HYR.L Regulatory News (HYR)

23 March 2015

Hydrodec Group plc

("Hydrodec" or the "Company")

Audited preliminary results for the year ended 31 December 2014

Trading and projects update

Hydrodec Group plc (AIM: HYR), the cleantech industrial oil re-refining group, is pleased to announce its audited preliminary results for the year ended 31 December 2014.

Hydrodec's annual results for 2014 reflect the accounting treatment of the insurance proceeds received in respect of the incident at Canton. A portion of the insurance proceeds has been attributed to the capital replacement cost of the damaged equipment, the rest has been attributed to business interruption covering the period from 1 December 2013 to 31 March 2015. These insurance proceeds have been apportioned between the 2013, 2014 and 2015 financial years, and are collectively shown as 'other income'. Any comparison of the 2014 financial outcome to 2013 needs to consider the unusual impact of the business interruption settlement. The business delivered the following in 2014:

Performance Highlights

· Total income for 2014 increased by 36% to US$54.7 million (2013: US$40.1 million), the tenth consecutive year of growth; revenues include a full year of OSS and in the US represent business interruption income and oil trading.

· Total oil sales for 2014 increased by 31% to 48.6 million litres (2013: 37.0 million litres); 2014 includes a full year of trading by OSS and oil sales in the US.

· Gross margin was higher than 2013 despite lower product sales prices and challenging market conditions in both the UK and Australia, and after accounting for business interruption income.

· Group Operating EBITDA* of US$1.6m in 2014 (including US$1.5 million (less associated lease rentals) from the gain on disposal of assets in Hydrodec (UK) Limited) (2013: US$0.2 million).

Strategic Highlights

· Resolved the Canton insurance claim - Settled insurance claim arising from the incident at Canton in December 2013 for a gross value of US$20 million (US$18.75 million net of deductibles) and resulted in a profit on disposal of US$1.4 million on the written off assets.

· De-risked proposed UK expansion - Signed exclusive licence agreement with California-based Chemical Engineering Partners (CEP) to develop the CEP wiped-film evaporation and hydrogenation technology in the UK as well as the basic engineering for an initial 75 million litre base oil re-refinery.

· Secured proprietary technology - Submitted provisional patent applications to protect operating and design innovations in our unique transformer oil re-refining technology and upgrade technology innovations that will enhance the re-refining of lubricant oils.

· US business financing - Entered into a US$10 million, seven year term, asset financing facility and increased working capital line for Hydrodec of North America LLC, to fund appropriately the North American business following the rebuild and expansion of the Canton re-refinery.

Commenting on the results, Ian Smale, Chief Executive Officer of Hydrodec said: "Despite volatile market conditions in general and the very specific task of rebuilding our Canton facility, Hydrodec continues to develop and strengthen its technical and operational platform, whilst improving its financial base. As a result of the actions taken during the year, Hydrodec will emerge stronger from the 'overhang' of the Canton insurance claim in 2014, with a more robust balance sheet and a clear sense of direction centred on our two core business streams."

* EBITDA adjusted for non-operating growth expenditure of US$2.3 million (2013: US$3.3 million), share based payment costs of US$0.3 million (2013: US$0.5 million) and foreign exchange loss of US$0.2 million (2013: US$0.7 million) ("Operating EBITDA")

Trading and Projects Update

Canton Rebuild and Expansion

There has been significant progress on the Canton project during the period and into 2015. All six 'trains' are now on site and in situ, on time and on budget.

Expansion 'trains' 1 & 2 are currently progressing through mechanical and electrical completion and are now available for operator training. Pre-commissioning of expansion 'trains' 1 & 2 will start on 5 April with first production expected to commence on 10 May. Replacement 'trains' 3 to 6 will follow sequentially such that all six 'trains' should be in production from 20 May this year. Despite the later start date, the US business is expecting to sell 5 million gallons of finished products in the US in 2015 (2013: 5.4 million gallons / 2012: 4.9 million gallons) having built a significant supply of feedstock since 4Q 2014, thereby keeping us on track to meet our overall expectations for the full year.

The new Canton plant will create several important advantages for the business. We can also announce today that the new plant will deliver at least 10% greater efficiency than the name plate capacity of the original equipment that is, in excess of 40 million litres of effective operating capacity. It will be safer, easier to maintain and produce the best quality transformer oil available in the US. It will also qualify for an offset carbon credit.

