HYR.L Regulatory News (HYR)

22 May 2014

Hydrodec Group plc

("Hydrodec", the "Company"or the "Group")

Results for the year ended 31 December 2013

Hydrodec Group plc, the cleantech industrial oil re-refining group (AIM:HYR), is pleased to announce the audited results for the year ended 31 December 2013.

Performance Highlights

· Revenue up 54% to US$40.1 million (2012: US$26.1 million), the ninth consecutive year of growth, driven by an 11% increase from the core re-refining business (US$28.9 million) and the acquisition of the OSS business in September

· Gross profit rose 75% to US$9.4 million (2012: US$5.4 million), with the re-refining business contributing US$7.6 million, up 42% on prior year; re-refining margins at 26% (2012: 21%) and improved Group margins at 23%

· Increased sales volumes of premium quality Hydrodec SUPERFINETM transformer oil and base oil, up 12% at 25.2 million litres (2012: 22.5 million litres); total oil sales, including OSS, of 37.0 million litres, an increase of 65%

· Higher utilisation of productive capacity in the re-refining business for the 11 months prior to the business interruption at Canton of 78% (2012: 70%) following significant increase in US feedstock supply

· Gross unit margins in the re-refining business significantly higher at US$0.30 per litre (2012: US$0.24 per litre) 

· Positive Operating EBITDA1,2 for first time of US$0.2 million (2012: US$2.8 million loss)

· Achieved target of positive total EBITDA run-rate in September, October and November, prior to the positive contribution from OSS

· Incident at the Canton plant in December halted US production - insurance claim for property damage and business interruption in progress with rebuild and expansion plans underway

· Overall loss for the period widened to US$17.4 million (2012: US$14.2 million) as a result of US$4.9 million non-cash, non-recurring finance charge in respect of loan stock repaid during the year

· Strengthened balance sheet with US$21.9 million cash at year-end and parent company debt free

Strategic Highlights

· April - strategic partnership with G&S in US, securing feedstock and capital for major US expansion

· September - acquisition of assets and business of OSS Group, securing feedstock and capability for UK market entry

· October - successful placing and open offer raising £24 million

· November - collaboration with Essar Oil UK around re-refining opportunities in UK and co-location of Australian plant with Southern Oil Refining

Trading Update

· Positive total EBITDA for Q1 20142

· Canton insurance claim - US$2 million received on account and progressing as expected towards final settlement

· OSS business contributing positive EBITDA and ahead of internal expectations for Q1

1 EBITDA adjusted for non-operating growth expenditure of US$3.3 million (2012: US$2.2 million), share based payment costs of US$0.5 million (2012: US$0.5 million) and foreign exchange loss of US$0.7 million (2012: US$0.04 million) ("Operating EBITDA")

2 on basis of assumed business interruption insurance coverage for Canton

Commenting on the results, Ian Smale, Chief Executive Officer of Hydrodec, said:

"In 2013 Hydrodec achieved substantial growth in all key performance and business measures; two transformational transactions and another two strategic agreements are further evidence of real and material strategic progress. Operational momentum and business improvement enabled a successful balance sheet restructuring leaving the Company debt free and better structured to grow.

As we resolve the aftermath of the Canton incident, we remain focused on a strategy to grow the business which will be delivered by securing access to the value chain, the application of "best in class" technology, the reduction of risk through partnership or acquisition and the rigorous focus on business costs and efficiency."

For further information please contact:

Notes to Editors:

Hydrodec's technology is a proven, highly efficient, oil re-refining and chemical process initially targeted at the multi-billion US$ market for transformer oil used by the world's electricity industry. Spent oil is currently processed at two commercial plants with distinct competitive advantage delivered through very high recoveries (near 100%), producing 'as new' high quality oils at competitive cost and without environmentally harmful emissions. The process also completely eliminates polychlorinated biphenyls ("PCBs"), a toxic additive banned under international regulations. Hydrodec's plants are located at Canton, Ohio, US and Young, New South Wales, Australia. Hydrodec recently acquired the business and assets of OSS Group, the UK's largest collector, consolidator and processor of used lubricant oil and seller of processed fuel oil, with a national network of oil storage and transfer stations, currently serviced by a fleet of more than 90 trucks which collect used oil and other garage workshop waste from over 30,000 customers. Used oil is converted into processed fuel oil at OSS's plant at Stourport and principally sold on to the UK quarry and power industry.

Hydrodec's shares are listed on the AIM Market of the London Stock Exchange. For further information, please visit www.hydrodec.com.

Chairman's Statement

2013 was my first full year in office and also the first in which Ian Smale and his management team sought to implement the Company's new strategy as unveiled in September 2012. I am therefore pleased to report on a successful year in terms of the performance of the Group and the delivery of that strategy.

