A unique renewable oil proposition. Hydrodec Group plc Annual Report and Accounts 2013

Transcription

1 A unique renewable oil proposition Hydrodec Group plc Annual Report and Accounts

2 Hydrodec Group plc is a cleantech industrial oil re-refiner. Our technology is a proven, highly efficient, oil re-refining and chemical process initially targeted at the multi-billion US$ market for transformer oil used by the world s electricity industry. Spent oil is processed at two commercial plants with distinct competitive advantage delivered through very high recoveries (near 100 per cent), producing as new high quality oils at competitive cost and without environmentally harmful emissions. We recently acquired the business and assets of OSS Group, the UK s largest collector, consolidator and processor of used lubricant oil. Strategic Report highlights 1 At a glance 2 Chairman s statement 4 Our business 5 Market opportunity 6 Technology and patents 7 Our strategy 8 Chief Executive s report 10 Chief Financial Officer s review 15 Key performance indicators 18 Principal risks and uncertainties 20 Governance Board of Directors 22 Introduction to governance 24 Report of the Directors 26 Corporate governance report 28 Remuneration Committee report 31 Audit Committee report 34 Financial Statements Independent auditor s report 35 Consolidated statement of income 36 Consolidated statement of comprehensive income 37 Consolidated statement of financial position 38 Consolidated statement of cash flows 39 Consolidated statement of changes in equity 40 Notes to the financial statements 41 Independent auditor s report 62 Company balance sheet 63 AGM Notice of Annual General Meeting 69 Explanatory information for the resolutions 72 Hydrodec Group plc Annual Report and Accounts

3 Strategic Report Governance Financial Statements highlights In Hydrodec achieved substantial growth in all key performance and business measures; two transformational transactions and another two strategic agreements are further evidence of real and material strategic progress. Operational momentum and business improvement enabled a successful balance sheet restructuring leaving the Company debt free and better structured to grow. Performance highlights 54% Revenue up to US$40.1 million (: US$26.1 million), the ninth consecutive year of growth 65% Total oil sales of 37.0 million litres (: 22.5 million litres) US$0.30 Gross unit margins per litre in the re-refining business (: US$0.24 per litre) US$0.2m Positive Operating EBITDA 1,2 for first time (: US$2.8 million loss) As we resolve the aftermath of the Canton incident, we remain focused on a strategy to grow the business which will be delivered by securing access to the value chain, the application of best in class technology, the reduction of risk through partnership or acquisition and the rigorous focus on business costs and efficiency. Ian Smale Chief Executive Officer Core re-refining business increased revenue 11 per cent to US$28.9 million driven by 12 per cent improvement in sales volumes of premium quality SUPERFINE transformer oil and base oil to 25.2 million litres Gross profit rose 76 per cent to US$9.4 million; re-refining margins at 26 per cent (: 21 per cent) and improved Group margins at 24 per cent Higher utilisation of productive capacity in the re-refining business for the 11 months prior to the business interruption at Canton of 78 per cent (: 70 per cent) Achieved target of positive total EBITDA run-rate in September, October and November Incident at the Canton plant in December halted US production insurance claim for property damage and business interruption in progress with rebuild and expansion plans under way Overall loss for the period widened to US$17.4 million (: US$14.2 million) as a result of US$4.9 million non-cash, non-recurring finance charge in respect of loan stock repaid during the year Strengthened balance sheet with US$21.9 million cash at year-end and parent company debt free Strategic highlights April strategic partnership with G&S in US, securing feedstock and capital for major US expansion September acquisition of assets and business of OSS Group, securing feedstock and capability for UK market entry October successful placing and open offer raising 24 million November collaboration with Essar Oil UK around re-refining opportunities in UK and co-location of Australian plant with Southern Oil Refining 1 EBITDA adjusted for growth expenditure of US$3.3 million (: US$2.2 million), share-based payment costs of US$0.5 million (: US$0.5 million) and foreign exchange loss of US$0.7 million (: US$0.04 million) ( Operating EBITDA ) 2 on basis of assumed business interruption insurance coverage for Canton 1

4 At a glance Hydrodec produces new, high quality transformer oil from globally distributed used and contaminated waste oil that would in many other situations be incinerated. The Group also collects and processes used lubricant oils producing fuel oil products. It intends to develop its existing re-refining technology for application on these used motor oils and other industrial oils in order to produce high quality base oils. For more information visit our website at United States Plant location Canton, Ohio. Australia Plant location Young, New South Wales United Kingdom Plant location Stourport-on-Severn, Worcestershire (and national network of oil storage and transfer stations). Process/products Re-refining used transformer oil to produce SUPERFINE transformer oil and base oil. Process/products Re-refining used transformer oil to produce SUPERFINE transformer oil and base oil. Process/products Recycling used motor oil to produce processed fuel oil ( PFO ) and recycled fuel oil ( RFO ). Capacity Existing 27 million litres SUPERFINE per annum*. Four train processing facility, supported by a state-of-the-art quality-control laboratory and a full service rail and truck loading facility. Planned Expansion to six trains at Canton by Q and to 10 trains in Capacity Existing 6.5 million litres SUPERFINE per annum. Hydrodec s first commercial processing facility a single train processing unit. Planned Co-location of existing plant to Southern Oil Refinery at Wagga Wagga, New South Wales. Capacity Existing 65 million litres PFO and 10 million litres RFO per annum. Planned Establishment of two train transformer oil re-refinery and semi-commercial pilot plant for lubricant oil re-refinery in * Plant was damaged by incident in December production expected to recommence Q (two trains) 2 Hydrodec Group plc Annual Report and Accounts

5 Strategic Report Governance Financial Statements Five year revenue growth 50 SUPERFINE Million US$ Hydrodec s re-refined branded products are marketed as SUPERFINE transformer oil and base oil. The transformer oil, which is endorsed by leading original equipment manufacturers including ABB and Coopers, meets or exceeds international specifications for transformer oil, and in a blind test conducted by the Doble Laboratories in Boston SUPERFINE tested better than new refined oil from the four largest base oil competitors in 10 out of 12 core tests for quality. The proven sustainability of the Hydrodec process will allow for its new, reusable oil to come with a carbon credit or offset as a source of value and a unique sales proposition the first oil product globally to do so Volume Partner 25 per cent partner in Hydrodec of North America since. Million litres G&S is a leading New Jersey-based electricity transformer recovery services group. G&S Technologies plant, Kearny, New Jersey Volume 5 4 Partner Proposed co-location and plant operator in Million litres Southern Oil and its partner JJ Richards are leading collectors and re-refiners of general used lubricant oil in Australia. Southern Oil plant at Wagga Wagga, NSW Volume Partner 60 Acquired in OSS is the UK s largest collector, consolidator and processor of used lubricant oil and seller 10 of PFO. It also provides complementary waste 0 services for a one-stop shop total waste 2011 * management offering to clients. * Acquired in September out of administration OSS recycling plant at Stourport Million litres 3

6 Chairman s statement The key performance indicators of the original re-refining business sales volumes, revenues, feedstock procurement, plant utilisation and margins were all significantly higher in than the prior year. was my first full year in office and also the first in which Ian Smale and his management team sought to implement the Company s new strategy as unveiled in September. I am therefore pleased to report on a successful year in terms of the performance of the Group and the delivery of that strategy. The primary focus, as ever, was on the operational and financial performance of the existing business. The key performance indicators of the original re-refining business sales volumes, revenues, feedstock procurement, plant utilisation and margins were all significantly higher in than the prior year. Additionally the Board continues to strengthen the governance of the Company and this is covered in the Governance section of this Report from page 24. Although our Company continues to report a statutory loss, larger this year due to the non-recurring, non-cash accounting treatment arising from the repayment of the loan stock, I would like to draw your attention to the key measure the Board and management use in reviewing the Group s performance, namely EBITDA. Operating EBITDA (adjusted for expenditure on growth costs and other non-operating items) was positive for the first time ever and our Group operated at a positive total EBITDA run-rate (ie after those growth costs and other non-operating items) for September, October and November. These are significant achievements and bode well for the years ahead. Strategically, the G&S and OSS transactions were completed during the year and have already had a significant, positive impact on a number of the Group s Key Performance Indicators ( KPIs ) for as Ian Smale and Chris Ellis expand on in their reports. The impact of the strategic agreement with Essar Oil in the UK will be of a longer wavelength whereas that with Southern Oil in Australia will be progressed in Alongside these partnership and acquisition developments, the placing and open offer, together with the repayment of all of the parent company s debt, have resolved issues with the balance sheet which have held the Company back for too long and resulted in a year-end cash balance of US$22 million. I would like to welcome new shareholders to the Company as well as thanking many of the existing holders who also invested further in the funding round. This leaves the Company well placed for further strategic developments in the months ahead. I must of course refer to the fire at the Canton plant in December. Clearly this was a serious incident occurring just as the Company was developing real momentum into the year-end. I want to use this opportunity to offer my gratitude to the exemplary reaction of local management and staff and our partners G&S, and to acknowledge the support of local authorities, suppliers and customers. With the pending resolution of the insurance claim we shall shortly be able to focus all of our efforts in the US on the rebuilding and expansion of the Canton plant, with the restoration of production expected by the end of this year. I would like to draw your attention to the Notice of Annual General Meeting at the back of these Report and Accounts. This year s AGM will be held in The Winchester Room, The Washington Mayfair Hotel, 5 Curzon Street, London W1J 5HE at a.m. on Monday 30 June Finally I would like to thank Ian, his management team and all the staff at Hydrodec for their efforts in as everyone played their part in a challenging yet ultimately successful year. The Board of Directors are looking forward to the remainder of 2014 and beyond with considerable optimism. Lord Moynihan Chairman 21 May Hydrodec Group plc Annual Report and Accounts

7 Strategic Report Governance Financial Statements Our business Management with proven track record in oil industry Established renewable transformer oil business with proven technology Strategic partnership in US Transformational new market entry in UK through acquisition of OSS; platform for new technology and European consolidation Global market potential in transformer oil and major opportunities with next stage technology robust potential for new protectable IP Proven economic and business model; attractive returns in transformer oil re-refining, replicable in used lubricant oil market (>15x larger) with significant upside option value Continue to target value chain integration (feedstock) and capability Secure feedstock Through value-chain integration Hydrodec Re-refine/recycle Technology driven efficient processes Sales Premium quality carbon-neutral oils Feedstock Processing Sales Transformer oil Used transformer oil sourced directly from utilities, or indirectly from hardware salvage, repair and service companies and used oil collectors/traders. Partnership with G&S provides one-stop shop offering for utilities in US treating used oil and hardware. Cost influenced by prevailing diesel price (given potential alternative uses of used oil) and polychlorinated biphenyl ( PCB ) contamination levels (higher PCB material available at nil/negative cost). Lubricant oil Used motor oils collected by own fleet of trucks from garages and service stations, aggregated at collection points and then transferred to recycling plant. Cost may be influenced by competing demand for feedstock from re-refiners (especially in Europe) but OSS one-stop shop total waste management service places it in a strong position in UK market. Transformer oil Hydrodec s unique, proprietary and industryleading hydrogenation re-refining technology. The process deconstructs PCBs and recovers more than 99 per cent of the used oil as new oil with de minimis air emissions and no hazardous waste by-products. Lubricant oil Current OSS recycling process produces two grades of fuel oil for industry: PFO (Gen3 ), an environmentally friendly alternative to virgin fuel oils and RFO, an economical alternative to virgin fuel oil. Future developing Hydrodec s transformer oil re-refining technology for application to lubricant oils. Transformer oil Premium SUPERFINE transformer oil sold directly to original equipment manufacturers ( OEMs ) (ie manufacturers of transformer hardware for first fill ) and utilities (new oil replacing old), or indirectly via distributors. Premium SUPERFINE base oil sold directly or indirectly to other industrial users (eg inks, agriculture and mining). Price influenced by ICIS benchmark index for Pale 60 base oil. Lubricant oil Current PFO and RFO are sold into UK power and other industries and also for use as bunker fuel. Future high grade premium base oil output (Group II+/III) would be produced and sold to blenders (where various additive packs applied to establish characteristics for various lubricant oil end uses) for marketing and on sale. 5

8 Market opportunity Hydrodec has proven its business model in the global transformer oil market. As we expand in this core market, we are also focusing on the materially larger lubricant oils market, initially in the UK and Europe. Following the acquisition of OSS we already recycle used lubricant oils but our intent is to develop the proven efficiencies of our re-refining technology into this wider market. Transformer oil Characteristics Predominantly refined from naphthenic crudes Specialised base oil having properties meeting long established power industry technical standards Used in electricity transformers an integral part of the world s power transmission network Environment Global market 1.35 billion litres, growing at estimated 5% CAGR to Valued at US$1.8 billion, growing c. 9% CAGR to Total naphthenic base oil supply of 3.7 billion litres will not meet projected demand of up to 5.0 billion litres 3 Hydrodec re-refining technology approved in US, Australia and Japan for treating PCB contaminated oil Lubricant oils Predominantly refined from paraffinnic crudes Additives to base oil produce different lubricant oils for different uses, including motor oil, hydraulic oil and other industrial oils Global market in excess of US$30 billion UK is most attractive market in Europe UK low grade recycling market vs Europe, creates ideal technology opportunity UK lubricant base oil demand estimated at 700 million litres per annum (predominantly imported) UK used oil protocol regulates production and use of processed fuel oil ( PFO ) as produced by OSS Sources of used oil OECD: 75 per cent rule new oil displacing old oil 4 Direct from utilities: c. 25 per cent Indirect channels in highly fragmented market Alternative uses: incineration, fuel additives, regeneration, recycling Total waste lubricant oil in UK c. 350 million litres per annum Collection-based activity drives access to used oil Active secondary market in bulk used oil in UK Uses Reused as new transformer oil into growing market Sustainable closed-loop proposition with utilities OEMs: ca. 40 per cent demand Other naphthenic applications: base oil markets in inks, agriculture, mining and explosives 170 million litres per annum of PFO produced in UK 5 Demand: industrial c. 80 million litres; UK power c. 350 million litres; > 100 million litres bunker fuel (shipping) Europe is short feedstock for oil recycling creates additional demand Competitive advantage > 99% as new oil, no waste Tests as better than new oil Single-step re-refining process Negligible emissions, carbon neutral oil UK lags European and US recycling technology platform supported by regulation Hydrodec lubricant re-refining technology potential to leapfrog existing Europe and US recycling technology Potential for carbon credits from Hydrodec methodology Consolidation opportunities 1 Source: Markets and Markets: Transformer oil market, Global Industry Trends & Forecast to Source: Markets and Markets: Transformer oil market, Global Industry Trends & Forecast to Source: Nynas European ICIS presentation, London Source: Hydrodec estimates 5 Source: Oil Recycling Association estimate 6 Hydrodec Group plc Annual Report and Accounts

9 Strategic Report Governance Financial Statements Technology and patents Our technology platform was originally developed in Australia in response to a challenge by the nation s power industry to eliminate potentially carcinogenic polychlorinated biphenyls ( PCBs ) from used transformer oil. PCBs were routinely added to enhance the flame retardant performance of transformer oil globally until banned in the 1970s. The technology now deployed commercially by Hydrodec in Australia and the United States is unique, proven, proprietary and industryleading. Not only does it deconstruct PCBs from transformer oil, the process also recovers more than 99 per cent of the used oil as new oil with de minimis air emissions and none of the hazardous waste materials normally associated with traditional re-refining processes. We continue to develop and improve the technology and operating processes. In addition to ongoing IP protection secured by operational know-how, we are constantly striving for new technological advancements. We have recently applied for patent protection in respect of developments in the original transformer oil re-refining technology and we expect to submit an application in respect of hydrogenation in the treatment of used lubricant oil in the near future. The patented Hydrodec hydrogenation re-refining process transformer oil Scavenger system Hydrogen Hydrogen recycle Reactor mixture To oxidiser SUPERFINE Developed to treat PCBs IP protected; secured by operational know-how Hydrogenation cleans and restores the hydrocarbon molecule New renewable oil with semisynthetic properties Approved by regulatory authorities in US, Australia and Japan Proof of concept achieved in lubricant oil application Heater Reactor Water wash Scavenger system 7

10 Our strategy Hydrodec aims to deliver outstanding growth in revenue and returns through the sustainable handling, treatment and re-refining of used oil; the application of its industry-leading clean technology creates new oil for original purpose and the world s first carbon-free mineral oil accessing voluntary carbon offset credits. 18 months into the clean-technology, twin revenue stream strategy first published in, it is appropriate to assess both current progress and future direction. The fundamental tenet of twin income streams: through technology licence royalty and equity participation where advantaged, remains appropriate and robust. Experience based on a pipeline of options informed by the strategy has shown greater optionality, better control and hence lower risk for Hydrodec through equity participation as a means to deliver growth rather than licensing through third parties. The barrier to progress in licensing is a function of legacy invested capital and small, undercapitalised operations which have insufficient incentive or capability to disrupt their established business. We address these constraints through partnerships as key enablers of growth. Existing partnerships (or acquisitions) delivered in create a strategic blueprint for how we intend to proceed. Each opportunity is assessed on the basis of key attributes for business success: including, access to secure supplies of feedstock and value chain integration; access to markets; access to infrastructure and capability; access to scale and operating efficiencies; and the opportunity to share and minimise risk. The key components for success are feedstock, technology, capability and appropriate market access within a clear equity and licence margin model. Transformer oil strategy We believe Hydrodec has a unique competitive technology, a position now reinforced with a new application for patent protection and a world-first sustainable methodology for mineral oil that quantifies SUPERFINE transformer oil as a carbon offset, or carbon neutral oil. The current plan envisaged with partners G&S Technologies will see an increase to six trains of capacity at the Canton site during Q secured by feedstock sourced through Hydrodec of North America and G&S and ultimately creating 60 million litres of potential capacity, or up to 15 per cent of the current North American demand for new transformer oil as well as a material demand for naphthenic base oil for other applications including printing, agriculture and metalwork. Hydrodec s upgraded plant will produce European-quality (500 hour certified) transformer oil, more efficiently. The carbon certification will make the product unique in the US, and globally. The new production units are designed to be standardised, modular, plug and play, easier and safer to maintain and operate, benefiting from eight years of learning through doing. They represent a step-change in the quality and integrity of the product and the operation.. The European market, and especially the UK, offers opportunities for the Hydrodec transformer oil technology starting with a proposed two train, 13 million litre, development in the UK. The new capacity will introduce new oil production in the UK to offset current imports, as well as offer a material and competitive upgrade to current regeneration practices at yields expected to be at least as attractive as the US. Other opportunities in Europe and elsewhere are being considered. In each case a targeted equity-participation and royalty approach is more likely to enable market access and growth than licensing alone, although that remains a possibility. Other opportunities, including Japan, remain under review as opportunities for investment or for licensing. Lubricant base oil technology strategy We believe that Hydrodec s unique re-refining technology, including new patent protection application offers an extension of the world-first sustainable methodology for transformer oil that can increase efficiency and quality in general used oil recycling; a material global market. 8 Hydrodec Group plc Annual Report and Accounts