Australian Co-location

The co-location of Hydrodec's Australian operations from Young to Southern Oil's Bomen lubricant oil re-refinery in Wagga Wagga will be complete at the end of March with full adoption of the outsourced tolling arrangement to start on 1 April, as planned and on budget. The project, which was subject to an extended planning process and submission, creates a significant re-refining hub in New South Wales, which will not only benefit from operating efficiencies under a single operating structure, but also offer better logistics and other location advantages. Hydrodec continues to own the transformer oil re-refining plant and the proprietary technology, and will control all the commercial activity of Hydrodec branded SUPERfine transformer oil.

UK re-refinery project

Hydrodec's intention to build and operate a 75 million litre base oil re-refining facility in the UK continues to be progressed. Having evaluated the proposed project in the context of the Department of Environment, Food and Rural Affair's infrastructure plan for the UK, its national policy for hazardous waste and relevant planning legislation, the need for our type of proposal is clearly supported, and advocated, by Government infrastructure policy. As such, it is identified as a nationally significant infrastructure project (NSIP) requiring a statutory development consent order from the Secretary of State. This positions the Hydrodec project within a national framework for development consent (rather than local planning), which offers greater clarity of process, with a defined framework for consultation, consideration of the application and determination within a guaranteed time line.

The Company will receive a front-end engineering design package (FEED) in March as per schedule. This along with a detailed evaluation of twelve potential locations, has led to selection of a pre-zoned 20 acre industrial site with excellent sea and road logistics, adjacent to the QE2 Docks and a significant oil storage facility on the Wirral in the North West of England. The site offers development within an established petrochemical hub where logistics, local capability and the proximity of complimentary facilities creates the opportunity for efficiencies for the projected new plant.

A lubricant oil re-refinery will provide the core development proposition. The intention is that this will be followed in due course by a Hydrodec proprietary transformer oil re-refining capability and the potential for a second phase lubricant oil re-refinery, thereby creating a fully-integrated world scale used oil treatment and processing facility supplied by Hydrodec UK's integrated collection and logistics operations. The full NSIP process, through to determination, will fit within an estimated 15 to 18 month time frame. That said, Hydrodec has already carried out environmental assessment work, as well as some preliminary consultation with the local authority, other statutory consultees and the community, to assist in developing our proposals.

Given these timescales, securing the statutory development consent order would be likely by the end of 2016, with commissioning of the plant expected for late 2017/early 2018. Whilst this does represent a delay from our prior best expectations, which envisaged a swift local authority planning consent with no consequent appeal to the Secretary of State or legal challenge, there is greater certainty around the NSIP timescales.

Hydrodec is continuing to engage with the local authority, statutory consultees and the local community and is gearing up with its advisors to make the application at the earliest opportunity.

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. Hydrodec processes spent oil in the US and Australia 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 whilst in Australia, Hydrodec's operations are currently being re-located from Young to Southern Oil's Refinery at Bomen, New South Wales, Australia. In 2013, Hydrodec 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. In line with our stated intention to develop a base oil re-refinery in the UK, we have an exclusive licence agreement with California-based Chemical Engineering Partners (CEP) to develop the CEP wiped-film evaporation and hydrogenation technology in the UK as well as the basic engineering for a 75 million litre per annum capacity base oil re-refinery. In February 2015, we moved the Group's head office to more cost effective serviced offices at 6 Hays Lane, London Bridge, London SE1 2HB.

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

In 2014, a key focus for the Board has been to support management to deliver a clear strategy for Hydrodec whilst ensuring that an effective management team and governance framework is in place to implement that strategy. Our objective is to deliver, within an integrated feedstock and value-chain business model, outstanding growth in revenue and returns. We apply 'best in class' disruptive technologies to handle, treat and re-refine used oil. Our goal is to produce sustainable, high quality oils.

Whilst 2014 will be remembered for the impact and successful resolution of the Canton insurance claim, significant progress has been made during the year in preparing the Company for future growth and profitability. Indeed, I believe the fundamentals of the Group are stronger than they have been at any point during my time with Hydrodec. The Group today and the Group of three years ago are materially different. I believe Hydrodec, led by Ian Smale, is on the threshold of growth and success, through the combination of a first rate management team, market leading technology and a focused strategy for growth in the US, Australia and the UK.

