HYR.L Regulatory News (HYR)

12 April 2016

Hydrodec Group plc

("Hydrodec" or the "Company")

Audited final results for the year ended 31 December 2015

Canton update and additional working capital facilities

Board changes

Hydrodec Group plc (AIM: HYR), the clean-tech industrial oil re-refining group, announces its audited final results for the year ended 31 December 2015.

Strategic summary

· 2015 was a challenging year for the Company due to the collapse in the world oil price and difficult market conditions particularly in the UK, whilst, in the USA, the Company faced delays and cost overruns in the commissioning of its rebuilt and expanded plant at Canton. These factors were combined with senior management changes and the need to put in place additional working capital facilities.

· The Company has acted decisively in response to these challenges. Decisions were made at the end of 2015 to grow our core transformer oil re-refining business in order to drive the Company to profitability in 2016 through a rigorous focus on our market-leading transformer oil re-refining technology, cost savings, and a successful ramp-up of sales in the USA. This is being undertaken against a current increase in the price for both base oil and transformer oil products in the US market.

· All six trains in Canton are now operational. Product has achieved the key '500hr' oil status industry test, and Canton achieved record monthly production in February 2016 followed by a further monthly production record of 2.56 million litres in March 2016.

· Commenced tolling under the outsourcing arrangement with Southern Oil in Australia in April 2015; product achieving '500hr' oil status.

· In view of the current oil price environment and its economic impact on the UK collection business, the Group disposed of Hydrodec's UK operations, including borrowings of approx. £1.2m, in March 2016 for £1, whilst retaining an economic interest in the proposed UK lubricant oil re-refining project and, to the extent the project is developed, an agreement to recover the Company's incurred costs associated with the re-refinery.

Financial summary

· Total income decreased to US$43.8 million (2014: US$54.7 million).

· Total sales volumes increased to 62.1 million litres (2014: 48.6 million litres), with the acquisition of the business and assets of Eco Oil Limited in April 2015. 

· Gross profit of US$1.1 million (2014: US$14.3 million); reflects limited revenues from the Canton facility, lost production in Australia following its relocation to Bomen, and the adverse impact of the lower global oil price on the UK recycling business.

· Group Operating EBITDA(1) loss, after restructuring and recommissioning costs, of US$12.8 million in 2015 (2014: US$1.6 million gain); reflects production delays in the US, costs associated with the relocation of operations in Australia; the effects of the decline in the world oil price and changing market conditions on margins in the UK recycling business.

· In order to reinforce the Company's working capital headroom, the Company announces today that it has entered into an agreement to extend its £2 million secured second working capital facility with Andrew Black, a Non-Executive Director, announced on 1 December 2015, by a further £2.25 million to £4.25 million.

(1) EBITDA excluding growth expenditure of US$1.8 million (2014: US$2.3 million), including acquisition costs of US$0.4 million (2014: nil).

Market outlook

· In the US, the business continues to improve both in terms of production and rebuilding market share. The Canton plant is expected to improve further on the record production levels achieved in March 2016. Operational performance is a key platform for growth in the US and these records confirm the improvement in operability and rateability of the plant as the Company continues to re-establish its US position. Whilst margins in the current oil price environment remain challenging, the expectation is that these will continue to improve throughout the year as the proportion of transformer oil sales volumes increases and the price for base oil is anticipated to prove increasingly robust.

· In Australia, the arrangement with Southern Oil (SOR) has achieved a high degree of operability and reliability following the relocation in 2015. The challenge is now firmly to ensure a rateable supply of feedstock to leverage the tolling arrangement and maximise profitability. The availability of feedstock in the first quarter has been below expectations but the pipeline of decommissioned transformers from which the Company draws much of its feedstock is anticipated to be strong going into second quarter.

Commenting on the results, Chris Ellis, Chief Executive Officer of Hydrodec said: "The challenges faced by many companies in 2015 in our industry are well known and documented. In many ways the continuance of the rebuild of Canton into 2015 along with the relocation of the Australian operations in the first half of the year coupled with the constant decline in the price of oil from the end of 2014 meant that the Company encountered a "perfect storm" from a performance perspective and this is reflected in these results. However, I believe that with Canton's ongoing performance and a growing penetration of the US transformer oil market, we can now focus on delivering a profitable 2016."