11 Strategic Report Governance Financial Statements Since proof of concept was established in December, extensive testing has provided evidence that an extension of Hydrodec s one-step catalytic hydrogenation process with a chemical pre-treatment and back-end reforming can produce an efficient, high quality and high recovery used oil re-refining process. The target is Group II+/III base oil (primarily imported into Europe currently), and a material quality (and recovery) improvement on existing competitive technologies. Aspects of the testing are already being applied to the OSS processed fuel oil ( PFO ) technology in the UK with the potential to improve recoveries and product quality, and economic performance as a consequence. The OSS treatment may develop into a viable pre-treatment for used oil, and under any circumstance will be a very helpful transition business into full scale used oil re-refining. A semi-commercial pilot scale plant is being engineered based on the test programme and will be commissioned in The pilot will inform full commercial design envisaged at 100 million litres annual capacity which will be developed in The UK is an attractive market opportunity as there is no current material recycling to high quality base oil unlike some other existing European countries. The UK used oil protocol provides for treatment of used oil for use as fuel or waste oil which is the predominant default activity resulting in some used oil being exported to the higher margin European solutions. OSS ensures a secure starting position in UK feedstock. Base oil produced would offset imports and feed into an annual demand of 800 million litres in the UK. Options for partnership and/or consolidation in Europe exist in a somewhat fragmented market and are under current review. In some cases, fit for purpose technology would have the potential to be enhanced. We believe that Hydrodec s emerging technology platform, the potential for best-in-class recovery and quality and our sustainable reuseable oil offer can in due course transform the sector profitability and competitiveness. Sustainability the green dividend Returning oil to its original purpose efficiently has created a world-first verifiable carbon methodology for mineral oil. Registration of past and future production in the US will allow monetisation through the US voluntary carbon offset market. A key next step will be to extend the transformer oil methodology to the regulated carbon markets in California and the EU Emissions Trading System. Longer term the challenge will be to apply the same methodology to high quality base oil production from used lubricant oils. There would be a strong case for regulatory support for reuse of quality re-refined oil as a means for both encouraging collection and processing, but also encouraging sustainable resource management such concepts have been proposed in previous government papers but not yet implemented in the UK, or elsewhere in Europe. Our progress in G&S partnership (US) April Creates leading re-refiner of waste and PCB contaminated oil in North America Secures feedstock for material growth through value-chain integration Alliance of best in class technology and service provision creates compelling, sustainable one-stop offer for customers De-risks expansion to 65 million litres p.a. (increase of 140 per cent), from four processing trains to six in 2015 and 10 in 2016 Establishes a recurring royalty for the technology at 5 per cent of revenues and business model for growth OSS acquisition (UK) September Access to Europe and key UK market through a leading position in used oil collection and processing Access to value-chain and capability creates a platform for SUPERFINE re-refining and sales Accelerates development and commercialisation of Hydrodec s new lubricant technology Secures feedstock for lubricant re-refining in UK Creates options for consolidation into Europe Placing and open offer ( 24 million) October Repositions Hydrodec for next stage of development Enhances credibility with all stakeholders (customers, suppliers, investors) Resolves balance sheet and capital structure effectively debt free Additional capital for specific identified growth opportunities Southern Oil Refining (Aus)/ Essar Oil UK November Strategic relationships established with leading operators in Australia and UK with potential for collaboration in transformer oil and lubricant oil markets 9

12 Chief Executive s report The management team remain focussed on a strategy to grow the business which will be delivered by securing access to the value chain, the application of best in class technology, the reduction of risk through partnership or acquisition and the rigorous focus on business costs and efficiency. was quite a year record revenues, sales volumes, feedstock procurement, plant utilisation and much improved margins; positive Operating EBITDA (pre growth costs) for the first time ever and positive total EBITDA run-rate for three successive months; two transformational strategic transactions completed and another two strategic relationships secured; and a positive resolution to the balance sheet structure. With a month of the year to go it appeared that our strategy had achieved real momentum only for the incident at Canton on 1 December to occur. An explosion and fire at the plant effectively shut down production causing significant damage to the main reactors and ancillary equipment. Most importantly no one was hurt and the team in Canton together with the local emergency services and authorities responded to the unfortunate situation in exemplary fashion. Insurance cover is expected to provide for the rebuilding of the Canton business and for business interruption for the period the plant is down, so enabling it to re-emerge stronger and back on track with the original plan for an expanded business. Strategic developments In line with the global strategy we outlined in September, the management team completed a number of strategic initiatives during the year under review with the announcement of strategic relationships which we would expect to develop further in the future. These developments are intended to provide a platform for long-term growth and profitability, reduce execution and business risk, and to monetise Hydrodec s proven cleantech sustainable oil re-refining process; from the core transformer oil business into the substantially larger used lubricant and base oil market. Strategic partnership with G&S in US In April the Company entered into a strategic partnership with G&S Technologies Group ( G&S ) in order to grow its core transformer oil business and create the largest transformer oil re-refiner in the US. G&S is a leading New Jersey-based electricity transformer recovery services group with a 50-year track record of serving the industrial and utility industries throughout the US. The commitment of feedstock from G&S to the new entity, Hydrodec of North America ( HoNA ), has enabled greater utilisation of existing available capacity in the US. It also provides HoNA with increased security of feedstock supply to support the planned expansion of US plant capacity from 27 million litres per annum to 65 million litres per annum. G&S has acquired a 25 per cent stake in HoNA which it will increase to 49.9 per cent as the expansion plans are delivered. The transaction also establishes a new recurring royalty for the technology which Hydrodec has licensed to HoNA. Acquisition of OSS Group In September the Company acquired the principal assets and business of OSS Group Limited from its administrators. OSS is the UK s largest collector, consolidator and processor of used lubricant oil and the largest seller of processed fuel oil ( PFO ). The used oil collection creates a competitive source of feedstock for new technology to upgrade PFO to higher margin lubricant base oils. The global market for lubricant oil is estimated to be in excess of US$30 billion per annum, materially larger than that for transformer oil (estimated at US$1.8 billion per annum); the UK is a key target market with little or no current upgraded oil recycling. 10 Hydrodec Group plc Annual Report and Accounts

13 Strategic Report Governance Financial Statements G&S Technologies our 25% partner in Hydrodec of North America ( HoNA ) G&S is a privately owned conglomerate based in New Jersey with a 50 year track record in the recovery and disposal of decommissioned transformers, treatment and handling of waste and/or contaminated transformer oils as well as associated asset recovery services. The group, which includes G&S Technologies and affiliation with TCI Alabama, Transformer Technologies (Oregon) and TCI of New York, serves the industrial and utility industries throughout the entire US offering its clients a wide range of services. Our partnership creates an alliance between the best asset recovery and service provider with the best oil re-refining technology, providing electrical utility industry customers with a compelling one-stop sustainability offer. The security of supply of used oil as feedstock for HoNA s Canton re-refinery has materially de-risked our operations and future expansion activities in the US. 11

14 Chief Executive s report continued Other strategic relationships UK The Company announced in November that it had reached heads of terms on an agreement to collaborate with Essar Oil UK Ltd to develop re-refining opportunities in the UK. We anticipate combining the existing infrastructure, expertise and operating capability at Stanlow, the UK s second largest refinery, with both Hydrodec s proprietary technology and feedstock from OSS to create a lubricant oil re-refining hub. A combined transformer oil and lubricant base oil business in the UK would target up to 100 million litres per annum of processing capacity. Australia Also in November the Group entered into an agreement to co-locate its Australian transformer oil re-refining operation at the Southern Oil Refining Pty Limited ( SOR ) lubricant oil re-refinery in Wagga Wagga, New South Wales ( NSW ). This will create a single re-refining site of scale in NSW, improving Hydrodec s cost and operational efficiency, and substantially enhancing operational resilience. SOR will operate the combined facility under a tolling agreement. SOR and its partner JJ Richards are leading collectors and re-refiners of general used lubricant oil in Australia and are currently commissioning their second re-refinery complex at Gladstone, Queensland. Hydrodec will retain all rights and ownership of the Hydrodec brand, business and technology in Australia and will continue to manage all commercial aspects of the business including used oil procurement as well as sales and marketing of SUPERFINE transformer oil and naphthenic base oil. We would expect the co-location to become effective later this year. Technology Transformer oil We have recently filed a provisional patent application to protect our operating and design intellectual property innovation in the original patented transformer oil re-refining technology developed over eight years of commercial operation. This reinforces the ongoing commercial protection of Hydrodec s proprietary technology leadership in the production of sustainable and high quality transformer oil products at market competitive prices. The innovation contained in this new patent application will enhance process economy, reliability and consistency while operationally simplifying the core re-refining technology. Since the turn of the year, our re-refining methodology for transformer oil has been accepted by the US Carbon Registry as a carbon offset, or carbon saving process, providing us with the potential to monetise production as a carbon credit through the voluntary carbon offset market in the US. Lubricant oil In December, we announced proof of concept that extends Hydrodec s proven technology into used paraffinic feedstock both industrial and used crank case motor oils. The technology offers the potential for new types of high quality, low carbon lubricant base oils that meet or exceed the higher-end specifications, being Group II, II+ and/or Group III. Market intelligence suggests that the ability to produce a Group III product in particular would mark a significant breakthrough for re-refined products. We continue to make steady progress and expect to submit an application for patent protection to cover hydrogenation in the treatment of used lubricant oil in the near future. Test rigs covering all three stages of the more complex lubricant re-refining process are operating in Australia; the immediate objective is to determine the operating and design parameters for a semi-commercial pilot plant targeted for the UK in the first half of 2015, subject to planning and other regulatory consents. New markets New market entry remains under review in line with strategy and in a sector which offers a number of consolidation opportunities. Targets would include access to secure feedstock and complementary or proven technology that can offer accelerated deployment and potential business synergies. Europe is a key area of focus, with the US having more medium term opportunities. Hydrodec has now dissolved the joint venture relationship with Kobelco-Eco in Japan pending a change in the regulatory and market conditions in the country that might offer renewed opportunity to access the material store of PCB contaminated used oil and hardware. While the regulatory environment has largely reconfirmed the extremely onerous restrictions on handling the legacy PCB issue, an extension of the completion date to 2026 has reduced short-term necessity to develop solutions. We keep Japan under close review with the 2020 Tokyo Olympics targeted to enhance and promote best environmental practice as a possible catalyst for action; it remains a long wavelength opportunity. 12 Hydrodec Group plc Annual Report and Accounts

15 Strategic Report Governance Financial Statements OSS acquired in September OSS is the UK s largest collector, consolidator and processor of used lubricant oil and seller of processed fuel oil. It has a national network of oil storage and transfer stations, serviced by a fleet of more than 90 trucks which collect used oil and other garage workshop waste from over 30,000 customers. Used oil is converted into processed fuel oil at OSS s plant at Stourport and principally sold on to the UK quarry and power industry. It also provides complementary waste services for a one-stop shop total waste management offering to clients. The combination of OSS s access to used oil together with its operating capability makes it an ideal partner for Hydrodec to utilise Hydrodec s existing transformer oil technology and to develop and ultimately deploy its new lubricant oils re-refining technology in the UK: it offers the potential to provide over 60 million litres per annum of feedstock which the Group intends to re-refine into a high grade lubricant base oil; it provides capability to collect used transformer oil from the UK power companies and overseas; and it provides a platform to develop other opportunities to consolidate the oil collection and re-refining market in the UK and Europe. Waste oil collection Fuel oil Parts washers Industrial services Hazardous waste collection Fragmentation services Ancillary products 13

16 Chief Executive s report continued Financial and operating performance Given the execution of a number of strategic developments during, we have this year included a Chief Financial Officer s review which will provide further explanation behind the headline numbers in the statutory accounts. It will also provide more detail in respect of the financial and operating performance of the Group and I shall therefore limit my report to the Group level headline numbers. represented the ninth consecutive year of growth for the Company with revenues increasing a further 54 per cent to US$40.1 million (: US$26.1 million). Total oil sales of 37.0 million litres represented an increase of 65 per cent on (22.5 million litres). Gross profit rose 76 per cent to US$9.4 million (: US$5.4 million) with margins at 24 per cent (: 21 per cent). I am pleased to report that Operating EBITDA (adjusted for growth costs, share-based payment costs and foreign exchange loss) was positive for the first time ever at US$0.2 million (: US$2.8 million loss). In line with our stated target during the year, we achieved a positive total EBITDA run-rate in September, October and November which bodes well for the future. The overall statutory loss for the year widened to US$17.4 million (: US$14.2 million) once growth costs, the significantly increased interest charge (including the final, nonrecurring US$4.9 million non-cash amortisation of the unsecured loan stock) and depreciation and amortisation are included. Balance sheet and funding Following the successful completion of the 24 million placing and open offer of new ordinary shares in November, together with the repayment of 12.9 million of unsecured loan stock (in cash) and 5 million of secured loan notes and a 7.5 million revolving credit facility (through the issue of new ordinary shares), the Company s balance sheet was significantly stronger at the year-end. Net assets were US$69.6 million (: US$25.5 million), including US$21.9 million in cash, and the parent Company is debt free. This represents a significant breakthrough for the Group and formed a key element in the implementation of our strategy. The Company is now on a much firmer financial footing for the next phase of growth with renewed flexibility around its future funding requirements. Trading update and outlook In respect of the Canton incident, the Group has submitted a claim for its total loss (including business interruption) which is under review by the insurers for final approval. On the basis of management s assumed insurance proceeds for business interruption, the Company achieved a positive total EBITDA result for the first three months of There remains significant scope for further improvement in the UK and Australian operations through the rest of the year. The Board expects that two re-refining processing units ( trains ) will be operational at Canton in the fourth quarter of 2014, with four more trains following in the first quarter of This will bring capacity at Canton to 150 per cent of that in operation prior to the incident in December last year, with further US expansion planned for later in Our local management team and partners G&S remain confident that neither feedstock supply nor customer demand, given an even higher specification end product arising from improved plant design, should prove material obstacles to the successful performance of the expanded plant. In Australia, feedstock constraints have impacted performance in the year to date but these are showing signs of improvement ahead of the planned co-location with SOR which is likely to be effected in the fourth quarter. The OSS oil recycling business in the UK has also experienced some feedstock constraints due to aggressive competition for used oil from European re-refiners. However, it continues to contribute positively to EBITDA and indeed its performance for the first quarter is ahead of our internal budget. Management remain confident that the business is progressing well and remains on track to return to its earlier levels of profitability within the next two years. Whilst we continue to have line of sight to establishing our own best in class re-refining technology for lubricant oils and to target 2016 for the commissioning of a full scale re-refining plant, the Board continues to monitor other opportunities which may enable the Company to move into this market at an earlier date. The Company s current plans are to establish a semi-commercial scale pilot plant in the first half of 2015, subject to planning and regulatory consents. In terms of a transformer oil business in the UK, the Board continues to target the commissioning of a two train plant in the second quarter of 2015, again subject to approvals. While there is little doubt that the unfortunate incident at Canton in December has slowed operational momentum, all indications are that the Group will re-emerge stronger in the US and march back to the original plan for expansion and growth. The wider market for re-refining remains a core target, through technology and, critically, access to feedstock. The market leading position enjoyed by OSS in the UK creates interesting strategic optionality for the development of our wider business strategy in new markets for re-refining. The management team remain focused on a strategy to grow the business which will be delivered by securing access to the value chain, the application of best in class technology, the reduction of risk through partnership or acquisition and the rigorous focus on business costs and efficiency. I am pleased to thank the Board for their support, as well as our enlarged stakeholder base, as we continue to build a business based on our unique, renewable oil proposition. Ian Smale Chief Executive Officer 21 May Hydrodec Group plc Annual Report and Accounts

17 Strategic Report Governance Financial Statements Chief Financial Officer s review Internally the business is managed and performance measured by reference to Operating EBITDA (pre growth costs and other non-operating items), which was significantly improved at US$0.2 million (: US$2.8 million loss). In their reports both the Chairman and Chief Executive covered key areas of the strategic development of the Group as well as reporting on key aspects of its financial performance. The successful execution of major elements of our strategy in have added further complexity to the Group s financial statements than previously and as part of this review I have provided additional commentary where relevant. Revenue and operational performance Group revenues increased by 54 per cent to US$40.1 million (: US$26.1 million), the ninth consecutive year of growth, driven by an 11 per cent increase from the core re-refining business (US$28.9 million) and the acquisition of the OSS business in September (US$11.2 million). Total oil sales of 37.0 million litres represented an increase of 65 per cent over (22.5 million litres). Gross unit margins in the re-refining business were significantly higher at US$0.30 per litre (: US$0.24 per litre) despite lower product sales prices, driven by a combination of better feedstock acquisition, a higher proportion of PCB contaminated feedstock, volume impacts and improved procurement processes. Gross profit from the re-refining business rose 42 per cent to US$7.6 million (: US$5.4 million) despite the impact of the incident at Canton in December. Sales volumes for recycled oil products totalled 11.8 million litres, with 10.9 million litres of processed fuel oil ( PFO ) and the balance from recycled fuel oil ( RFO ). The recycling division contributed US$1.8 million of gross profit with recycling margins at 16 per cent. Utilisation of productive capacity in the re-refining business for the 11 months prior to the business interruption at Canton improved significantly to 78 per cent (: 70 per cent), predominantly driven by greater access to feedstock following the strategic partnership with G&S. Overall employee costs and other operating costs increased by 15 per cent to US$16.5 million (: US$14.3 million) reflecting the overhead acquired as part of the OSS acquisition (US$1.8 million) and the increased investment in the Company s growth initiatives during the year, both in respect of the ongoing development of the technology as well as transaction fees and costs. The overall operating loss improved to US$8.6 million (: US$9.2 million) whilst the underlying operating loss (pre growth costs, bargain purchase and amortisation of intangible assets) improved by 27 per cent to a loss of US$3.2 million (: US$4.3 million). Internally the business is managed and performance measured by reference to Operating EBITDA (pre growth costs and other non-operating items), which was significantly improved at US$0.2 million (: US$2.8 million loss). As this is not a statutory accounting measure the table below reconciles this figure to the statutory operating loss: US$ 000 Operating EBITDA 187 Growth costs (3,256) Bargain purchase 874 Depreciation (2,673) Amortisation (2,499) Share-based payment costs (530) Foreign exchange loss (664) Statutory operating loss (8,561) Canton incident and insurance On 1 December an explosion and fire at the US plant in Canton, Ohio effectively shut down production causing significant damage to the main reactors and ancillary equipment. Since the date of the incident the Group along with its insurers and their loss adjusters, have gone through a process of establishing the extent of the damage caused, the costs to rebuild it and the estimated time it would take to re-establish full operational capability. The Group has submitted a claim for its total loss (including business interruption) which is under review by the insurers for final approval. Under its policy the Group has single incident coverage of US$35 million and in the opinion of the Directors is therefore adequately covered in respect of this claim. In anticipation of the resolution of the total claim the Group received US$2 million on account on 17 February As at 31 December the Group has estimated a total impairment and write-off of assets of US$7.2 million for which it has created a corresponding receivable due from the insurers. Based on actual orders and sales pipelines, and after taking account of the proceeds of sale of inventory held at the time of the incident, it has also assumed US$0.4 million of net income receivable for the period from 1 December to 31 December recognised in revenue under the terms of its business interruption coverage. 15

