Final Results, Investor Presentation & AGM Notice
5 October 2020
Quadrise Fuels International plc
("Quadrise", "QFI", the "Company" and together with its subsidiaries the "Group")
Final Results for the year ended 30 June 2020, Investor Presentation and Notice of Annual General Meeting
Quadrise Fuels International plc (AIM: QFI) announces its audited final results for the year ended 30 June 2020 and gives notice that the Company's Annual General Meeting ("AGM") will be held at 12pm on 27 November 2020.
Operational summary for the period and since the period end
Business Development
A prompt, proactive approach has ensured that Quadrise has been able to mitigate, to a significant extent, the potential impact of COVID-19 on its business development and project activities. This has enabled Quadrise to continue to build positive momentum over the period and demonstrate significant progress in a number of key areas:
· The planned trial in Morocco was paused in mid-March 2020, just as mobilisation of the team to the client's site was due to commence (with the equipment and fuel for the trial having already arrived at the site). Prompt engagement with the client enabled the start of the Phase 2 front end engineering and design ("FEED") study to be brought forward with a significant part of this work now completed. As a result of regular engagement with the client both directly and through our in-country agent, we now plan to complete the trial on-site in October 2020 and to finalise a Phase 2 FEED study thereafter.
· Following the signing of the MoU with Valkor Technologies LLC ("Valkor") during Q1 2020, rapid progress has been made with a Commercial Trial Agreement ("CTA") with Greenfield Energy LLC ("Greenfield", a joint venture between Valkor and Tomco Energy plc), signed on 18 August 2020. Plans are now progressing for Quadrise to undertake the trial at the Asphalt Ridge site (managed by Greenfield) in Utah, USA. Preparatory work on the trial MSAR® Manufacturing Unit ("MMU") has commenced and plans are being finalised for Quadrise personnel to access the Asphalt Ridge facility to install our plant during early December 2020, subject to being able to comply with any relevant travel restrictions. Commencement of the Utah MSAR® trial before year-end is reliant on Quadrise Research Facility ("QRF") confirming the required MSAR® formulation from the Asphalt Ridge oil samples to be supplied during the planned November 2020 start-up.
· Building on our long history in the region, following the meetings with the major power utility in the Kingdom of Saudi Arabia ("KSA") that were organised by our local partners Al Khafrah Holding Group ("AKHG"), with whom we are now working to engage with key stakeholders. To reinforce our commitment to the region, in August 2020 we published a White Paper (in both Arabic and English), outlining the substantial economic and environmental advantages of MSAR®. This was followed, in September 2020 by providing an Arabic version of the main elements of the Quadrise website, including the animated video.
· In Ecuador, we made rapid progress during the H1 2020;following an initial meeting in January, we undertook a series of meetings in early March 2020 with the refinery and nearby power utility, that led to the delivery and presentation (remotely) of a detailed techno-economic study to the client team. Recent changes in the client's management team have resulted in a delay to the review of the study and the agreement of next steps. However, we are working with in-country representatives at Freepoint to progress this significant opportunity with both the client and the relevant ministries.
· In the marine market, Quadrise has continued to progress opportunities with the intention of seeking to reach agreement during 2020 for the undertaking of LONO trials with major companies in the container and/or bulker markets.
· We are working with Redliner in Mexico, though the impact of COVID-19 restrictions on the client have been significant and progress has not been as rapid as we had hoped at this time.
· A new agency agreement covering certain Caribbean, Central and South American markets with Energy & Petroleum Consultants Ltd (ex-PDVSA emulsion fuel specialists) and an agency agreement with Pacific Green Technologies, Inc (a major provider of marine and land-based exhaust gas scrubbers), demonstrates our ability to drive new opportunities for MSAR®.
· Whilst at a very early stage, we are progressing some very promising work at QRF which, if demonstrated in larger scale studies, would fundamentally enhance the environmental performance of MSAR®. "Green MSAR®" incorporates biofuels or derivatives into MSAR® (displacing water and residue) with Nouryon additives. This leads to significant reductions in both CO2 and SOx emissions when compared with HFO, as well as the reductions in NOx and particulates that MSAR® already offers consumers. This could, if successful, fundamentally increase the market opportunity and the speed and scale of market penetration for Quadrise.