Canton update and additional working capital facilities

The Company remains in discussions with its partner in the US, G&S Oil Recycling Group LLC (G&S), in relation to the acquisition by G&S of a further 12.45% interest in Hydrodec of North America (HoNA) for approx. US$1.7m, which was conditional upon Trains 5 and 6 of the Canton plant being completed. This payment was originally envisaged in H2 2015, but all six trains were only successful commissioned at the end of 2015 and the payment has not yet been made. In lieu of the receipt of such payment, to ensure that the Company remains adequately funded, the Company announces today that it has entered into an agreement to extend its £2 million secured second working capital facility with Andrew Black, a Non-Executive Director, which was announced on 1 December 2015 (the Second Facility). Andrew Black has agreed to extend the Second Facility by a further £2.25 million to £4.25 million (the Increased Second Facility). The Increased Second Facility is secured over the rights for Hydrodec Development Corporation Pty Ltd to receive income based on the quantity of SUPERfineTM oil produced by Hydrodec of North America LLC and Hydrodec of Australia Pty Ltd respectively, which royalty, based on average annual production, is estimated to generate approximately US$1 million per annum. More broadly, the Company continues to work well with G&S, its key provider of feedstock oil, and the Company has an additional arrangement with them to develop further plants.

Related Party Transaction and Substantial Transaction

Andrew Black is a Non-Executive Director and a substantial shareholder (as defined in the AIM Rules for Companies (AIM Rules)) of the Company. Accordingly, the agreement by Mr Black to increase the Second Facility to £4,250,000 constitutes both a related party transaction and a substantial transaction for the purposes of the AIM Rules.

The Directors, with the exception of Mr Black, consider, having consulted with the Company's Nominated Adviser, Canaccord Genuity Limited, that the terms of the Increased Second Facility are fair and reasonable insofar as shareholders are concerned.

Commenting on the Increased Second Facility, Lord Moynihan, Chairman of Hydrodec, said: "The Board are appreciative of the ongoing support from our lead shareholder. With recent months of record production at Canton coupled with an emphasis on being lean and efficient and retaining a strong focus on cash control, the Board are closely monitoring the execution of our strategy to deliver a profitable company in 2016."

Board Change

The Company announces that Alan Carruthers, Non-Executive Director and Chair of the Nomination and Remuneration Committees, will be retiring today. Lord Moynihan, Chairman, commented: "On behalf of the Board I would like to express our deep appreciation to Alan for his commitment to Hydrodec and the valuable and informed contribution he has made over the last four years. As a long standing member of the Board, he has been integral to the development of Hydrodec. We all wish him well for the future."

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. MarketsandMarkets forecasts that the global transformer oil market is expected to grow from US$1.98 billion in 2015 to US$2.79 billion by 2020 at a CAGR of 7.14% from 2015 to 2020. 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 PCBs, a toxic additive banned under international regulations. Hydrodec's plants are located at Canton, Ohio, US and Bomen, New South Wales, Australia. 

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

2016 will be an important year for Hydrodec. As a Board, our focus is clear. Following three months of corporate restructuring, we are committed to drive the Company to profitability through a rigorous focus on our market leading transformer oil re-refining technology and operational performance.

December 2015 saw the beginning of an intensive three month turnaround programme for the Group driven by the Company's Chief Executive, Chris Ellis. As part of this process, the Board undertook a detailed strategic review of the Company's UK collections business and proposed UK lubricant oil re-refining project, following a significant collapse in the Brent crude oil price from US$115 per barrel at the time we acquired the business and assets of the OSS Group in September 2013 to US$37 per barrel on 31 December 2015. The Board reviewed all available options and concluded that, in the challenging market conditions, despite the implementation of extensive restructuring and cost-saving measures during 2015, it was in the best interests of the Company to dispose of those operations, which it did in March this year. The Board considers that this divestment, whilst retaining a material economic and strategic interest in the UK lubricant oil re-refining project and, to the extent the project is developed, an agreement to recover the costs we had invested in the project, was a necessary step and best promotes shareholder value, addressing, as it did, the significant downside risk to the Group from the UK operations.

