Surface Transforms Regulatory News (SCE)

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Surface Transforms plc

("Surface Transforms" or the "Company")

Placing and Open Offer to raise up to £1.5m

Posting of Circular and Notice of General Meeting

Surface Transforms (AIM:SCE) is pleased to announce a conditional capital raise of up to £1.5m, comprising a placing and open offer. Cantor Fitzgerald Europe has conditionally placed on behalf of the Company 3,846,154 new ordinary shares ("Placing Shares") of 1p each ("Ordinary Shares") at a price of 13p per share, raising gross proceeds of £0.5 million (the "Placing").

Additionally, in order to provide shareholders who have not taken part in the Placing with an opportunity to invest in the Company, the Company is providing all Qualifying Shareholders with the opportunity to also subscribe at 13p per share, for an aggregate of 7,687,025 new Ordinary Shares ("Open Offer Shares") to raise up to £1m. Qualifying Shareholders may subscribe for Open Offer Shares on the basis of 2 Open Offer Shares for every 11 Existing Ordinary Shares held on the Record Date. Shareholders subscribing for their full entitlement under the Open Offer may also request additional New Ordinary Shares through the Excess Application Facility.

Assuming full take up under the Open Offer the gross proceeds of the Open Offer will raise a further £1m. The Open Offer is not underwritten.

Reasons for the Placing and Open Offer

As previously announced, the challenges and opportunities now facing management are less technology based issues but rather operating matters relating to the management of product supply and working capital to manage the expected growth of the business. In particular, the Company is focused on the aircraft brakes market for military and light commercial aircraft and the premium automotive brakes markets.

Aircraft brakes market

The Company has made good progress with its key 'game changing' activities, in particular, announcing in September 2014 that it had signed a pre-production contract with an international aerospace system supplier for the supply of its carbon ceramic brake discs onto a US military aircraft. The contract is on a rolling three year basis and the Company estimates that sales at contract maturity will exceed £1.3 million per annum. The Company believes that the securing of this contract is strategically important for two main reasons; first, it enhances the Company's credentials for future business in the light commercial aircraft market and second, it reduces the risk profile of the Company and its technology for adoption in the main stream automotive market.

In addition, the Company and this US customer continue to work on a separate and potentially financially more significant programme to develop a generic carbon brake system for application both in civil and military aviation.

Automotive brakes market

The key criteria for adoption by major automotive original equipment manufacturers (OEMs) are price, product quality and security of supply. To address these criteria, the Company has a three year investment programme totalling approximately £3.5 million gross. This programme will enable the Company to:

1. reduce the cost of manufacture by more than 50 per cent. (inclusive of the 20 per cent. savings achieved over the last two years);

2. increase annual manufacturing capacity to 10,000 discs per annum;

3. complete our wet endurance product development; and

4. secure our supply chain.

In addition, to ensure the Company has sufficient human resources to implement this programme and deliver our strategies, further working capital is required to employ additional engineers.

Investment programme

The Company's investment programme comprises two phases.

Phase 1 is expected to take approximately 18 months to complete and will cost approximately £1.8 million, net of anticipated grant funding. Key projects in this phase 1 comprise:

· Cost reduction project - design, build, install and commission;

· Advanced machining - select, install and commission;

· CVIST3 - design, build, install and commission;

· Adopt total quality management systems to achieve aerospace and automotive standards; and

· Additional engineering resources

The Board anticipate various benefits arising from these projects, in particular:

· Production capacity will increase by approximately 3,000 discs per annum to approximately 6,000 discs per annum;

· Manufacturing costs will fall by approximately £100 per disc;

· Manufacturing lead time will shorten by approximately seven weeks;

· Additional floor space of approximately 12,000 sq ft; and

· Mitigation of existing supply chain risk.

The net proceeds of the Placing and Open Offer, which will total up to approximately £1.4 million after expenses (on the assumption that the Open Offer is taken up in full by Qualifying Shareholders), will permit the Company to finance phase 1 of the investment programme.