18 Chief Financial Officer s review continued Under the terms of the Group s insurance, the Directors consider the above amounts represent the best estimate of amounts recoverable with certainty in respect of the period under review at the date of preparation of these financial statements. Confirmation of all amounts due to the Group above the value of these assets including any compensation for business interruption will only occur once the loss adjusters have completed their technical review and evaluation which the Directors believe is close to completion and at which time the total claim receivable can be properly estimated and recorded. Finance costs Following the successful completion of the placing and open offer of new ordinary shares in November the Group was able to repay (in cash and through the issue of new shares) all outstanding indebtedness with the exception of finance leases acquired as part of the OSS acquisition. The early repayment of the unsecured loan stock increased the finance costs charged in the year to US$9.1 million (: US$5.3 million), with US$4.9 million of this increase being a non-cash charge for the difference between the carrying value of the unsecured loan liability and its face value on repayment. Bargain purchase As well as the one-time costs and fees incurred as part of the Company s growth initiatives, following the acquisition of the tangible assets and liabilities of the OSS Group out of administration on 6 September, a fair value exercise as required under IFRS 3 was carried out. Under this exercise both tangible and intangible assets and liabilities were attributed provisional fair values. The resulting excess of net fair value of the assets over the consideration paid is recognised in the consolidated statement of income (US$0.9 million) as required by the accounting standards. Strategic developments The Company successfully executed a number of strategic initiatives during the year, the key financial aspects of which are described below. Partnership with G&S Technologies Group The Group disposed of 25 per cent of its interest in Hydrodec of North America LLC to the G&S Recycling Group LLC ( G&S ) on 16 April. Under the terms of the agreement G&S made an initial payment of US$1.73 million based on a multiple of earnings for the year ended 31 December (5 times EBITDA) with an additional amount payable on the excess of the EBITDA over EBITDA paid at a multiple of 6.5 times. The total consideration is estimated at US$3.3 million resulting in a small loss on disposal of US$0.3 million. Under the terms of the partnership a royalty is also payable to the Hydrodec Group of 5 per cent of net revenue. Acquisition of OSS Group The Group acquired the principal business and assets of OSS Group Limited ( OSS ) from the administrator on 6 September for a total consideration of US$7.7 million settled in cash on the date of acquisition. The total associated costs of acquiring OSS in respect of fees and transaction costs were US$0.3 million. OSS has made a positive contribution to EBITDA in its first six months and is well positioned to exceed the required return within the period targeted by management at the time of the acquisition. Agreement with Essar Oil UK The Company reached heads of terms on an agreement to collaborate with Essar Oil UK Ltd to develop re-refining opportunities in the UK in November. Whilst two discrete re-refining operations are envisaged, no ongoing financial commitments by either party had been entered into at the balance sheet date. Agreement with Southern Oil The Group entered into an agreement in November to co-locate its Australian transformer oil business with the Southern Oil Refining ( SOR ) lubricant oil re-refinery in Wagga Wagga, New South Wales to create a single re-refining site of scale improving Hydrodec s cost and operational efficiency as well as enhancing operational resilience. SOR will operate the combined facility under a tolling agreement. The implementation of this arrangement is linked to obtaining appropriate planning and operating permits to facilitate the move, the certainty for timing of which is beyond the Group s control. Any benefits or costs incurred under this arrangement will commence at the time that such permits are granted. Transaction costs and fees of US$0.4 million were incurred in to execute this agreement. Amortisation and impairment of intangible assets Amortisation of US$2.5 million (: US$2.1 million) principally represents the annual charge relating to the Group s intangible assets comprising of the Hydrodec technology and prepaid royalty, both of which are being amortised over anticipated useful lives of 15 years from their acquisition date in In accordance with accounting standards, the Board has reviewed the carrying value of goodwill and other intangible assets across the Group in the light of current trading and prospects and progress towards achieving the Group s strategic plans. The Board concluded that the carrying value of goodwill and other intangible assets remained appropriate and that no impairment had occurred. Segmental analysis Following the acquisition of OSS in September the Board, in its capacity as the Group s Chief Operating Decision Maker (for the purposes of accounting standards), reviewed the continuing appropriateness of the Group s operating segment disclosures. The Group now operates two clearly defined divisions re-refining (the historic transformer oil business) and recycling (the OSS business) and, accordingly, the Board has concluded that the most appropriate segmental analysis for stakeholders is provided on this basis. Operating cash flow and working capital During the year we retained a strong focus on management of working capital within each of the divisions, with the aim of achieving an appropriate balance between commercial priorities and financial efficiency. Each division has a specific cash target which is monitored throughout the year and flexed according to demand levels. In addition, over the last 12 months, the Group has successfully established working capital facilities in all of its principal operating units that properly reflect its commercial activities and give it greater flexibility in the execution of its commercial strategy. Despite increased levels of trading, the impact of the OSS acquisition and excluding the insurance income receivable, net cash outflow from operating activities improved by US$0.3 million over. If the impact of OSS is excluded, the net cash outflow would have shown an improvement of US$1.0 million on. 16 Hydrodec Group plc Annual Report and Accounts

19 Strategic Report Governance Financial Statements Credit management processes remain robust with no bad debts written off during the year. Continued proactive management of customer credit, which starts at the point of sale remains a priority for the businesses in 2014 as we continue to seek to maximise commercial opportunities. Capital expenditure In we continued our programme of targeted investment across each of the businesses. Overall net capital expenditure (excluding property, plant and equipment acquired as part of the acquisition of OSS) was US$1.0 million (: US$1.1 million) with most expenditure focused on projects related to providing more resilience in the re-refining division. Liquidity The Company successfully completed a placing and open offer of new ordinary shares in November under which it was able to repay 12.8 million of unsecured loan stock in cash and settle 5 million of secured loan notes and a 7.5 million revolving credit facility through the issue of ordinary shares. As at 31 December the Group s net assets were US$ 69.6 million (: US$25.5 million) of which US$21.9 million was held in cash and the parent Company is debt free. Financial reporting The financial information has been prepared under IFRS and in accordance with the Group s accounting policies. There have been no changes to the Group s accounting policies during the year ended 31 December. Going concern The Directors are confident, on the basis of current financial projections and facilities available, and after considering possible changes in trading performance, that the Group has sufficient resources for its operational needs for the next 12 months. Accordingly, the Directors continue to adopt the going concern basis. Chris Ellis Chief Financial Officer 21 May 2014 The Group has sufficient cash balances and undrawn banking facilities to finance all investment and capital expenditure included in its plan for the current year with an additional margin for contingencies. Shares in issue Following the placing and open offer in November the Company issued million new ordinary shares which increased the total number of shares in issue to million. The basic and fully diluted weighted average number of shares in issue for was million (: million). As at 31 December, 56.6 million shares were owned by a member of the Group and therefore treated as if they were treasury shares on consolidation (: 56.6 million). The Group intends to take the necessary steps to allow it to cancel these shares. The Hydrodec Employee Benefit Trust held 2.6 million shares as at 31 December (: 2.6 million). 17

20 Key performance indicators The Group monitors and measures performance against its KPIs, a number of which are highlighted below. These KPIs are in line with strategic priorities of the Group and provide a means of evaluating how well the Group is working together to deliver the long-term strategy. Additional KPIs may be reported in the future to reflect the integration and operation of the OSS recycling business. Financial performance Total revenue 40 Gross margin 24 Strategic financial performance Operating EBITDA 1 US$ million Per cent US$ million Recycling Re-refining Purpose To identify directional trend in sales revenue and evaluate the ability of the Group to grow its customer base Target To grow revenue year-on-year Performance Revenue has grown 54 per cent in, driven by 11 per cent improvement in core re-refining business and acquisition of OSS recycling business +54% Purpose To evaluate the profitability and financial health of the Group. A relative measure of each US$ of revenue remaining after all direct costs have been incurred Target To maintain and improve gross margin Performance Gross margins improved by 300 basis points to 24 per cent, driven by 550 basis points increase to 26 per cent from re-refining segment partially offset by 16 per cent gross margin in recycling 23% (: 21 per cent) Purpose To evaluate the operational performance and profitability of the Group Target to achieve a positive result. Future years to outperform year-on-year Performance Significant improvement on previous year and first positive result in the Group s history US$0.2m (: US$2.8m loss) 18 Hydrodec Group plc Annual Report and Accounts

21 Strategic Report Governance Financial Statements Operational performance Total volume 40 Re-refining utilisation 100 Litres millions Per cent * Recycling Re-refining * Jan Nov Purpose To identify directional trend in sales volumes and evaluate the ability of the Group to grow its customer base Target To grow sales volumes year-on-year Performance Volumes grew 65 per cent in, driven by 12 per cent improvement in core re-refining business and acquisition of OSS recycling business Purpose To measure utilisation of effective re-refining capacity Target 85 per cent Performance Further year-on-year improvement towards target level +65% 78% (: 70 per cent) 19

22 Principal risks and uncertainties The Board and management regularly review and monitor the key risks involved in running and operating the business. The table below sets out a number of these risks together with relevant mitigating factors. Risk Description Mitigation Resolution of Canton insurance claim Feedstock availability transformer oil Feedstock availability lubricant oils New technology development Permitting and relationship with regulators The Group is in the process of seeking settlement of its insurance claim in respect of the incident at Canton. A failure, or significant delay, in achieving the expected outcome may impact negatively on the anticipated financial performance and position of the Company for and The Group is dependent on sourcing of used oil feedstock from which to manufacture its SUPERFINE products. Historically this has provided the main operational challenge to the business due to competing uses for used transformer oil and/or long-established practices around waste incineration. The same issue applies as the Group expands its operations into lubricant oils. A key element of the Group s expansion into the lubricant oils market relates to the ultimate successful commercial deployment of its technology to the re-refining of these oil types, either as a standalone or as an additive to available existing technology. The rebuild and expansion programme at Canton, the co-location project in Australia and any new plants and locations will require appropriate permitting and licences, over which the Group may have only have limited control as to timing and conditions attached. An initial payment of US$2 million has already been received and management are encouraged by progress in respect of the balance of the claim. The Group has significantly greater cash resources than in previous years enabling it to continue to trade and develop its rebuild, expansion and strategic growth plans pending resolution. The strategic partnership with G&S in the US, together with further investment in procurement capability and strategy development and the added profile and credibility of the Hydrodec process derived from the US EPA permit to treat PCB contaminated material, resulted in significantly improved feedstock volumes in. The G&S relationship has significantly de-risked security of feedstock supply and underpins expansion in the key US market. The acquisition of the OSS business provides the Group with a strong market position in the UK for sourcing used motor oil. The Group has achieved proof of concept and is close to applying for patent protection. It proposes to build a semi-commercial scale pilot plant in 2015 and full scale plant in The Board will monitor other opportunities to accelerate full market entry. The Group has developed very good relations and has a strong environmental and safety record with the relevant EPA and other national and local bodies in each of its countries of operation. 20 Hydrodec Group plc Annual Report and Accounts

23 Strategic Report Governance Financial Statements Risk Description Mitigation Operational reliability and product quality Concentration/loss of major customers Key executives and personnel Realising the opportunities for growth Competitors Market conditions The Group is dependent on the continuing reliability of its operational plants and product quality, with risk of loss of revenue and reputation should it fail. Sales in the US are relatively highly concentrated in a small number of key customers which, if lost, might have a material impact on the Group. The Group s future success is substantially dependent on the continued services and performance of its senior management team and its ability to attract and retain highly skilled and qualified personnel particularly during the current stage of business and technology development. Project risk, including integrity of the technology, commercial viability and need to develop partnerships in different business models. The Group may face competition including from global competitors with larger capital resources. The overall growth and demand for the Group s products is subject, to a certain extent, to the usual drivers of commercial activity (ie general economic conditions, interest rates, confidence levels, unemployment, housing starts, population growth, etc). This demand can be unpredictable and the Group has a relatively low visibility of future orders from its customers. During any economic downturn customers and competitors may apply pressure to prices and this pressure can lead to temporary and/or lasting changes in terms of pricing policies and market expectations. Investment in operational and capital expenditure, including human resource, to maintain and improve reliability and quality. The Group aims to build long-term relationships with our customers based on value, quality and service. Furthermore we continue to build our customer base and would expect to decrease the reliance on key customers over time. The Remuneration Committee maintains a policy that aims to attract, motivate and retain key personnel for the Group. This incorporates a significant element of performance related remuneration to align interests with those of shareholders. Increased investment in human capability and R&D, together with improved communication with all stakeholders around the opportunities and requirements to fulfil them. The Group s technology is its key differentiating factor and this is currently patent protected as well as commercial first mover advantage provided by know-how and trade secrets. Securing significant additional financing in has materially strengthened the Group s ability to withstand future short-term downturns in its markets. Management prepares regular forecasts and reviews that can focus on remedial action plans required to deliver the desired performance. The Strategic Report was approved by the Board of Directors on 21 May 2014 and was signed on its behalf by: Ian Smale Chief Executive Officer Chris Ellis Chief Financial Officer 21

24 Board of Directors There were no changes to the composition of the Board during the year. All Directors shall retire at the AGM and all Directors shall put themselves forward for re-election. Lord Moynihan Chairman Ian Smale Chief Executive Officer Chris Ellis Chief Financial Officer Background and experience Lord Moynihan was previously Executive Chairman and Chief Executive of Consort Resources Limited and Executive Chairman of Clipper Windpower Europe Limited. Colin was a Member of Parliament in the UK for 10 years, serving as Minister for Energy from 1990 to He was the first Patron of the British Wind Energy Association and a member of the Royal Institute of International Affairs: Energy and Environment Programme Steering Committee. Colin stood down as Chairman of the British Olympic Association in after seven years, during which he oversaw Team GB s successful performance in the Beijing and London Olympic Games. He was a Rowing Silver Medallist in the 1980 Olympic Games. Prior to joining the Board as CEO in January, Ian had spent his entire career with BP plc and held various senior roles in a career spanning 30 years. He held a variety of leadership positions across BP, including Group Head of Strategy & Policy, Business Unit Leader for Commercial Marketing and Distribution in South Africa, Global Head of Mergers and Acquisitions, and President and Chief Executive of BP North Africa. Chris is a qualified chartered accountant and has more than 20 years board level finance and management experience of running a range of large, complex international businesses as well as small and medium-sized ventures, including a significant period within GE Capital. From 2009 to, he served as Global Chief Financial Officer of PPC Worldwide, a global healthcare business within UnitedHealth Group Inc, a New York Stock Exchange listed company with a market capitalisation of approximately US$60 billion. Date of appointment Colin joined the Board and became Chairman in October. Ian joined the Board as CEO in January. Chris joined the Board in July as CFO. External appointments Colin is a director of Rowan Companies plc (offshore drilling) and a number of renewable energy companies. Ian is a non-executive director of Nexen Petroleum UK Ltd. None. Committee memberships Colin chairs the Board s Remuneration and Nominations Committees and also serves on the Board s Audit Committee. Ian serves on the Board s Nominations Committee. None. Independence The Board consider Colin to be an independent Director, and consider that the historic one-off option grant does not impact upon his independence given its quantum and on basis that its award was supported by leading shareholders at the time. Executive non-independent. Executive non-independent. 22 Hydrodec Group plc Annual Report and Accounts

25 Strategic Report Governance Financial Statements Mark McNamara Senior Executive Director Andrew Black Non-executive Director Alan Carruthers Non-executive Director Gillian Leates Non-executive Director Mark s experience and background are primarily in the chemical engineering, technology and environmental services fields. He managed the construction and subsequent commissioning of the first Hydrodec plant in Australia in Mark joined the Board in December 2004, at the time of the Company s acquisition of the Hydrodec technology, originally as Chief Operating Officer and assumed the role of CEO in August He became Senior Executive Director on Ian Smale s commencement of duties as CEO in January and is Head of Technology and International Projects within the Group. Andrew is the co-founder of Betfair, the world s leading online betting exchange and FTSE 250 constituent, having devised its unique betting exchange model. He was a director of the Betfair Group from 1999 to Alan has 27 years experience in the financial markets and from 2003 to 2010 he was Global Head of Equities at Cazenove. During this time he was appointed a main board director and was a member of both the executive and operations committees. He helped spearhead the joint venture with J.P.Morgan in 2005 and spent a year as Head of EMEA Cash Equities at J.P.Morgan Cazenove, following the buyout of Cazenove in January Gill brings with her a wealth of public market experience, having spent eight years at Schroder Investment Management as an analyst and fund manager and later serving as Investment Director on the main board of Majedie Investments PLC. She also served as a non-executive director of Majedie Asset Management Limited where she played a key role in setting up the UK pension fund management business in Mark joined the Board in December Andrew joined the Board in July Alan joined the Board in August. Gill joined the Board in June None. Andrew holds board seats at a number of companies, with a focus on technology. None. Gill serves as non-executive Chairman of Verdes Management plc. None. Andrew serves on the Board s Remuneration and Nominations Committees. Alan serves on the Board s Audit, Nominations and Remuneration Committees. Gill chairs the Board s Audit Committee and also serves on the Board s Remuneration and Nominations Committees. Executive non-independent. Non-independent due to significant shareholding. The Board consider Alan to be an independent Director. The Board consider Gill to be an independent Director, and consider that the historic one-off option grant does not impact upon her independence given its quantum and on basis that its award was supported by leading shareholders at the time. 23

26 Introduction to governance Dear Shareholder, I am a strong believer that good corporate governance supports a Company s long-term success. Constantly improving corporate governance is fundamentally about the culture of the governance model and should never become a box-ticking exercise. As Chairman my primary responsibility is the delivery of that model, including running an effective Board and determining where responsibility lies within the Company for the delivery of key outputs. Good corporate governance involves having the appropriate structures for establishing and articulating the Board s chosen strategy, while at the same time establishing the appetite for risk in its delivery. It also involves monitoring the performance of the Company s management in delivering on that strategy and within that risk profile. Elsewhere in this Annual Report you can read about the Company s strategy, the delivery thereof and the management of the key identified risks that arise out of this. On the following pages we have set out the key elements to the corporate governance structures currently in place in the Company. During the year the Company joined the Quoted Companies Alliance ( QCA ), an independent membership organisation that champions the interests of small to mid-size quoted companies. The QCA updated and reissued its own Corporate Governance Code for Small and Mid-Size Quoted Companies in (the QCA Code ). The Board considers that the QCA Code provides the most appropriate guidance in respect of best corporate governance practice and disclosure for a company such as ours and the Board currently draws upon, and benchmarks itself against, this best practice and we have reported on our own corporate governance arrangements accordingly. As the Group is listed on the Alternative Investment Market it is not required to comply with the provisions of the UK Corporate Governance Code (the Code ) issued in September and, having taken account of the additional costs and practicalities involved in doing so and the current size and structure of the Company, the Board considers it desirable to move towards compliance with the Code over the coming years as the Company grows. I expect to report on the additional measures the Company has taken during 2014 in my report next year. We believe this approach to the Code and the QCA Code is in the best interests of shareholders. 24 Hydrodec Group plc Annual Report and Accounts

