostar grant to support the development of lower cost, precision machining of carbon ceramic products. The project began in November 2011 and is scheduled to be completed within two years. This grant is expected to contribute approximately £85,000 per annum over the two years to support the Company's activities.

The Company operates in markets which have a high degree of seasonality, with automotive revenues in particular tending to be higher early in the calendar year and Spring, in advance of the main racing season. The current financial year ending May 2012 is not expected to be an exception, with revenues in the second half of the year being significantly higher than the first.

Kevin Johnson

Chief Executive

31 January 2012

SURFACE TRANSFORMS PLC

STATEMENT OF COMPRHENSIVE INCOME

for THE six months ended 30 November 2011

SURFACE TRANSFORMS PLC

BALANCE SHEET

AS AT 30 NOVEMBER 2011

SURFACE TRANSFORMS PLC

STATEMENT OF Cash flowS

for THE six months ended 30 November 2011

SURFACE TRANSFORMS PLC

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS TO 30 NOVEMBER 2011

SURFACE TRANSFORMS PLC

NOTES

1. Accounting policies

The interim financial statements are the responsibility of the Directors and were authorised and approved by the Board of Directors for issuance on 31 January 2012.

Basis of preparation

In the condensed consolidated half-yearly financial statements, the term 'Company' refers to Surface Transforms plc, a company incorporated in the United Kingdom. These condensed consolidated half-yearly financial statements comprise the Company and its subsidiaries as detailed in note 6 (together referred to as 'the Group' or 'Surface Transforms'). The financial statements of the Group for the six months ended 30 November 2011 are available from the Company's website www.surface-transforms.com.

These financial statements have not been prepared in accordance with IAS 34 "Interim Financial Reporting". They do not include all the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Company for the year ended 31 May 2011.

The comparative figures for the financial year ended 31 May 2011 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The accounting policies and presentation used in the preparation of these condensed consolidated half-yearly financial statements are consistent with those used in the preparation of the Company's published financial statements for the year ended 31 May 2011.

Segmental reporting

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

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

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

Estimates

The preparation of half-yearly financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these condensed consolidated half-yearly financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 May 2011.

Seasonality of operations

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

Going concern

The financial statements have been prepared on a going concern basis which the Directors believe to be appropriate. Whilst the Company incurred a net loss of £272,586 during the period, the Directors are satisfied, based on detailed cash flow projections, that sufficient cash is available to meet the Company's liabilities as and when they fall due for at least 12 months from the date of signing the half yearly report. In addition revenues are expected to continue to increase in the coming periods resulting in the company becoming profitable in due course.

2 Taxation

Analysis of credit in the period

The effective rate of tax for the period/year is lower than the standard rate of corporation tax in the UK of 28 per cent. principally due to losses incurred by the Company.

The potential deferred tax asset relating to losses has not been recognised in the financial statements because it is not possible to assess whether there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

3 Loss per share

Loss per ordinary share is based on the Company's loss for the financial period of £272,586 (30 November 2010: £458,191; 31 May 2011: £870,961). The weighted average number of shares used in the basic calculation is 31,885,422 (30 November 2010: 24,553,287; 31 May 2011: 28,229,963).

The calculation of diluted loss per ordinary share is identical to that used for the basic loss per ordinary share. This is because the exercise of share options would have the effect of reducing the loss per ordinary share and is therefore not dilutive under the terms of International Accounting Standard 33 "Earnings per share".

4. Segment reporting

Due to the start up nature of the business the Company is currently focussed on building revenue streams from a variety of markets. As there is only one manufacturing facility and this has capacity above and beyond the current levels of trade there is no requirement to allocate resources to or discriminate between specific markets or products. As a result the Company's chief operating decision maker, the CEO, 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 ceramic products.

5. Dividends

The Directors are not proposing the payment of a dividend in respect of the six months ended 30 November 2011.

6. Subsidiary companies

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

- ST Aerospace Limited

- ST Automotive Ceramic Limited

- ST Defence Limited

- ST Racing Limited

None of these companies have traded since their incorporation.

7. Copies of results

Copies of the half-yearly financial results are available at the Company's website www.surface-transforms.com.