By concentrating on significantly growing our market leading transformer oil technology and business, our objective is to grow that business within the US$2 billion+ global transformer oil market. The Canton plant achieved record levels of production in March 2016 and we expect to improve significantly on this during 2016. Continued operational performance, product quality in both base oil and transformer oil, supported by a strong marketing team, underpin our strategy for growth in the US. Record levels of production confirm the improvement in operability and rateability of the plant as we continue to rebuild market share in the US, increase the production ratio of transformer oil against base oil and build margins. We also continue to review opportunities to develop re-refining capability in other jurisdictions.

The appointment of Chris Ellis as Acting Chief Executive in December 2015 and then as Chief Executive in March 2016 reflects the whole Board's focus on execution, delivering improved operational performance and efficiencies and driving the Company to profitability. The appointment of Caroline Brown to the Board as Senior Independent Director and Chair of the Audit Committee during the year also strengthens our financial governance framework. Caroline brings an important financial and governance experience to the Board and reinforces the Board's ability to support the development of the Hydrodec business going forward. I would also like to take this opportunity to thank Alan Carruthers, who is retiring from the Board, for his commitment to Hydrodec and the valuable and informed contribution he has made over the last four years. As a long standing member of the Board, he has been integral to the development of Hydrodec. We all wish him well for the future.

We remain confident that the rebuilt and expanded Canton plant has a unique market proposition and is well placed in 2016 to leverage the production of the highest quality transformer oil produced in the US. As we continue to turn the corner our focus is on delivering operational performance and efficiencies, continuing to implement a rigorous cost reduction programme, and on driving the Company to a profitable 2016.

Lord Moynihan

Non-Executive Chairman

CHIEF EXECUTIVE'S REPORT

The challenges faced by many companies in our industry in 2015 are well known and documented. In many ways the extended commissioning of the Canton plant, the relocation of the Australian operations in the first half of the year coupled with the decline in the price of oil from the end of 2014, created a 'perfect storm' for the Group. Responding to this environment the Company took decisive measures at the end of 2015 to turnaround Hydrodec and set it on a firm, growth strategy for profitability in 2016.

Strategic developments

(i) Disposal of UK waste oil collections business (HUK) and proposed UK re-refinery project (HRR)

In late 2015 and January 2016, the Company undertook a detailed strategic review of its UK waste oil collections business and proposed UK lubricant oil re-refining project, following a significant deterioration in its UK operations. This deterioration was driven predominately by the rapid decline in global oil prices and continued challenging market conditions which resulted in HUK generating an increasing level of significant losses. Despite implementing extensive restructuring and cost-saving measures during 2015 (including an approximate 38% reduction in UK headcount), Hydrodec remained exposed to the impact of the global oil price decline. Given the significant cash consumption and limited cash resources available to the Company (in the absence of a significant further fundraising), the directors of the Company reviewed all available options and concluded that it was in the best interests of the Company to dispose of the UK operations.

Following a strategic auction process conducted by an independent third party financial adviser, the Company sold its UK operations to Andrew Black, a Non-Executive Director and substantial shareholder, (the Buyer) on 4 March 2016 for a consideration of £1 in cash, including the transfer to the Buyer of circa. £1.2 million of existing third party indebtedness in HUK and involving the injection by the Buyer of working capital into HUK. In addition, the Buyer granted Hydrodec a contractual right to receive a proportion of the Buyer's entitlement to any future profits of the UK re-refining project on the following waterfall basis (a) first, the Buyer, as primary risk taker, to recover the costs of its investment in the UK re-refining project; (b) then, the next tranche to be applied 70:30 between Hydrodec and the Buyer respectively until Hydrodec has recovered its costs incurred to date in connection with the UK re-refining project; and (c) finally, the balance of any profits to be shared 90:10 between the Buyer and Hydrodec. The Buyer will bear all risk and responsibility for developing the UK lubricant oil re-refining project going forward, with Hydrodec retaining only a passive economic interest under these profit share arrangements. The UK re-refining project also offers a potential opportunity to develop transformer oil re-refining capacity in the UK. The impact on the Company of all of the above is described in note 9.