The primary focus, as ever, was on the operational and financial performance of the existing business. The key performance indicators of the original re-refining business - sales volumes, revenues, feedstock procurement, plant utilisation and margins - were all significantly higher in 2013 than the prior year.

Although our Company continues to report a statutory loss, larger this year due to the non-recurring, non-cash accounting treatment arising from the repayment of the loan stock, I would like to draw your attention to the key measure the Board and management use in reviewing the Group's performance, namely EBITDA. Operating EBITDA (adjusted for expenditure on growth costs and other non-operating items) was positive for the first time ever and our Group operated at a positive total EBITDA run-rate (ie after those growth costs and other non-operating items) for September, October and November. These are significant achievements and bode well for the years ahead.

Strategically, the G&S and OSS transactions were completed during the year and have already had a significant, positive impact on a number of the Group's KPIs for 2013 as Ian Smale and Chris Ellis expand on in their reports. The impact of the strategic agreement with Essar Oil in the UK will be of a longer wavelength whereas that with Southern Oil in Australia will be progressed in 2014. Alongside these partnership and acquisition developments, the placing and open offer, together with the repayment of all of the parent Company's debt, have resolved issues with the balance sheet which have held the Company back for too long and resulted in a year-end cash balance of US$22 million. I would like to welcome new shareholders to the Company as well as thanking many of the existing holders who also invested further in the 2013 funding round. This leaves the Company well placed for further strategic developments in the months ahead.

I must of course refer to the fire at the Canton plant in December. Clearly this was a serious incident occurring just as the Company was developing real momentum into the year-end. I want to use this opportunity to offer my gratitude to the exemplary reaction of local management and staff and our partners G&S, and to acknowledge the support of local authorities, suppliers and customers. With the pending resolution of the insurance claim we shall shortly be able to focus all of our efforts in the US on the rebuilding and expansion of the Canton plant, with the restoration of production expected by the end of this year.

Finally I would like to thank Ian, his management team and all the staff at Hydrodec for their efforts in 2013 as everyone played their part in a challenging yet ultimately successful year. The Board of Directors are looking forward to the remainder of 2014 and beyond with considerable optimism.

Lord Moynihan

Chairman

Chief Executive's Report

2013 was quite a year - record revenues, sales volumes, feedstock procurement, plant utilisation and much improved margins; positive Operating EBITDA (pre non-operating growth costs) for the first time ever and positive total EBITDA run-rate for three successive months; two transformational strategic transactions completed and another two strategic relationships secured; and a positive resolution to the balance sheet structure.

With a month of the year to go it appeared that our strategy had achieved real momentum only for the incident at Canton on 1 December to occur. An explosion and fire at the plant effectively shut down production causing significant damage to the main reactors and ancillary equipment. Most importantly no one was hurt and the team in Canton together with the local emergency services and authorities responded to the unfortunate situation in exemplary fashion. Insurance cover is expected to provide for the rebuilding of the Canton business and for business interruption for the period the plant is down, so enabling it to re-emerge stronger and back on track with the original plan for an expanded business.

Strategic developments

In line with the global strategy we outlined in September 2012, the management team completed a number of strategic initiatives during the year under review with the announcement of strategic relationships which we would expect to develop further in the future. These developments are intended to provide a platform for long term growth and profitability, reduce execution and business risk, and to monetise Hydrodec's proven cleantech sustainable oil re-refining process from the core transformer oil business into the substantially larger used lubricant and baseoil market.

Strategic partnership with G&S in US

In April 2013 the Company entered into a strategic partnership with G&S Technologies Group ("G&S") in order to grow its core transformer oil business and create the largest transformer oil re-refiner in the US. G&S is a leading New Jersey-based electricity transformer recovery services group with a 50-year track record of serving the industrial and utility industries throughout the US.

The commitment of feedstock from G&S to the new entity, Hydrodec of North America ("HoNA"), has enabled greater utilisation of existing available capacity in the US. It also provides HoNA with increased security of feedstock supply to support the planned expansion of US plant capacity from 27 million litres per annum to 65 million litres per annum. G&S has acquired a 25 per cent stake in HoNA which it will increase to 49.9 per cent as the expansion plans are delivered.

The transaction also establishes a new recurring royalty for the technology which Hydrodec has licensed to HoNA.

Acquisition of OSS Group

In September 2013 the Company acquired the principal assets and business of OSS Group Limited from its administrators. OSS is the UK's largest collector, consolidator and processor of used lubricant oil and the largest seller of processed fuel oil ("PFO").

The used oil collection creates a competitive source of feedstock for new technology to upgrade PFO to higher margin lubricant baseoils.

The global market for lubricant oil is estimated to be in excess of US$30 billion per annum, materially larger than that for transformer oil (estimated at US$1.8 billion per annum); the UK is a key target market with little or no current upgraded oil re-cycling.