Phase 2 of the investment programme relates to capital equipment projects rather than engineering projects and is expected to generate further cost savings of approximately £60 per disc, further reduce manufacturing lead times and further and significantly reduce remaining supply chain risks.

Current trading

In the year ended 31 May 2014, the Company generated increased revenues of £1.3 million (2013: £1.1 million) whilst losses after taxation increased to £0.7 million (2013: £0.6 million). The Board regarded the year as mixed, being disappointed with retrofit sales which are crucial to the Company becoming cash flow generative in the short term. However, the Company subsequently identified and established a new route to market, establishing an office in Germany, with new network and pricing structures implemented. However, the Board was pleased with the progress made on the 'game changer' contracts which the Company has been working on, the first of which being the pre-production agreement that was signed in September 2014.

The changes introduced to improve retrofit sales are having a positive effect on trading in the current financial year ending 31 May 2015. As at 31 August 2014, the automotive order book, representing confirmed orders totalled £0.5 million (2013: £0.2 million) all being for delivery in the current financial year. This strengthening in our order book, together with sales invoiced during the first four months of the year, equates to more than 50 per cent. of the Company's budgeted turnover for the full financial year.

Other details of the Placing and Open Offer

The record date for entitlement under the Open Offer is the close of business on 25 November 2014 and the ex-entitlement date of the Open Offer is 26 November 2014. The latest time and date for receipt of completed application forms and payment in full under the Open Offer and settlement of relevant CREST instructions (as appropriate) is 11.00 a.m. on 11 December 2014.

The Open Offer Shares have not been placed subject to clawback nor have they been underwritten. Consequently, there may be fewer than 7,687,025 new Ordinary Shares issued pursuant to the Open Offer.

Both the Placing and Open Offer are conditional, inter alia, on the approval by shareholders of the resolutions at the General Meeting of the Company at 11.00 a.m. on 12 December 2014 and upon the placing agreement becoming unconditional in all respects.

Directors' participation

Mr David Bundred, Chairman of the Company, is participating in the Placing and is subscribing for 76,923 Ordinary Shares at the Placing Price.

Irrevocable undertakings

The Company has received an irrevocable undertaking to vote in favour of the Resolutions from Mr. Richard Gledhill, who has a beneficial interest in 8,801,977 Ordinary Shares representing approximately 20.82 per cent. of the existing Ordinary Shares.

EIS / VCT

The Directors believe that the Placing Shares and Open Offer Shares should be eligible (subject to the circumstances of investors) for tax reliefs under the Enterprise Investment Scheme ("EIS") and for investment by Venture Capital Trusts ("VCT"). The Company has obtained advance assurance from Her Majesty's Revenue and Customs that shares in the Company represent a qualifying investment for a VCT and qualify for EIS tax reliefs. The Directors are not aware of any change in the qualifying conditions or the Company's circumstances that would prevent the Placing Shares and Open Offer Shares from being eligible VCT and EIS investments on this occasion.

Notice of General Meeting

The Company announces that a notice to convene a General Meeting of the Company at 11.00 a.m. on 12 December 2014 at the offices of Gateley LLP, Ship Canal House, 98 King Street, Manchester M2 4WU to approve the Placing and Open Offer, has today been posted to shareholders, together with the circular which sets out further details of the Placing (the "Circular"). 

Copies of the Circular will be available at the Company's registered office and principal place of business at Surface Transforms plc, Unit 4 Olympic Park, Poole Hall Road, Ellesmere Port, South Wirral, Merseyside CH66 1ST and at the offices of Gateley LLP, Ship Canal House, 98 King Street, Manchester, M2 4WU up to and including the date of Admission and on Surface Transforms' website at www.surface-transforms.com.

David Bundred, Chairman of Surface Transforms commented:

"This Placing enables the Company to move forward on the next step of its exciting development. I would therefore like to take this opportunity to thank both those new and existing shareholders who have participated in this Placing and are hopeful that existing shareholders continue to support the Company through the proposed Open Offer."

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Surface Transforms plc

Cantor Fitzgerald Europe