(ii) USA

The rebuild of the Canton plant was completed during the year, re-establishing a plant with a nameplate capacity significantly higher at 45 million litres compared to 27 million litres prior to the incident in December 2013. It is safer, easier to maintain, and we consider capable of producing the highest quality transformer oil in the US.

The recommissioning of the plant did, however, take longer than planned and, whilst commissioning issues are not unusual, the issues experienced with the plant's new heat exchangers, to which over 100 days of potential lost production can be attributed, were material and negatively impacted the performance of the business in 2015. Since then, all six trains at Canton were brought in production by the end of December 2015. Further significant progress on operability and reliability has meant that Canton achieved an all-time monthly production record of 2.56 million litres in March 2016. Operational performance is a key platform for our strategy of growth in the US and these production records confirm the improvement in operability and rateability of the plant as we continue to rebuild market share in the US.

(iii) Australia

The relocation of Hydrodec's Australian operations from Young to Southern Oil's used lubricant oil re-refinery in Bomen, New South Wales was completed at the end of March 2015, a month later than envisaged. First commercial oil sales were made shortly thereafter. As a result of relocation, the plant now benefits from operating efficiencies under a single operating structure, which also offer better logistics and other locational advantages. Hydrodec continues to own the transformer oil re-refining plant and the proprietary technology, and controls all the commercial activity related to the branded SUPERFINETM oil.

Total income and operational performance

Full year total income was lower than the prior year at US$43.8 million (2014: US$54.7 million), driven principally by the later than planned start of production in Canton and the decline in the overall headline selling price of oil. Overall total oil sales were 62.1 million litres (2014: 48.6 million litres) of which 14.4 million related to the re-refining businesses (2014: 12.0 million litres) and 47.7 million litres related to the UK operations (2014: 36.6 million litres). Additionally, in the first quarter, the re-refining business benefited from the remaining business interruption income of US$1.5 million received under the settlement negotiated at the end of 2014.

Sales volumes in the re-refining business increased to 14.4 million litres at a gross margin of -6.9% (2014: 12.0 million litres at a pro forma gross margin of 30%), a 20% increase in volume over the prior year reflecting the commencement of production at Canton during the year whilst the deterioration in gross margin was a function of the low utilisation rate attributable to the commissioning process. Sales volumes in the recycling business increased to 47.7 million litres after the acquisition of Eco-Oil at a margin of 5.3% (2014: 13.6%) and contributed US$1.8 million gross profit (2014: US$ 4.7 million), 38% down on 2014. This was despite the implementation of strategies to improve margins and accommodate lower global oil prices, including the renegotiation of feedstock pricing mechanisms with suppliers following the rapid decline in oil prices from the end of 2014.

Administrative expenses fell by 6% compared to the prior year to $20.7 million (2014: US$22.1 million). The key driver (US$ 3.8 million) being a reduction in employee cost due to the relocation of the Australian operation offset by an increase in costs from the acquisition of the business of Eco-Oil in the UK. Costs as a percentage of total income increased to 47% (2014: 40%) given the lower levels of total income driven by the decline in the oil price impacting sales revenue and the later than planned start up in Canton.

The operating loss, before impairment, after charging restructuring costs (US$ 1.3 million), increased to US$19.5 million (2014: US$7.9 million).

In accordance with accounting standards, the Board has reviewed the carrying value of goodwill and other intangible assets across the Group in light of current trading, prospects and progress towards achieving the Group's strategic plans. Following this review, the Company charged a total of US$11.1 million (2014: US$0.8 million) for the impairment of such assets. This impairment charge comprised two key elements. The first related to the disposal of the UK operations for £1 in March 2016 (see note 9) giving rise to a charge of US$3.0 million for the relevant plant and equipment (2014: US$0.8 million) and US$4.7 million in respect of intangible assets. The second related to the net assets of the Company's non-trading subsidiary, Virotec International plc, which had a carrying value of goodwill of US$3.4 million which has been impaired to nil.

Finance costs

Net financial expense was US$0.5 million (2014: US$0.2 million) and relates to the interest payable under the lease in the US and interest payable on the shareholder loans in the UK.