Other strategic relationships

UK

The Company announced in November 2013 that it had reached heads of terms on an agreement to collaborate with Essar Oil UK Ltd to develop re-refining opportunities in the UK.

We anticipate combining the existing infrastructure, expertise and operating capability at Stanlow, the UK's second largest refinery, with both Hydrodec's proprietary technology and feedstock from OSS to create a lubricant oil re-refining hub. A combined transformer oil and lubricant baseoil business in the UK would target up to 100 million litres per annum of processing capacity.

Australia

Also in November 2013 the Group entered into an agreement to co-locate its Australian transformer oil re-refining operation at the Southern Oil Refining Pty Limited ("SOR") lubricant oil re-refinery in Wagga Wagga, New South Wales ("NSW"). This will create a single re-refining site of scale in NSW, improving Hydrodec's cost and operational efficiency, and substantially enhancing operational resilience. SOR will operate the combined facility under a tolling agreement.

SOR and its partner JJ Richards are leading collectors and re-refiners of general used lubricant oil in Australia and are currently commissioning their second re-refinery complex at Gladstone, Queensland. Hydrodec will retain all rights and ownership of the Hydrodec brand, business and technology in Australia and will continue to manage all commercial aspects of the business including used oil procurement as well as sales and marketing of SUPERFINETM transformer oil and naphthenic base oil. We would expect the co-location to become effective later this year.

Technology

Transformer oil

We have recently filed a provisional patent application to protect our operating and design intellectual property innovation in the original patented transformer oil re-refining technology developed over eight years of commercial operation. This reinforces the ongoing commercial protection of Hydrodec's proprietary technology leadership in the production of sustainable and high quality transformer oil products at market competitive prices. The innovation contained in this new patent application will enhance process economy, reliability and consistency while operationally simplifying the core re-refining technology.

Since the turn of the year, our re-refining methodology for transformer oil has been accepted by the US Carbon Registry as a carbon offset, or carbon saving process, providing us with the potential to monetise production as a carbon credit through the voluntary carbon offset market in the US.

Lubricant oil

In December 2012, we announced proof of concept that extends Hydrodec's proven technology into used paraffinic feedstock - both industrial and used crank case motor oils. The technology offers the potential for new types of high quality, low carbon lubricant base oils that meet or exceed the higher-end specifications, being Group II, II+ and/or Group III. Market intelligence suggests that the ability to produce a Group III product in particular would mark a significant breakthrough for re-refined products.

We continue to make steady progress and expect to submit an application for patent protection to cover hydrogenation in the treatment of used lubricant oil in the near future. Test rigs covering all three stages of the more complex lubricant re-refining process are operating in Australia; the immediate objective is to determine the operating and design parameters for a semi-commercial pilot plant targeted for the UK in the first half of 2015, subject to planning and regulatory consents.

New markets

New market entry remains under review in line with strategy and in a sector which offers a number of consolidation opportunities. Targets would include access to secure feedstock and complementary or proven technology that can offer accelerated deployment and potential business synergies. Europe is a key area of focus, with the US having more medium term opportunities.

Hydrodec has now dissolved the joint venture relationship with Kobelco-Eco in Japan pending a change in the regulatory and market conditions in the country that might offer renewed opportunity to access the material store of PCB contaminated used oil and hardware. While the regulatory environment has largely reconfirmed the extremely onerous restrictions on handling the legacy PCB issue, an extension of the completion date to 2026 has reduced short term necessity to develop solutions. We keep Japan under close review with the 2020 Tokyo Olympics targeted to enhance and promote best environmental practice as a possible catalyst for action; it remains a long wavelength opportunity.

Financial and operating performance

Given the execution of a number of strategic developments during 2013, we have this year included a Chief Financial Officer Review which will provide further explanation behind the headline numbers in the statutory accounts. It will also provide more detail in respect of the financial and operating performance of the Group and I shall therefore limit my report to the Group level headline numbers.

2013 represented the ninth consecutive year of growth for the Company with revenues increasing a further 54 per cent to US$40.1 million (2012: US$26.1 million). Total oil sales of 37.0 million litres represented an increase of 65 per cent on 2012 (22.5 million litres). Gross profit rose 75 per cent to US$9.4 million (2012: US$5.4 million) with margins at 23 per cent (2012: 21 per cent).

I am pleased to report that Operating EBITDA (adjusted for non-operating growth costs, share based payment costs and foreign exchange loss) was positive for the first time ever at US$0.2 million (2012: US$2.8 million loss). In line with our stated target during the year, we achieved a positive total EBITDA run-rate in September, October and November which bodes well for the future.

The overall statutory loss for the year widened to US$17.4 million (2012: US$14.2 million) once growth costs, the significantly increased interest charge (including the final, non-recurring US$4.9 million non-cash amortisation of the unsecured loan stock) and depreciation and amortisation are included.