The re-commissioning of the Canton re-refinery marks a substantial achievement, not only will it return us to being operational at Canton, but it will do so with in excess of a 50% increase in capacity compared to December 2013. Our technology platform has also broadened with provisional patent applications submitted in 2014 to protect operating and design innovations in our unique transformer oil re-refining technology and upgrade innovations that will enhance the re-refining of lubricant oils. The co-location of our Australian operations to the Southern Oil Refinery at Bomen, and the on-going work to restructure the OSS business and 'realign' it to the customer further reposition the business for growth. Underpinned by an exclusive licence agreement with CEP to develop their technology in the UK, we also continue to make progress towards the independent development of a base oil re-refinery in the UK.

I believe that good governance is integral to delivering growth in shareholder value. Whilst listed on AIM, our governance should strive to meet FTSE 350 standards. The Board continues to strengthen the governance of the Group and this year the Board has established a new Safety and Technology Committee, chaired by Dame Mary Archer, to reinforce its oversight of the key areas of health, safety and technology. Dame Mary brings considerable scientific and governance experience to the Board. Under her leadership, the Committee will provide rigorous oversight and a robust challenge for the Group's technology programme.

Long term success also requires transparency, accountability and engagement to maintain a consistent, high quality dialogue with both institutional and retail investors. In this regard, I was pleased to meet with a wide cross-section of shareholders at the Group's first retail investor lunch in January.

In conclusion, I want to return to the Canton insurance claim. It was a long process and made 2014 a challenging year. However, the insurance settlement obtained was, in the end, comprehensive and a good outcome for the Company. Whilst special mention should be made to recognise the efforts of Chris Ellis; Michael Pitcher (the CEO of Hydrodec of North America) and their respective teams, I would like to thank Ian, his management team and all the staff at Hydrodec for their efforts in 2014 as everyone played their part in maintaining professionalism and morale in a challenging year. 

Lord Moynihan

Chairman

CHIEF EXECUTIVE'S REPORT

2014 has been a year of rebuilding and setting the platform for the future of Hydrodec; a future where we re-emerge stronger. Responding to and resolving the aftermath of the Canton incident certainly created an 'overhang' which impacted the business, particularly as we worked to resolve the insurance claim. However, we were still able to deliver a number of significant milestones during the year that will prepare the Group for growth in 2015 and beyond. These milestones and our other achievements in my view confirm the resilience but also the potential of the Hydrodec business.

Technology

We continue to invest in growth, a significant portion of which is in the development, delivery and innovation of our technology.

We submitted provisional patent applications to protect operating and design innovations in our unique transformer oil re-refining technology and upgrade technology innovations that will enhance the re-refining of lubricant oils. I believe this strengthens our position for the longer term in lubricant re-refining where the aspiration is to reproduce very high quality oil, fit for its original purpose with world leading yields and efficiencies (just as we do for transformer oil).

Lubricant re-refining

We signed an exclusive licence agreement with California-based Chemical Engineering Partners (CEP) to develop the CEP wiped-film evaporation and hydrogenation technology in the UK as well as the basic engineering design for an initial 75 million litre base oil re-refinery. The CEP relationship also offers the opportunity to collaborate on the development of our own technology going forward. CEP is the most commercial and distributed of the re-refining technologies; current projects and installed capacity add to approaching a billion litres per annum of capacity globally. The relationship is very important and will significantly de-risk our major business move into used lubricant oil re-refining. Moreover, we believe our technology innovation can upgrade the CEP process increasing yield and improving product quality. In the meantime, the deal brings in the experience and pedigree to move our project on, as well as learn from recent applications of this technology in Europe, the US and Brazil.

Zeton relationship

Hydrodec has had a close relationship through 2014 with Zeton from Canada, firstly on the engineering design for the new transformer oil plants planned for the Canton expansion, but also on their fabrication. The design is a major step forward. The new plant is modular in construction and provides access at all levels for easier monitoring and maintenance. Importantly, the design incorporates end-to-end processing through two reactor trains with each module having a capacity of 15 million litres per annum, at least 10% more efficient than their predecessors. We are also confident that this improved configuration will become our best available technology capable of producing the best quality transformer oil available today in the US.