Operating cash flow and working capital

In 2015, the Group had net cash outflow from operating activities of US$13.7 million, compared to a US$6 million net cash inflow in 2014. The movement in working capital of US$1.7 million net cash inflow was a result of a reduction in inventory levels both in the US and UK, a reduction in trade receivables (including a reduction in prepayments for oil purchased from G&S (US$1.2 million)), and a reduction in trade and other payables consisting principally of the payment of Group insurance of US$1.5 million, payment of the basic engineering design package of US$0.5 million under the CEP licence, fuel duties of US$0.5 million and a reduction in the level of payables in the UK recycling business driven by market contraction. 

The amount of working capital required by the Group's operations continues to be closely monitored and controlled, and forms a key part of the management information. Credit management remains robust with no bad debts written off during the year.

Liquidity and Financing Activities

The Group's principal financing facility is a seven year US$10 million finance lease arrangement with First Merit fully drawn and repayment under which commenced on 1 October 2015, as well as shareholder loans from Andrew Black, a substantial shareholder and Non-Executive Director, of US$6.2 million as at 31 December 2015 (of which US$4 million was utilised as at 31 December 2015), repayable on 31 December 2017. The Company also has a lease financing arrangement of US$1.4 million with its partner in Australia, Southern Oil, in respect of the infrastructure costs incurred for the establishment of its facilities at the site in Bomen. Additional working capital has been provided by overdraft facilities in the USA and Australia. Borrowings associated with the UK business were divested as part of the sale arrangements for the UK operations on 4 March 2016.

Capital expenditure in 2015 totalled US$14.9 million (2014: US$19.0 million), primarily incurred in the US in relation to both the rebuild and expansion of the plant at Canton. Rebuild capital expenditure in Canton has been funded through a combination of operating cashflow, the insurance proceeds received during 2014, and the finance lease arrangement referred to above, whilst the two expansion trains have been funded equally by Hydrodec and its partner G&S.

Outside of the US, the Group started to incur capital costs in relation to the establishment of the UK re-refinery, primarily in relation to site preparation and the acquisition of the basic engineering design package from CEP, such costs being funded out of Group cash reserves prior to the disposal of the UK operations. A mechanism to potentially recoup these costs was agreed as part of the disposal of the UK operations and is detailed in note 9.

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 2015.

Going concern

As set out in note 1, taking into account the Group's current forecasts and projections and recent progress in re-establishing market share in the US, and considering the uncertainties described in note 1, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least the next 12 months. Accordingly, the directors continue to adopt the going concern basis in preparing the annual report and financial statements.

At 31 March 2016, after divesting the UK operations, the Group's overdraft and committed loan facilities (excluding finance lease liabilities) provided headroom over the Group's actual borrowing requirement. However, as referred to in the Outlook section below, the next six months are likely to see the Group's working capital needs increase before sustained monthly cash generation reduces the working capital requirements. Therefore on 11 April 2016, the Group signed a further £2.25 million facility agreement to allow for the working capital needs to be met while also providing further headroom against downside risk. Further details of the new loan facility are set out in note 9.

Progress on delivering our strategy and Outlook

As was recognised by the market generally, 2015 was an extremely difficult year in the oil and gas sector and this was no different for Hydrodec. Following the review commenced at the end of 2015, the successful disposal of the UK operations in early March was the first step in my strategy to implement a fundamental turnaround for the Company to refocus on our core transformer technology business.

The next stage of this plan is to deliver operational performance and efficiencies, continuing to implement a rigorous cost reduction programme and to drive to a profitable 2016. In both the US and Australia, we will continue aggressively to build market share, ensure product quality and maximise margins following significant service interruption with the plant re-build in Canton and relocation of our operations in Australia. Market dynamics remain difficult and regaining momentum will be challenging in the first half of the year. However, progress to date in the US is strong: the business delivering a monthly production record in March producing 2.56 million litres having already posted a production record in February of 2.45 million litres. The quality of the product the business produces is also of the highest standard and our objective is now to strengthen margins as we grow market share whilst ensuring rigorous cost control.

The recent price rises posted by producers of base oil and transformer oil in the US are encouraging indications of a move towards price stabilisation, and I expect that over time the progress we have made in the first few months of this year will enable us to grow the business as envisaged prior to the incident in Canton, and expand further in the US and into other geographical markets as we seek to enlarge our global footprint in a profitable and capital efficient manner.