Balance sheet and funding

Following the successful completion of the £24 million placing and open offer of new ordinary shares in November 2013, together with the repayment of £12.9 million of unsecured loan stock (in cash) and £5 million of secured loan notes and a £7.5 million revolving credit facility (through the issue of new ordinary shares), the Company's balance sheet was significantly stronger at the year-end. Net assets were US$69.6 million (2012: US$25.5 million), including US$21.9 million in cash, and the parent Company is debt free.

This represents a significant breakthrough for the Group and formed a key element in the implementation of our strategy. The Company is now on a much firmer financial footing for the next phase of growth with renewed flexibility around its future funding requirements.

Trading update and outlook

In respect of the Canton incident, the Group has submitted a claim for its total loss (including business interruption) which is under review by the insurers for final approval. On the basis of management's assumed insurance proceeds for business interruption, the Company achieved a positive total EBITDA result for the first three months of 2014. There remains significant scope for further improvement in the UK and Australian operations through the rest of the year.

The Board expects that two re-refining processing units ("trains") will be operational at Canton in the fourth quarter of 2014, with four more trains following in the first quarter of 2015. This will bring capacity at Canton to 150 per cent of that in operation prior to the incident in December last year, with further US expansion planned for later in 2015. Our local management team and partners G&S remain confident that neither feedstock supply nor customer demand, given an even higher specification end product arising from improved plant design, should prove material obstacles to the successful performance of the expanded plant.

In Australia, feedstock constraints have impacted performance in the year to date but these are showing signs of improvement ahead of the planned co-location with SOR which is likely to be effected in the fourth quarter.

The OSS oil recycling business in the UK has also experienced some feedstock constraints due to aggressive competition for used oil from European re-refiners. However, it continues to contribute positively to EBITDA and indeed its performance for the first quarter is ahead of our internal budget. Management remain confident that the business is progressing well and remains on track to return to its earlier levels of profitability within the next 2 years.

Whilst we continue to have line of sight to establishing our own "best in class" re-refining technology for industrial oils and to target 2016 for the commissioning of a full scale re-refining plant, the Board continues to monitor other opportunities which may enable the Company to move into this market at an earlier date. The Company's current plans are to establish a "semi-commercial" scale pilot plant in the first half of 2015, subject to planning and regulatory consents.

In terms of a transformer oil business in the UK, the Board continues to target the commissioning of a two train plant in the second quarter of 2015, again subject to approvals.

While there is little doubt that the unfortunate incident at Canton in December has slowed operational momentum, all indications are that the Group will re-emerge stronger in the US and march back to the original plan for expansion and growth. The wider market for re-refining remains a core target, through technology and, critically, access to feedstock. The market leading position enjoyed by OSS in the UK creates interesting strategic optionality for the development of our wider business strategy in new markets for re-refining. The management team remain focused on a strategy to grow the business which will be delivered by securing access to the value chain, the application of "best in class" technology, the reduction of risk through partnership or acquisition and the rigorous focus on business costs and efficiency.

I am pleased to thank the Board for their support, as well as our enlarged stakeholder base, as we continue to build a business based on our unique, renewable oil proposition.

Ian Smale

Chief Executive Officer

Chief Financial Officer's Review

In their reports both the Chairman and Chief Executive covered key areas of the strategic development of the Group as well as reporting on key aspects of its financial performance. The successful execution of major elements of our strategy in 2013 have added further complexity to the Group's financial statements than previously and as part of this review I have provided additional commentary where relevant.

Revenue and operational performance

Group revenues increased by 54 per cent to US$40.1 million (2012: US$26.1 million), the ninth consecutive year of growth, driven by an 11 per cent increase from the core re-refining business (US$28.9 million) and the acquisition of the OSS business in September (US$11.2 million). Total oil sales of 37.0 million litres represented an increase of 65 per cent over 2012 (22.5 million litres).

Gross unit margins in the re-refining business were significantly higher at US$0.30 per litre (2012: US$0.24 per litre) despite lower product sales prices, driven by a combination of better feedstock acquisition, a higher proportion of PCB contaminated feedstock, volume impacts and improved procurement processes. Gross profit from the re-refining business rose 42 per cent to US$7.6 million (2012: US$5.4 million) despite the impact of the incident at Canton in December.

Sales volumes for recycled oil products totaled 11.8 million litres, with 10.9 million litres of processed fuel oil ("PFO") and the balance from recycled fuel oil ("RFO"). The recycling division contributed US$1.8 million of gross profit with recycling margins at 16 per cent.

Utilisation of productive capacity in the re-refining business for the 11 months prior to the business interruption at Canton improved significantly to 78 per cent (2012: 70 per cent), predominantly driven by greater access to feedstock following the strategic partnership with G&S.

Overall employee costs and other operating costs increased by 15% to US$16.5 million (2012: US$14.3 million) reflecting the overhead acquired as part of the OSS acquisition (US$1.8 million) and the increased investment in the Company's growth initiatives during the year, both in respect of the ongoing development of the technology as well as transaction fees and costs as set out below:

The overall operating loss improved to US$8.6 million (2012: US$9.2 million) whilst the underlying operating loss (pre non-operating growth costs and amortisation of intangible assets) improved by 27 per cent to a loss of US$3.2 million (2012: US$4.3 million).

Internally the business is managed and performance measured by reference to Operating EBITDA (pre growth costs and other non-operating items), which was significantly improved at US$0.2 million (2012: US$2.8 million loss). As this is not a statutory accounting measure the table below reconciles this figure to the statutory operating loss:

Canton incident and insurance

On 1 December 2013 an explosion and fire at the US plant in Canton, Ohio effectively shut down production causing significant damage to the main reactors and ancillary equipment. Since the date of the incident the Group, along with its insurers and their loss adjusters, have gone through a process of establishing the extent of the damage caused, the costs to rebuild it and the estimated time it would take to re-establish full operational capability. The Group has submitted a claim for its total loss (including business interruption) which is under review by the insurers for final approval. Under its policy the Group has single incident coverage of US$35 million and in the opinion of the Directors is therefore adequately covered in respect of this claim. In anticipation of the resolution of the total claim the Group received US$2 million on account on 17 February 2014.

As at 31 December 2013 the Group has estimated a total impairment and write-off of assets of US$7.2 million for which it has created a corresponding receivable due from the insurers. Based on actual orders and sales pipelines, and after taking account of the proceeds of sale of inventory held at the time of the incident, it has also assumed US$0.4 million of net income receivable for the period from 1 December to 31 December recognised in revenue under the terms of its business interruption coverage.

Under the terms of the Group's insurance, the Directors consider the above amounts represent the best estimate of amounts recoverable with certainty in respect of the period under review at the date of preparation of these financial statements. Confirmation of all amounts due to the Group above the value of these assets including any compensation for business interruption will only occur once the loss adjusters have completed their technical review and evaluation which the Directors believe is close to completion and at which time the total claim receivable can be properly estimated and recorded.

Finance costs

Following the successful completion of the placing and open offer of new ordinary shares in November the Group was able to repay (in cash and through the issue of new shares) all outstanding indebtedness with the exception of finance leases acquired as part of the OSS acquisition. The early repayment of the unsecured loan stock increased the finance costs charged in the year to US$9.1 million (2012: US$5.3 million), with US$4.9 million of this increase being a non-cash charge for the difference between the carrying value of the unsecured loan liability and its face value on repayment.

Bargain purchase

As well as the one-time costs and fees incurred as part of the Company's growth initiatives, following the acquisition of the tangible assets and liabilities of the OSS Group out of administration on 6 September, a fair value exercise as required under IFRS 3 was carried out. Under this exercise both tangible and intangible assets and liabilities were attributed provisional fair values. The resulting excess of net fair value of the assets over the consideration paid is recognised in the consolidated statement of income (US$0.9 million) as required by the accounting standards.

Strategic developments

The Company successfully executed a number of strategic initiatives during the year, the key financial aspects of which are described below.

Partnership with G&S Technologies Group

The Group disposed of 25 per cent of its interest in Hydrodec of North America LLC to the G&S Recycling Group LLC on 16 April 2013. Under the terms of the agreement G&S made an initial payment of US$1.73 million based on a multiple of earnings for the year ended 31 December 2012 (5 times EBITDA) with an additional amount payable on the excess of the 2013 EBITDA over 2012 EBITDA paid at a multiple of 6.5 times. The total consideration is estimated at US$3.3 million resulting in a small loss on disposal of US$0.3 million. Under the terms of the partnership a royalty is also payable to the Hydrodec Group of 5 per cent of net revenue.

Acquisition of OSS Group

The Group acquired the principal business and assets of OSS Group Limited ("OSS") from the administrator on 6 September 2013 for a total consideration of US$7.7 million settled in cash on the date of acquisition. The total associated costs of acquiring OSS in respect of fees and transaction costs were US$0.3 million. OSS has made a positive contribution to EBITDA in its first six months and is well positioned to exceed the required return within the period targeted by management at the time of the acquisition.

Agreement with Essar Oil UK

The Company reached heads of terms on an agreement to collaborate with Essar Oil UK Ltd to develop re-refining opportunities in the UK in November 2013. Whilst two discrete re-refining operations are envisaged, no ongoing financial commitments by either party had been entered into at the balance sheet date.