Canton Insurance settlement

We settled the Canton insurance claim for a total gross value of US$20 million, which net of deductibles, resulted in total cash payments of US$18.75 million being made to the Group. This was a good and comprehensive result, after a frustratingly long and arduous process. Importantly, it allows us to rebuild at Canton funded and confident that we can re-capture the growth and momentum in the business interrupted by the incident. Our relationship with, and the full co-operation of, our partners, G&S Technologies, has been critical to achieving our ambitious re-build plans and I extend my thanks to them.

Safety and Technology Committee

The Board has introduced a new Board Committee specifically focused on our HSEQ agenda, but also with oversight of Hydrodec's technology programme and development. Dame Mary Archer, DBE a renowned chemist, but also widely associated with science, renewable technologies and governance in the NHS, agreed to join the board and assume responsibility for this committee in November 2014. As our Chairman said at the time, "Mary's access to academia and knowledge of the renewable energy sector will greatly strengthen the Board's ability to support the development of the Hydrodec business and technology."

Strategic developments

(i) USA

There has been significant progress in the Canton project during the period and into 2015. All six 'trains' are now on site and in situ, on time and on budget. Expansion 'trains' 1 & 2 are currently progressing through mechanical and electrical completion and are now available for operator training. The replacement 'trains' 3 to 6 will follow sequentially. The new Canton will create several important advantages for the business. The new plant will deliver at least 10% greater efficiency than the name plate capacity of the original equipment; that is, in excess of 40 million litres of effective operating capacity. It will be safer, easier to maintain and will produce the best quality transformer oil available in the US. It will also qualify for an offset carbon credit.

(ii) Australia

The co-location of Hydrodec's Australian operations from Young to Southern Oil's Bomen lubricant oil re-refinery in Wagga Wagga will be complete at the end of March 20015. The project, which was subject to an extended planning process and submission, creates a significant re-refining hub in New South Wales, which will not only benefit from operating efficiencies under a single operating structure, but also offer better logistics and location advantages. Hydrodec continues to own the transformer oil re-refining plant and the proprietary technology, and will control all the commercial activity of Hydrodec branded SUPERFINETM transformer oil.

(iii) OSS Group

OSS has a good, experienced team and remains the leading service provider in the UK by size and benefits from that scale. Emerging from administration created a number of challenges, and we realised that its business strategy and structure needed to change even before the decline in oil prices had any impact and that decline has and will drive further significant change into the used oil market. We believe realigning the business back towards the major transport and industrial clients and by focusing on its compliant, convenient and competitive service offer to major car groups, workshop networks as well as industrial and transport companies, is the right strategy. Furthermore, we have taken action to reduce headcount and costs by more than £0.5 million.

(iv) UK re-refining project

We continue to progress the independent development of a base oil re-refinery. Indeed, it is worth noting that base oil prices have held up well relative to the prevailing oil price. The UK is a very attractive option for our growth and development in the used-oil and transformer oil markets - a unique opportunity to create a fully integrated operation from a standing start covering all oil, as well as leapfrogging much of the European competition in efficiency and product quality. OSS is critical to this, securing feedstock to underpin and support further investment, as well as offering the brand, business and customer base to be successful in its own right. After detailed consideration in which twelve potential sites were evaluated, a location adjacent to the QE2 Dock on the Wirral in the North West of England has been identified. This is a pre-zoned industrial site close to both excellent sea and road transport logistics and a significant storage facility. The project itself qualifies as a nationally significant infrastructure project and requires a statutory development consent order.

Financial and operating performance

The benefit of a full year of trading from OSS has enabled the Group to continue its commendable year on year growth in income, up 36% to US$54.7 million, as well as a significant increase in total oil sales, up 31% to 48.6 million litres. This was without production revenue from the US offset in part by business interruption income and a step up in oil trading as we maintained our channels of trade in preparation for 2015. Gross margins this year are more complex to understand given the impact and accounting treatment of business interruption given the income reimbursing lost margin due to the incident, but margins have otherwise stood up despite lower product sales prices and challenging market conditions.

Balance sheet

In December, we entered into a US$10 million, seven year term, asset financing facility and increased working capital line for Hydrodec of North America LLC, to fund appropriately the North American business following the rebuild and expansion of the Canton re-refinery. This creates a more efficient capital structure, introduces competitively priced debt onto the balance sheet of the operating company, and gives us the capability to fund additional working capital for the expanded business as well as creating flexibility for Hydrodec as a group to invest further in strengthening the value chain or in other opportunities.