Chris Ellis

Chief Executive Officer

Consolidated Income Statement

For the year ended 31 December 2015

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2015

Consolidated Statement of Financial Position

As at 31 December 2015

Consolidated Statement of Cash Flow

For the year ended 31 December 2015

Consolidated Statement of Changes in Equity

For the year ended 31 December 2015

Notes to the Financial Statements

For the year ended 31 December 2015

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 11 April 2016. 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 year ended 31 December 2015, but is derived from the 2015 Annual Report. Statutory accounts for 2014 have been delivered to the Registrar of Companies and those for 2015 will be delivered in due course. The auditors have reported on those accounts; their reports were unqualified.

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 2014 which can be found on the Group's website.

Going Concern

As described in the Chief Executive's Report, the Group has reported a loss for the year, after impairment, of US$31.1 million resulting principally from delays and cost overruns in commissioning the Canton plant and from its UK operations (disposed of on 4 March 2016) which were adversely affected by the significant decline in the oil price during the year. The disposal of the UK operations on 4 March 2016 resulted in, amongst other matters, an improved net current liability position for the Group, compared with that at 31 December 2015, and this has been used as the basis for the Group's working capital projections. The current economic environment for the Group remains challenging. Accordingly, and in the context of the risks highlighted above, the pace and execution at which the Canton plant builds back market share in the US transformer oil market remains a key underlying risk for the Group. Whilst the directors have instituted measures to deliver improved operational performance and efficiencies and to implement a rigorous cost reduction programme, the US transformer oil market and the Group's speed of re-entry thereto will continue to be affected by market conditions giving rise to uncertainties over future trading results and cash flows. However, current pricing for transformer oil shows signs of steady improvement from the lows of 2015 and the Canton plant has now established a reliable operating record over the last three months with all six of its trains running. The new Australian operations are stable and plans are underway to increase the level of feedstock to the Australian business. The base case projections, for assessing going concern, through to June 2017 for the combined US and Australian operations, which reflect a degree of downside risk on revenues, show a steadily improving position and achieving a monthly cash breakeven position in Q3 of 2016 for the Group.

At 31 March 2016, the Group's indebtedness (excluding finance lease liabilities) was US$7.3 million and the base case projections indicate this increasing over the next six months before steadily improving through to the end of the projection period in June 2017 as a result of the measures taken.

At 31 March 2016, the Group's indebtedness (excluding finance lease liabilities) was funded by a combination of overdraft facilities in the USA and Australia, amounting to US$2.6 million, and a committed loan facility of £4.135 million ($5.8 million at a rate of $1.4/£1). In order to fund additional working capital requirements over the next six months and provide headroom to cater for additional downside risk in the period covered by the projections, a further committed facility was entered into on 11 April 2016 for £2.25 million ($3.15 million at a rate of $1.4/$). The key risks considered by the Directors in making their assessment as to the adequacy of headroom include a reduction in volume of production and a decline in projected revenue.

After making enquiries, taking into account the Group's current projections, financial position, its loan and overdraft facilities and recent progress in re-establishing market share in the US with record production in February and March 2016, and considering the uncertainties described above, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least the next 12 months from the date of approval of these financial statements. Accordingly, the directors continue to adopt the going concern basis in preparing the annual report and financial statements.

2 Revenue and operating loss

2.1. Segment analysis

The Group operates two 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) and decisions made on the basis of adjusted segment operating results. 

2.2. Geographic analysis

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

Revenue and other income have been identified on the basis of the customers' geographical location. Non-current assets are based on their physical location.

2.3. Loss on ordinary activities

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

Profit on disposal of assets in 2015 relate to the surplus generated from a sale and leaseback arrangement with TIP Europe.

Fees paid to the Group auditors and its associates for non-audit services to the Group are not disclosed in the individual accounts of Hydrodec Group plc because the Group's consolidated financial statements are required to disclose such fees on a consolidated basis.

2.4. Growth costs

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

2.5. Other income - Insurance Proceeds

On 11 November 2014 the Group and its insurers settled the Group's insurance claim arising from the incident at Canton in December 2013. The total gross value of the claim was agreed at USD 20,000,000, which after deduction of property damage and business interruption insurance excesses of USD 1,250,000 in aggregate, resulted in cash payments of USD 18,750,000 to the Group.