Agreement with Southern Oil

The Group entered into an agreement in November 2013 to co-locate its Australian transformer oil business with the Southern Oil Refining ("SOR") lubricant oil re-refinery in Wagga Wagga, New South Wales to create a single re-refining site of scale improving Hydrodec's cost and operational efficiency as well as enhancing operational resilience. SOR will operate the combined facility under a tolling agreement. The implementation of this arrangement is linked to obtaining appropriate planning and operating permits to facilitate the move, the certainty for timing of which is beyond the Group's control. Any benefits or costs incurred under this arrangement will commence at the time that such permits are granted. Transaction costs and fees of US$0.4 million were incurred in 2013 to execute this agreement.

Amortisation and impairment of intangible assets

Amortisation of US$2.5 million (2012: US$2.1 million) principally represents the annual charge relating to the Group's intangible assets comprising of the Hydrodec technology and prepaid royalty, both of which are being amortised over anticipated useful lives of 15 years from their acquisition date in 2004.

In accordance with accounting standards, the Board has reviewed the carrying value of goodwill and other intangible assets across the Group in the light of current trading and prospects and progress towards achieving the Group's strategic plans. The Board concluded that the carrying value of goodwill and other intangible assets remained appropriate and that no impairment had occurred.

Segmental analysis

Following the acquisition of OSS in September 2013 the Board, in its capacity as the Group's Chief Operating Decision Maker (for the purposes of accounting standards), reviewed the continuing appropriateness of the Group's operating segment disclosures. The Group now operates two clearly defined divisions - re-refining (the historic transformer oil business) and recycling (the OSS business) and, accordingly, the Board has concluded that the most appropriate segmental analysis for stakeholders is provided on this basis.

Operating cashflow and working capital

During the year we retained a strong focus on management of working capital within each of the divisions, with the aim of achieving an appropriate balance between commercial priorities and financial efficiency. Each division has a specific cash target which is monitored throughout the year and flexed according to demand levels. In addition, over the last twelve months, the Group has successfully established working capital facilities in all of its principal operating units that properly reflect its commercial activities and give it greater flexibility in the execution of its commercial strategy.

Despite increased levels of trading, the impact of the OSS acquisition and excluding the insurance income receivable, net cash outflow from operating activities improved by US$0.3 million over 2012. If the impact of OSS is excluded, the net cash outflow would have shown an improvement of US$1.0 million on 2012.

Credit management processes remain robust with no bad debts written off during the year. Continued proactive management of customer credit, which starts at the point of sale, remains a priority for the businesses in 2014 as we continue to seek to maximise commercial opportunities.

Capital expenditure

In 2013 we continued our programme of targeted investment across each of the businesses. Overall net capital expenditure (excluding property, plant and equipment acquired as part of the acquisition of OSS) was US$1.0 million (2012: US$1.1 million) with most expenditure focused on projects related to providing more resilience in the re-refining division.

Liquidity

The Company successfully completed a placing and open offer of new ordinary shares in November 2013 under which it was able to repay £12.8 million of unsecured loan stock in cash and settle £5 million of secured loan notes and a £7.5 million revolving credit facility through the issue of ordinary shares. As at 31 December 2013 the Group's net assets were US$69.6 million (2012: US$25.5 million) of which US$21.9 million was held in cash and the parent Company is debt free.

The Group has sufficient cash balances and undrawn banking facilities to finance all investment and capital expenditure included in its plan for the current year with an additional margin for contingencies.

Shares in issue

Following the placing and open offer in November 2013 the Company issued 324.1 million new ordinary shares which increased the total number of shares in issue to 803.2 million. The basic and fully diluted weighted average number of shares in issue for 2013 was 467.8 million (2012: 407.9 million). As at 31 December 2013, 56.6 million shares were owned by a member of the Group, and therefore treated as if they were treasury shares on consolidation (2012: 56.6 million). The Group intends to take the necessary steps to allow it to cancel these shares. The Hydrodec Employee Benefit Trust held 2.6 million shares as at 31 December 2013 (2012: 2.6 million).

Financial reporting

The financial information has been prepared under IFRS and in accordance with the Group's accounting policies. There have been no changes to the Group's accounting policies during the year ended 31 December 2013.

Going concern

The Directors are confident, on the basis of current financial projections and facilities available, and after considering possible changes in trading performance, that the Group has sufficient resources for its operational needs for the next 12 months. Accordingly, the Directors continue to adopt the going concern basis.

Chris Ellis

Chief Financial Officer

Consolidated statement of income

For the year ended 31 December 2013

Consolidated statement of financial position

As at 31 December 2013

Consolidated statement of cash flows

For the year ended 31 December 2013

Consolidated statement of changes in equity

For the year ended 31 December 2013

Notes to financial statements

For the year ended 31 December 2013

1 Accounting policies

Basis of preparation

These financial statements have been prepared in accordance with the principal accounting policies adopted by the Group, International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations (IFRIC) as adopted by the EU and those parts of the Companies Act 2006 applicable to companies reporting under it and were approved by the Board on 21 May 2014. They are presented in US Dollars, which is the presentational currency of the Group. The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates.

