Final Results

RNS Number : 9110K

HydroDec Group plc

28 April 2010

 

28 April 2010

Hydrodec Group plc

("Hydrodec" or the "Company") 

 

Trading Update and 2009 Final Results

 

Hydrodec Group plc, the cleantech industrial oil recycling and refining group, (AIM:HYR) today provides a trading update and announces audited results for the year ended 31 December 2009.

 

Trading Update

 

·; Trading conditions and cash generation improving

 

·; Agreement signed with Kobelco Eco Solutions

 

The Company has made good progress since its update of 23 March. The US base oil industry generally is reporting a pick-up in demand and a move towards a more balanced supply and demand position. Conditions in the transformer oil market have also improved with prices appearing to enter into an uptrend, away from the late 2009 and early 2010 historic lows, for the first time since late 2008, and the availability of feedstock has also increased. The Company has been able to reduce its average cost of feedstock and some modest sale price rises have been achieved. The resulting improved margins of about US 7 cents per litre from their low point at the start of the year, combined with sales growth in both Young and Canton, mean that Hydrodec is currently ahead of its forecasts made at the time of that announcement and is confident that cash generation will enable it to meet the next interest payment on the convertible loan notes ("CULS") in full on 30 June 2010.

 

The Board looks forward to ongoing improvement in trading conditions through which the Company can progressively build its resources and continue to develop its portfolio of customers and suppliers in order to deliver the robust returns of which it should be capable.

 

The poor trading conditions over the past year and a quarter have held the Company in a tight cash position, constraining its ability to operate as well as the Board would have wished. The Company is therefore in discussions with several possible sources of additional funds which, if they can be obtained on the right terms, would enable it to take full advantage of the current recovery and pursue the ongoing growth and development of the business without the risk of being upset by a temporary market setback.

 

Regarding the CULS the Board has carefully reviewed the previously announced proposal of reducing the interest cash cost by offering a short window for conversion at the March placing price of 10p. The Board has concluded not to proceed with this offer as there does not appear to be sufficient interest from CULS holders to secure a significant change in the cash call, which in any event it expects to meet from existing resources and cash flow.

 

While it will be a long haul back to the gross margins of over US 70 cents per litre achieved by the Company in 2008, recent evidence of improving margins from both increasing crude oil prices generating higher selling prices and lower feedstock costs from a broadening feedstock supply base have been encouraging. Once approval is received later this year from the US Federal Environmental Protection Agency to process poly-chlorinated biphenyls ("PCB") contaminated oil, this position will be further reinforced, and 2011 should be a full year of lower feedstock costs and increased margins.

 

The Board are delighted Stephen Harker has now joined the Company as Chief Operating Officer. His extensive experience in the international lubricants business brings a much needed strengthening of the existing management team. His will be a key role in the progressive development of a diversified and more balanced commercial envelope of customers and suppliers, especially around the Canton plant but also in preparation for the second US plant as these plans are finalised.

 

The Company has this week signed an agreement with Kobelco Eco Solutions fixing the final Strategic Alliance Agreement terms, which were announced on 4 March. Good progress is being made in the identification of the first two sites, chosen for their proximity to substantial PCB contaminated material. Work on planning approvals and site planning is well on track with the proposed date of mid 2012 for the completion of the first site. The Japanese market is huge, given the very stringent pollution standards and accumulated backlog of contaminated waste oil and equipment that needs treatment and the Alliance has already started receiving approaches from other electricity companies in Japan and some potential large industrial customers. Assuming that the first two sites are successful, the Board expects at least a further two sites, also receiving PCB contaminated material, to be identified and developed in Japan. The Board would expect each Canton sized plant in Japan to generate gross revenues in excess of US$25 million per annum on top of which it expects early development of other project related work for individual PCB owning customers.

 

Beyond Japan, the Alliance covers several other Far East territories with similarly potentially attractive markets although it is too early to develop any firm plans for these wider markets.

 

2009 Final Results

 

Financial Summary

 

·; Revenues increased 49% to US$10.4m (2008: US$7.0m), following ramp-up in production and sales to major utilities and original equipment manufacturers ("OEMs")

·; Operating loss amounted to US$11.5 million (2008: US$9.4 million) reflecting weak trading conditions causing sharply reduced margins

·; Loss on ordinary activities down to US$13.6 million (2008: US$15.5 million)

·; Net assets increased to US$39.6 million (2008: US$38.2 million)

·; Raised a total c.£7.25m from share placings

 

Operational Highlights

 

·; Re-refined transformer oil sales up 206% to 11.80 million litres (2008: 3.85m litres)

·; First full year of commercial operations in the US with successful resolution of teething problems at Canton plant

·; Received exclusive regulatory approvals from Australia and Japan for processing and treatment of poly-chlorinated biphenyls ("PCB") contaminated transformer oil

·; Reached agreement on transformational strategic alliance with Kobe Steel subsidiary to open up multi-billion US dollar market in Japan and East Asia

·; Strengthened Board and management team

·; On track to receive US approval in 2010 from Environmental Protection Agency to process PCB-contaminated oil

 

 

Neil Gaskell, Chairman, commented:

 

"2009 was a challenging year for Hydrodec as we confronted a severe global recession, steep oil price declines, historically poor industry fundamentals as well as teething problems at our maiden US refining plant in Canton, Ohio. That said, we made solid progress throughout the year to improve our operational performance and position the Company for growth as market conditions improve.

Based on the steady economic recovery in the US, there are signs of increasing demand and feedstock supply, and margins are starting to improve. As a result, the Board and Management believe the Company is well positioned to take advantage of this recovery and look forward to progressive improvement in 2010 and beyond."

 

 

For further information please contact:

 

Hydrodec Group plc	020 7786 9810
Neil Gaskell, Chairman Mark McNamara, Chief Executive Mike Preen, Company Secretary
Numis Securities Limited	020 7260 1000
Nominated Adviser: Simon Blank Corporate Broker: David Poutney, Alex Ham
Corfin Communications	020 7977 0020
Neil Thapar, Harry Chathli, Alexis Gore

Chairman's Statement

 

2009 was a challenging year but the Company made significant progress against a difficult economic backdrop, ending the year with its two plants running well, major new customers in the US and improved throughput in both the US and Australia. Challenges included some of the worst trading conditions for many decades in the US, steep oil price declines at the start of the year, global recession and equipment related operational problems at Canton. The global recession reversed the previous tight supply conditions for transformer oils and the subsequent oversupply created an immediate drop in prices at the start of the year that carried through the entire year. Average gross margins fell from around US 70 cents per litre in 2008 to below US 20 cents per litre by the end of the year driven by global market conditions beyond the control of the Company. These unprecedented events resulted in the Company making a further loss in the second half of the year on lower volumes than planned.

However, based on the steady economic recovery underway in the US, there are now signs of increasing demand and feedstock supply, and during the first quarter of 2010 margins had already improved by around US 7 cents per litre from their low point at the start of 2010 and this trend has continued in April. The Board and Management believe the Company is well positioned to take advantage of this recovery and look forward to further progress in 2010.