Outlook

The Board expects 2015 will be a year of regaining momentum, much as we were doing in 2013. Clearly Canton is very important and we will be looking to rebuild the business and ramp up production from the second and third quarters. It will be very interesting to see how far we can take this new design and equipment through the rest of the year and this is a very exciting proposition for us. In the UK, the key is resolving the market structure of the collections business in the short term whilst making progress on the UK re-refinery project including building the business case and resolving how best to fund and develop this project. Moreover, because of our actions I am confident that growth can be delivered at lower risk and from a stronger financial base than we envisaged in our original strategy from September 2012. Delivering an expanded Canton, re-locating in Australia and progressing our plans for a re-refinery in the UK as we envisage today will put us back, or at least very close, to our original trajectory from before the incident.

Ian Smale

Chief Executive Officer

CHIEF FINANCIAL OFFICER'S REVIEW

In their reports both the Chairman and Chief Executive summarised key areas of the strategic development of the Group and covered in some detail the successful resolution of the insurance claim in our US business. The conclusion of this claim brings some complexity to understanding the Group's financial statements this year and as part of this review I have sought to clarify the key elements arising from the claim and their impact where appropriate.

Revenue and operational performance

Group income increased by 36% over 2013 to US$54.7 million (2013: US$40.1 million), the tenth consecutive year of growth. This growth was achieved in spite of the replacement of revenues in Canton with margin based insurance income and significant pricing pressure in the UK as a result of the global slump in oil prices. The Group benefited from supplementary oil trading of 7.8 million litres generating US$4.5 million of revenue in the US, undertaken to maintain customer relationships during the shutdown period as well as a full year of trading at OSS Group. Overall, total oil sales grew by 31% to 48.6 million litres (2013: 37.0 million litres).

The comparison of gross margin with 2013 is complicated due to the nature and basis of business interruption insurance proceeds. However, on a pro forma basis using the actual data upon which the claim was paid, gross margin in the re-refining business would have increased to 30% (2013: 23%). In addition, challenging feedstock supply in the Australian market and the necessity to carry out a safety related shutdown following the incident in Canton impacted utilisation in Australia.

Sales volumes in the recycling business totalled 36.2 million litres at a gross margin of 14.4% and contributed US$4.9 million gross profit. Given the accelerated decline in the global oil market at the end of 2014, the Group implemented strategies to improve margins and accommodate lower global oil prices including the renegotiation of feedstock pricing mechanisms with suppliers.

Total employee costs and other operating overheads increased to US$21.9 million (2013: US$16.4 million) driven principally by a full year of trading at OSS in the UK. This increase was in part offset by reduced growth costs, reflecting reduced transaction related fees and costs in 2014 compared to 2013, and rationalisation of fleet costs through a sale and leaseback arrangement with one of the primary fleet service providers, TIP Europe, generating a surplus of US$1.5 million. Costs as a percentage of total income fell to 40% from 41% and including Canton on a pro forma revenue basis would have decreased to 32% of total income.

The underlying operating loss (before growth costs, amortisation of intangible assets, profit on disposal of assets, restructuring costs and bargain purchase gain) improved to US$2.9 million (2013: US$3.2 million). The overall operating loss improved to US$7.9 million (2013: US$9.0 million, after restatement for the bargain purchase price adjustment).

Internally the business continues to be managed and performance measured by reference to Operating EBITDA (pre growth costs and other non-operating items), which for 2014 was US$1.6 million (including US$1.5 million (less associated lease rentals) from the gain on disposal of assets in Hydrodec (UK) Limited) (2013: US$0.2 million). As this is not a statutory accounting measure, the table below reconciles this figure to the statutory operating loss:

**(Including US$1.5 million (less associated lease rentals) from the gain on disposal of assets in Hydrodec (UK) Limited)