27 Strategic Report Governance Financial Statements A key aspect of good corporate governance is how a company communicates with its shareholders. In recent years the management team has sought to improve its engagement with the Company s institutional shareholders around interim and annual results. I have recently met a number of investors where the focus was on matters of governance including executive remuneration. However the Company accepts that it can be more difficult to engage with the retail shareholder base over and above its regulatory announcements and the Annual Report. Therefore, in order to facilitate improved communication, the Chief Executive, Ian Smale, now records regular video updates and/or audio interviews at the time of results announcements and on other material news flow which are posted to the Company s website and also carried on other media. Furthermore, and best demonstrated during the aftermath of the Canton incident in December, greater use has been made of the website for the publication of news and updates which do not of themselves justify a formal announcement. We have received a good deal of positive feedback on these initiatives and will no doubt continue to improve in this respect. All shareholders are of course welcome to attend the Company s AGM on 30 June and my colleagues and I look forward to welcoming you there. Also on the topic of communication the Board and management reviewed two of its key external adviser appointments during the year. Following a formal selection process at which the two joint incumbents and five other firms were invited to pitch, the Board resolved to appoint Peel Hunt as its new broker and nominated adviser ( NOMAD ). The broker is an important conduit to the institutional investor existing and potential shareholders alike and in accepting the role of NOMAD Peel Hunt were required to be comfortable with the Company s corporate governance structure and processes generally. Later in the year the management carried out a similar pitch process for the public relations ( PR ) function and Vigo Communications were appointed as PR advisers to the Company. This is another important part of the Company s communication with existing and potential investors and other stakeholders. The function and activities of the Audit, Remuneration and Nominations Committees of the Board are described further in the coming pages. We have recently reviewed the Audit Committee s oversight of the risk management process and we propose to introduce changes to enable the Board and the Audit Committee to develop and monitor a structured risk management system going forward. Given the composition of the Board was reviewed and significantly refreshed at both executive and non-executive level in, I did not oversee a formal evaluation of the performance of the Board, its committees and the individual Directors during. However such a process is already under way in 2014 and I shall continue to review the composition of the Board to ensure there is an appropriate balance of functional and sector skills and experience for the next stage of the Company s growth and development and to ensure that the Board works effectively together as a unit. In addition, and although not required by law or the Company s articles, I have proposed that all Directors stand for annual re-election at the Company s AGM, starting this year. Lord Moynihan Chairman 21 May

28 Report of the Directors The Directors present their report together with the audited financial statements for the year ended 31 December. Results and dividends The consolidated statement of income for the year is set out on page 36. No dividend has been declared or is proposed for the year. Directors and their interests The Directors who served during the year are set out below, together with their beneficial interests in the ordinary shares of the Company: Biographical details are included on pages 22 and 23. Ordinary shares of 0.5 pence each 31 December 31 December Share options Ordinary shares of 0.5 pence each Share options Andrew Black 176,144,798 81,267,021 Alan Carruthers 1,278, ,000 Chris Ellis 892, ,849 Gillian Leates 136, , , ,000 Mark McNamara 180,555 6,500, ,667 6,500,000 Lord Moynihan 8,788,659 1,000,000 3,000,326 1,000,000 Ian Smale 473, ,000 Further details regarding the share options and the executive Directors interests in the Company s Long Term Incentive Plan are provided in the Remuneration Committee Report on pages 31 to 33. The following Directors had a beneficial interest in warrants to subscribe for ordinary shares: 16 pence exercise price 31 December 31 December 8 pence exercise price 16 pence exercise price 8 pence exercise price Andrew Black 13,000,000 7,000,000 10,000,000 7,000,000 Lord Moynihan 1,500,000 These warrants were granted in connection with subscriptions for the Company s fixed rate secured loan note instruments, all of which have now been repaid. The warrants exercisable at 8p per ordinary share may be exercised at any time prior to 14 June The warrants exercisable at 16p per ordinary share may be exercised at any time prior to 19 December The grants of these warrants are unconnected with the Directors appointments to the Board. Substantial shareholdings As at 31 December the Company was aware of the following beneficial interest in 3 per cent or more of its issued voting share capital: Shareholder Holding Andrew Black 23.59% Aviva plc (and subsidiaries) 15.85% Thesis Asset Management plc 12.20% Royal London Asset Management Limited 5.11% Employee involvement The Group s policy is to encourage involvement at all levels, as it believes this is essential for the success of the business. Employees are encouraged to present their views and suggestions in respect of the Group s performance and policies. An employee share investment plan is under consideration for adoption during 2014 to allow employees a tax efficient means of investing in the Company. Occupational health and safety and environment ( OHSE ) The Group operates complex industrial plants involving hazardous conditions, substances and materials. As a consequence it places great emphasis on our environmental performance and the safety of our employees and our broader communities and strives continuously to further improve in these areas. It has dedicated OHSE personnel providing advice and support to staff, customers, suppliers and other visitors, as well as coordinating the fulfilment of the Group s regulatory obligations. Following the incident at Canton in December a full OHSE review was undertaken and the Board determined to establish a new OHSE Committee during the year. Currently the full Board sits as the OHSE Committee with the Chief Operating Officer also in attendance. During 2014 we propose to appoint a new Committee Chairman, independent from the Board and management. 26 Hydrodec Group plc Annual Report and Accounts

29 Strategic Report Governance Financial Statements Financial risk management objectives and policies The Group s financial instruments comprise cash, liquid resources and various items, such as trade receivables, trade payables and finance losses that arise directly from, or in support of, its operations. The main risks arising from the Group s financial instruments are currency risk, interest rate risk, credit risk and liquidity risk. The Directors review the policies for managing each of these risks on an ongoing basis and they are summarised in note 20 to the financial statements. These policies have remained unchanged from previous years. Going concern The financial statements have been prepared on the going concern basis, which assumes that the Group will have sufficient funds to continue in operational existence for the foreseeable future. The Group s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current available working capital and working capital facilities for the next 12 months. Therefore the Directors consider the going concern basis appropriate. Directors indemnity and insurance The Company has granted an indemnity to its Directors and officers under which the Company will indemnify them, subject to the terms of the deed of indemnity, against all costs, charges, losses and liabilities incurred by them in the performance of their duties. The Company has also arranged directors and officers liability insurance. Related party transactions In addition to the related party transactions disclosed in note 25 to the financial statements and as required by the AIM Rules, the Directors report that during the year Aviva plc (and its subsidiaries), being a holder of more than 10 per cent of the Company s voting share capital at the time, subscribed for 37,244,444 ordinary shares for total consideration of 4,190,000 in the Company s placing of shares in October. Statement of Directors responsibilities The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have to prepare financial statements in accordance with International Financial Reporting Standards as adopted by the European Union ( IFRSs ) and elected to prepare parent company financial statements in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). The financial statements are required by law to give a true and fair view of the state of affairs of the Group and parent company and of the profit or loss of the Company and Group for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable UK accounting standards and IFRS have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. In so far as the Directors are aware: there is no relevant audit information of which the Company s auditors are unaware; and the Directors have taken all steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. The Directors are responsible for keeping adequate accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditor Grant Thornton UK LLP, offer themselves for reappointment as auditors in accordance with the section 489 of the Companies Act On behalf of the Board Ian Smale Chief Executive Officer 21 May 2014 Company registration no

30 Corporate governance report Role of the Board and management The Board s primary role is the protection and enhancement of long-term shareholder value. To fulfil this role, the Board is responsible for the overall management and corporate governance of the consolidated entity including its strategic direction, establishing goals for management and monitoring the achievement of these goals. From time to time the Board may delegate or entrust to any Director holding executive office (including the CEO) such of its powers, authorities and discretions for such time and on such terms as it thinks fit. The Board has adopted a Delegation of Board authority which establishes those matters which it is considered appropriate remain within the overall control of the Board (or its committees) and those which are delegated to the CEO (or onwards as appropriate). This delegation authority was reviewed and updated during the year. In addition to overall Group strategy, the Board approves the annual budget and retains control over corporate activity (mergers, acquisitions, joint ventures, material disposals and investments) and material contract and financing decisions (over and above set value/credit-risk limits). Management s role is to implement the strategic plan established by the Board and to work within the corporate governance and internal control parameters established by the Board. Role of Chairman and Chief Executive Officer There is a clear division of responsibilities between the running of the Board and the executive responsible for the Group s business. The Chairman is responsible for leadership of the Board, ensuring its effectiveness and setting the agenda for Board meetings. Once strategic objectives have been agreed by the Board, it is the Chief Executive Officer s responsibility to ensure they are delivered upon and consistently to be accountable to the Board. The Chief Executive Officer regularly meets the executive management team which comprises the executive Directors and senior members of the management team. The day-to-day operations of the Group are managed by the executive management team. Board processes The full Board hold meetings quarterly and at any other time as may be necessary to address any specific significant matters that may arise. The agenda for Board meetings is prepared in conjunction with the Chairman. Submissions are circulated in advance and for regular quarterly Board meetings will include operational and financial updates together with papers relating to specific agenda items. Management prepare monthly finance reports which allow the Board to assess the Company s activities and review its performance. Non-Board executives are regularly involved in Board discussions and Directors have other opportunities, including regular visits to operations, for contact with a wider group of employees. To assist in the execution of its responsibilities, the Board has established an Audit Committee, a Remuneration Committee and a Nominations Committee and a framework for the management of the consolidated entity including a system of internal control. The Board is ultimately responsible for the Company s system of internal control and for reviewing its effectiveness. This includes financial, operational and compliance controls and risk-management systems. The Board has reviewed the effectiveness of the system of internal control during the year. In particular, it has reviewed and updated the process for identifying and evaluating the significant risks affecting the Company and policies by which these risks are managed. Internal control systems are designed to meet the Company s particular needs and the risks to which it is exposed. Accordingly, the internal control systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against misstatement and loss. 28 Hydrodec Group plc Annual Report and Accounts

31 Strategic Report Governance Financial Statements Composition of the Board The Board currently comprises seven Directors. This may be increased where it is felt that additional expertise is required in specific areas, or when an outstanding candidate is identified. The composition of the Board is determined using the following principles: a majority of the Board should be non-executive Directors; the role of Chairman is to be filled by a non-executive Director; the Board should have enough Directors to serve on various committees of the Board without overburdening the Directors or making it difficult for them to fully discharge their responsibilities; the Company Secretary should not be a member of the Board but should attend meetings and should report directly to and advise the Chairman, and not the executives, on corporate governance matters; and Directors appointed by the Board are subject to election by shareholders at the following annual general meeting and thereafter Directors are subject to re-election every year. The Board has considered whether the appointment of a Senior Independent Director ( SID ) is necessary or appropriate given the current composition of the Board. At present the Board do not believe that such an appointment is required. Conflict of interest Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. Where the Board believes that a significant conflict exists, the Director concerned is either not present or does not take part in discussions and voting at the meeting whilst the item is considered. During the year Andrew Black recused himself from Board discussions and voting when his offer of a revolving credit facility to finance the acquisition of OSS was under consideration. Independent professional advice and access to Company information Each Director has the right of access to all relevant Company information and to the Company s executives and, subject to prior consultation with the Chairman, may seek independent professional advice at the Company s expense. A copy of any advice received by the Director is to be made available to all other members of the Board. Committees The report of the Remuneration Committee is set out on pages 31 to 33 and the report of the Audit Committee is set out on page 34. Nominations Committee The role of the Nominations Committee is documented in its Terms of Reference which were most recently reviewed and adopted by the Board of Directors in December and can be accessed on the Company s website. The objectives of the Nominations Committee are: to ensure that the Company has a formal and transparent procedure for the appointment of new executive and non-executive Directors to the Board; and to ensure that the Company reviews the balance and effectiveness of the Board and the senior executive management team, identifying the skills and experience needed for the next stage in the Company s development and those individuals who might best provide them, including appropriate succession plans and considering possible internal candidates for future Board roles. The members of the Nominations Committee for were Lord Moynihan (Chairman), Andrew Black, Alan Carruthers, Gillian Leates and Ian Smale. The Company Secretary also attends meetings. The Committee plans to meet at least twice during the year in the future. The agenda for Nominations Committee meetings is prepared in conjunction with the Chairman. Submissions are circulated in advance relating to specific agenda items. 29

32 Corporate governance report continued Directors attendance record The following table provides details of attendance by Directors who served during the year at Board and committee meetings. Attendance of committee meetings is only shown for committee members and not invitees. Number of meetings Board Remuneration Committee Nominations Committee Audit Committee Number attended Number of meetings Number attended Number of meetings Number attended Number of meetings Number attended Andrew Black Alan Carruthers Chris Ellis 8 8 Gillian Leates Mark McNamara 8 7 Lord Moynihan Ian Smale The role of shareholders The Board of Directors aims to ensure that the shareholders are informed of all major developments affecting the Company s state of affairs. Information is communicated to shareholders as follows: the release of announcements, trading updates and interim and annual financial statements through the Regulatory News Service and on the Company s website; the release of video and audio material around results and material announcements on the Company s website; the full annual financial report is sent to all registered shareholders; proposed major changes in the Company which may impact on share ownership rights are submitted to a vote of shareholders; and notices of all meetings of shareholders are sent to all registered shareholders. The Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the Company s strategy and goals. Important issues are presented to the shareholders as separate resolutions. The Notice of Annual General Meeting is included at the end of this document. The Company s auditors are also invited to attend the Annual General Meeting and are available for discussion in relation to the Company s financial statements. 30 Hydrodec Group plc Annual Report and Accounts

33 Strategic Report Governance Financial Statements Remuneration Committee report The role of the Remuneration Committee is documented in its Terms of Reference which were most recently reviewed and adopted by the Board of Directors in December and can be accessed on the Company s website. The objectives of the Remuneration Committee are: to ensure that the Company s directors and senior executives are fairly rewarded for their individual contributions to the Company s overall performance by determining their pay and other remuneration; and to demonstrate to all shareholders that the general policy relating to and actual remuneration of individual senior executives of the Company is set by a committee of the Board members who have no personal interest in the outcome of the decisions and who will give due regard to the interests of the shareholders and to the financial and commercial health of the Company. The members of the Remuneration Committee for were Lord Moynihan (Chairman), Andrew Black, Alan Carruthers and Gillian Leates. The Company Secretary also attends meetings. The Chief Executive Officer may be invited to Remuneration Committee meetings at the discretion of the Committee. The Committee plans to meet at least twice during the year. The agenda for Remuneration Committee meetings is prepared in conjunction with the Chairman. Submissions are circulated in advance and may include remuneration benchmark surveys and best practice guidelines together with papers relating to specific agenda items. Remuneration policy The Remuneration Committee intends that its policy and practice should align with and support the implementation of the Company s strategy and effective risk management for the long term. The Committee seeks to ensure that this principle is applied and it seeks to have regard to the views of shareholders. The policy is intended to motivate the right behaviours and to ensure that any risk created by the remuneration structure is acceptable to the Committee and within the risk appetite of the Board and its strategy. Remuneration packages for the executive Directors currently comprise a combination of annual salary, annual performance bonus (part cash and part deferred into ordinary shares through a Joint Share Ownership Plan ( JSOP )) and interests in a Long Term Incentive Plan ( LTIP ). Previously Directors were granted share options pursuant to a share option scheme but this is now only used occasionally and generally for those below the senior executive management team. Implementation of the policy Salary The Remuneration Committee continues to review the executive Directors salaries against appropriate benchmark surveys for executive directors of AIM companies of a similar scale. The Committee notes that the salaries fall towards the higher end of the benchmark range and it believes that these remain appropriate given the experience of the individuals concerned, the overall remuneration packages and the current growth phase of the Company. There was no increase in these base salaries in. The non-executive Directors fees (including those of the Chairman) are reviewed and benchmarked annually. They have not increased for several years. No additional fees are paid for serving on or chairing Board committees. Annual bonus Executive Directors and other members of the senior executive management team are entitled to participate in an annual bonus scheme pursuant to which they can earn up to 100 per cent of their base annual salary. Despite having qualified for an annual bonus for by reference to the performance parameters agreed at the start of that year they agreed to waive any entitlement. The performance parameters for the bonus related to: a 60 per cent weighting towards delivering the plan safely with reference to EBITDA, EBITDA run-rate, production/utilisation and safe operations; and a 40 per cent weighting towards key milestones including positive EBITDA trajectory, strategic transactions, expansion, IP development and investor relations. The Remuneration Committee approved a total annual bonus pot for for the senior executive management team representing approximately 50 per cent of the maximum potential aggregate bonus award. Individual bonuses were then agreed between the Committee and the Chief Executive Officer by reference to individual contributions towards the targets. In terms of benchmarking against AIM companies of a similar scale, the bonus awards to the Executive Directors are slightly higher than the median in terms of percentage of salary. 50 per cent of the annual bonus was paid in cash in respect of that period. The balance was deferred by the senior executive management team into 2014 and will be settled through the issue of interests in a JSOP. 31

34 Remuneration Committee report continued Long Term Incentive Plan In November 2011 shareholders approved the Hydrodec Group plc LTIP for the purposes of attracting, retaining and motivating key executives of the Group and securing greater alignment of shareholders and management s interests with transparency over performance targets. Awards were granted to selected members of the senior executive team effective 15 January and in the case of Chris Ellis on his appointment on 7 July. An award entitles the executive to receive a fixed proportion of a share pool conditional on achieving certain share price targets and continued employment within the Group. The aggregate number of ordinary shares in the share pool will be determined by reference to growth in the market capitalisation of the Company (less appropriate adjustments for fundraisings) and will be conditional on the achievement of the following share price targets on or before 15 January 2015: 16 pence, 20 pence and 25 pence per ordinary share (each a Share Price Threshold ). In the normal course, all Awards will vest on 15 January 2015 subject to the achievement of the share price targets and continued employment with the Group. Awards will not vest at all unless the 16 pence Share Price Threshold is achieved. To achieve a Share Price Threshold, the average closing price of an ordinary share over any 90 dealing day period ending on or before 15 January 2015 must be equal to or exceed the relevant Share Price Threshold. The aggregate value of ordinary shares comprised in the share pool will equal 15 per cent of the growth in market capitalisation of the Company between 1 November 2011 and the first date on which a Share Price Threshold is met and successive subsequent growth in market capitalisation upon achievement of any higher Share Price Thresholds. The number of ordinary shares in the pool will be determined by reference to the closing mid-market price on each relevant date on which a Share Price Threshold is met. The executive Directors who have been granted awards, and their proportion of the share pool, are as follows: Ian Smale Chris Ellis Mark McNamara per cent per cent per cent During the year the existing awards were restructured as various classes of shares in Hydrodec Holdco Limited ( Holdco ), a subsidiary of Hydrodec Group plc. The Holdco articles of association entitle the individuals to exchange their Holdco shares for shares in the Company, determined by reference to the individual s proportionate interest in the share pool, if the Share Price Thresholds are met. Any shares in the Company acquired following exchange will be subject to restrictions on sale and transfer until 12 months after the date on which the relevant hurdle is met. For illustrative purposes only the number of ordinary shares in the Company which may be issued to the executive Directors in exchange for their shares in Holdco if the 16p share price hurdle is met on or prior to 15 January 2015 (and assuming no further issue of shares in the Company prior to such date) is as follows: Director Number of ordinary shares* Ian Smale 11,250,000 Chris Ellis 6,750,000 Mark McNamara 4,500,000 * assuming share price of 16p on the date on which the share price hurdle is met If the 20p and/or 25p share price hurdles were to be met the number of shares would be considerably higher. The mid-market price of an ordinary share was 12.25p on 1 January and p on 31 December, with a high and low during the year of 14.25p and 8.125p respectively. The Remuneration Committee would expect to introduce a new three year LTIP following the expiry of the existing scheme in January 2015 and only after having consulted with the Company s principal shareholders. Directors remuneration The following table shows emoluments paid to Directors during the financial year, applying the average exchange rates (AUD to USD and GBP to USD) used in the financial statements. 32 Hydrodec Group plc Annual Report and Accounts

35 Strategic Report Governance Financial Statements Salary/fees Bonus Total emoluments Total emoluments Current Directors: Andrew Black (non-executive) Alan Carruthers (non-executive) * Chris Ellis * Gillian Leates (non-executive) Mark McNamara Lord Moynihan (non-executive Chairman) * Ian Smale * Past Directors: Neil Gaskell (non-executive Chairman) 90* John Gunn (non-executive) 86** Paul Manchester 142* 1, ,793 1,509 * from appointment or to resignation during period ** includes compensation for loss of office There were no pension contributions or benefits in kind made to Directors during the period (: USD 13,000 in pension contributions). Share options In 2005 the Company established an unapproved share option scheme pursuant to which certain Directors and other senior members of staff have been granted share options. Options granted under this scheme typically have a vesting schedule of between two to three years and exercise prices corresponding to the market price of a share at the date of grant. With the exception of historic awards to Mark McNamara, none of the executive Directors have been granted options pursuant to this scheme. Indeed, with the introduction of the LTIP, the Committee would not expect to grant any further awards under this scheme to executive Directors except in exceptional circumstances (such as where the tax residence of individuals determines that they cannot participate efficiently in other schemes). On the appointment of certain non-executive Directors one-off awards of options have historically been made following consultation with principal shareholders. The number, exercise price and earliest and latest dates of exercise of options over ordinary shares in the Company held by Directors at the end of the year were as follows: Share options Exercise price (pence) Earliest exercise date Latest exercise date Gillian Leates 500, p n/a 16 Jul 2019 Mark McNamara 5,000, p 15 Jul Apr 2015 Mark McNamara 1,500, p 24 Jan Jan 2018 Lord Moynihan 1,000, p n/a 24 Oct 2022 Options issued to Gillian Leates and Lord Moynihan are only exercisable on the attainment of predetermined share price targets. No options were granted to Directors during the year and no options held by Directors were exercised, lapsed or forfeited during the year. Service contracts The executive and non-executive Directors have entered into service contracts with the Group that are terminable by either party on not less than 12 months prior notice (reducing to six months prior notice with effect from 15 January 2015). Pensions and private healthcare There are no pension or private healthcare arrangements in place for Directors, except for any mandatory contributions for superannuation as may be required by regulations in Australia. Directors share interests The Directors shareholdings in the Company are set out in the Report of the Directors on page 26. Lord Moynihan Chairman of the Remuneration Committee 21 May

36 Audit Committee report The role of the Audit Committee is documented in its Terms of Reference which were most recently reviewed and adopted by the Board in December and can be accessed on the Company s website. The purpose of the Committee is to assist the Board in the effective discharge of its responsibilities for financial reporting, corporate control and risk management. Its objectives are: to increase shareholder confidence and to ensure the credibility and objectivity of published financial information; to assist the Board in meeting its financial reporting responsibilities; to assist the Board in ensuring the effectiveness of the Company s internal accounting and financial controls; to strengthen the independent position of the Company s external auditors by providing channels of communication between them and the non-executive Directors; and to review the performance of the Company s external auditing functions. The members of the Audit Committee for were Gillian Leates (Chairman), Alan Carruthers and Lord Moynihan. The Company Secretary also attends meetings. The external auditors, the Chief Executive Officer and the Chief Financial Officer may be invited to Audit Committee meetings at the discretion of the Committee. The Committee plans to meet at least four times during the year. The Audit Committee reviews the performance of the external auditors on an annual basis and plans to meet with then during the year as required to discuss audit planning, any potential changes in accounting policies or related accounting issues, any issues arising from the half year review or full year audit and any other special matters or investigations deemed necessary by the Board. The agenda for Audit Committee meetings is prepared in conjunction with the Chairman. Submissions are circulated in advance and may include drafts of interim and annual financial statements, related papers from management, audit planning and key issues memoranda from the external auditors, and papers relating to specific agenda items. The main items addressed by the Audit Committee in the period since the approval and signing of the report and accounts have been: review and approval of the unaudited interim financial statements; independent consideration of the options, structure and terms for financing the acquisition of the OSS business and ultimate approval of Andrew Black s offer of short-term finance (Andrew Black is not a member of the Audit Committee); review of process for annual risk management review; receiving and considering management s risk management submissions; reviewing the Group s finance function capability, particularly in the light of the acquisition of OSS; and review and approval of the audited report and accounts. In respect of the latter item, significant issues arising and considered included: the accounting treatment for, any management estimates in respect of, and the appropriate disclosure around: -- the Canton incident and related insurance claim; -- the acquisition of the OSS business and treatment of the bargain purchase element arising from the fair value exercise; -- the strategic partnership with G&S; -- the repayment of the unsecured loan stock; -- share-based payments following restructuring of the Long Term Incentive Plan; and -- segmental reporting re-refining and recycling segments a review of the Group s going concern position; a review of the carrying value of the Group s intangible assets and whether any impairment was required; and a review of the non-audit services provided by Grant Thornton to ensure ongoing auditor independence. Gillian Leates Chairman of the Audit Committee 21 May Hydrodec Group plc Annual Report and Accounts

37 Strategic Report Governance Financial Statements Independent auditor s report to the members of Hydrodec Group plc We have audited the Group financial statements of Hydrodec Group plc for the year ended 31 December which comprise the consolidated statement of income, the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the consolidated statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards ( IFRSs ) as adopted by the European Union. This report is made solely to the Company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the Directors and auditor As explained more fully in the Statement of Directors responsibilities set out on page 27, the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s ( APB s ) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council s website at Opinion on financial statements In our opinion the Group financial statements: give a true and fair view of the state of the Group s affairs as at 31 December and of its loss for the year then ended; have been properly prepared in accordance with IFRS as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act Emphasis of matter uncertain measurement of quantum of insurance claim In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosures made in note 5 to the financial statements and of the disclosures of key sources of estimation uncertainty concerning the uncertain amount of the claim settlement from the Group s insurers with regards to the explosion and fire at the US plant in Canton, Ohio. The Group has submitted a claim for its total loss including business interruption which is under review by the insurers for final approval. The ultimate amount to be received from the insurers is therefore unknown at this time and consequently the Directors have estimated a receivable amount for impaired property, plant and equipment based on the book value of the impaired assets at the time of the incident. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Report of the Directors for the financial year for which the Group financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: certain disclosures of Directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the parent company financial statements of Hydrodec Group plc for the year ended 31 December. David Miller Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor Chartered Accountants London 21 May

38 Consolidated statement of income For the year ended 31 December Note Revenue 2 40,101 26,112 Cost of sales (30,664) (20,745) Gross profit 9,437 5,367 Operating costs: Employee benefit expense (8,595) (7,083) Other operating costs (7,871) (7,244) Depreciation (868) (182) Foreign exchange loss (664) (35) Total operating costs (17,998) (14,544) Operating loss (8,561) (9,177) Analysed as: Underlying operating loss (3,150) (4,343) Growth costs 2 (3,256) (2,206) Bargain purchase on acquisition Amortisation of intangible assets 9 (2,499) (2,091) Share-based payments costs 3 (530) (537) Operating loss (8,561) (9,177) Finance costs 4 (9,100) (5,343) Impairment of property, plant and equipment 5 (7,160) Other income 5 7,160 Finance income 7 3 Profit/(loss) on sale of asset 3 (32) Loss on ordinary activities before taxation (17,651) (14,549) Income tax Loss for the year (17,449) (14,196) Loss for the year attributable to: Non-controlling interests 259 Owners of the parent (17,708) (14,196) Total loss for the year (17,449) (14,196) Loss per share basic/diluted 7 (3.73) cents (3.48) cents The accompanying accounting policies and notes form an integral part of these financial statements. 36 Hydrodec Group plc Annual Report and Accounts

39 Strategic Report Governance Financial Statements Consolidated statement of comprehensive income For the year ended 31 December Total loss for the year (17,449) (14,196) Other comprehensive income Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign operations (1,890) 594 Total comprehensive loss for the year (19,339) (13,602) Other comprehensive income for the year attributable to: Non-controlling interests 259 Owners of the parent (19,598) (13,602) Total comprehensive loss for the year (19,339) (13,602) The accompanying accounting policies and notes form an integral part of these financial statements. 37

40 Consolidated statement of financial position As at 31 December Note Non-current assets Property, plant and equipment 8 22,866 22,959 Intangible assets 9 23,189 21,622 Investments ,169 44,692 Current assets Trade and other receivables 11 16,965 2,080 Inventories 12 1,572 1,432 Cash and cash equivalents 21,902 1,635 40,439 5,147 Current liabilities Borrowings bank overdraft (542) Trade and other payables 13 (12,587) (4,557) Provisions 14 (34) (143) (12,621) (5,242) Net current assets/(liabilities) 27,818 (95) Non-current liabilities Employee obligations (105) (112) Provisions 14 (952) (356) Borrowings 15 (1,276) (16,979) Deferred taxation 16 (2,025) (1,669) (4,358) (19,116) Net assets 69,629 25,481 Equity attributable to equity holders of the parent Called up share capital 17 6,619 3,870 Share premium account 130,524 72,446 Equity reserve 6,929 Merger reserve 48,940 47,967 Treasury reserve (44,186) (43,308) Employee Benefit Trust (1,312) (1,286) Foreign exchange reserve 2,850 4,906 Share option reserve 7,330 6,640 Profit and loss account (85,008) (72,683) 65,757 25,481 Non-controlling interests 3,872 Total equity 69,629 25,481 The financial statements were approved by the Board of Directors on 21 May 2014 and were signed on its behalf by: Ian Smale Chief Executive Officer Chris Ellis Chief Financial Officer The accompanying accounting policies and notes form an integral part of these financial statements. 38 Hydrodec Group plc Annual Report and Accounts

41 Strategic Report Governance Financial Statements Consolidated statement of cash flows For the year ended 31 December Cash flows from operating activities Loss before tax (17,651) (14,549) Adjustments for: Net finance costs 9,093 5,340 Amortisation and depreciation 5,172 3,567 Bargain purchase recognised in statement of income (874) Loss/(gain) on disposal of fixed assets (3) 32 Share-based payment expense Foreign exchange movement Operating cash flows before working capital movements (3,352) (4,983) (Decrease)/increase in inventories 533 (872) (Increase)/decrease in receivables (1,517) 481 Increase in trade and other payables Decrease in provisions (709) (208) Taxes paid (108) Net cash outflow from operating activities (4,903) (4,756) Cash flows from investing activities Acquisition of OSS Group (7,664) Purchase of property, plant and equipment (1,046) (1,151) Proceeds from disposal of property, plant and equipment Interest received 7 3 Net cash outflow from investing activities (8,687) (1,133) Cash flows from financing activities Issue of new shares 39,491 Costs of share issue (814) Proceeds from loans 17,446 4,039 Repayment of loans (21,085) (1,777) Proceeds from sale of investment 1,733 Interest paid (1,924) (1,981) Repayment of lease liabilities (470) (104) Net cash inflow from financing 34, Increase /(decrease) in cash and cash equivalents 20,787 (5,712) Movement in net cash Cash 1,635 6,977 Bank overdraft (542) (222) Exchange differences on cash and cash equivalents Opening cash and cash equivalents 1,115 6,805 Increase /(decrease) in cash and cash equivalents 20,787 (5,712) Closing cash and cash equivalents 21,902 1,093 Reported in the consolidated statement of financial position as: Cash and cash equivalents 21,902 1,635 Borrowings bank overdraft (542) 21,902 1,093 The accompanying accounting policies and notes form an integral part of these financial statements. 39

42 Consolidated statement of changes in equity For the year ended 31 December Share capital Share premium Equity reserve Merger reserve Treasury reserve Employee benefit trust Foreign exchange reserve Share option reserve Profit and loss account Total attributable to owners of the parent Noncontrolling interest At 1 January 3,598 66,969 13,650 45,768 (41,322) (1,244) 5,815 5,803 (63,131) 35,906 35,906 Exchange differences 173 3, ,199 (1,986) (24) (4,258) 21 Share-based payment Issue of shares 99 2,258 (18) 2,339 2,339 Transfer (7,377) (301) 7,678 Transactions with owners 272 5,477 (6,721) 2,199 (1,986) (42) (4,258) 558 7,678 3,177 3,177 Exchange differences 3, (3,034) Loss for the year (14,196) (14,196) (14,196) Total comprehensive income 3, (17,230) (13,602) (13,602) At 31 December 3,870 72,446 6,929 47,967 (43,308) (1,286) 4,906 6,640 (72,683) 25,481 25,481 Exchange differences 78 1, (878) (26) (1,774) 24 6 (6) Share-based payment Issue of shares 2,671 57,423 60,094 60,094 Issue costs (814) (814) (814) Transfer (7,069) (361) 7,430 Investment in subsidiary (303) (303) 3,619 3,316 Transactions with owners 2,749 58,078 (6,929) 973 (878) (26) (1,829) 554 7,127 59,874 3,613 63,487 Exchange differences (282) 136 (1,744) (1,890) (1,890) Loss for the year (17,708) (17,708) 259 (17,449) Total comprehensive income (282) 136 (19,452) (19,598) 259 (19,339) At 31 December 6, ,524 48,940 (44,186) (1,312) 2,850 7,330 (85,008) 65,757 3,872 69,629 Total equity A description of each reserve is set out in note 18. The accompanying accounting policies and notes form an integral part of these financial statements. 40 Hydrodec Group plc Annual Report and Accounts

43 Strategic Report Governance Financial Statements Notes to the financial statements For the year ended 31 December 1 Accounting policies The Group s principal activities are grouped into the following principal service lines: re-refining of used transformer oil into, and sale of, new SUPERFINE oil; and collection and treatment of waste lubricant oil and the sale of recycled oil products. Hydrodec Group plc is incorporated and domiciled in England and Wales and situated at 50 Curzon Street, 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 ( IFRC ) 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 following standards have been amended or became effective during the year. The Group s consolidated financial statements have been prepared in accordance with these changes where relevant: IAS 1 Amendment: Presentation of other items of comprehensive income (effective 1 January ) IAS 19 Amendment: Defined benefit plans (effective 1 January ) IFRS 13 Fair Value Measurement (effective 1 January ) Application of these standards did not result in any impact on the financial statements for. IFRS standards and interpretations not yet adopted The following standards and interpretations are in issue but not yet adopted by the EU: IFRS 10 Consolidated Financial Statements (IASB effective date 1 January *) IFRS 11: Joint arrangements (IASB effective date 1 January *) IFRS 12: Disclosures of interest in other entities (IASB effective date 1 January *) IAS 27 (Revised), Separate Financial Statements (IASB effective date 1 January *) IAS 32 Amendment: Offsetting financial assets and financial liabilities (effective 1 January 2014) Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36) (effective 1 January 2014) * EU mandatory effective date is 1 January 2014 Standards issued but not yet effective In addition, the following is a list of standards that are in issue but are not effective in, and have not yet been endorsed for use in the EU, together with the effective date of application to the Group: IFRS 9: Financial instruments (no effective date) The Directors do not anticipate that the adoption of these standards will have a material impact on the Group s reported results. 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. Presentational currency The Group presents its financial statements in US dollars translated at the closing rate each year, as the Group s business is influenced by pricing in international commodity markets which are primarily dollar based. Basis of consolidation The Group financial statements consolidate those of the Company and its subsidiary undertakings drawn up to 31 December. 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. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Business combinations Business combinations are dealt with by the acquisition method. This 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. Acquisition costs are recognised as an expense in the period in which they are incurred. 41

44 Notes to the financial statements For the year ended 31 December Disposal of non-controlling interest Disposal of an investment where there is no loss of control is recognised in equity. No gain or loss on disposal is recorded in profit or loss. Goodwill Goodwill, 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, is initially recognised as an asset at its fair value and is subsequently measured at cost less any accumulated impairment losses. If the fair values of identifiable net assets exceed fair value of consideration paid, the excess amount (ie gain on a bargain purchase) is recognised in profit or loss immediately. Investments in associates Investments in associates are initially recognised at cost and subsequently accounted for using the equity method. Any goodwill or fair value adjustment attributable to the Group s share in the associate is not recognised separately and is included in the amount recognised as investment in associates. The carrying amount of the investment in associates is increased or decreased to recognise the Group s share of the profit or loss and other comprehensive income of the associate, adjusted where necessary to ensure consistency with the accounting policies of the Group. Unrealised gains and losses on transactions between the Group and its associates are eliminated to the extent of the Group s interest in those entities. Where unrealised losses are eliminated, the underlying asset is also tested for impairment. 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 consolidated financial statements, the results and financial position of each entity are firstly expressed in sterling, which is the functional currency of the parent company. The presentational currency for the consolidated financial statements is US dollars at the rate of exchange ruling at the consolidated statement of financial position date, and at the average rate for the statement of comprehensive income where this approximates to the actual rate. Any differences arising from this procedure have been included in other comprehensive income. Foreign currency transactions 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 statement of financial position date. All differences are taken to profit or loss with the exception of differences on translation of the net investment in a foreign Group entity. These are taken directly to other comprehensive income until the disposal of the net investment, at which time they are re-classified from equity to profit or loss. 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 the weighted average exchange rate. The exchange differences arising on the retranslation are taken to other comprehensive income. On disposal of a foreign entity, accumulated exchange differences are re-classified from equity to profit or loss. 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. Government grants The Australian Government provides an incentive for product stewardship of used oil which is recognised at the point of delivery of the associated revenue stream. Insurance income The Company has business interruption insurance which provides coverage if business operations are suspended because of the loss of use of property and equipment resulting from a covered loss. Accordingly insurance income is recognised on an accrual basis as a result of an insurance event under the terms of such coverage. Interest income Interest income is brought to account as it accrues, using the effective interest method. 42 Hydrodec Group plc Annual Report and Accounts

45 Strategic Report Governance Financial Statements 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 diminishing value basis. The rates used vary between 5% and 33% per annum and residual values and useful economic lives are reassessed annually. Assets are derecognised if subject to impairment. Patents All costs incurred in establishing and or maintaining patents are expensed in the period in which they are incurred. Growth costs Expenditure on growth costs is classified into two key categories: Market expansion costs Expenditure on extending existing products or operations into new markets is recognised as an expense in the period in which it is incurred. New product development costs Expenditure on new product development 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 At each balance sheet 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. 43

46 Notes to the financial statements For the year ended 31 December 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. 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 and is not subject to subsequent reversal. 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 the unsecured loan stock (which was previously convertible) was determined using a market interest rate for an equivalent non-convertible instrument. The amount was recorded as a liability on an amortised cost basis until extinguished on repayment of the loan stock. The remainder of the proceeds was allocated to the conversion option, which was recognised and included in shareholders equity. Derecognition of financial liabilities A financial liability is removed from the balance sheet when the obligation is discharged, or cancelled, or expires. On the redemption or settlement of debt securities issued by the Group, the Group derecognises the debt instrument and records a gain or loss being the difference between the debt s carrying amount and the cost of redemption or settlement. The same treatment applies where the debt is settled via the issue of new ordinary shares calculated by reference to the prevailing market price of those shares. Interest-bearing loans and borrowings All loans and borrowings are initially recognised at 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 and Directors. Equity-settled share-based payments are measured at fair value of the instruments granted (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. Warrants The Group has issued equity-settled warrants in connection with fixed rate loan notes. Equity-settled warrants are measured at fair value of the instruments granted (excluding the effect of non-market-based exercise 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 exercise period (or until fixed rate loan notes are repaid), based on the Group s estimate of the shares that will eventually be issued and adjusted for the effect of non-market-based exercise conditions. 44 Hydrodec Group plc Annual Report and Accounts

47 Strategic Report Governance Financial Statements 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. Provisions Provisions are recognised when: the Group has a present legal or constructive obligation as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Trade and other receivables Trade receivables, which generally have 30-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 other comprehensive income or equity in which case the related deferred tax is also charged or credited directly to other comprehensive income or equity. 45

48 Notes to the financial statements For the year ended 31 December 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 consolidated statement of comprehensive income. Going concern The financial statements have been prepared on the going concern basis, which assumes that the Group will have sufficient funds to continue in operational existence for the foreseeable future. The Group s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current available working capital and working capital facilities for the next 12 months. Key judgements in applying the Group s accounting policies In the process of applying the Group 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 effect on the amounts of assets and liabilities within the next financial year, are discussed below. Valuation and 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 The original cost of 19.5 million is 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 and for the purposes of calculating the period over which the costs are amortised it has been estimated that the cost will be amortised over 15 years (note 9). The intangible assets recognised during the year relate to customer contracts and brand name acquired by the Group through the acquisition of the principal business and assets of OSS Group Limited (note 21). The original cost of 2.8 million is amortised over the estimated useful life of the assets which management estimate will be three years for these purposes (note 9). 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 is made. 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 9). Estimation of insurance receivable An estimate is triggered by an insurance event with reference to the relevant sections of the insurance policy. In determining the business interruption receivable, income is based on actual orders and sales pipelines at the time of the event. The Directors have estimated a receivable for impaired property, plant and equipment based on the book value of the impaired assets at the time of the incident whilst recognising, on the basis of existing knowledge, that the outcome in the next financial year could be materially different (note 5). Useful lives and impairment of property, plant and equipment Property, plant and equipment are 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 8). In determining whether property, plant and equipment assets are impaired, if the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is an impairment loss with amounts charged to the statement of comprehensive income in the relevant periods (note 8). Provisions Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date. In making this assessment management have referenced third party costs and the likelihood of the full cost being incurred (note 14). 46 Hydrodec Group plc Annual Report and Accounts

49 Strategic Report Governance Financial Statements 2 Revenue and operating loss 2.1. Segment analysis Following the acquisition of the principal assets and business of OSS Group Limited in September, the Group now operates two main operating segments: Re-refining: principally the treatment of used transformer oil and the sale of SUPERFINE TM oil Recycling: principally the collection and treatment of waste lubricant oil and the sale of recycled oil products The financial information detailed below is frequently reviewed by the Board (the Chief Operating Decision Maker): Year ended 31 December Re-refining Recycling Unallocated Total Revenue 28,857 11,244 40,101 Underlying operating EBITDA 3, (3,803) 187 Growth costs (2,453) (266) (537) (3,256) Bargain purchase Depreciation (2,498) (138) (37) (2,673) Amortisation (2,133) (366) (2,499) Share-based payment costs (530) (530) Foreign exchange loss (664) (664) Operating (loss)/profit (3,768) 114 (4,907) (8,561) Re-refining Recycling Unallocated Year ended 31 December Revenue 26,112 26,112 Underlying operating EBITDA (524) (2,308) (2,832) Growth costs (1,635) (571) (2,206) Depreciation (1,456) (20) (1,476) Amortisation (2,091) (2,091) Share-based payment costs (537) (537) Foreign exchange (loss)/gain 18 (53) (35) Operating loss (5,688) (3,489) (9,177) Total 2.2. Geographic analysis The Group s revenues from external customers and its non-current assets are divided into the following geographical areas: Revenue Non-current assets Revenue Non-current assets UK 11,244 13,467 USA 20,603 6,289 18,372 13,994 Australia 8,254 14,675 7,740 16,954 Unallocated 11,738 13,744 40,101 46,169 26,112 44,692 Revenue substantially comprises amounts earned on receivables from trade customers. During the year one customer in the US accounted for more than 10 per cent of the Group s total revenue. Revenue recognised during the year and the amounts outstanding at the year-end in respect of that customer were as follows: Revenue Outstanding at year end Revenue Outstanding at year end Customer 10, ,

50 Notes to the financial statements For the year ended 31 December 2.3. Loss on ordinary activities The loss on ordinary activities before taxation is stated after charging/(crediting) the following amounts: Revenue - grant income (2,327) (1,986) Cost of goods sold inventory expensed 16,479 11,443 other direct costs 8,514 5,406 employee benefit expense 3,865 2,602 depreciation 1,805 1,294 Amortisation 2,499 2,091 Share-based payments Depreciation Impairment of property, plant and equipment 7,160 Operating lease rentals land and buildings Treatment of Young contaminated material (58) (167) Exchange loss Fees payable to the Company s auditor for the audit of the annual accounts Fees payable to the Company s auditor and its associates for other services: the audit of the Company s subsidiaries tax and other services 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. Capital expenditure property, plant and equipment 1,047 1, Growth costs The business continues to invest in long term strategic growth initiates focused on geographic expansion and research and development. These costs are analysed as follows: Market expansion development costs 1,747 1,622 New product development Transaction fees and one-time costs ,256 2,206 Recognised in: Employee benefit expense 1,588 1,153 Other operating costs 1,668 1,053 3,256 2, Hydrodec Group plc Annual Report and Accounts

51 Strategic Report Governance Financial Statements 3 Directors and employees Staff costs, excluding key management personnel (shown below), during the year were as follows: Wages and salaries 9,673 7,524 Payroll taxes Share-based payments ,711 8,225 The average number of employees of the Group during the year was: Number Operations Corporate office Number The remuneration of the Group s key management personnel (including executive Directors), are set out below. Additional information on remuneration, share options and pension contributions can be found in the Remuneration Committee Report. Wages and salaries 1,793 1,509 Payroll taxes Share-based payments ,279 1,997 The highest paid Director received emoluments of USD 615,000 (: USD 458,000). Pension contributions for Directors totalled USD nil (: USD 13,000). 4 Finance costs Bank overdrafts and leases Loan stock 8,221 4,582 Fixed rate loan notes Revolving credit facility ,100 5,343 As a result of the repayment of the unsecured loan stock during the period (see note 15), the loan stock finance cost includes a non-cash element of USD 4,937,000 representing the difference between the carrying value of the unsecured loan stock liability and the redemption value of the unsecured loan stock repaid on 8 November. A short-term revolving credit facility was provided by Andrew Black, a Director, during the period to finance the acquisition of the principal business and assets of OSS Group Limited in September. Interest was payable at 7 per cent per annum. This facility was fully repaid (through the issue of new ordinary shares at 11.25p per share) in November as part of the fundraising and debt repayment program (see note 17). 49

52 Notes to the financial statements For the year ended 31 December 5 Impairment and other income On 1 December an explosion and fire at the US plant in Canton, Ohio effectively shut down production there causing significant damage to the main reactors and ancillary equipment. Since the date of the incident the Company along with its insurers and their loss adjusters have gone through a process of establishing the extent of the damage caused, the costs to rebuild it and the estimated time it would take to re-establish full operational capability. The Company has submitted a claim for its total loss including business interruption which is under review by the insurers for final approval. Under its policy the Company has single incident coverage of USD 35,000,000 and in the opinion of the Directors is therefore adequately covered in respect of this claim. Accordingly as at 31 December the Group has estimated a total impairment and write off of assets of USD 7,160,000 for which it has created a corresponding receivable due from the insurers. Based on actual orders and sales pipelines, and after taking account of the proceeds of sale of inventory held at the time of the incident, it has also assumed USD 436,000 of net income receivable for the period from 1 December to 31 December recognised in revenue under the terms of its business interruption coverage. Under the terms of the Group s insurance, the Directors consider the above amounts represent the best estimate of amounts recoverable with certainty in respect of the period under review at the date of preparation of these financial statements. Confirmation of all amounts due to the Group above the value of these assets including any compensation for business interruption will only occur once the loss adjusters have completed their technical review and evaluation which the Directors believe is close to completion and at which time the total claim receivable can be properly estimated and recorded. 6 Income tax Current tax (108) Deferred tax Reversal of temporary differences Adjustment for change in UK tax rate Total tax Loss on ordinary activities before taxation (17,651) (14,549) Rate of corporation tax in the United Kingdom of per cent (: 24.5 per cent) (4,104) (3,565) Effects of: Current tax expense (108) Expenses not deductible for tax purposes Release of deferred tax Tax losses not recognised 3,369 3, A deferred tax asset of approximately USD 17,854,000 (: USD 13,927,000) in respect of unused losses against future taxable profits is not recognised due to the uncertainty of future taxable profits. 7 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: Number of shares Number of shares 467,828, ,944,242 In and, the share options and warrants were anti-dilutive and diluted earnings per share is the same as basic. The calculation of the weighted average number of shares excludes shares which are now held by a member of the Group and in respect of which votes may not be cast at a general meeting (which are treated as treasury shares) and also shares held by the Employee Benefit Trust. 50 Hydrodec Group plc Annual Report and Accounts

53 Strategic Report Governance Financial Statements 8 Property, plant and equipment Land and buildings Plant and equipment Cost At 31 December ,231 23,172 29,403 Change in exchange rates Additions 17 1,134 1,151 Disposals (158) (158) At 31 December 6,287 24,384 30,671 Change in exchange rates (242) (1,655) (1,897) Acquisition 1,953 7,962 9,915 Additions 43 1,004 1,047 Impairment (3,064) (6,206) (9,270) Disposals (186) (186) At 31 December 4,977 25,303 30,280 Accumulated depreciation At 31 December ,687 6,184 Change in exchange rates Depreciation charge for the year 125 1,351 1,476 Disposals (31) (31) At 31 December 625 7,087 7,712 Change in exchange rates (25) (827) (852) Depreciation charge for the year 118 2,555 2,673 Impairment (388) (1,722) (2,110) Disposals (9) (9) At 31 December 330 7,084 7,414 Carrying amount At 31 December 4,647 18,219 22,866 At 31 December 5,662 17,297 22,959 Total Buildings are depreciated at various rates depending on the estimated life of the item. The rates of depreciation vary between 2.5 per cent and 10 per cent per annum. Plant and equipment is depreciated at various rates depending on the estimated life of the item. The rates of depreciation vary between 5 per cent and 33 per cent per annum. The impairment is the result of the assessment of the property, plant and equipment destroyed in the Canton fire on 1 December. Where the recoverable amount of an asset is determined to be less than its carrying amount the asset has been treated as impaired (note 5). The carrying amount of the Group s plant and equipment includes USD 3,127,000 (: USD 303,000) in respect of assets held under finance leases. 51

54 Notes to the financial statements For the year ended 31 December 9 Intangible assets Royalty Re-refining Hydrodec technology Goodwill Contracts Recycling Brand name Cost At 31 December ,684 24,183 6,289 36,156 Exchange translation 131 1, ,595 At 31 December 5,815 25,345 6,591 37,751 Exchange translation (805) (157) Acquisition (note 21.1) 2,354 2,201 4,555 At 31 December 5,010 25,859 6,725 2,354 2,201 42,149 Accumulated amortisation and impairment At 31 December ,829 8,455 3,087 13,371 Exchange translation Provided in the year 530 1,561 2,091 At 31 December 2,440 10,454 3,235 16,129 Exchange translation (38) Provided in the year 523 1, ,499 At 31 December 2,925 12,361 3, ,960 Carrying amount At 31 December 2,085 13,498 3,425 2,175 2,006 23,189 At 31 December 3,375 14,891 3,356 21,622 Total The Group tests intangible assets annually for impairment or more frequently if there are indications that the carrying value might be impaired. The Group considers it has two cash generating units ( CGUs ) re-refining and recycling. Re-refining relates to the global exploitation of the Hydrodec re-refining technology (currently operating in respect of the treatment of used transformer oil and the production and sale of SUPERFINE oils) and recycling relates to the recently acquired OSS business (principally focused on the collection and treatment of other waste oils and the sale of recycled oil products). The recoverable amounts of the CGU are determined from the value in use calculations. Re-refining The royalty was recorded at cost in 2008 and represented the right to receive income based on the quantity of SUPERFINE oil produced for a period of 15 years and commenced in It is being amortised on a straight-line basis and, at 31 December, the remaining unamortised life of the asset was seven years. 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 The intellectual property consists of know-how and trade secrets relating to the technology, some of which is covered by a patent. The patent expired in in respect of certain countries but continues in respect of the US. It is management s view that the useful life of the intellectual property will extend far beyond the life of the patent 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, the remaining unamortised life of the asset was seven years. Goodwill of USD 2,904,000 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 in Value in use is the present value of the projected cash flows of this CGU. The key assumptions regarding the value in use calculations were budgeted growth in revenues, budgeted gross profit margins and the discount rate applied. Budgeted revenue growth and budgeted gross profit margins were estimated based on actual performance over the past two financial years and expected market changes. The discount rate used (13.8 per cent) is a pre-tax rate and reflects the risks specific to the relevant CGU. The Group prepares cash flow forecasts, based on the most recent financial budgets approved by management, which cover a five-year period. After the five-year forecast period a static growth rate of 0 per cent is applied thereafter. The cash flow projections anticipate significant investment and expansion in existing and new markets. This is considered consistent with the stage of the development of the Company and the identified market opportunities that have been assessed. Included within this are various sensitivities, one of which is no further expansion. Even against this key sensitivity, although the headroom is small, there is no impairment. 52 Hydrodec Group plc Annual Report and Accounts

55 Strategic Report Governance Financial Statements Recycling The customer contracts (USD 2,354,000) and brand name (USD 2,201,000) were recognised on acquisition of the principal assets and business of OSS Group Limited as part of the fair value assessment of the assets acquired (see note 21) and will be amortised over their anticipated useful life. Both items will be amortised on a straight-line basis and, at 31 December, the remaining unamortised life of the assets was three years. 10 Investments Through its Japanese subsidiary, the Group owns a 50 per cent interest in Hydrotek Eco Japan Co Limited, a 47.5 per cent interest in Pacific Eco Refining Co Limited and a 5 per cent interest in Central Eco Cycle Co Limited. These entities have not commenced trading and accordingly no financial statements have been incorporated into the consolidated financial statements. 11 Trade and other receivables Trade receivables 6,098 1,191 Other receivables insurance proceeds (note 5) 7,160 Other receivables 2, Other taxation and social security Prepayments and accrued income 1, ,965 2,080 All trade receivable amounts are short term. The carrying value is considered a fair approximation of their fair value. All of the Group s trade and other receivables have been reviewed for indicators of impairment. On acquisition of OSS, certain trade receivables were found to be impaired and an allowance for credit losses of USD 340,000 (: USD nil) was included in the acquisition balance sheet (note 21.1). At 31 December, some of the unimpaired trade receivables are past their due date but all are considered recoverable. The analysis of financial assets is as follows: Less than one month 5,347 1,091 Past due but not impaired ,098 1,191 Credit sales are only made after credit approval procedures are completed, and the carrying value represents the Group s maximum exposure to credit risk. Included in other receivables is deferred consideration of USD 1,584,000 payable by G&S Oil Recycling Group LLC (see note 21.2). The carrying amounts of the Group s trade and other receivables are denominated in the following currencies: Sterling 5, Australian dollars 1, United States dollars 10, Japanese yen 15 16,965 2,

56 Notes to the financial statements For the year ended 31 December 12 Inventories Raw materials 1, Finished goods at cost 263 1,040 1,572 1,432 All inventory is carried at cost. 13 Trade and other payables Trade payables 3,568 1,415 Accruals 7,508 2,540 Finance lease obligations due within 1 year 1, Deferred income ,587 4,557 The carrying value of trade and other payables are considered to be a reasonable approximation of fair value. 14 Provisions Remediation of contaminated stock Current Non-current Remediation of contaminated land Non-current The movement in the provision is represented by: At 31 December 499 Change in exchange rates (68) Additional provisions 650 Released to income statement (57) Utilised in the period for contaminated stock (38) At 31 December 986 The remediation of contaminated stock provision of USD 336,000 relates to stocks of materials at the Young facility dating from the plant s original function, ownership and business strategy. During the period the Company was able to process certain materials for which it incurred costs for remediation services charged to the provision. The cost for treatment and disposal has been reassessed by management and the current remaining provision is deemed to be adequate. The remediation of contaminated land provision of USD 650,000 was recognised on acquisition of the principal assets and business of OSS Group Limited as part of the fair value assessment of the assets acquired (see note 21.1). The provision represents the costs of remediation of land occupied by the Group s operations as estimated by the Directors following advice from an external environmental consultant. 15 Non-current liabilities borrowings Unsecured loan stock 13,732 Fixed rate loan notes ,231 Finance lease liabilities due in 1 5 years 1, ,276 16, Hydrodec Group plc Annual Report and Accounts

57 Strategic Report Governance Financial Statements Unsecured loan stock In November 2007, the Company issued 13,800,000 of convertible unsecured loan stock, convertible at the loan stock holder s option into ordinary share capital of the Company at a price of 19p, subject to anti-dilutive conditions for subsequent share issues at below market price. On 1 November, these conversion rights lapsed and the stock became an unsecured loan, repayable at the Company s determination. On 8 November, the outstanding balance of 12,790,000 was repaid in full together with accrued interest. Fixed rate loan notes Between 24 December and 27 June, the Company received subscriptions for a total of 5,000,000 of fixed rate loan notes The notes were secured over Group assets. Interest was payable at 5 per cent per annum. On 8 November, the loan notes were repaid in full (through the issue of new ordinary shares at 11.25p per share) and the security was released as part of the fundraising and debt repayment programme (see note 17). Finance leases Finance leases are secured over the assets to which they relate. 16 Deferred taxation At 31 December ,936 Transfer to statement of comprehensive income (353) Change in exchange rates 86 At 31 December 1,669 Recognised on acquisition (note 21.1) 646 Transfer to statement of comprehensive income (310) Change in exchange rates 20 At 31 December 2, Share capital Issued and fully paid ordinary shares of 0.5 pence each Number of shares Number of shares At the beginning of the year 479,137, ,854,531 Issued for cash 212,983,000 Issued in settlement of loans 111,111,111 12,282, ,231, ,137,027 At the beginning of the year 3,870 3,598 Exchange translation Issued for cash 1,755 Issued in settlement of loans ,619 3,870 On 8 November the Company issued 212,983,000 new ordinary shares for cash at a price of 11.25p per share pursuant to a placing and open offer. At the same time the Company issued 111,111,111 new ordinary shares at a price of 11.25p per share in consideration for the repayment of 5,000,000 of fixed rate loan notes 2015 (see note 15) and a 7,500,000 revolving credit facility (see note 4). VIN Australia Pty Ltd, a member of the Group, holds 54,500,000 ordinary shares in Hydrodec Group plc pursuant to the acquisition of Virotec International plc in Votes in respect of these shares, and a further 2,173,333 shares issued pursuant to that acquisition, may not be cast in a general meeting of Hydrodec Group plc and as such they are treated as if they were treasury shares on consolidation. Warrants In 2011, the Company issued 10,750,000 warrants in connection with the issue of 2,000,000 of fixed rate loan notes The warrants have an exercise price of 8p per share with an exercise window from 14 June to 14 June Between 24 December and 27 June, the Company issued an additional 25,000,000 warrants in connection with the issue of 5,000,000 of fixed rate loan notes The warrants have an exercise price of 16p per share with an exercise window from 19 June to 19 December

58 Notes to the financial statements For the year ended 31 December 18 Reserves The share premium account represents the excess over the nominal value of shares allotted. The merger reserve arose on the acquisition of Virotec International plc. 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. 19 Share-based payments Long Term Incentive Plan In November 2011 shareholders approved the Hydrodec Group plc Long Term Incentive Plan (the LTIP ) for the purposes of attracting, retaining and motivating key executives of the Group and securing greater alignment of shareholders and management s interests with transparency over performance targets. Awards were granted to selected members of the senior executive team effective 15 January (or on later appointment) and will be conditional on the achievement of the following share price targets on or before 15 January 2015: 16 pence, 20 pence and 25 pence per ordinary share (each a Share Price Threshold ). Awards will not vest at all unless the 16 pence Share Price Threshold is achieved. The aggregate value of ordinary shares in the share pool will equal 15 per cent of the growth in market capitalisation of the Company between 1 November 2011 and the first date on which a Share Price Threshold is met and successive subsequent growth in market capitalisation upon achievement of any higher Share Price Thresholds (in each case as adjusted to reflect any cash subscribed for the issue of shares by the Company during the relevant period). During the period the existing awards were restructured as various classes of shares in Hydrodec Holdco Limited ( Holdco ), a subsidiary of Hydrodec Group plc, which was treated as a modification of the existing accounting treatment. The Holdco articles of association entitle the individuals to exchange their Holdco shares for shares in the Company, determined by reference to the individual s proportionate interest in the share pool, if the Share Price Thresholds are met. 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 two and five years. A total of 1,000,000 options were granted during the year and a total of 1,500,000 options granted to previous Directors and employees of the Company lapsed or were forfeited during the year. No options were exercised in the year. The total number of options in issue is shown below: Number Weighted average exercise price Number Weighted average exercise price At the beginning of the year 20,450, p 20,966, p Issued in the year 1,000, p 1,500, p Exercised in the year (166,667) 6.8p Lapsed/forfeited during the year (1,500,000) 21.6p (1,850,000) 17.8p At the end of the year 19,950, p 20,450, p Fair value is determined by reference to the fair value of the instrument granted to the employee. The expected life used in the Black-Scholes option pricing model has been adjusted, based on management s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. 56 Hydrodec Group plc Annual Report and Accounts

59 Strategic Report Governance Financial Statements These fair values were calculated using a Black-Scholes option pricing model as follows: Weighted average share price 19.47p 19.98p Weighted average exercise price 17.34p 17.9p Expected volatility 92% 89% Expected life 6.24yrs 6.47yrs Risk free rate 4.3% 4.3% Expected dividend yield 0.0% 0.0% 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 6.9p 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. 20 Financial instruments Capital management risk The Group manages its capital structure to ensure it will be able to continue as a going concern. The Group s financial instruments comprise cash, and various items, such as trade and other receivables (note 11) and trade payables and finance leases (note 13) that arise directly from or in support of 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. The Group manages liquidity risk by the pooling of cash resources and depositing funds available for investment in approved financial instruments with financial institutions. Counterparty risk with respect to cash and cash equivalents is managed by only investing in banks and financial instruments with good credit ratings. Management does not expect any losses from the non-performance of these counterparties. 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 2.76 per cent (: 0.3 per cent) during the year. 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 7.9 per cent (: 8.1 per cent) per annum. The Directors consider the only element of risk from changes in interest rates arises on bank deposits which are not expected to give rise to a material adjustment to the reported results for either or. The table below analyses the Group s financial liabilities into relevant groupings based on the remaining period at the balance sheet date to the contractual maturity date. Balance sheet Contractual cash flows Less than 1 year Between 1 year and 2 years Between 2 year and 5 years Trade and other payables At December 11,514 11,514 11,514 At December 4,465 4,465 4,465 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 USD 6,098,000 (: USD 1,191,000), and there are no material concentrations of credit risk, other than as set out in note 2. The credit risk on liquid funds is limited because the counterparties are reputable banks. 57

60 Notes to the financial statements For the year ended 31 December 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. The Group s policy is to match, as far as possible, its principal projected cash flows by currency. Transactions and balances of entities within the Group are denominated in the local functional currencies and had the following balances denominated in UK sterling and Australian dollars: UK sterling Australian dollars Trade and other payables 18 (30) 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 Australian dollar exchange rates. There is insignificant currency risk arising within the Group, but the presentation of the Group results can be affected by presentation in US dollars. 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 Currency fluctuation 4% 1% 6% 1% If the US dollar had strengthened against each currency by the percentage above retrospectively, then this would have had the following impact: GBP AUD Net result for the year Equity (514) GBP AUD If the US dollar had weakened against each currency by the percentage above retrospectively, then this would have had the following impact: GBP AUD Net result for the year (680) (95) (88) (25) Equity 514 (49) (166) (13) GBP AUD Exposure to foreign exchange rates varies 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. 58 Hydrodec Group plc Annual Report and Accounts

61 Strategic Report Governance Financial Statements 21 Acquisitions and disposals 21.1 Acquisition of OSS Group On 6 September, the Group acquired the principal business and assets of OSS Group Limited ( OSS ) from the administrators of OSS. The acquisition was made as part of the Group s strategy to develop its existing re-refining technology for deployment in the re-refining of used lubricant oils. The acquisition of OSS secures significant feedstock for the UK market and provides a platform to develop other opportunities to consolidate the oil collection and re-refining market in the UK and Europe. The details of the business combination are as follows: Fair values Amount settled in cash 7,664 Recognised amounts of identifiable net assets Property, plant and equipment 9,915 Other intangible assets 4,555 Total non-current assets 14,470 Trade and other receivables 4,076 Inventories 672 Total current assets 4,748 Trade and other payables (7,832) Total current liabilities (7,832) Borrowings (1,551) Provisions (651) Deferred tax liability (646) Total non-current liabilities (2,848) Identifiable net assets 8,538 Bargain purchase on acquisition (874) Consideration settled in cash 7,664 Acquisition costs charged to expenses 266 Net cash paid relating to the acquisition 7,930 Consideration The acquisition of OSS was settled in cash amounting to USD 7,664,000. The gain on bargain purchase arising from the purchase of a business in a distressed state and acquisition-related costs are not included as part of consideration transferred and have been recognised as an expense in the consolidated statement of income, as part of other operating costs. Post-acquisition trading and profitability for the acquired business is set out in note 2. No pre-acquisition activity is disclosed as the assets were acquired pursuant to an administration. Identifiable net assets The fair value of the trade and other receivables acquired as part of the business combination amounted to USD 4,076,000 with a gross contractual amount of USD 4,416,000. As of the acquisition date, the Group s best estimate of the contractual cash flow not expected to be collected amounted to USD 340,000. Other intangible assets Intangible assets recognised on acquisition comprised of customer contracts fair valued at USD 2,354,000 and brand name fair valued at USD 2,201,000. These primarily related to expected future profitability. These are expected to have a finite useful life and accordingly the related carrying amounts will be amortised on a straight-line basis. 59

62 Notes to the financial statements For the year ended 31 December 21.2 Sale of interest in Hydrodec of North America On 16 April the Group sold a 25 per cent interest in Hydrodec of North America LLC ( HoNA ) to G&S Oil Recycling Group LLC ( G&S ) for total consideration based on a multiple of earnings for the years ended 31 December (5 times EBITDA) and (6.5 times EBITDA). Management have estimated the value of the consideration to be USD 3,310,000 (of which cash of USD 1,733,000 was received in the period), resulting in a loss on sale of investment of USD 302,000. The value of the remaining consideration has been included in Other receivables (see note 10). Additionally a royalty stream of 5 per cent of net revenue is payable to a member of the Group under the terms of the strategic partnership with G&S. Included in the agreement with G&S is the potential for the sale of a further 24.9 per cent of HoNA in two equal tranches, conditional on a number of future actions to be undertaken by both parties. The value of the consideration is set at a price to be determined by earnings for the years ended 31 December and. The details of the sale of the initial interest of 25 per cent are as follows: Value disposed 3,619 Consideration received (1,733) Deferred consideration subject to earn out (1,584) Loss on sale of interest (302) 22 Capital commitments At 31 December, the Group had contractual capital commitments of USD 385,000 (: USD nil) in relation to the US expansion programme and research and development equipment. There were no other material contractual commitments. 23 Contingent liabilities There were no contingent liabilities at 31 December or 31 December. 24 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: Within one year 1, Between one and five years 1, , Related party transactions AirTerAq Pty Ltd, a company in which a Director, Mark McNamara has an interest, supplied services to the value of USD 395,000 during (: USD 389,000) and was owed at 31 December USD 61,500 (: USD 49,500). These services were for the provision of Mr McNamara as a Director of the Company. G&S Technologies, a company in which G&S Oil Recycling Group LLC (the holder of a 25 per cent interest in Hydrodec of North America LLC ( HoNA )) has an interest, supplied feedstock to the value of USD 4,200,000 in subsequent to taking an interest in HoNA (: USD nil) and was owed at 31 December USD 289,000 (: USD nil). Between 24 December and 27 June, Andrew Black, a Director, subscribed for USD 4,120,000 of fixed rate loan notes 2015, secured over Group assets (see note 14). On 19 March, Lord Moynihan, a Director, subscribed for USD 494,000 of the loan notes. In accordance with the terms of these subscriptions, Andrew Black and Lord Moynihan were granted 13 million and 1.5 million of warrants to subscribe for ordinary shares at 16p per share (respectively). Andrew Black also provided a USD 12,361,000 revolving credit facility relating to the acquisition of the principal assets and business of OSS in September (see note 4). The Company repaid the loan notes and revolving credit facility on 8 November through the issue of new ordinary shares at 11.25p per share, with Andrew Black and Lord Moynihan issued 89,777,778 and 2,666,667 new ordinary shares respectively. Total interest paid on these loan instruments to Andrew Black and Lord Moynihan during the period were USD 383,000 and USD 22,000 respectively. 60 Hydrodec Group plc Annual Report and Accounts

63 Strategic Report Governance Financial Statements The following Directors subscribed in cash for the following number of new ordinary shares at 11.25p per share as part of a placing which was completed on 8 November : Lord Moynihan 2,666,667 Alan Carruthers 888,889 Chris Ellis 444,444 None of the transactions incorporate special terms and conditions, and no guarantees were given or received. 26 Post balance sheet events Insurance receipts As detailed in note 5, in anticipation of the resolution of the total claim the Group received USD 2,000,000 on account from our insurers on 17 February Warrants On 26 March 2014 the Company issued 125,000 new ordinary shares pursuant to the receipt of an exercise notice in respect of warrants to subscribe for ordinary shares at an exercise price of 8p per share and exercise proceeds of 10,

64 Independent auditor s report to the members of Hydrodec Group plc We have audited the parent company financial statements of Hydrodec Group plc for the year ended 31 December which comprise the parent company balance sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company s members, as a body, in accordance with Chapter 3 of part 16 of the Companies Act Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the Statement of Directors responsibilities set out on page 27, the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s ( APB s ) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council s website at Opinion on financial statements In our opinion the parent company financial statements: give a true and fair view of the state of the Company s affairs as at 31 December ; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act Opinion on the matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Report of the Directors for the financial year for which the financial statements are prepared is consistent with the parent company financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of Directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the Group financial statements of Hydrodec Group plc for the year ended 31 December. That report includes an emphasis of matter. David Miller Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants London 21 May Hydrodec Group plc Annual Report and Accounts

65 Strategic Report Governance Financial Statements Company balance sheet As at 31 December Fixed assets Tangible assets Investments 31 38,133 38,879 38,206 38,975 Current assets Debtors Amounts due from subsidiary undertakings 32 8,272 1,342 Cash at bank 11, ,239 2,714 Creditors: amounts falling due within one year Amounts due to subsidiary undertakings (164) (161) Trade and other creditors 33 (539) (367) (703) (528) Net current assets 19,536 2,186 Total assets less current liabilities 57,742 41,161 Creditors: amounts falling due after more than one year 34 (10,501) 57,742 30,660 Equity attributable to equity holders of the parent Called up share capital 35 4,016 2,396 Share premium account ,885 74,539 Equity reserve 36 4,289 Treasury reserve 36 (649) (649) Share option reserve 36 1, Profit and loss account 36 (55,527) (50,595) Total equity 57,742 30,660 Note The financial statements were approved by the Board of Directors on 21 May 2014 and were signed on its behalf by: Ian Smale Chief Executive Officer Chris Ellis Chief Financial Officer The accompanying accounting policies and notes form an integral part of these financial statements. 63

66 Notes to the financial statements For the year ended 31 December 27 Significant accounting policies The separate financial statements of the Company are presented as required by the Companies Act As permitted by that Act, the separate financial statements have been prepared in accordance with all applicable United Kingdom accounting standards. The principal accounting policies of the Company are set out below. The financial statements have been prepared on the historical cost basis. Investments Investments in subsidiaries are recorded at cost, less amount written off. Financial liabilities and equity Financial liabilities and equity instruments issued by the Company 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 Company 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 the unsecured loan stock (which was previously convertible into shares) was determined using a market interest rate for an equivalent non-convertible instrument. The amount was recorded as a liability on an amortised cost basis until extinguished on repayment of the loan stock. The remainder of the proceeds was allocated to the conversion option, which was recognised and included in shareholders equity. Tangible fixed assets and depreciation Depreciation is calculated to write down the cost less estimated residual value of all tangible fixed assets other than freehold land by equal annual instalments over their expected useful lives. The rates generally applicable are: Fixtures, fittings and equipment 30 per cent diminishing value Employee Benefit Trust The assets and liabilities of the Employee Benefit Trust ( EBT ) have been included in the Company 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 Company income statement. Share-based payments The Company issues equity-settled share-based payments to certain employees and Directors. 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 Company s estimate of the shares that will eventually vest and adjustment for the effect of non-market-based vesting conditions. Warrants The Company has issued equity-settled warrants in connection with fixed rate loan notes. Equity-settled warrants are measured at fair value of the instruments granted (excluding the effect of non-market-based exercise 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 exercise period (or until fixed rate loan notes are repaid), based on the Group s estimate of the shares that will eventually be issued and adjusted for the effect of non-market-based exercise conditions. Interest-bearing loans and borrowings All loans and borrowings are initially recognised at 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. Taxation Deferred tax is recognised on all timing differences where the transactions or events that give the Group an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Deferred tax assets are recognised when it is more likely than not that they will be recovered. Deferred tax is measured using rates of tax that have been enacted or substantively enacted by the balance sheet date. 64 Hydrodec Group plc Annual Report and Accounts

67 Strategic Report Governance Financial Statements Going concern As set out in note 1 of the Group financial statements, 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. 28 Directors Directors emoluments paid during the year were: Emoluments 1, The highest paid Director received emoluments totalling 393,000 (: 289,000). Pension contributions for Directors were nil (: 7,500). 29 Loss attributable to the shareholders of the Company The Company is an investment holding company. As permitted by section 408 of the Companies Act 2006, the Company s profit and loss account has not been included in these accounts. The loss on ordinary activities attributable to shareholders of the Company dealt with in these accounts was 9,439,000 (: 2,675,000). 30 Tangible fixed assets Fixtures and equipment 000 Cost At 1 January 139 Additions in the year At 31 December 139 Depreciation At 1 January 43 Provided in the year 23 At 31 December 66 Carrying amount At 31 December 73 At 31 December Investments Shares in subsidiary undertakings 000 Loans to subsidiary undertakings 000 Cost At 31 December 57, ,363 Additions At 31 December 57, ,363 Total 000 Accumulated impairment At 31 December 19,484 19,484 Increase in provision At 31 December 20,230 20,230 Carrying amount At 31 December 37, ,133 At 31 December 38, ,

68 Notes to the financial statements For the year ended 31 December The subsidiary undertakings at 31 December are listed below: Country of incorporation and principal operations Ordinary share capital held Hydrodec Holdco Limited UK 100% Holding company Hydrodec Development Corporation Pty Limited* Australia 100% Technology and holding company Hydrodec Australia Pty Limited** Australia 100% Oil treatment services Hydrodec Inc* USA 100% Holding company Hydrodec Holdings LLC *** USA 100% Holding company Hydrodec of North America LLC**** USA 75% Oil treatment services Hydrodec (UK) Limited* UK 100% Oil treatment services Virotec International plc UK 100% Holding company VIN Australia Pty Ltd***** Australia 100% Investment company Hydrodec Japan Co Limited Japan 100% Holding company Activity * Held through Hydrodec Holdco Limited ** Held through Hydrodec Development Corporation Pty Limited *** Held through Hydrodec Inc **** Held through Hydrodec Holdings LLC ***** Held through Virotec International plc The joint venture undertakings at 31 December are listed below: Country of incorporation and principal operations Ordinary share capital held Hydrotek Eco Japan Co Limited^ Japan 50% Patent holding company Pacific Eco Refining Co Limited^ Japan 47.5% Oil treatment services Activity ^ Held through Hydrodec Japan Co Limited 32 Debtors and amounts due from subsidiaries Other debtors Amounts due from subsidiary undertakings 8,272 1,342 9,225 2, The amount due from subsidiaries relate to the ongoing funding provided to the principal trading subsidiaries during their development phase. All intercompany amounts are repayable on demand. The timing of the repayment of this debt is uncertain and unlikely to be within one year. 33 Trade and other creditors Trade creditors Other creditors Accruals Hydrodec Group plc Annual Report and Accounts

69 Strategic Report Governance Financial Statements 34 Creditors: amounts falling due after more than one year Unsecured loan stock Fixed rate loan notes ,501 2,000 10,501 Unsecured loan stock In November 2007, the Company issued 13,800,000 of convertible unsecured loan stock, convertible at the loan stock holder s option into ordinary share capital of the Company at a price of 19p, subject to anti-dilutive conditions for subsequent share issues at below market price. On 1 November, these conversion rights lapsed and the stock became an unsecured loan, repayable at the Company s determination. On 8 November, the outstanding balance of 12,790,000 was repaid in full together with accrued interest. Fixed rate loan notes Between 24 December and 27 June, the Company received subscriptions for a total of 5,000,000 of fixed rate loan notes The notes were secured over Group assets. Interest was payable at 5 per cent per annum. On 8 November, the loan notes were repaid in full (through the issue of new ordinary shares at 11.25p per share) and the security was released as part of the fundraising and debt repayment programme (see note 18). 35 Share capital Issued and fully paid 803,231,138 ordinary shares of 0.5p each 4,016 2,396 During the period the Company issued 324,094,111 new ordinary shares at a price of 11.25p per share, of which 111,111,111 were issued in consideration for the repayment of 5,000,000 of fixed rate loan notes 2015 and a 7,500,000 revolving credit facility and the balance were issued for cash pursuant to a placing and open offer. 36 Reconciliation of movements in shareholders funds Share capital 000 Share premium 000 At 1 January 2,334 73,141 8,856 (649) 335 (52,674) 31,343 Share issues 62 1,398 1,460 Share-based payment Transfers (4,567) (187) 4,754 Loss for the year (2,675) (2,675) At 1 January 2,396 74,539 4,289 (649) 680 (50,595) 30,660 Share issues 1,620 34,840 36,460 Issue costs (494) (494) Share-based payment Transfers (4,289) (218) 4,507 Loss for the year (9,439) (9,439) At 31 December 4, ,885 (649) 1,017 (55,527) 57,742 Equity reserve 000 Treasury reserve 000 Share option reserve 000 Profit and loss account 000 Total