· JGC - We are in discussions with JGC and a major diesel OEM regarding a new joint initiative for MSAR® to reduce Japanese refinery emissions of CO2 using combined heat and power diesel technology to replace residue-fired boilers.
Financial summary for the period
· Prompt action in early 2020, together with the impact of significantly reduced travel costs since mid-March 2020, has enabled Quadrise to extend its business development "runway", with the £2.4m in cash reserves as at 30 June 2020 (30 June 2019: £1.1m) now sufficient to fund the Group to mid Q2 calendar 2021.
· Loss after tax of £4.8m (2019: £3.0m) of which £1.4m (2019: £1.5m) is attributable to production and development costs, and £1.8m (2019: £1.5m) relates to administrative and corporate expenses. Non-cash charges comprise £1.1m of fair value adjustments to the Convertible Securities balance due (2019: £nil) and £0.5m relating to share option and warrant expenses (2019: £0.3m).
· Cumulative tax losses of £53.7m (2019: £51.0m) available for set-off against future profits.
· Total assets of £6.3m at 30 June 2020 (2019: £5.1m).
Commenting on the results and progress since the period end, Mike Kirk, Chairman of QFI, said:
"Despite the significant impediments caused by the COVID-19 pandemic, Quadrise has been able to build on the substantial progress we delivered in 2019. Critical to our success has been the combination of a wider range of project and development opportunities, our established in-country partners in key markets and our innovative approach.
It is very pleasing, therefore, to be able to outline our goal of completing two key trials before the end of 2020. The first of these is the Phase 1 trial at one of our client's sites in Morocco (and to progress the on-site work to enable the Phase 2 FEED study to be finalised in due course. This is scheduled to be followed by the testing at the Asphalt Ridge site being managed by Greenfield in Utah, USA - which is subject to the prior receipt and confirmatory testing at QRF of samples from the facility in Utah which is due to recommence operations in November 2020. In addition, we continue to seek to reach agreement during 2020 for the undertaking of marine LONO trials with major companies in the container and/or bulker markets.
The QFI Project and Operations teams are now fully focused on ensuring that we are able to mobilise all equipment and personnel required for each of these trials. With the client site in Morocco currently accessible, subject to conditions, our team are due to travel out to the site within the next few weeks. Prior to this, the work required to enable the trial MMU to be prepared for operation and shipped to the Asphalt Ridge site in Utah is being progressed. This includes ensuring that key Quadrise personnel can undertake the necessary quarantine measures in place prior to, during and after the trials.
Due to a reduction in operational costs (principally as a result of virtually no travel costs since March 2020 and our proactive approach to cost management), the benefits of which will be reflected more fully in the current financial year, we have been able to significantly extend our period of operation on existing funds to mid-Q2 2021.
When this extended "runway" is allied with the recent progress we have made on these two critical on-site trials which are due to be completed in 2020, we have a high degree of confidence that we will, on success, have a clear pathway to future commercial revenues. This, alongside the significant additional potential that Green MSAR® provides for Quadrise, would enable the funding required to progress to sustainable commercial revenues to be put in place prior to mid-Q2 2021.
The dedication and professionalism of the team and board of Quadrise remains fundamental to our continued success, and as we move into the final quarter of the year, I would like to pay tribute to their efforts during what has been an incredibly challenging period for all. I would also like to thank, once again, our shareholders for their continued support of the business."
Live Investor Presentation
The Company is also pleased to announce that Mike Kirk, Chairman, and Jason Miles, CEO will provide a live investor presentation relating to the Business Update via the Investor Meet Company ("IMC") platform on Tuesday 13th October at 14.00 BST.
The Company is committed to ensuring that there are appropriate communication structures for all elements of its shareholder base so that its strategy, business model and performance are clearly understood:
· The online presentation is open to all existing and potential shareholders
· Questions can be submitted pre-event via your IMC dashboard or at any time during the live presentation via the "Ask a Question" function. Although the Company may not be in a position to answer every question it receives, it will address the most prominent within the confines of information already disclosed to the market. Responses to the Q&A from the live presentation will be published at the earliest opportunity on the Investor Meet Company platform
Investor feedback can also be submitted directly to management post-event to ensure the Company can gather the views of its shareholder base
Investors can sign up to Investor Meet Company for free and add Quadrise Fuels International plc via
https://www.investormeetcompany.com/quadrise-fuels-international-plc/register-investor
Investors who have already registered and added to meet the Company, will be invited automatically.