Canton incident and insurance claim

On 1 December 2013 a fire at the US plant in Canton, resulted in a shutdown of production and caused significant damage to the main reactors and ancillary equipment. From the date of the incident, the Company along with its insurers and their loss adjusters went 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 submitted a claim for its total loss including business interruption. As at 31 December 2013, the Company had estimated a total impairment and write off of assets of US$7.2 million for which it created a corresponding receivable due from the insurers. Based on actual orders and sales pipelines, and taking account of stock in trade, it also assumed US$0.4 million of income receivable for the period from 1 December 2013 to 31 December 2013 post the incident under the terms of its business interruption coverage and pending settlement and final agreement of the claim. Final resolution of the insurance claim in November 2014 resulted in payments totalling US$18.75 million (gross agreed claim US$20 million net of US$1.25 million property damage and business interruption excess). Total income of US$9.7 million was recognised in 2014 (2013: US$ 7.6 million), based on the capital replacement payment and business interruption income under the claim and after asset disposal and insurance claim related expenses totalled US$8.6 million. In accordance with the finalised claim, a further US$1.5 million of business interruption income will be recognised in 2015.

Strategic Developments

Partnership with G & S Technologies Group

The Group disposed of 25% of its interest in Hydrodec of North America LLC to G&S Recycling Group LLC (G&S) 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 was estimated at US$3.3 million resulting in a small loss on disposal of US$0.3 million in 2013.The final calculation of the 2013 EBITDA resulted in an additional payment of US$1.7 million reducing this loss to US$0.2 million. Under the terms of the agreement, G&S were obliged to contribute additional capital for the two expansion trains ordered in December 2013 and during the year provided US$2.5 million in relation to this obligation with a further payment expected of US$0.7 million in 2015.

Agreement with Southern Oil

The Group entered into an agreement in November 2013 to co-locate its Australian transformer oil business at the Southern Oil Refining (SOR) lubricant oil refinery in Bomen, New South Wales (NSW), to create a single re-refining site of scale and improving Hydrodec's cost and operational efficiency as well as enhancing operational resilience. SOR will operate the combined facility under a tolling agreement. As highlighted last year, the implementation of this arrangement was linked to obtaining appropriate planning and operating permits to facilitate the move, the timing of which was outside the Group's control. All such requirements were fulfilled in the latter part of 2014 with the physical relocation of the operating equipment taking place in Q1 2015. Accordingly, the Group has provided restructuring costs of US$0.3 million related to employee termination costs. It is expected that the employment termination costs will be incurred in Q1 2015. At the same time, the Group reviewed the carrying value and value in use of the remaining production assets at the Young site following the relocation to Bomen and carried out a professional valuation assessment using a market comparison approach as the primary method to arrive at the realisable value. This exercise resulted in an impairment charge of US$0.8 million on the production assets and a revaluation surplus (principally on tanks and laboratory equipment) totalling US$0.5 million.

Development of UK lubricant oil re-refinery

During 2014, the Group signed an exclusive engineering and licence agreement with Chemical Engineering Partners (CEP), covering the engineering, planning and development for a UK lubricant oil re-refinery. In line with the agreement, 50% of the one-off licence fee together with 100% of the Basic Engineering Design (BED) fee, totalling US$1.25 million were paid to CEP on delivery of the BED package during 2014. The remaining 50% of the licence fee, totalling US$1.0 million is payable on commissioning of the UK re-refinery and as such is held as a non-current liability of the Group.

A site for the UK re-refinery has been identified with preparation for the planning application currently underway. Costs incurred but not expensed pending approval associated with the planning application together with the establishment of the UK plant amounted to US$0.4 million.

Amortisation and impairment of intangible assets

Amortisation of US$3.5 million (2013: US$2.5 million) principally relates to the annual charge relating to 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. The increase in the charge from the prior year relates to the charge for the intangible assets acquired with the OSS Group in 2013, comprising the brand name and customer contracts, both of which are being amortised over 3 years, reflecting the anticipated change in the nature of the business to the UK base oil re-refinery over that period. 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.

Foreign exchange rates

The Group has historically reported its results in US dollars, though a significant proportion of trading now takes place in sterling following the OSS Group acquisition. The main currency exposure arises on the translation of sterling earnings and costs into US dollars at the average rate as well as the translation of reserves at the closing rate. The Group does not hedge this exposure as these hedges only have a temporary effect and each operating unit is not subject to currency exchange risk as their commercial activities are for the most part executed within their own local currency. The exchange rates used for the consolidated income statement and balance sheet are set out below:

Operating cash flow and working capital

In 2014, the Group generated net cash from operating activities of US$6.0 million, compared to a US$4.9 million net cash outflow in 2013. This was as a result of the improved Operating EBITDA and reduced transaction fees, together with significant positive working capital movements arising from the payment of insurance proceeds included in receivables at the end of 2013. 