The Board was reinforced with a number of changes during the year including the appointment of Gill Leates as a new non-executive Director. Since the period end we have also strengthened the executive management team with the appointment of Paul Manchester as Chief Financial Officer and Stephen Harker as Chief Operating Officer.

I am confident that the business will continue to grow stronger as we develop further both our existing business and our exciting plans for growth with the recently announced Japanese strategic alliance. Hydrodec's potential global market opportunity to treat PCB contaminated transformer oil is huge and likely to be driven by increasing regulatory pressure. PCBs are a highly toxic substance that were extensively used as an additive in transformer oils and are still widely present globally, either stockpiled by users or still in circulation within transformers built many years ago.

The results for the year have been reported in US dollars, compared with previous reporting in Sterling. The Board has taken the view that the presentational currency for the Group should be US dollars reflecting not only the importance of the US operations to the Group but also that the US dollar is the currency most widely used around the world in oil pricing. The comparative information has been restated to reflect US dollar values.

 

Neil Gaskell

Chairman

 

 

Chief Executive's Report

2009 was a year of substantial achievement for Hydrodec in firmly establishing itself as an innovative provider of cleantech solutions to the world's transformer oil markets. Yet these achievements were overshadowed by a tough global economic environment and poor industry fundamentals, resulting in a continued loss for the period.

 

The Group's technology is a proven oil refining and recycling process which is currently being targeted at the multi-billion US$ market for transformer oil, primarily used by the world's electricity industry. The group takes spent oil, including PCB-contaminated oil (currently only in Australia), as the primary feedstock, which is then processed at its two plants enabling 99% or greater recovery of oil for reuse while also eliminating PCBs without environmentally harmful emissions.

 

Demand for the Company's SUPERfine branded transformer oil continued to grow during the year as the environmental and economic benefits of our process and technically premium product gained wider acceptance.

 

Turnover for the year increased by 49 per cent. to US$10.4 million (2008: US$7.0 million), reflecting higher refinery output from the first full year of operations at our US plant in Canton, Ohio. Increased sales volumes were, however, offset by the lower market prices for transformer oil which fell from an average of just over US$1.25 per litre in 2008 to US 79 cents per litre in 2009. 2009 revenue benefited from c.US$1m in loss of profits insurance proceeds relating to equipment failure which caused temporary capacity reduction at the Canton plant, and which has since been addressed.

 

The strong ramp up in sales volumes was more than offset by reduced margins resulting in an overall operating loss of US$11.5 million (2008: US$9.4 million).

 

Operating review

 

The Company commenced 2009 having successfully commissioned its first US plant in Canton, Ohio and having a second US plant in Laurel, Mississippi at an advanced stage of planning. 2009 provided an extremely difficult economic and market backdrop for the Company to operate against. The first weeks of 2009 saw the global financial crisis cause a sharp drop in demand for transformer oil resulting in an immediate and sharp drop in prices and volumes. 2009 base oil refining margins in the US were in real terms at multi-decade lows across the board indicating significant general oversupply in the market which has continued into 2010.

 

We also noticed a reduction in feedstock availability in the US which also continued into 2010 and which may relate to increased diversion of used oil into the home heating oil market during the winter, combined with decreased utility maintenance rates linked to the heavy winter and tightened maintenance budgets during the recession.

 

The Company's success in converting new customers to a new product in this environment is a testament to the quality of our SUPERfine product and the competitiveness of our business model. The Company achieved increased sales to, and expanded its direct relationship with, major customers including US utilities and OEMs. We also secured new export customers in Colombia, Brazil, Peru and the Dominican Republic. Additionally, the technical approval process for the Company's product is ongoing with further new customers in the US including SUPERfine transformer oil in their approved products list. As a result Group sales volumes for the year were c.11.80 million litres, compared with 3.85 m litres in 2008, of which about 8 million litres were delivered in second half sales. The goal is progressively to widen and deepen the portfolio of customers so that earnings are both increased and diversified.

 

Following the resolution of the heater problems at Canton, both plants ended the year with reliable production and potential sales in Australia and Canton were not production constrained.

 

The Company operates complex industrial plants involving hazardous conditions, substances and materials. As a consequence we place great emphasis on our environmental performance and the safety of our employees and our broader communities. During 2009 we maintained our exemplary safety and environmental performance with a world class All Injury Frequency Rate (AIFR) of 0.644 and no reportable environmental incidents. We are very proud of our world class safety and environmental performance and strive continuously to further improve in these areas.

 

Multiple environmental approvals

 

During the year the smaller demonstration plant attached to the Young facility in New South Wales, Australia was granted an Environmental Protection Agency licence to destroy PCB contaminated material with a concentration of up to 5,000 parts per million. This licence was granted with no requirement to monitor air emissions. We believe this is the first high level PCB destruction process to be granted a licence based upon nil emissions.

 

In the US, the Group expects final approval from the Federal Environmental Protection Agency to treat PCB-contaminated transformer oil at the Canton plant to be granted in the second half of 2010, having successfully completed demonstration trials at the Canton plant.

 

Of potentially far greater significance still is the approval by the Japanese Ministry of Environment of Hydrodec's recycling process, obtained shortly after the year end. It is the only treatment approved and authorised in Japan that recovers in excess of 99% of used transformer oil while removing PCBs, a toxic substance banned under international and Japanese laws. Based on industry data the current estimated volume of PCB-contaminated transformer oil processing demanded by the technology approval granted in Japan is in excess of 1 billion litres, or US$1 billion in potential revenues.

 

Strategic alliance in Japan/Asia

 

Following two years of negotiations, in March 2010 the Company announced it had reached a strategic alliance agreement with Kobelco Eco-Solutions, a unit of the Kobe Steel Group, for an exclusive 50/50 joint venture to commercially exploit all Hydrodec technology applications and operations in a region covering Japan, South Korea, Taiwan, China, India and Vietnam. 

 

The alliance with KES combines the unique Hydrodec technology with a respected multinational engineering group with a major operational presence in Japan and the East Asia market place. The Board believes this is a transformational deal that provides the platform for accelerated growth of Hydrodec in the transformer oil and PCB treatment markets and accelerated entry into other projects and markets outside transformer oils especially in Japan.

 

The agreement provides for construction of the first plant in Japan by 2012 and Hydrodec's share of development, construction and working capital costs are to be financed by debt secured on the joint venture projects. 

 

Disposals

 

During the first half of the year the Company also disposed of its transformer oil condition monitoring business for AUD$0.8 million and the Molectra shares, which were acquired as part of the Virotec acquisition, for £0.3 million. These disposals produced cash without affecting the core business of the Group and neither had a material effect on the Group's results or financial position for the period.

 

Fundraisings

 

During the year the Company raised approximately £7.25m (gross) through the issue of, in aggregate, approximately 60 million new ordinary shares in placings carried out in February, June and December. Since the year end the Company has raised an additional £2m (gross) through the issue of approximately 20 million new ordinary shares in a placing in March 2010.

 

Board and management changes

 

The composition of the Board of the Company changed during the year with the appointment in June 2009 of Neil Gaskell as the new non-executive Chairman, John Gunn as non-executive Deputy Chairman and Gill Leates as a new non-executive director. Rodger Sargent resigned as a non-executive director with effect from July 2009 and John Dickson resigned as finance director with effect from December 2009.

 

Since the year end the Board and I have been very pleased to welcome Paul Manchester (Chief Financial Officer) and Stephen Harker (Chief Operating Officer) to the management team. Their respective strengths and experience will prove of great value to the Company.

 

Outlook

 

The US base oil industry is reporting a pick-up in demand and a move towards a more balanced supply and demand position. More specifically transformer oil appears to have entered an upward price trend, away from the late 2009 and early 2010 historic lows, for the first time since late 2008. We look forward to ongoing improvement in trading conditions through which we can progressively rebuild our resources and continue to develop our portfolio of customers and suppliers so that the Company can deliver the robust returns of which it should be capable.

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

For the year ended 31 DECEMBER 2009

	Note	2009	2008
		USD'000	USD'000
Revenue	2	10,393	7,014
Cost of sales		(6,725)	(2,778)
Gross profit		3,668	4,236
Administrative expenses:
Employee benefit expenses		(7,683)	(6,152)
Depreciation & amortisation		(3,250)	(2,330)
Other administrative expenses		(4,201)	(5,197)
Operating loss		(11,466)	(9,443)
Exceptional item - profit on sale of asset		595	-
Exceptional item - provision for investment loss	11	-	(3,608)
Interest payable	4	(2,691)	(2,994)
Interest receivable		3	577
Loss on ordinary activities before taxation		(13,559)	(15,468)
Tax on loss on ordinary activities	5	-	-
Loss for the year		(13,559)	(15,468)
Other comprehensive income
Exchange differences on translating foreign operations		3,013	(3,346)
Total comprehensive loss for the year		(10,546)	(18,814)
Loss per share - basic and diluted	6	(5.46cents)	(6.56cents)

 

All transactions arise from continuing operations.

 

 

 

 

	Note	2009	2008	2007
		USD'000	USD'000	USD'000
Non-current assets
Property, plant and equipment	7	24,543	22,948	13,502
Intangible assets	8	27,508	21,963	12,586
Other asset - prepaid royalty	9	-	3,705	-
		52,051	48,616	26,088
Current assets
Trade and other receivables	10	1,902	1,622	1,496
Current asset investment	11	-	432	-
Inventories	12	403	135	312
Cash and cash equivalents		384	352	24,258
		2,689	2,541	26,066
Current liabilities
Borrowings - bank overdraft		(123)	(249)	-
Trade and other payables	13	(3,645)	(3,176)	(2,388)
		(3,768)	(3,425)	(2,388)
Net current (liabilities)/assets		(1,079)	(884)	23,678
Non-current liabilities
Employee Provisions		(28)	-	-
Borrowings	14	(7,973)	(6,545)	(8,102)
Deferred taxation	15	(3,338)	(3,012)	-
		(11,339)	(9,557)	(8,102)
		39,633	38,175	41,664
Capital and reserves
Called up share capital	16	2,734	2,014	1,938
Share premium account		54,223	38,500	38,058
Equity reserve		14,232	13,645	19,148
Merger reserve		47,718	43,058	-
Treasury reserve		(43,083)	(38,873)	-
Employee benefit trust		(1,298)	(1,170)	(568)
Share options reserve		5,513	4,210	4,954
Profit and loss account		(44,812)	(31,545)	(22,174)
Foreign exchange reserve		4,406	8,336	308
Total equity		39,633	38,175	41,664

 

The financial statements were approved by the Board of Directors on 27 April 2010 and were signed on its behalf by:

 

 

Neil Gaskell

Non-executive Chairman

 

 

John Gunn

Non executive Deputy Chairman

 

The accompanying accounting policies and notes form an integral part of these financial statements.

 

		2009	2008
		USD'000	USD'000
Cashflows from/(used in) operating activities
Loss before tax		(13,559)	(15,468)
Net finance costs		2,688	2,417
Exceptional item - Provision for loss on disposal		-	3,608
Amortisation		1,954	1,678
Depreciation		1,296	652
(Gain)/Loss on disposal of fixed assets		(595)	33
Share based payment expense		828	788
Foreign exchange movement		(1,541)	2,027
(Increase)/decrease in inventories		(268)	117
(Increase)/decrease in amounts receivable		(269)	(535)
Increase in amounts payable		697	318
Net cash outflow from operating activities		(8,769)	(4,365)
Cashflows from/(used in) investing activities
Purchase of property plant and equipment		(1,403)	(12,828)
Purchase of subsidiary undertaking		-	(9,709)
Proceeds from disposal of property plant and equipment		865	-
Proceeds from sale of investment		432	-
Royalty prepayment		-	(4,967)
Bank interest and other income received		3	577
Net cash outflow from investing activities		(103)	(26,927)
Cashflows from financing activities
Issue of new shares		11,337	10,859
Costs of share issue		(517)	(297)
Purchase of share capital		-	(842)
Interest paid		(1,737)	(2,237)
Repayment of lease liabilities		(53)	(361)
Net cash inflow from financing		9,030	7,122
Increase / (decrease) in cash and cash equivalents		158	(24,170)
Movement in net cash
Cash		352	24,258
Bank overdraft		(249)	-
Opening cash and cash equivalents		103	24,258
Cash acquired with acquisition		-	15
Increase/(decrease) in cash and cash equivalents		158	(24,170)
Closing cash and cash equivalents		261	103

 

 The accompanying accounting policies and notes form an integral part of these financial statements.

 

	Share capital	Share premium	Equity reserve	Merger reserve	Treasury reserve	Employee benefit trust	Foreign exchange reserve	Share option reserve	Profit and loss account	Total
	USD	USD	USD	USD	USD	USD	USD	USD	USD	USD
	'000	'000	'000	'000	'000	'000	'000	'000	'000	'000
At 31December 2007	1,938	38,058	19,148	-	-	(568)	-	4,954	(22,174)	41,356
Prior year adjustment	-	-	-	-	-	-	308	-	-	308
At 1 January 2008	1,938	38,058	19,148	-	-	(568)	308	4,954	(22,174)	41,664
Change in exchange rates	(533)	(10,466)	(5,266)	-	-	156	16,109	-	-	-
Share-based payment	-	-	-	-	-	-	-	618	-	618
Issue of shares	148	10,859	-	-	(941)	84	-	-	-	10,150
Acquisition	452	-	-	43,058	-	-	-	-	-	43,510
Issue costs	-	(297)	-	-	-	-	-	-	-	(297)
Purchase of shares	-	-	-	-	-	(842)	-	-	-	(842)
Acquisition	-	-	-	-	(37,932)	-	-	-	-	(37,932)
Conversion of loan stock	9	346	(237)	-	-	-	-	-	-	118
Transactions with owners	76	442	(5,503)	43,058	(38,873)	(602)	16,109	618	-	15,325
Change in exchange rates	-	-	-	-	-	-	(8,081)	(1,362)	6,097	(3,346)
Loss for the year	-	-	-	-	-	-	-	-	(15,468)	(15,468)
Total Comprehensive Income	-	-	-	-	-	-	(8,081)	(1,362)	(9,371)	(18,814)
At 31 December 2008	2,014	38,500	13,645	43,058	(38,873)	(1,170)	8,336	4,210	(31,545)	38,175
Change in exchange rates	218	4,176	1,479	4,660	(4,210)	(128)	(6,195)	-	-	-
Share-based payment	-	-	-	-	-	-	-	847	-	847
Issue of shares	468	10,869	-	-	-	-	-	-	-	11,337
Issue costs	-	(517)	-	-	-	-	-	-	-	(517)
Conversion of loan stock	34	1,195	(892)	-	-	-	-	-	-	337
Transactions with owners	720	15,723	587	4,660	(4,210)	(128)	(6,195)	847	-	12,004
Change in exchange rates	-	-	-	-	-	-	2,265	456	292	3,013
Loss for the year	-	-	-	-	-	-	-	-	(13,559)	(13,559)
Total Comprehensive Income	-	-	-	-	-	-	2,265	456	(13,267)	(10,546)
At 31 December 2009	2,734	54,223	14,232	47,718	(43,083)	(1,298)	4,406	5,513	(44,812)	39,633

The group's principal activity is the commercialisation of the Hydrodec technology which is a patented technology for the re-refining of used transformer oil into new SUPERfineTM transformer oil. Hydrodec Group plc is the group's ultimate parent company. It is incorporated and domiciled in England & Wales and situated at 120 Moorgate, London. The group's shares are listed on the Alternative Investment Market of the London Stock Exchange.

 

Basis of preparation

The Group's consolidated financial statements are prepared in accordance with the principal accounting policies adopted by the Group as set out below and International Financial Reporting Standards ("IFRS") and International Financial Reporting Interpretations ("IFRIC") as adopted for use in the European Union (EU), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

 

The financial information set out in this announcement does not constitute the Group's statutory accounts, as defined in Section 435 of the Companies Act 2006, for the years ended December 31 2009, December 31 2008 or December 31 2007, but is derived from the 2009 Annual Report. Statutory accounts for 2008 and 2007 have been delivered to the Registrar of Companies and those for 2009 will be delivered in due course. The auditors have reported on those accounts; their reports were unqualified, however they included a reference to an emphasis of matter in 2009 with regard to going concern, and the reports did not contain statements under section 498(2) or 498(3) of the Companies Act 2006.

 

In the current year, the group has adopted IAS 1 (revised) 'Presentation of Financial Statements', IFRS 7 'Financial Instruments: Disclosures' and IFRS 8 'Operating segments'. IAS 1 (revised) brings new disclosure requirements regarding owner and non-owner changes in equity which are now required to be shown separately. These financial statements have been prepared under the revised disclosure requirements which requires the presentation of a comparative balance sheet at the start of the comparative period. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the group that are regularly reviewed by the board. IFRS 7 requires enhanced disclosures about fair value measurement and liquidity risk.

 

The forthcoming standards may affect the preparation of the Group's financial statements in the future:

IFRIC 16: Hedges;

IFRS 3 (Revised): Business combinations; and

 

.

 

IFRS standards and interpretations not yet adopted

The IASB and IFRIC have issued the following standards and interpretations which are effective for periods starting after the date of these financial statements and are yet to be adopted by the group:

 

·; IFRS 9 Financial Instruments (effective 1 January 2013)

·; Prepayments of a Minimum Funding Requirement - Amendments to IFRIC 14 (effective 1 January 2011)

·; IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective 1 July 2010)

·; Improvements to IFRSs (Issued 16 April 2009)

·; Group Cash-settled Share-based Payment Transactions - Amendment to IFRS 2 (effective 1 January 2010)

·; Amendment to IFRS 1 Additional Exemptions for First-time Adopters (effective 1 January 2010)

·; IAS 24 (Revised 2009) Related Party Disclosures (effective 1 January 2011)

 

The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the consolidated financial statements.

 

Presentational currency

In the current year the Group has changed its presentational currency from Pound Sterling to US dollars. The change in presentational currency represents a change in accounting policy and in accordance with IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors', has been accounted for as a prior year adjustment. This has resulted in a cumulative amount of USD$0.2m being charged to the translation reserve at 31 December 2007, and a further USD$8.1m being charged in the year to 31 December 2008. This amount represents the translation difference arising from re-presenting the comparative figures through to 31 December 2008 in a different presentational currency (USD) from the historic functional currency of GBP. US dollars has been selected as the presentational currency as the group's business is influenced by pricing in international commodity markets which is primarily dollar based.

 

The principal foreign exchange rates used in the preparation of these financial statements were:

 

In US dollars:	2009	2009	2008	2008	2007
	Year end	Average	Year end	Average	Year end
British pounds	0.62	0.64	0.69	0.54	0.50
Australian dollars	1.12	1.26	1.45	1.17	1.13

 

The group's reserves are translated using year end rates.

 

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.

 

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.

 

Currently, the group is dependent upon its two plants to produce sufficient SUPERfine oil at satisfactory margins to generate sufficient cash to meet the group's forecast requirements. Margins are affected by, amongst other things, the world price for oil and demand for transformer oil which are beyond the directors' control and about which there is material uncertainty. The plants are also reliant on satisfactory production rates which are dependent on the availability of sufficient feedstock, and at the appropriate cost. Sensitivity to change on both criteria have been assessed by the board.

 

The Directors are satisfied that at projected production, sales and margin rates the Group's operating cash flow requirements will be met.

 

The directors believe that it is appropriate to prepare the financial statements on a going concern basis as they believe that the operating parameters outlined above will be met or exceeded.

 

Basis of consolidation

The group financial statements consolidate those of the company and its subsidiary undertakings drawn up to 31 December 2009. Subsidiaries are entities over which the group has the power to control the financial and operating policies so as to obtain benefits from its activities.

 

Business combinations are dealt with by the purchase method. The purchase method involves the recognition at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary at the acquisition date whether or not they were recognised in the statements of the subsidiary prior to acquisition. On initial recognition the assets and liabilities of the subsidiary are included in the consolidated statement of financial position at their fair values which are also used as the bases for subsequent measurement in accordance with the group accounting policies. The results of any subsidiary undertakings acquired during the period, where applicable are included from the date of acquisition. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

 

Goodwill

Goodwill on consolidation, representing the excess of the fair value of the consideration paid over the fair value of the identifiable net assets of subsidiary undertakings at the date of acquisition. Goodwill is initially recognised as an asset at its fair value and is subsequently measured at cost less any accumulated impairment losses. 

 

Goodwill is not amortised but is subject to an impairment review on an annual basis or more frequently when events or changes in circumstances indicate it might be impaired. Any impairment is charged to the statement of comprehensive income in the period in which it arises.

 

Foreign currency translation

The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are firstly expressed in sterling, which is the functional currency of the company. The presentational currency for the consolidated financial statements is US dollars.

 

Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the statement of comprehensive income with the exception of differences on translation of the net investment in a foreign group entity. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in the statement of comprehensive income. Tax charges and credit attributable to exchange differences on those borrowings are also dealt with in equity.

 

The assets and liabilities of overseas subsidiaries are translated at the rate of exchange ruling at the balance sheet date. The income statements of overseas subsidiaries are translated at weighted average exchange rates for the year. The exchange differences arising on the retranslation are taken directly to equity. On disposal of a foreign entity, accumulated exchange differences are recognised in the statement of comprehensive income as a component of the gain or loss on disposal.

 

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign operations and translated at the closing rate.

 

Revenue recognition

Revenues are recognised at fair value of the consideration receivable net of the amount of value added taxes.

 

Sale of goods

Sales revenue comprises revenue earned (net of returns, discounts and allowances) from the provision of products to entities outside the consolidated entity. Sales revenue is recognised when the risks and rewards of ownership of the goods passes to the customer, which is normally upon delivery, and when the amount of revenue can be measured reliably.

 

Rendering of services

Revenue from rendering services is recognised in the period in which the service is provided.

 

Interest income

Interest income is brought to account as it accrues, using the effective interest method.

 

Other income

Other income is brought to account when the consolidated entity's right to receive income is established and the amount can be reliably measured.

 

 

Property plant and equipment

Property, plant and equipment is measured at cost less accumulated depreciation.

 

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, and any other costs directly attributable to bringing the asset to a working condition for its intended use.

 

When parts of an item of property plant and equipment have different useful lives, they are accounted for as separate items (major components) of property plant and equipment.

 

The cost of replacing part of an item of property plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The cost of the day-to-day servicing of property, plant and equipment are recognised as an expense as incurred.

 

Depreciation is provided at rates calculated to write off the cost of property, plant and equipment, less their estimated residual value, over the expected useful lives on a straight line basis. The rates used vary between 5% and 20% per annum and residual values are re-assessed annually.

 

Patents

All costs incurred in establishing and or maintaining patents are expensed in the period in which they are incurred.

 

Research and development costs

Expenditure on research is recognised as an expense in the period in which it is incurred.

 

Development costs incurred on specific projects are capitalised when all the following conditions are satisfied:

 

·; completion of the intangible asset is technically feasible so that it will be available for use or sale

·; the group intends to complete the intangible asset and use or sell it

·; the group has the ability to use or sell the intangible asset

·; the intangible asset will generate probable future economic benefits. Among other things, this requires that there is a market for the output from the intangible asset or for the intangible asset itself, or, if it is to be used internally, the asset will be used in generating such benefits

·; there are adequate technical, financial and other resources to complete the development and to use or sell the intangible asset, and

·; the expenditure attributable to the intangible asset during its development can be measured reliably

 

Costs incurred which do not meet the above criteria are expensed as incurred.

 

Intangible assets

Intangible assets acquired separately from a business are capitalised at cost. Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill if the fair value can be measured reliably on initial recognition. Intangible assets, excluding development costs, created within the business are not capitalised and expenditure is charged against profits in the year in which it is incurred.

 

The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

 

Intangible assets, other than goodwill, are amortised over their estimated useful economic life.

 

Impairment of tangible and intangible assets excluding goodwill

At each balance date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant assets are carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

 

Government grants

The Australian Government provides an incentive for product stewardship of used oil which is recognised on the same basis as revenue.

 

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and demand deposits that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

 

Financial liabilities and equity

Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.

 

The fair value of the liability portion of a convertible bond is determined using a market interest rate for an equivalent non-convertible bond. The amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the bond. The remainder of the proceeds is allocated to the conversion option, which is recognised and included in shareholders equity.

 

Exceptional items

Exceptional items are those designated as material to the financial statements which are not expected to recur on a regular basis.

 

Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at cost fair value of the consideration received net of issue costs associated with the borrowing.

 

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.

 

All interest costs are charged to the income statement.

 

Share based payments

The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of the shares that will eventually vest and adjusted for the effect of non market-based vesting conditions.

 

Inventories

Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of selling expenses.

 

The cost of inventories is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing locations and condition.

 

Trade and other receivables

Trade receivables, which generally have 30-90 day terms, are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method less provisions for impairment. Provision against trade receivables is made when there is objective evidence that the group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the asset's carrying amount and the present value of estimated future cash flows.

 

Leasing

Leased assets

Leases under which the consolidated entity assumes substantially all the risks and benefits of ownership are classified as finance leases. Other leases are classified as operating leases.

 

Finance leases

A lease asset and a lease liability equal to the lower of the present value of the minimum lease payments and fair value are recorded at the inception of the lease.

 

The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to the income statement over the period of the lease.

 

Operating leases

Payments made under operating leases are expensed on a straight line basis over the period of the lease.

 

Taxation

Current tax is the tax currently payable based on taxable profit for the year.

 

Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries and joint ventures is not provided if reversal of these temporary differences can be controlled by the group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the group are assessed for recognition as deferred tax assets.

 

Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.

 

Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to equity (such as the revaluation of land) in which case the related deferred tax is also charged or credited directly to equity.

 

Employee benefit trust

The assets and liabilities of the Employee Benefit Trust (EBT) have been included in the group accounts. Any assets held by the EBT cease to be recognised on the group balance sheet when the assets vest unconditionally in identified beneficiaries.

 

The costs of purchasing own shares held by the EBT are shown as a deduction against equity. The proceeds from the sale of own shares held increase equity. Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the group income statement.

 

Key judgements in applying the entity's accounting policies

In the process of applying the entity's accounting policies, which are described in this note, management has not been required to make any judgements that have a significant effect on the amounts recognised in the financial statements (apart from those involving estimations, which are dealt with below).

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

 

Amortisation of intangible assets and goodwill

The intangible assets carried forward relate to the intellectual property and goodwill acquired by the group in 2004, and through the acquisition of Virotec International plc and reclassification of a royalty prepaid in 2008. The original cost of £19.5 million will be amortised over the estimated useful life of the asset. The intellectual property consists of know how and trade secrets relating to the technology, some of which is covered in a patent. It is management's view that the useful life of the intellectual property will extend far beyond the life of the patent (approximately 10 years) and for the purposes of calculating the period over which the costs will be amortised it has been estimated that the cost will be amortised over 15 years (note 8).

 

Convertible loan notes

The fair value of the loan notes is lower than the net proceeds. Management have applied their judgment in estimating the fair value of the loan element and in posting the corresponding credit to equity on the basis that the debt holder has an equity interest in the company (note 14).

 

Impairment of goodwill and other intangibles

There are a number of assumptions management have considered in performing impairment reviews of goodwill and intangible assets. In determining whether goodwill and intangible assets are impaired, an estimation of value in use of cash generating units to which goodwill and other intangible assets are allocated. The value in use calculation requires the directors to estimate the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate present value (note 8).

 

Useful lives of property, plant and equipment

Property, plant and equipment is depreciated over its useful life. The useful life is based on the management's estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations in the carrying value and amounts charged to the income statement in specific periods (note 7).

 

 

 

2 Revenue and operating loss

Revenue and assets for both years are wholly attributable to the Group's sole activity of the treatment of used transformer oil and the sale of SUPERfine oil, which are deemed to be continuing activities. Revenue includes loss of profits insurance proceeds totalling USD1,022,000 for heater failures which caused a temporary shutdown of the Canton refinery.

 

 

Geographic analysis

 

	USA	Australia	Unallocated	Total
Year ended 31 December 2009	USD'000	USD'000	USD'000	USD'000
Revenue	6,408	3,985	-	10,393
Non-current assets	16,494	15,422	20,135	52,051

 

	USA	Australia	Unallocated	Total
Year ended 31 December 2008	USD'000	USD'000	USD'000	USD'000
Revenue	398	6,616	-	7,014
Non-current assets	16,462	12,934	19,220	48,616

 

All revenue comprises amounts earned on amounts receivable from customers. During the year two customers in the USA each accounted for more than 10% of the Group's total revenue. Revenue recognised during the year and the amounts outstanding at the year end in respect of those customers were as follows:

 

	2009	2009	2008	2008
	Turnover	Outstanding at year end	Turnover	Outstanding at year end
	USD'000	USD'000	USD'000	USD'000
Customer 1	2,807	545	-	-
Customer 2	1,488	121	-	-

 

The loss on ordinary activities before taxation is stated after charging the following expenses:

 

	2009	2008
	USD'000	USD'000
Cost of goods sold	6,725	2,778
Depreciation	1,296	652
Amortisation	1,954	1,678
Share based payments	828	789
Exchange losses	20	174
Operating lease rentals - land & buildings	96	45
Fees payable to the company's auditor for the audit of the annual accounts	133	130
Fees payable to the company's auditor and its associates for other services:
- the audit of the company's subsidiaries	28	56
- tax & other services	56	28

Revenue and operating loss (continued)

 

	2009	2008
	USD'000	USD'000
Capital expenditure
- property, plant and equipment	1,403	12,180
- intangible assets	-	13,975

 

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

 

3 Directors and employees

The average number of persons (including directors) employed by the group during the year was:

 

	2009	2008
	Number	Number
Operations	69	62
Corporate office	7	6
	76	68

 

The aggregate cost of these employees was:

	2009	2008
	USD'000	USD'000
Wages and salaries	4,727	3,169
Payroll taxes	346	204
Share based payments	828	788
	5,901	4,161

 

Directors emoluments paid during the period were:

 

	2009	2008
	USD'000	USD'000
Emoluments	896	860

 

The highest paid director received emoluments totalling USD222,000 (2008: USD246,000). Pension contributions for directors totalled USD19,000 (2008: USD24,000).

 

Remuneration in respect of key management personnel was as follows:

 

	2009	2008
	USD'000	USD'000
Emoluments	219	170
Share-based payments	196	231
	415	401

 

 

 

4 Interest payable

	2009	2008
	USD'000	USD'000
Bank overdrafts & leases	107	87
Convertible loan stock	2,584	2,907
	2,691	2,994

 

 

5 Tax

	2009	2008
	USD'000	USD'000
Current and total tax	-	-
Loss on ordinary activities before taxation	(13,559)	(15,468)
Rate of corporation tax in the United Kingdom of 28% (2008: 28.5%)	(3,796)	(4,408)
Effects of:
Expenses not deductible for tax purposes	1,058	1,672
Tax losses not recognised	2,738	2,736
	-	-

 

A deferred tax asset of approximately USD7,105,000 (2008: USD3,885,000) in respect of losses against future taxable profits is not recognised due to the uncertainty of future taxable profits.

 

 

6 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:

 

	2009	2008
	Number of Shares	Number of Shares
	248,398,044	201,866,635

 

In 2008 and 2009, the share options were anti-dilutive and consequently no diluted earnings per share figure is included. The calculation of the weighted average number of shares excluded 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 and also shares held by the Employee Benefit Trust.

 

 

7 Property, plant and equipment

				Plant and equipment
				USD'000
Cost
At 1 January 2007				7,693
Change in exchange rates				286
Additions				6,275
At 31 December 2007				14,254
Change in exchange rates				(1,780)
Additions				12,180
Disposals				(65)
At 31 December 2008				24,589
Change in exchange rates				2,568
Additions				1,403
Disposals				(345)
At 31 December 2009				28,215
Accumulated depreciation
At 1 January 2007				165
Change in exchange rates				3
Depreciation charge for the year				584
At 31 December 2007				752
Change in exchange rates				402
Depreciation charge for the year				526
Disposals				(39)
At 31 December 2008				1,641
Change in exchange rates				752
Depreciation charge for the year				1,354
Disposals				(75)
At 31 December 2009				3,672
Carrying amount
At 31 December 2009				24,543
At 31 December 2008				22,948

 

Plant and equipment is depreciated at various rates depending on the estimated life of the item of plant. The rates of depreciation vary between 5% and 20% per annum. Depreciation was charged on additions comprising of plant and machinery in the United States of America for the first time in 2008.

 

The carrying amount of the group's plant and equipment includes USD1,019,000 (2008: USD899,000) in respect of assets held under finance leases.

 

 

8 Intangible assets

	Royalty	Hydrodec Technology	Goodwill	Total
	USD'000	USD'000	USD'000	USD'000
Cost
At 1 January 2007	-	15,417	3,926	19,343
Exchange translation	-	315	80	395
At 31 December 2007	-	15,732	4,006	19,738
Exchange translation	-	(4,326)	(1,102)	(5,428)
Additions	-	10,963	3,012	13,975
At 31 December 2008	-	22,369	5,916	28,285
Exchange translation	-	2,423	641	3,064
Transfer from other non-current assets	5,023	-	-	5,023
Additions	-	-	422	422
At 31 December 2009	5,023	24,792	6,979	36,794
Accumulated amortisation and impairment
At 1 January 2007	-	2,056	3,926	5,982
Exchange translation	-	42	80	122
Provided in year	-	1,048	-	1,048
At 31 December 2007	-	3,146	4,006	7,152
Exchange translation	-	(865)	(1,102)	(1,967)
Provided in year	-	1,137	-	1,137
At 31 December 2008	-	3,418	2,904	6,322
Exchange translation	-	370	315	685
Transfer from other non-current assets	626	-	-	626
Provided in the year	-	1,653	-	1,653
At 31 December 2009	626	5,441	3,219	9,286
Carrying amount
At 31 December 2009	4,397	19,351	3,760	27,508
At 31 December 2008	-	18,951	3,012	21,963

 

The pre-paid royalty was recorded at cost in 2008 and amortised over its anticipated useful life, as determined by the volume of SUPERfine oil produced by the group on which the royalty was payable. On 29 October 2009 the patents which were the subject of the pre-paid royalty were assigned to the Group for a nominal sum and transferred to intangible assets when a formal agreement was signed by Hydrodec Development Corporation Pty Ltd .

 

The Hydrodec Technology is being amortised over its anticipated useful life of 15 years. The intangible asset carried forward relates to intellectual property acquired by the group in 2004. The intellectual property consists of know how and trade secrets relating to the Technology, some of which is covered in a patent. It is management's view that the useful life of the intellectual property will extend far beyond the life of the patent (approximately 10 years) and for the purposes of calculating the period over which the costs will be amortised it has been estimated that the minimum useful life of the Technology is 15 years. At 31 December 2009, the unamortised life of the asset was 11 years.

 

Intangible assets (continued)

Goodwill of USD2,904,000 arose on the acquisition of Oil Treatment Services Pty Ltd in 2005, which has been fully provided for and the balance relates to the acquisition of Virotec International plc.

 

Impairment tests for intangibles

 

The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the cash generating unit ("CGU") are determined from value in use calculations.

 

Cash flow projections are derived from financial plans approved by the board and cover a four year period. They reflect management's expectations of revenue growth, operating cost and margin for the CGU based on past experience. After the four year forecast period, no further growth in revenue and profit has been assumed based on a prudent view of long term growth rates. A pre-tax discount rate of 14.5% has been applied to cash flow projections reflecting management's assessment of the risk profiles for CGU.

 

The forecasts are most sensitive to changes considered possible by management in projected revenue growth rates in the first three years of the forecast period. Total future forecast revenue would have to be 29% lower than currently projected before a possible impairment charge would be indicated.

 

 

9 Other non-current assets

				Pre-paid  Royalty
				US'000
Cost
At 1 January 2008				-
Addition				3,894
At 31 December 2008				3,894
Exchange translation				1,129
Transfer to intangible assets				(5,023)
At 31 December 2009				-
Accumulated depreciation
At 1 January 2008				-
Expensed during the year				189
At 31 December 2008				189
Exchange translation				55
Expensed during the year				382
Transfer to intangible assets				(626)
At 31 December 2009				-
Carrying amount
At 31 December 2009				-
At 31 December 2008				3,705

 

 

 

10 Trade and other receivables

	2009	2008	2007
	USD'000	USD'000	USD'000
Trade receivables	1,319	826	998
Other receivables	127	255	220
Other taxation and social security	430	364	40
Prepayments and accrued income	26	177	238
	1,902	1,622	1,496

 

All trade receivable amounts are short term. All of the group's trade and other receivables have been reviewed for indicators of impairment and no impairment indicators have been identified. The carrying value is considered a fair approximation of their fair value. No material amounts are past due date.

 

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

 

	2009	2008	2007
	USD'000	USD'000	USD'000
Sterling	442	362	123
Australian dollars	570	851	1,373
United States dollars	890	409	-
	1,902	1,622	1,496

 

 

11 Current asset investment

	2009	2008	2007
	USD'000	USD'000	USD'000
Investment	-	432	-

 

The investment in Molectra Group Limited was sold at its carrying amount on 5 February 2009.

 

 

12 Inventory

	2009	2008	2007
	USD'000	USD'000	USD'000
Raw materials	92	31	8
Finished goods at cost	311	104	304
	403	135	312

 

 

13 Trade and other payables

	2009	2008	2007
	USD'000	USD'000	USD'000
Trade payables	870	1,536	1,580
Finance lease obligations	7	215	255
Other taxation and social security	726	517	77
Accruals and deferred income	2,042	908	476
	3,645	3,176	2,388

 

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

 

 

14 Non-current liabilities - borrowings

	2009	2008	2007
	USD'000	USD'000	USD'000
Convertible loan stock	7,139	5,866	7,436
Finance lease liabilities due within five years	834	679	666
	7,973	6,545	8,102

 

In November 2007, the company issued a £13.8m convertible loan note which is convertible at the loan note holders option into ordinary share capital of the company, at a fixed price of 17.65p (2008: 19p) per share, at any time between April 2008 and November 2012. Under the terms of the issue, the conversion price is revised for subsequent issues of share capital at discounts in excess of 10 per cent. to the prevailing 5 day share price average. Those elements not converted into shares by this date are repayable between 1 November 2012 and 31 October 2014. Interest is charged at a fixed rate of 8% per annum on the value of the unconverted loan.

	2009	2008	2007
	USD'000	USD'000	USD'000
Face value of convertible bond issued	20,553	19,655	27,600
Issue costs	(672)	(609)	(838)
Equity component	(14,232)	(13,645)	(19,148)
Liability component	5,649	5,401	7,614
Interest expense	5,195	2,279	470
Interest payable	(3,577)	(1,701)	(330)
Liability component at 31 December	7,267	5,979	7,754
Unamortised issue costs	(128)	(113)	(318)
Net liability component at 31 December	7,139	5,866	7,436

 

Management recognise that the 8% interest rate is below market rate for this type of financial instrument and the fair value of the liability component was calculated using estimated interest rates for an equivalent non-convertible bond. The internal rate of return for the convertible bond has been assessed using comparable internal rates of return by the group for other income streams. The residual amount representing the equity conversion option, is included in shareholders equity in other reserves.

 

Non current liabilities - borrowings (continued)

During the year, loan notes with a value of US$1,229,000 (2008: US$355,000) were converted into share capital of the company.

 

15 Deferred taxation

				USD'000
Intangible assets on acquisition
At 1 January 2007 and 31 December 2007				-
Addition				3,012
Transfer to/(from) income statement				-
At 31 December 2008				3,012
Exchange translation				326
Transfer to/(from) income statement				-
At 31 December 2009				3,338

 

16 Share capital

	2009	2008	2007
	£'000	£'000	£'000
Authorised
800,000,000 ordinary shares of 0.5p each	4,000	4,000	4,000
	Number of  Shares	Number of  Shares	Number of  Shares
Issued and fully paid - ordinary shares of 0.5 pence each
At the beginning of the year	277,824,101	193,845,400	184,645,400
Issued on acquisition	-	62,515,894	-
Treasury stock issued	-	2,173,335	-
Conversion of loan note	4,183,314	1,289,472	-
Issued for cash	58,181,457	18,000,000	9,200,000
	340,188,872	277,824,101	193,845,400
	2009	2008	2007
	USD'000	USD'000	USD'000
At the beginning of the year	2,014	1,938	1,809
Exchange translation	218	(533)	37
Issued on acquisition	-	452	-
Conversion of loan note	34	9	-
Issued for cash	468	148	92
At the end of the year	2,734	2,014	1,938

 

The company issued the following 0.5 pence ordinary shares during the period:

Date of issue	Number of shares	Issue price	Total cash consideration
		pence	USD'000
26 February 2009	19,230,114	10p	3,090
12 June 2009	1,973,684	19p	-
30 June 2009	22,857,143	14p	4,853
20 October 2009	2,209,630	17.65p	-
21 December 2009	16,094,200	12p	3,103

Share capital (continued)

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

 

 

17 Reserves

The share premium account represents the excess over the nominal value for shares allotted.

 

The equity reserve represents the equity element of the convertible bond.