3 Finance costs

4 Loss per share

The calculation of the basic loss per share of 4.17 cents per share (2014: 1.14 cents loss per share) is based on the loss attributable to ordinary shareholders of USD 31,138,000 (2014: USD 8,452,000 loss) 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 2014 and 2015, the share options and warrants exercise values are greater than the market price and diluted earnings per share is the same as basic. The calculation of the weighted average number of shares excludes shares which were held by a member of the Group in 2014 (which were treated as if they were treasury shares) and which were subsequently cancelled in 2015 following the liquidation of the relevant entity, and also shares held in 2014 by the Hydrodec Group Employee Benefit Trust.

5 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. 

At 31 December 2015, some of the unimpaired trade receivables are past their due date but all are considered recoverable. The analysis of financial assets is as follows:

Credit sales are only made after credit approval procedures are completed, and the carrying value represents the Group's maximum exposure to credit risk.

The carrying amounts of the Group's trade and other receivables are denominated in the following currencies:

6 Trade and other payables

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

7 Other interest-bearing loans and borrowings

In 2014, the finance lease facility of USD 3,000,000 related to the initial draw down of the total USD 10,000,000 finance lease facility in the US which converted to a seven year finance lease arrangement once the Canton plant was commissioned. The remaining USD 7,000,000 finance lease facility was recognised in 2015. The finance leases are secured over the assets to which they relate.

Unsecured bank facility of USD 4,121,000 includes USD 2,802,000 relating to factoring in the UK and USD 1,319,000 for the working capital facility in the US.

Other loans include USD 3,962,000 owed to Andrew Black, a Non-Executive Director and a substantial shareholder.

8 Share capital

Hydrodec Group plc held 54,500,000 of its own ordinary shares (which were previously held by VIN (Australia) Pty Ltd pursuant to the acquisition of Virotec International plc in 2008) and which were transferred to Hydrodec Group plc as part of a dividend in specie to Hydrodec Group plc on the liquidation of VIN (Australia) Pty Ltd in 2014. These shares, together with a further 2,173,333 shares issued as part of the acquisition of Virotec International plc, were cancelled in 2015 upon the liquidation of VIN (Australia) Pty Ltd and Virotec International plc.

Warrants

In 2011, the Group 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 Group 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.

No value has been ascribed to the warrants in these accounts due to the value being negligible and thus immaterial.

9 Post balance sheet events

On 4 March 2016, following a strategic auction process conducted by an independent third party financial adviser, Hydrodec Holdco Limited, a wholly-owned subsidiary of the Company, disposed of Hydrodec (UK) Limited and Hydrodec Re-Refining (UK) Limited (together, the "UK Operations"), and the Company agreed to transfer certain other rights and assets relating to its UK Operations, to Andrew Black, a Non-Executive Director and a substantial shareholder of the Company (the "Buyer"). The disposal of the UK Operations constituted both a related party transaction and a substantial transaction for the purposes of the AIM Rules. The consideration for the sale of the UK Operations was £1 in cash, and included the transfer to the Buyer of circa. £1.2 million of existing third party indebtedness in HUK. In addition to this, the Buyer has agreed to grant Hydrodec a contractual right to receive 10% of the Buyer's entitlement to any future net profits of the UK lubricant oil re-refining project on distribution or exit. The Buyer will bear all risk and responsibility for developing the UK lubricant oil re-refining project going forward, with Hydrodec retaining only a passive economic interest under these profit share arrangements. The transfer of the UK licence and basic engineering package from CEP is subject to the consent of CEP, which the Company has agreed to use its reasonable efforts to achieve.

On 11 April 2016, the Company entered into an agreement to extend its £2 million secured second working capital facility with Andrew Black, a Non-Executive Director, dated 30 November 2015 by a further £2.25 million to £4.25 million. This extension to the facility is also secured over the rights for Hydrodec Development Corporation Pty Ltd to receive income based on the quantity of SUPERFINETM oil produced by Hydrodec of North America LLC and Hydrodec of Australia Pty Ltd respectively, which royalty is based on average annual production.