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.

Capital expenditure

Capital expenditure in 2014 totalled US$19.0 million (2013: US$1.0 million), primarily incurred in the US in relation to both the re-build and the expansion of the plant at Canton. Re-build capital expenditure in Canton has been funded entirely through the insurance proceeds received during 2014, while the expansion has been funded equally by the Group and its partner G&S, as previously highlighted. Outside of the US, the Group has 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 BED from CEP which has been funded out of current Group cash reserves.

Liquidity

The Group's sources of funding currently comprise operating cash flow and access to committed bank and asset financing facilities from a range of banks and asset leasing institutions. During 2014 the Group's US subsidiary, Hydrodec of North America LLC (HoNA) entered into a seven year term asset financing facility, while increasing its working capital line of credit to US$1.5 million to provide an efficient capital structure for the US business and provide further working capital for investment in feedstock and other opportunities. The facilities are secured by a charge over all of the assets of HoNA. The Group has sufficient cash balances and undrawn financing facilities to finance all investment and capital expenditure included in its plant for the current year with an additional margin for contingencies. The Group is committed to renewing its facilities on a regular basis.

Shares in issue

The basic and fully diluted weighted average number of shares in issue for 2014 was 744.1 million (2013: 467.8 million) following the placing and open offer in November 2013 and the issue of a further 125,000 shares in March 2014 pursuant to the receipt of an exercise notice in respect of warrants. As at 31 December 2014, 56.6 million shares were owned by a member of the Group and therefore treated as if they were treasury shares on consolidation (2013: 56.6 million). The Group is currently taking the necessary steps to allow it to cancel these shares. The Hydrodec Employee Benefit Trust held 2.6 million shares as at 31 December 2014 (2013: 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 2014.

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 income statement

For the year ended 31 December 2014

Consolidated other comprehensive income statement

For the year ended 31 December 2014

Consolidated statement of financial position

As at 31 December 2014

Consolidated cash flow statement 

For the year ended 31 December 2014

Consolidated statement of changes in equity 

For the year ended 31 December 2014

Notes to financial statements 

For the year ended 31 December 2014

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 20 March 2015. 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 2014, but is derived from the 2014 Annual Report. Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 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 2013 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 at least 12 months.

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 SUPERFINETMoil

• 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. 

The 2013 bargain purchase restatement reflects changes in the opening balance sheet in relation to the acquisition of the business and assets of OSS Group Ltd (in administration).

*** Including US$1.5 million (less associated lease rentals) from the gain on disposal of assets in Hydrodec (UK) Limited

 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. Net 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 2014 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 itself 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 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 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 2013 and 2014, 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 if they were treasury shares) and also shares held 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. The 2013 balance sheet restatement reflects changes in the opening balance sheet in relation to the acquisition of the business and assets of OSS Group Limited (in administration) and the final agreed earn out from G&S Technologies. Refer to note 9.

At 31 December 2014, 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. The 2013 balance sheet restatement reflects changes in the opening balance sheet in relation to the acquisition of the business and assets of OSS Group Limited (in administration).

Deferred income as at 31 December 2014 relates to insurance proceeds received in relation to the fire at Canton on 1 December 2013 which is being recognised over the period to March 2015, the anticipated completion date for re-instalment of the plant. The Other loan obligation of USD 3,000,000 relates to the initial draw down of the finance lease facility in the US which will convert to a seven year finance lease arrangement once the Canton plant is commissioned.

7. Non-current liabilities - borrowings

Finance leases

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

8. Share capital

Hydrodec Group plc holds 54,500,000 of its own ordinary shares which were held by VIN (Australia) Pty Ltd pursuant to the acquisition of Virotec International plc in 2008 and 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. The intention is for these shares to be cancelled in due course. 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 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.

9. Measurement Period Adjustments

On 6 September 2013, the Group acquired the principal business and assets of OSS Group Limited (in administration) (OSS) from the administrators of OSS. In line with Group accounting policies, provisional amounts were reported as at 31 December 2013. These provisional amounts were adjusted during the measurement period.

The details of the measurement period adjustments are as follows: