HYR.L Regulatory News (HYR)

10 September 2018

Hydrodec Group plc

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

Unaudited Interim Results

Hydrodec Group plc (AIM: HYR), the clean-tech industrial oil re-refining group, today announces unaudited results for the six months ended 30 June 2018.

Strategic highlights

- Strategic focus on increased feedstock supplies resulting in the US demonstrating significant performance improvements in late Q2 and post period end

- First initiative arising from Group-wide business review leads to decision to either sell Australian operating business or relocate the plant to US - considered non-core given sub-scale market and Group's focus on US; to be treated as "discontinued business"

- Concluded successful sale of historic carbon credits from 2009 to 2013 vintages during H1 - progress underway on selling remaining historic carbon credits up to June 2018

- Recent new patent validation in US extended to Europe - UK, Germany and Denmark. Further European applications being progressed

- Board's business review well developed with full outcomes currently on schedule to be announced by end of September

Trading update

- New executive management team (Lord Moynihan appointed Executive Chairman and Interim CEO and David Dinwoodie appointed Interim CFO in April 2018) complete five months in post having introduced new governance measures into Hydrodec of North America with first of regular quarterly board meetings and a strong relationship with leading feedstock suppliers and partners, G&S Technologies ("G&S")

- Historical average run rate of 45% plant utilisation in Canton during the first five months of 2018 has increased to 65% in June and 69% in July with support from G&S

- While sales volumes in H1 from continuing US business of 10.3 million litres were down on prior year (H1 2017: 13.2 million litres) driven by challenging feedstock conditions in Q1, these have been addressed and supplies continue to increase with demand for products and margins remaining strong

- Higher margin transformer oil sales as proportion of all oil sales in US improved at 64% (H1 2017: 59%)

Financial update

- Income from continuing operations broadly flat at US$6.6 million (H1 2017: US$6.7 million) following challenging Q1 - expected to materially improve in H2

- Group EBITDA from continuing operations slightly improved at loss of US$161k (H1 2017: US$204k loss). Operational EBITDA at Canton up at US$799k (H1 2017: US$660k) despite the challenging conditions in Q1. Significant improvement expected in H2 with operational EBITDA at Canton for the month of July alone at US$463k and August expected to be at a similar level

- Overall loss for the period increased to US$3.3 million (H1 2017: US$2.6 million) due to under performance from discontinued Australian operation

- Increased loan facility from Andrew Black to pay Australian creditor balances and provide ongoing working capital support

Lord Moynihan, Executive Chairman and Interim Chief Executive Officer of Hydrodec, commented:  "This is an important period for Hydrodec and the strong start to the second half of the year has reinforced our belief in the market-leading quality of our technology, plant, product and our ability to resolve the feedstock challenges of the past. The Group-wide business review continues to be the principal assignment for David Dinwoodie and myself. We have already concluded that our Australian business does not possess sufficient materiality or near term growth prospects to merit further capital deployment when we can deliver stronger returns, especially in North America where there is a significant market for us to grow the business. Our objective is to continue to work to put in place the platform on which to grow Hydrodec rapidly. The business review is on track and subject to Board approval is expected to be announced by the end of September. We are excited about what lies ahead for the Company and its shareholders."

For further information, please contact:

Hydrodec Group plc hydrodec@vigocomms.com

Lord Moynihan, Executive Chairman and Interim Chief Executive Officer

Arden Partners plc (Nominated Adviser and Broker) 0207 614 5900

Chris Hardie

Ciaran Walsh

Alex Penney

Vigo Communications (PR adviser to Hydrodec) 020 7390 0240

Patrick d'Ancona

Chris McMahon

Notes to Editors:

Hydrodec's technology is a proven, highly efficient, oil re-refining and chemical process principally 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. Used transformer oil is processed 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.

In 2016 Hydrodec received carbon credit approval from the American Carbon Registry ("ACR"), enabling its product to be sold with a carbon offset and creating an incremental revenue stream. The Group is now generating carbon offsets through the re-refining of used transformer oil, which would otherwise ordinarily be incinerated or disposed of in an unsustainable manner. This is a highly distinctive feature for the Group, confirming (as far as the Board is aware) Hydrodec as the only oil re-refining business in the world to receive carbon credits for its output. This is a significant endorsement of the Company's proprietary technology and standing as a leader in its field.

Hydrodec's main operating plant is located at Canton, Ohio, US.

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

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Executive Chairman and Interim Chief Executive Officer's Report

Recent months have been transformational for Hydrodec operationally. Our focus on creating a platform from which to maximise the value of the Company, a process in which David as CFO and I have immersed ourselves, has begun to bear fruit.

At the centre of the previously announced Group-wide business review that I updated shareholders on at the Annual General Meeting in June has been a relentless drive to identify - and then deliver - ways to address the historical drag on our business performance in recent years - namely our inability to access both sufficient working capital and feedstock to maximise the value of the core, value additive elements of our business: our IP; the carbon credits we have been awarded; and the 'closed loop sustainability offer' we can make as the first 'Green Oil Company' in the global transformer oil market.

That we have now begun to deliver through a combination of initiatives including strengthening our relationship with G&S Technologies and focusing our activities on the growing demand within the US market for sustainable product. David, as interim CFO, and I have been asked by the Board to see through the delivery of the review and, subject to Board approval, will deliver the implementation phase following which the senior management team will be reviewed in order to deliver continuity and specialist expertise.

Operational review

The US business sold 10.3 million litres of premium quality SUPERFINE transformer oil and base oil during the period, a decrease of 22% on the corresponding period in 2017, reflecting the challenging feedstock market in Q1. Current trading is much improved and sales volumes for July and August are ahead of forecast with demand for product remaining strong.

The sales mix between higher margin transformer oil and lower margin base oil produced at the Canton plant improved over the period with transformer oil sales representing 64% of sales (H1 2016: 59%).

Plant utilisation has been improving, averaging 51% (H1 2017: 61%) during the period but rising significantly to 65% in June with improvements maintained in H2 to date. These rates indicate the spare capacity, the operational gearing and the potential for further significant operational and financial improvement as the feedstock position improves further. Strategic initiatives in respect of sourcing additional feedstock are underway.

Discontinued operations - Australia

As part of the Company's Group-wide business review the Board decided that with the capacity of one train in Australia (as opposed to six in Canton, Ohio); the impact of the business on management bandwidth; the nature of the small, fragmented domestic market and the feedstock challenges experienced in recent years, shareholder equity was better invested behind the US growth plans. As a result we have initiated a formal process to sell our business in Australia to a vertically integrated participant in the market whilst simultaneously commissioning a business case to consider the relocation of the plant to the US. This decision reinforces the Board's clear priority to ensure that every investment dollar is put to secure maximum returns for the shareholders.

Carbon credits

Having received carbon credit approval from the American Carbon Registry ("ACR") in 2016, Hydrodec's products can be sold with a carbon offset creating an incremental revenue stream. This is a highly distinctive feature for the Company, confirming (as far as the Board is aware) Hydrodec as the only oil re-refining business in the world to receive carbon credits for its output. This is a significant endorsement of the Company's proprietary technology and standing as a leader in its field.

Hydrodec of North America ("HoNA") generates carbon offsets through the re-refining of used transformer oil, which would otherwise ordinarily be incinerated or disposed of in an unsustainable manner. The ACR recognised 165,000 credits for HoNA's previous production between 2009 and 2013 and the Board was pleased to announce during the period that all of these historic credits have been sold, generating US$170k of net income. Whilst these historic credits only generated nominal sums, the Company anticipates that it could generate between 50,000 to 60,000 tons of carbon offset annually going forward and the ongoing generation of such credits for future production could realise a value of between US$3 and US$5 per ton based on recent industry reports. Management are currently looking at the potential sale of the remaining historic credits up to June 2018.

Financial review

Income from continuing operations were broadly flat at US$6.6 million (H1 2017: US$6.7 million), impacted by a challenging Q1, with higher pricing offsetting lower sales volumes. Revenues are expected to materially improve in H2 as the recent improved feedstock position and plant utilisation translate into increased sales.

The improvement in sales mix between higher margin transformer oil and lower margin base oil, coupled with higher sales prices, enabled delivery of further margin enhancement with gross margin improving significantly to 16% (H1 2017: 11%).

Group EBITDA from continuing operations improved slightly to a loss of US$161k (H1 2017: US$204k loss). Operational EBITDA at Canton increased to US$799k (H1 2017: US$660k) despite the challenging conditions in Q1. Significant improvements are expected in H2 with operational EBITDA at Canton for the month of July alone at US$463k and August expected to be at a similar level.

The overall loss for the period increased to US$3.3 million (H1 2017: US$2.6 million) due to under performance from the discontinued Australian operation.

Operating cash outflow (before working capital movements) increased to US$0.9 million (H1 2017: US$0.1 million). 

The amount of working capital required by the Group's operations continues to be closely monitored and controlled, and forms a key part of management information. The Group is not yet sufficiently cash generative from its operations to meet all central costs, having taken account of the need to retain sufficient working capital in the operations. As a result, the Company announced in April 2018 that it had agreed an additional working capital facility (the "Facility") with Andrew Black, the Company's largest shareholder and a non-executive Director (the "Lender"). The Facility was initially for up to £500,000 and was extended to £1.5 million in May 2018. It bears no interest and is secured over the assets of the Company. The Company announces today that it has agreed with the Lender to extend this Facility further to up to £3 million to cover the costs of meeting Australian creditors during recent performance issues in Australia and on-going central costs during the Board's wider business review (including the potential sale or relocation of the Australian plant).

The Group's principal financing facilities are a seven year US$10 million finance lease arrangement with First Merit fully drawn and repayment under which commenced on 1 October 2015, and shareholder loans from Andrew Black of US$12.8 million as at 30 June 2018, currently repayable on 31 December 2018. The interest (where applicable) on these shareholder loans is accrued and rolled-up in order that ongoing interest payments are not a cash drain on the Company. As noted above, an extension to the most recent facility to up to £3 million bearing no interest has been made available by Mr Black post period end and the Company now has the option, at the Company's sole discretion, to extend the repayment date of all of these shareholder loans to 31 December 2019.

Net financial expense was US$0.7 million (H1 2017: US$0.5 million) and relates to the interest payable under the lease in the US and interest accruing on the shareholder loans in the UK.

Going concern

Taking into account the Group's current forecast and projections, available facilities and on-going support from Andrew Black (a non-executive Director of the Company and its largest shareholder), the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue operating for at least the next 12 months. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements.

Related party transaction

As Andrew Black is a non-executive Director and a substantial shareholder of the Company (as defined in the AIM Rules for Companies ("AIM Rules")), the agreement by Mr. Black to increase the amount available under the working capital loan facilities (as referred to above), when aggregated with previous agreements between Mr. Black and the Company in respect of the facilities in the previous 12 months, constitutes a related party transaction for the purposes of the AIM Rules.

The Directors, with the exception of Andrew Black and David Dinwoodie who were excluded from the Board's discussions to approve the proposed loan, consider that, having consulted with the Company's Nominated Adviser, Arden Partners plc, the terms of the increase in the facilities are fair and reasonable insofar as shareholders are concerned. The Company is indebted to Andrew Black for his continued support and enthusiasm for Hydrodec.

Outlook

Recent trading in the continuing US business has been very encouraging with all key metrics - feedstock, utilisation, sales volumes, pricing and margins - continuing to show significant improvement on the challenging conditions faced earlier in the year. The outlook for the rest of this year is promising as these trends continue and the Board expects H2 performance to show material improvement over H1.

As previously reported, the Board is also focused on developing a stronger balance sheet and finalising the Board's review of its various growth options, which it intends to conclude by the end of September 2018. These include opportunities for internal and organic business growth as well as strategic opportunities and partnerships if, and only if, they are seen by the Board to add shareholder value.

Lord Moynihan

Executive Chairman and Interim CEO

7 September 2018

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June 2018

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 30 June 2018

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2018

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Audited)

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

HYDRODEC GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW

For the six months ended 30 June 2018

HYDRODEC GROUP PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the six months ended 30 June 2018

1. ACCOUNTING POLICIES

Basis of preparation

This report was approved by the Directors on 7 September 2018.

The condensed consolidated interim financial statements have been prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards as adopted by the EU ('Adopted IFRSs').

The condensed consolidated interim financial statements are presented in United States dollars ('USD') as the Group's business is influenced by pricing in international commodity markets which are primarily USD based.

The Company is domiciled in the United Kingdom. The Company's shares are admitted to trading on the AIM market.

The current and comparative periods to June have been prepared using the accounting policies and practices consistent with those adopted in the annual financial statements for the year ended 31 December 2017, and with those expected to be adopted in the Group's financial statements for the year ended 31 December 2018. This is the first set of the Group's financial statements where IFRS 15 and IFRS 9 have been applied. There is no material impact on the financial statements from the adoption of these standards.

In applying these policies to the interim financial results, the Board has exercised its judgement in respect of the fair value of the Australian assets classified as held for sale.

In accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', the comparative income statement has been re-presented so that the disclosures in relation to discontinued operations relate to all operations that have been discontinued by the balance sheet date.

Comparative figures for the year ended 31 December 2017 have been extracted from the statutory financial statements for that period which carried an unqualified audit report, did not contain a statement under sections 498(2) or (3) of the Companies Act 2006 and have been delivered to the Registrar of Companies.

The financial information contained in this report does not constitute statutory financial statements as defined by section 434 of the Companies Act 2006, and should be read in conjunction with the Group's financial statements for the year ended 31 December 2017. This report has not been audited by the Group's auditors.

Taking into account the Group's current forecast and projections, available facilities and on-going support from Andrew Black (a non-executive Director of the Company and its largest shareholder), the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue operating for at least the next 12 months. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements.

The principal risks and uncertainties of the Group have not changed since the publication of the last annual financial report where a detailed explanation of such risks and uncertainties can be found.

2. SEGMENTAL INFORMATION

The Group has one main operating segment, Re-refining, which is classified as the treatment of used transformer oil and the sale of SUPERFINETM oil. Subsequent to the Board's decision to cease activities in Australia (see note 4), the operating segment arises from one geographic location, being USA. The remaining items disclosed within the Australia segment relates to the Group's royalty, patent and carbon credit assets. 

3. DIVIDENDS

The Directors do not recommend the payment of a dividend for the period.

4. DISCONTINUED OPERATIONS

By the period end, and as part of the Company's Group-wide business review, the Board had decided that with the capacity of one train in Australia (as opposed to six in Canton, Ohio); the impact of the business on management bandwidth; the nature of the small, fragmented domestic market and the feedstock challenges experienced in recent years, shareholder equity was better invested behind the US growth plans. As a result, the Board has initiated a formal process to sell the operating business in Australia to a vertically integrated participant in the market whilst simultaneously commissioning a business case to consider the relocation of the plant to the US.

Accordingly, the Australian operations have been treated as discontinued operations for the period ended 30 June 2018. A single amount is shown on the face of the condensed consolidated income statement, comprising the post-tax result of discontinued operations. The income statement for the prior periods have been restated to conform to this presentation. In the cash flow statement, the cash used by the operating activities of the Australian operation has been reported as a single line item.

The results of the discontinued operations, which have been included in the condensed consolidated income statement, were as follows:

5. LOSS PER ORDINARY SHARE

Basic loss per Ordinary Share is calculated by dividing the net loss for the period attributable to ordinary shareholders by the weighted average number of Ordinary Shares in issue during the period. The calculation of the basic and diluted loss per Ordinary Share is based on the following data:

Due to the losses incurred in the years reported there is no dilutive effect from the existing share options. or share based employment compensation plan.

6. ASSETS HELD FOR SALE

As described in note 4, by the period end the Board had resolved to dispose of the Group's interest in Hydrodec Australia Pty Limited and these operations were classified as non-current assets held for sale and presented separately in the Consolidation Statement of Financial Position.

The major classes of assets and liabilities comprising the operations classified as held for sale were as follows:

The Directors consider that the carrying amount of the net assets held for sale approximates to their fair value and no provision for impairment is required.

7. OTHER INTEREST-BEARING LOANS AND BORROWINGS

8. RELATED PARTY TRANSACTIONS

On 4 April 2018, the Company agreed an additional working capital facility of USD 0.7 million (£0.5 million) from Andrew Black, a non-executive Director and significant shareholder of the Company. The facility is secured over the assets of the Group, is non-interest bearing and is not subject to any arrangement or other fees. This facility was extended to USD 2.0 million (£1.5 million) on 31 May 2018. The principle of this additional facility was originally due for repayment on 31 December 2018, but the Company has subsequently agreed an option to extend the repayment date on all of the shareholder loans from Andrew Black to 31 December 2019.

9. SHARE CAPITAL

10. POST BALANCE SHEET EVENTS

On 7 September 2018, the Company agreed a further extension to the additional working capital facility referred to in note 8, taking the facility to USD 4 million (£3 million) on the same terms.