 

The treasury reserves are shares held by a subsidiary undertaking in the parent company that were acquired as part of the acquisition of Virotec International plc.

 

The Employee Benefit Trust represents the value of shares held on trust for the benefit of employees.

 

The foreign exchange reserve records differences arising from the translation of the net investment in subsidiaries.

 

The share option reserve represents accumulated charges made under IFRS 2 in respect of share based payments.

 

The merger reserve arose from the acquisition of Virotec International plc in 2008.

 

 

18 Share based payments

Equity-settled share option scheme

 

The Company has a share option scheme for selected employees and directors of the Group. Options are generally exercisable at a price equal to the quoted market price of the Company's shares on the date of grant. The vesting period for each grant is variable and typically between 1 and 5 years. A total of 4,000,000 options issued previously to previous directors of the Company lapsed during the year. No options were exercised in the year and 16,760,000 options were exercisable at prices between 11.5p and 33.25p at 31 December 2009 at a weighted average exercise price of 18.65p per share.

 

	2009		2008
	Number	Weighted  average  exercise  price	Number	Weighted  average  exercise  price
At the beginning of the year	24,700,000	20.4p	21,700,000	18.1p
Issued in the year	3,200,000	14.6p	3,500,000	33.3p
Lapsed during the year	(4,000,000)	18.9p	-	-
Exercised during the year	-	-	(500,000)	11.3p
At the end of the year	23,900,000	19.7p	24,700,000	20.4p

 

Share based payments (continued)

Fair value is determined by reference to the fair value of the instrument granted to the employee. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations. These fair values were calculated using a Black-Scholes option pricing model as follows:

 

	2009	2008
Weighted average share price	21.84p	21.0p
Weighted average exercise price	19.72p	20.4p
Expected volatility	83%	97%
Expected life	6.55yrs	8.0yrs
Risk free rate	5.0%	5.2%
Expected dividend yield	0.0%	0.6%

 

Expected volatility was assessed based on the volatility of the company's shares since incorporation. The share options outstanding at the end of the year have exercise prices of between 11.5p and 33.25p per share. In the directors' experience, the expected life of an employee share option is 10 years from the date of grant.

 

 

19 Financial instrument

Financial risk

The group's financial instruments comprise cash, liquid resources and a convertible loan, and various items, such as trade receivables and trade payables that arise directly from its operations. No trading in financial instruments is undertaken.

 

The main risks arising from the group's financial instruments are interest rate, currency and liquidity. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged during the year.

 

Liquidity risk

The group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably.

 

Interest rate risk

The group finances its operations through equity group funds which are invested in deposit accounts with the objective of maintaining a balance between accessibility of funds and competitive rates of return. The weighted average interest rate received on deposited funds was 0.0% during the year.

 

The convertible loan stock carries a fixed interest rate of 8% per annum on unconverted amounts. Interest costs of items acquired under lease arrangements are fixed at the time the lease is entered into for the term of the lease, which carry a weighted average interest cost of 7.5% per annum.

 

The directors consider the only element of risk from changes in interest rates arises on bank deposits which is not expected to give rise to a material adjustment to the reported results for either 2009 or 2008.

 

Financial instrument (continued)

Credit risk

The group's credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group's management based on prior experience and their assessment of the current economic environment. The maximum exposure to credit risk for the group is US$1,319,000 (2008: US$826,000), and there are no material concentrations of credit risk.

 

The credit risk on liquid funds is limited because the counterparties are reputable international banks.

 

Currency risk

The group is exposed to translation and transaction foreign exchange risk. The currencies where the group is most exposed to volatility are UK Sterling and Australian dollars.

 

Transactions and balances of entities within the Group are denominated in the local functional currencies and had the following balances denominated in GBP and Australian dollars:

 

	UK sterling		Australian dollars
	2009	2008	2009	2008
	USD'000	USD'000	USD'000	USD'000
Inventory	-	-	13	118
Trade and other receivables	437	245	570	851
Cash and cash equivalents	201	227	-	6
Borrowings	-	-	(123)	(250)
Trade and other payables	(1,311)	(594)	(1,352)	(558)

 

Currently, no hedging instruments are used. The Group keeps under review the extent of its exposure to currency fluctuations.

 

The following table illustrates the sensitivity of the net result for the year and equity in regards to the Group's financial assets and financial liabilities and the US dollar to British pound and AUD exchange rates. It assumes a percentage change in the exchange rate based on the foreign currency financial instruments held at each balance sheet date. Both of these percentages have been determined based on the average market volatility in exchange rates in the previous 12 months.

 

	UK sterling		Australian dollars
	2009	2008	2009	2008
Currency fluctuation	10%	10%	10%	10%

 

If the US dollar had strengthened against each currency by the percentage above retrospectively, then this would have had the following impact:

 

	2009		2008
	USD'000		USD'000
	GBP	AUD	GBP	AUD
Net result for the year	506	240	398	106
Equity	67	88	12	45

 

Financial instruments (continued)

If the US dollar had weakened against the each currency by the percentage above retrospectively, then this would have had the following impact:

 

	2009	2009	2008	2008
	USD'000		USD'000
	GBP	AUD	GBP	AUD
Net result for the year	(506)	(240)	(398)	(106)
Equity	(67)	(88)	(12)	(45)

 

Exposure to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the group's exposure to currency risk.

 

Fair values

The directors consider there to be no material difference between the book value and fair value of the group's financial instruments in either financial year.

 

 

20 Capital commitments

At 31 December 2009, the group had no capital commitments (2008: US$nil)

 

 

21 Contingent liabilities

There were no contingent liabilities at 31 December 2009 or 31 December 2008.

 

 

22 Financial commitments

The Group has entered into commercial leases on certain properties. There are no restrictions placed upon the lessee by entering into these leases.

 

The present value of future minimum rentals payable under non-cancellable operating leases are as follows:

 

	2009	2008
	USD'000	USD'000
Within 1 year	81	55
Between 2 and 5 years	190	131
	271	186

 

 

23 Related party transactions

AirTerAq, a company in which a director, M D McNamara has an interest, supplied services to the value of USD277,522 during 2009 (2008: USD205,350) and was owed USDnil at 31 December 2009 (2008: USDnil). These services are for the provision of Mr McNamara as a director of the company.

 

Wengen Ltd, a company in which a director, J Gunn has an interest, supplied services to the value of USD129,000 during 2009 (2008: USD83,000) and was owed USDnil at 31 December 2009 (2008:USDnil).

These services are for the provision of Mr Gunn as a director of the company.

 

In May 2009 the Group sold its condition monitoring business (represented by a commercial oil analysis laboratory in Adelaide) for a total cash consideration of AUD$800,000 to Healey Energy Services Pty Ltd, a company owned by Mr Russell Healey, a part-time executive of the Group who, at the relevant time, was a director of Hydrodec Australia Pty Ltd.

 

 

24 Post balance sheet events

On 13 January 2010, 29 March 2010 and 14 April 2010 the group raised additional capital of USD0.3million, USD2.7million, and USD0.5million gross respectively through issues of new shares.