70 Notes to the financial statements For the year ended 31 December 37 Related party transactions The Company has taken advantage of the exemption in Financial Reporting Standard no.8 Related party disclosures and has not disclosed transactions with Group undertakings. Between 24 December and 27 June, Andrew Black, a Director, subscribed for 2,600,000 of fixed rate loan notes 2015, secured over Group assets. On 19 March, Lord Moynihan, a Director, subscribed for 300,000 of the loan notes. In accordance with the terms of these subscriptions, Andrew Black and Lord Moynihan were granted 13 million and 1.5 million of warrants to subscribe for ordinary shares at 16p per share (respectively). Andrew Black also provided a 7,500,000 revolving credit facility relating to the acquisition of the principal assets and business of OSS in September. The Company repaid the loan notes and revolving credit facility on 8 November through the issue of new ordinary shares at 11.25p per share, with Andrew Black and Lord Moynihan issued 89,777,778 and 2,666,667 new ordinary shares respectively. Total interest paid on these loan instruments to Andrew Black and Lord Moynihan during the period were 244,600 and 13,900 respectively. The following Directors subscribed in cash for the following number of new ordinary shares at 11.25p per share as part of a placing which was completed on 8 November : Lord Moynihan 2,666,667 Alan Carruthers 888,889 Chris Ellis 444,444 None of the transactions incorporate special terms and conditions, and no guarantees were given or received. 38 Post balance sheet events On 26 March 2014, the Company issued 125,000 new ordinary shares pursuant to the receipt of an exercise notice in respect of warrants to subscribe for ordinary shares at an exercise price of 8p per share and exercise proceeds of 10, Hydrodec Group plc Annual Report and Accounts

71 NOTICE OF ANNUAL GENERAL MEETING Hydrodec Group plc (incorporated and registered in England and Wales under the Companies Act 1985 with registered no ) NOTICE IS HEREBY GIVEN THAT the Annual General Meeting of Hydrodec Group plc (the Company ) will be held in The Winchester Room, The Washington Mayfair Hotel, 5 Curzon Street, London W1J 5HE at a.m. on 30 June The business of the meeting will be to consider and, if thought fit, to pass the following resolutions (the Resolutions ), of which Resolutions 1 to 10 will be proposed as ordinary resolutions of the Company and Resolutions 11 and 12 will be proposed as special resolutions of the Company: ORDINARY BUSINESS: 1. To receive and adopt the Report of the Directors and the audited accounts of the Company for the year ended 31 December together with the report of the auditors thereon. 2. To re-elect Andrew Black who retires at the meeting and who, being eligible, offers himself for re-election as a director of the Company (each a Director and together the Directors ). 3. To re-elect Alan Carruthers who retires at the meeting and who, being eligible, offers himself for re-election as a Director. 4. To re-elect Christopher Ellis who retires at the meeting and who, being eligible, offers himself for re-election as a Director. 5. To re-elect Gillian Leates who retires at the meeting and who, being eligible, offers herself for re-election as a Director. 6. To re-elect Mark McNamara who retires at the meeting and who, being eligible, offers himself for re-election as a Director. 7. To re-elect Lord Moynihan who retires at the meeting and who, being eligible, offers himself for re-election as a Director. 8. To re-elect Ian Smale who retires at the meeting and who, being eligible, offers himself for re-election as a Director. 9. To re-appoint Grant Thornton UK LLP as auditors of the Company from the conclusion of this meeting until the conclusion of the next general meeting at which accounts are laid before the Company and to authorise the Directors to fix their remuneration. SPECIAL BUSINESS: 10. That, in substitution for all subsisting authorities to the extent unused, the Directors be and they are hereby generally and unconditionally authorised in accordance with section 551 of the Companies Act 2006 ( CA 2006 ) to exercise all the powers of the Company to allot shares in the Company and to grant rights to subscribe for, or to convert any security into, shares in the Company: A. up to an aggregate nominal amount of 1,338,000; and B. comprising equity securities (within the meaning of section 560 of the CA 2006) up to a further aggregate nominal amount of 1,338,000 in connection with an offer by way of a rights issue: i. to ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and ii. to holders of other equity securities as required by the rights of those securities or as the Directors otherwise consider necessary, and so that the Directors may impose any limits or restrictions and make any arrangements which they consider necessary or appropriate to deal with treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory or the requirements of any regulatory body or stock exchange or any other matter (including any such problems arising by virtue of equity securities being represented by depositary receipts). The authorities conferred on the Directors under paragraphs (A) and (B) above shall expire at the conclusion of the next Annual General Meeting of the Company after the passing of this Resolution or 15 months after the passing of this Resolution, whichever is the earlier save that under each authority the Company may, before such expiry, make an offer or agreement which would or might require shares to be allotted or rights to subscribe for, or to convert any security into, shares to be granted after such expiry and the Directors may allot shares or grant rights to subscribe for, or to convert any security into, shares (as the case may be) in pursuance of such an offer or agreement as if the authority conferred hereby had not expired. 69

72 11. That, subject to the passing of Resolution 10 above and in substitution for all subsisting authorities to the extent unused, the Directors be and they are hereby empowered pursuant to sections 570 and 573 of the CA 2006 to allot equity securities (within the meaning of section 560 of the CA 2006) for cash pursuant to the authority conferred under Resolution 10 or by way of a sale of treasury shares, as if section 561(1) of the CA 2006 did not apply to such allotment provided that the power conferred by this resolution shall be limited to: A. the allotment of equity securities of the Company in connection with an issue or offer of equity securities to the holders of ordinary shares in the capital of the Company in proportion (as nearly as may be) to their existing holdings of such shares (excluding any shares held by the Company as treasury shares (within the meaning of section 724 of the CA 2006)) on the record date for such allotment or in accordance with the rights attached to such shares but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or as a result of legal or practical problems under the laws of or the requirements of any regulatory body or any stock exchange in any territory or any other matter; B. pursuant to the grant or exercise of any share awards or share options pursuant to any share options scheme or long term incentive scheme of the Company in force from time to time; and C. the allotment, otherwise than pursuant to paragraphs (A) and (B) above, of equity securities of the Company or the sale or transfer of treasury shares which is treated as an allotment of equity securities under section 560(3) of the CA 2006 up to an aggregate nominal value equal to 400,000; and unless previously renewed, revoked, varied or extended this power shall expire on the earlier of the date which is 15 months from the date of the passing of this Resolution and the conclusion of the next Annual General Meeting of the Company except that the Company may before the expiry of this power make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such offer or agreement as if this power had not expired. 12. That the articles of association produced to the meeting and initialled by the Chairman of the meeting for the purpose of identification be adopted as the articles of association in substitution for, and to the exclusion of, the existing articles of association (including those provisions of the Company s memorandum of association which, by virtue of section 28 CA 2006, are treated as provisions of the Company s articles of association). By order of the Board Michael Preen Company Secretary Registered office 50 Curzon Street London W1J 7UW 30 May Hydrodec Group plc Annual Report and Accounts

73 NOTES: 1. A member of the Company entitled to attend, speak and vote at this meeting is entitled to appoint one or more proxies to attend, speak and vote in that member s place. A member may appoint more than one proxy in relation to this meeting provided that each proxy is appointed to exercise rights attached to a different share or shares held by that member. A proxy need not also be a member. Completion and return of a Form of Proxy (or any CREST Proxy Instruction, as described in notes 6 to 8) will not preclude a member from attending and voting at the meeting should the member so decide. A Form of Proxy accompanies this notice. If you wish to appoint multiple proxies please photocopy the Form of Proxy, fill in each copy in respect of different shares and send the multiple forms together to the Company s registrars, Capita Registrars, in accordance with note 2 below. Alternatively you may appoint multiple proxies by CREST Proxy Instruction in accordance with note 6 below. 2. To be valid, the enclosed Form of Proxy and any power of attorney or other authority (if any) under which it is signed (or a copy certified notarially, or in some other manner approved by the Board) must be completed and returned so as to reach the Company s registrars, Capita Asset Services, PXS 1, 34 Beckenham Road, Beckenham, BR3 4ZF by 10 a.m. on 28 June 2014 (or, if the meeting is adjourned, not less than 48 hours before the time fixed for the holding of the adjourned meeting). 3. In the event that a poll is demanded at the meeting, and such poll is to be taken more than 48 hours thereafter, the enclosed Form of Proxy (together with any documents of authority required by note 2) may be returned to the Company s registrars, Capita Registrars at the address in note 2 above so as to arrive not later than 24 hours before the time appointed for such poll. In the event that a poll is demanded at the meeting, and such poll is not taken at the meeting, but is taken less than 48 hours after the meeting, the enclosed Form of Proxy (together with any documents of authority required by note 2) may be delivered at the meeting to the Chairman of the meeting or to the secretary or any director of the Company. 4. Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001 (as amended), to be entitled to attend and vote at the meeting (and for the purpose of determining the number of votes a member may cast), members must be entered on the Register of Members of the Company by 6 p.m. on 27 June In the case of joint holders, the signature of only one of the joint holders is required on the Form of Proxy, but the vote of the senior (by order in the register of members) who tenders a vote will be accepted to the exclusion of the others. 6. CREST members who wish to appoint a proxy or proxies by utilising the CREST electronic proxy appointment service may do so for this meeting and any adjournment(s) thereof by utilising the procedures described in the CREST Manual. CREST personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. 7. In order for a proxy appointment made by means of CREST to be valid, the appropriate CREST message (a CREST Proxy Instruction ) must be properly authenticated in accordance with Euroclear UK & Ireland Limited s ( Euroclear ) specifications and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by the Company s agent (ID RA10) by the latest time for proxy appointments set out in note 2 above. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Application Host) from which the Company s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time, any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. 8. CREST members and, where applicable, their CREST sponsors or voting service providers should note that Euroclear does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings ( 9. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001 (as amended). 71

74 EXPLANATORY INFORMATION FOR THE RESOLUTIONS The following explanatory information is provided by way of background to the special business of the meeting: Authority of Directors to allot shares (Resolution 10 ordinary resolution) The authority given to the Directors to allot further shares in the capital of the Company requires the prior authorisation of the shareholders in general meeting under section 551 of the Companies Act The authority granted at the Company s last general meeting is due to expire at this year s Annual General Meeting. Accordingly, Resolution 10 will be proposed as an ordinary resolution to grant new authorities to allot shares and grant rights to subscribe for, or convert any security into, shares: (i) up to an aggregate nominal amount of 1,338,000 and (ii) in connection with a rights issue up to an aggregate nominal amount (when added to allotments under paragraph (A) of the Resolution) of 1,338,000. These amounts represent approximately one third and approximately two thirds respectively of the total issued ordinary share capital of the Company, in accordance with current guidelines. This authority will expire immediately following the Annual General Meeting in 2015 or, if earlier, 15 months following the Resolution being passed. Disapplication of pre-emption rights (Resolution 11 special resolution) If the Directors wish to exercise the authority under Resolution 10 and offer shares (or sell any shares which the Company may purchase and elect to hold as treasury shares) for cash, the Companies Act 2006 requires that, unless shareholders have given specific authority for the waiver of the statutory pre-emption rights, the new shares be offered first to existing shareholders in proportion to their existing shareholdings. In certain circumstances, it may be in the best interests of the Company to allot new shares (or to grant rights over shares) for cash without first offering them to existing shareholders in proportion to their holdings. The authority granted at the Company s last general meeting is due to expire at this year s Annual General Meeting. Accordingly, Resolution 11 would authorise the Directors to disapply the strict statutory pre-emption provisions. This would provide the Directors with a degree of flexibility to act in the best interests of the Company by allotting shares for cash: (i) by way of a rights issue, open offer or other offer of securities in favour of existing shareholders in proportion to their shareholdings (subject to certain exclusions); (ii) pursuant to any long term incentive plan or share option scheme; and (iii) to persons other than pro rata to existing shareholders up to an aggregate nominal value of 400,000, which is equivalent to approximately 10 per cent of the Company s issued share capital. This authority will expire immediately following the Annual General Meeting in 2015 or, if earlier, 15 months following the Resolution being passed. Amendment of the articles of association (Resolution 12 special resolution) It is proposed in resolution 12 to adopt new articles of association (the New Articles ) in order to update the Company s current articles of association (the Current Articles ) primarily to take account of various provisions of the Companies Act 2006 and certain other legislation. The principal changes introduced in the New Articles are summarised in Appendix 1 below. Other changes, which are of a minor, technical or clarifying nature and also some more minor changes which merely reflect changes made by the Companies Act 2006 or the Shareholders Rights Regulations, or conform the language of the New Articles with that used in the model articles for public companies produced by the Department for Business, Innovation and Skills have not been noted in Appendix 1. The New Articles showing all the changes to the Current Articles are available for inspection at the Company s registered office from the date of this notice until the date of the Annual General Meeting and at the place of the Annual General Meeting from 15 minutes prior to the start of the meeting until its conclusion. Action to be taken You will find enclosed a Form of Proxy for use at the Annual General Meeting. Please complete, sign and return the enclosed form as soon as possible in accordance with the instructions printed thereon, whether or not you intend to be present at the Annual General Meeting. Forms of Proxy should be returned so as to be received by Capita Asset Services, PXS 1, 34 Beckenham Road, Beckenham, BR3 4ZF as soon as possible and in any event no later than 48 hours before the time appointed for holding the Annual General Meeting. Recommendation Your Directors consider that all the Resolutions to be put to the meeting are in the best interests of the Company and its shareholders as a whole and unanimously recommend shareholders to vote in favour of all the Resolutions, as they intend to do in respect of their own beneficial holdings. 72 Hydrodec Group plc Annual Report and Accounts

75 Appendix 1 EXPLANATORY NOTES OF PRINCIPAL CHANGES TO THE COMPANY S ARTICLES OF ASSOCIATION 1. The Company s objects The provisions regulating the operations of the Company are currently set out in the Company s memorandum and articles of association. The Company s memorandum contains, among other things, the objects clause which sets out the scope of the activities the Company is authorised to undertake. This is drafted to give a wide scope. The Companies Act 2006 significantly reduced the constitutional significance of a company s memorandum. The Companies Act 2006 provides that a memorandum will record only the names of subscribers and the number of shares each subscriber has agreed to take in the company. Under the Companies Act 2006 the objects clause and all other provisions which are contained in a company s memorandum are deemed to be contained in the company s articles of association but the company can remove these provisions by special resolution. Further the Companies Act 2006 states that unless a company s articles provide otherwise, a company s objects are unrestricted. This abolishes the need for companies to have objects clauses. For this reason the Company is proposing to remove its objects clause together with all other provisions of its memorandum which, by virtue of the Companies Act 2006, are treated as forming part of the Company s articles of association as of 1 October Resolution 12 confirms the removal of these provisions for the Company. As the effect of this resolution will be to remove the statement currently in the Company s memorandum of association regarding limited liability, the New Articles also contain an express statement regarding the limited liability of shareholders. 2. Articles which duplicate statutory provisions Provisions in the Current Articles which replicate provisions contained in the Companies Act 2006 are in the main to be removed in the New Articles. This is in line with the approach advocated by the Government that statutory provisions should not be duplicated in a company s constitution. 3. Authorised share capital and unissued shares The Companies Act 2006 abolishes the requirement for a company to have an authorised share capital and the New Articles reflect this. Directors will still be limited as to the number of shares they can at any time allot because allotment authority continues to be required under the Companies Act 2006, save in respect of employee share schemes. 4. Redeemable shares Under the Companies Act 1985, if a company wished to issue redeemable shares, it had to include in its articles the terms and manner of redemption. The Companies Act 2006 enables directors to determine such matters instead provided they are so authorised by the articles. The New Articles contain such an authorisation. The Company has no plans to issue redeemable shares but if it did so the Directors would need shareholders authority to issue new shares in the usual way. 5. Authority to purchase own shares, consolidate and sub-divide shares, and reduce share capital Under the Companies Act 1985, a company required specific enabling provisions in its articles to purchase its own shares, to consolidate or sub-divide its shares and to reduce its share capital or other undistributable reserves as well as shareholder authority to undertake the relevant action. The Current Articles include these enabling provisions. Under the Companies Act 2006 a company will only require shareholder authority to do any of these things and it will no longer be necessary for articles to contain enabling provisions. Accordingly the relevant enabling provisions have been removed in the New Articles. 6. Provision for employees on cessation of business The Companies Act 2006 provides that the powers of the directors of a company to make provision for a person employed or formerly employed by the company or any of its subsidiaries in connection with the cessation or transfer to any person of the whole or part of the undertaking of the company or that subsidiary, may only be exercised by the directors if they are so authorised by the company s articles or by the company in general meeting. The New Articles provide that the Directors may exercise this power. 7. Use of seals Under the Companies Act 1985, a company required authority in its articles to have an official seal for use abroad. Under the Companies Act 2006, such authority will no longer be required. Accordingly, the relevant authorisation has been removed in the New Articles. The New Articles provide an alternative option for execution of documents (other than share certificates). Under the New Articles, when the seal is affixed to a document it may be signed by one authorised person in the presence of a witness, whereas previously the requirement was for signature by either a Director and the secretary or two Directors or such other person or persons as the Directors may approve. 73

76 8. Suspension of registration of share transfers The Current Articles permit the Directors to suspend the registration of transfers. Under the Companies Act 2006 share transfers must be registered as soon as practicable. The power in the Current Articles to suspend the registration of transfers is inconsistent with this requirement. Accordingly, this power has been removed in the New Articles. 9. Vacation of office by Directors The Current Articles specify the circumstances in which a Director must vacate office. The New Articles update these provisions to treat physical illness in the same manner as mental illness. 10. Voting by proxies on a show of hands The Shareholders Rights Regulations have amended the Companies Act 2006 so that it now provides that each proxy appointed by a member has one vote on a show of hands unless the proxy is appointed by more than one member in which case the proxy has one vote for and one vote against if the proxy has been instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution. The Current Articles have been amended to reflect these changes. 11. Notice of board meetings Under the Current Articles, when a Director is abroad he can request that notice of Directors meetings are sent to him at a specified address and if he does not do so he is not entitled to receive notice while he is away. This provision has been removed, as modern communications mean that there may be no particular obstacle to giving notice to a Director who is abroad. It has been replaced with a more general provision that a Director is treated as having waived his entitlement to notice, unless he supplies the Company with the information necessary to ensure that he receives notice of a meeting before it takes place. 12. Records to be kept The provision in the Current Articles requiring the Board to keep accounting records has been removed as this requirement is contained in the Companies Act Distribution of assets otherwise than in cash The Current Articles contain provisions dealing with the distribution of assets in kind in the event of the Company going into liquidation. These provisions have been removed in the New Articles on the grounds that a provision about the powers of liquidators is a matter for insolvency law rather than the articles and that the Insolvency Act 1986 confers powers on the liquidator which would enable it to do what is envisaged by the Current Articles. 14. General Generally the opportunity has been taken to bring clearer language into the New Articles and in some areas to conform the language of the New Articles with that used in the model articles for public companies produced by the Department for Business, Innovation and Skills. 74 Hydrodec Group plc Annual Report and Accounts

77 Notes 75

78 Notes 76 Hydrodec Group plc Annual Report and Accounts

79 Directors and advisers Company registration number: Registered office: Directors: Company secretary: 50 Curzon Street London W1J 7UW Lord Moynihan (Non-executive Chairman) Andrew Black (Non-executive Director) Alan Carruthers (Non-executive Director) Gillian Leates (Non-executive Director) Ian Smale (Chief Executive Officer) Chris Ellis (Chief Financial Officer) Mark McNamara (Senior Executive Director) Michael Preen Nominated adviser and broker: Solicitors: Registrars: Auditor: Peel Hunt LLP Moor House 120 London Wall London EC2Y 5ET Norton Rose Fulbright LLP 3 More London Riverside London SE1 2AQ Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Grant Thornton UK LLP Registered Auditor Chartered Accountants Grant Thornton House Melton Street Euston Square London NW1 2EP

80 Hydrodec Group plc 50 Curzon Street London W1J 7UW