These results are audited, however the financial information set out in this announcement does not constitute the Group's statutory accounts, as defined in Section 435 of the Companies Act 2006, for the years ended December 31 2013, or December 31 2012, but is derived from the 2013 Annual Report. Statutory accounts for 2012 have been delivered to the Registrar of Companies and those for 2013 will be delivered in due course. The auditors have reported on those accounts; their reports were unqualified, however they included a reference to an emphasis of matter in 2013 with regard to the uncertain measurement of quantum of the insurance claim, and the reports did not contain statements under section 498(2) or 498(3) of the Companies Act 2006.

The accounting policies used in completing this financial information have been consistently applied in all periods shown. These accounting policies are detailed in the Group's financial statements for the year ended 31 December 2012 which can be found on the Group's website.

Going concern

The financial statements have been prepared on the going concern basis, which assumes that the Group will have sufficient funds to continue in operational existence for the foreseeable future. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current available working capital and working capital facilities for the next 12 months.

2 Revenue and operating loss

2.1. Segment analysis

Following the acquisition of the principal assets and business of OSS Group Limited in September 2013, the Group now operates two main operating segments:

• Re-refining: principally the treatment of used transformer oil and the sale of SUPERFINETM oil

• Recycling: principally the collection and treatment of waste lubricant oil and the sale of recycled oil products

The financial information detailed below is frequently reviewed by the Board (the Chief Operating Decision Maker). 

2.2. Geographic analysis

The Group's revenues from external customers and its non-current assets are divided into the following geographical areas:

Revenue substantially comprises amounts earned on receivables from trade customers. During the year one customer in the USA accounted for more than 10 per cent of the Group's total revenue. Revenue recognised during the year and the amounts outstanding at the year-end in respect of that customer were as follows:

2.3. Loss on ordinary activities

The loss on ordinary activities before taxation is stated after charging/(crediting) the following amounts:

2.4. Growth costs

The business continues to invest in long term strategic growth initiates focused on geographic expansion and research and development. These costs are analysed as follows:

3 Finance costs

As a result of the repayment of the unsecured loan stock during the period (see note 8), the loan stock finance cost includes a non-cash element of USD 4,937,000 representing the difference between the carrying value of the unsecured loan stock liability and the redemption value of the unsecured loan stock repaid on 8 November 2013.

4 Impairment and other income

On 1 December 2013 an explosion and fire at the US plant in Canton, Ohio effectively shut down production there causing significant damage to the main reactors and ancillary equipment. Since the date of the incident the Company along with its insurers and their loss adjusters have gone through a process of establishing the extent of the damage caused, the costs to rebuild it and the estimated time it would take to re-establish full operational capability. The Company has submitted a claim for its total loss including business interruption which is under review by the insurers for final approval. Under its policy the Company has single incident coverage of USD35,000,000 and in the opinion of the Directors is therefore adequately covered in respect of this claim.

Accordingly as at 31 December 2013 the Group has estimated a total impairment and write off of assets of USD7,160,000 for which it has created a corresponding receivable due from the insurers. Based on actual orders and sales pipelines, and after taking account of the proceeds of sale of inventory held at the time of the incident, it has also assumed USD436,000 of net income receivable for the period from 1 December to 31 December recognised in revenue under the terms of its business interruption coverage.

Under the terms of the Group's insurance, the Directors consider the above amounts represent the best estimate of amounts recoverable with certainty in respect of the period under review at the date of preparation of these financial statements. Confirmation of all amounts due to the Group above the value of these assets including any compensation for business interruption will only occur once the loss adjusters have completed their technical review and evaluation which the Directors believe is close to completion and at which time the total claim receivable can be properly estimated and recorded.

5. Loss per share

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

The weighted average number of shares used in the calculations are set out below:

In 2012 and 2013, the share options and warrants were anti-dilutive and diluted earnings per share is the same as basic. The calculation of the weighted average number of shares excludes shares which are now held by a member of the Group and in respect of which votes may not be cast at a general meeting (which are treated as treasury shares) and also shares held by the Employee Benefit Trust.

6 Trade and other receivables

All trade receivable amounts are short term. The carrying value is considered a fair approximation of their fair value. All of the Group's trade and other receivables have been reviewed for indicators of impairment. On acquisition of OSS, certain trade receivables were found to be impaired and an allowance for credit losses of USD340,000 (2012: nil) was included in the acquisition balance sheet.

7 Trade and other payables

The carrying value of trade and other payables are considered to be a reasonable approximation of fair value.

8 Non-current liabilities - borrowings

Unsecured loan stock

In November 2007, the Company issued £13,800,000 of convertible unsecured loan stock, convertible at the loan stock holder's option into ordinary share capital of the Company at a price of 19p, subject to anti-dilutive conditions for subsequent share issues at below market price.

On 1 November 2012, these conversion rights lapsed and the stock became an unsecured loan, repayable at the Company's determination. On 8 November 2013, the outstanding balance of £12,790,000 was repaid in full together with accrued interest.

Fixed rate loan notes

Between 24 December 2012 and 27 June 2013, the Company received subscriptions for a total of £5,000,000 of fixed rate loan notes 2015. The notes were secured over Group assets. Interest was payable at 5 per cent per annum. On 8 November 2013, the loan notes were repaid in full (through the issue of new ordinary shares at 11.25p per share) and the security was released as part of the fundraising and debt repayment program (see note 9).

Finance leases

Finance leases are secured over the assets to which they relate.

9 Share capital

On 8 November 2013 the Company issued 212,983,000 new ordinary shares for cash at a price of 11.25p per share pursuant to a placing and open offer. At the same time the Company issued 111,111,111 new ordinary shares at a price of 11.25p per share in consideration for the repayment of £5,000,000 of fixed rate loan notes - 2015 (see note 8) and a £7,500,000 revolving credit facility.

VIN Australia Pty Ltd, a member of the Group, holds 54,500,000 ordinary shares in Hydrodec Group plc pursuant to the acquisition of Virotec International plc in 2008. Votes in respect of these shares, and a further 2,173,333 shares issued pursuant to that acquisition, may not be cast in a general meeting of Hydrodec Group plc and as such they are treated as if they were treasury shares on consolidation.

Warrants

In 2011, the Company issued 10,750,000 warrants in connection with the issue of £2,000,000 of fixed rate loan notes - 2014. The warrants have an exercise price of 8p per share with an exercise window from 14 June 2013 to 14 June 2016.

Between 24 December 2012 and 27 June 2013, the Company issued an additional 25,000,000 warrants in connection with the issue of £5,000,000 of fixed rate loan notes - 2015. The warrants have an exercise price of 16p per share with an exercise window from 19 June 2013 to 19 December 2017.

10 Acquisitions and disposals

10.1. Acquisition of OSS Group

On 6 September 2013, the Group acquired the principal business and assets of OSS Group Limited ("OSS") from the administrators of OSS. The acquisition was made as part of the Group's strategy to develop its existing re-refining technology for deployment in the re-refining of used lubricant oils. The acquisition of OSS secures significant feedstock for the UK market and provides a platform to develop other opportunities to consolidate the oil collection and re-refining market in the UK and Europe.

The details of the business combination are as follows:

Consideration

The acquisition of OSS was settled in cash amounting to USD 7,664,000. The gain on bargain purchase arising from the purchase of a business in a distressed state and acquisition-related costs are not included as part of consideration transferred and have been recognised as an expense in the consolidated statement of income, as part of other operating costs. Post-acquisition trading and profitability for the acquired business is set out in note 2. No pre-acquisition activity is disclosed as the assets were acquired pursuant to an administration.

Identifiable net assets

The fair value of the trade and other receivables acquired as part of the business combination amounted to USD 4,076,000 with a gross contractual amount of USD 4,416,000. As of the acquisition date, the Group's best estimate of the contractual cash flow not expected to be collected amounted to USD 340,000.

Other intangible assets

Intangible assets recognised on acquisition comprised of customer contracts fair valued at USD 2,354,000 and brand name fair valued at USD 2,201,000. These primarily related to expected future profitability. These are expected to have a finite useful life and accordingly the related carrying amounts will be amortised on a straight line basis.

10.2. Sale of interest in Hydrodec of North America

On 16 April 2013 the Group sold a 25 per cent interest in Hydrodec of North America LLC ("HoNA") to G&S Oil Recycling Group LLC ("G&S") for total consideration based on a multiple of earnings for the years ended 31 December 2012 (5 times EBITDA) and 2013 (6.5 times EBITDA). Management have estimated the value of the consideration to be USD 3,310,000 (of which cash of USD 1,733,000 was received in the period), resulting in a loss on sale of investment of USD 302,000. The value of the remaining consideration has been included in "Other receivables" (see note 6). Additionally a royalty stream of 5 per cent of net revenue is payable to a member of the Group under the terms of the strategic partnership with G&S.

Included in the agreement with G&S is the potential for the sale of a further 24.9 per cent of HoNA in two equal tranches, conditional on a number of future actions to be undertaken by both parties. The value of the consideration is set at a price to be determined by earnings for the years ended 31 December 2012 and 2013.

The details of the sale of the initial interest of 25 per cent are as follows:

11 Post balance sheet events

Insurance receipts

As detailed in note 4, in anticipation of the resolution of the total claim the Group received USD2,000,000 on account from our insurers on 17 February 2014.

Warrants

On 26 March 2014 the Company issued 125,000 new ordinary shares pursuant to the receipt of an exercise notice in respect of warrants to subscribe for ordinary shares at an exercise price of 8p per share and exercise proceeds of £10,000.