Notice of Annual General Meeting
The Company's Annual General Meeting ("AGM") will be held at 12:00 noon on 27 November 2020 at the Company's registered office address at First Floor, Gillingham House, 38-44 Gillingham Street, London, SW1V 1HU.
As a result of measures introduced by the UK government to combat the ongoing COVID-19 pandemic, the AGM will be held as a closed meeting and shareholders will not be permitted to attend in person. Any shareholder that seeks to attend the AGM in person will not be permitted entry.
Shareholders are therefore strongly encouraged to vote by proxy. The Company will convene the AGM with the minimum necessary quorum (which the Company will facilitate) and voting on each resolution at the AGM will be by poll and will include all valid proxy votes received. The format of the meeting will be purely functional and will comprise only the formal voting on the resolutions tabled.
We are of course disappointed that our AGM has been impacted by COVID-19, but the safety and security of our shareholders and colleagues remains our priority. We hope that all of our shareholders will therefore understand the need for such arrangements to be put in place.
The current situation is evolving and the Government may change current restrictions or implement further measures relating to the holding of general meetings during the affected period. The Company will make any further announcement(s) in relation to any change to arrangements in respect of the AGM by way of a Regulatory Information Service.
To ensure that shareholders are still given the opportunity to ask questions, following the conclusion of the AGM, the Company will give a live online presentation via the Investor Meet Company ('IMC') platform on 27 November 2020 at 12.30pm GMT. Please see the Live Investor Presentation section above for details of how to register for this event.
For additional information, please contact:
Quadrise Fuels International plc +44 (0)20 7031 7321
Mike Kirk, Chairman
Jason Miles, Chief Executive Officer
Cenkos Securities plc +44 (0)20 7397 8900
Nominated Adviser
Ben Jeynes
Katy Birkin
Peel Hunt LLP +44 (0)20 7418 8900
Joint Broker
Richard Crichton
David McKeown
Shore Capital Stockbrokers Limited +44 (0)20 7408 4090
Joint Broker
Tony Gibbs
Fiona Conroy
FTI Consulting +44 (0)20 3727 1000
Public and Investor Relations
Ben Brewerton
Ntobeko Chidavaenzi
The information communicated within this announcement was deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 prior to the release of this announcement. Upon the publication of this announcement, this inside information is now considered to be in the public domain.
Chairman's Statement
Overview of the 2020 Financial Year and significant post year-end events
Introduction
The 2020 financial year was a critical year for Quadrise, with sufficient funding raised in September 2019 to enable the business to progress and expand our portfolio of MSAR® project opportunities during the year and to continue activity through to mid Q2 calendar 2021.
Quadrise's well-established strategy to broaden and deepen the range of available project opportunities through our network of influential partners in major global markets proved to be very effective in 2020. This has enabled Quadrise, at negligible cash-cost, to use the skills, networks and resources of our partners to effectively and efficiently scale our in-house business development capabilities. Integral to this strategy is that we now have a range of opportunities at various stages of development; from early stage discussions and market assessments, to active on-site projects to evaluate MSAR® technology ahead of a decision to progress to commercial implementation. In addition, this network of in-country partners has played a pivotal role in enabling Quadrise to mitigate the impact of COVID-19 on our project and business development activities - which is outlined in more detail below.
Our 2019 funding programme commenced with the announcement of up to £4 million (gross) funding from Bergen Global Opportunities Fund ("Bergen"). The first £2 million tranche was drawn down in September 2019 and this underpinned our £1.84 million open offer which was fully underwritten by Peel Hunt and a £0.72 million subscription - raising additional funds of £2.56 million (gross). We were delighted with the response from our shareholders to the open offer, which saw a take-up of 75%. In addition, and whilst not currently available to the Company, the Bergen funding could provide an additional drawdown of up to a further £2 million, subject to certain conditions precedent having been met, including the granting by shareholders of the relevant authorities to allot shares at a General Meeting, though the Company is not reliant on this to continue its operations through to mid Q2 2021.
Our continued close working relationship with Nouryon was further enhanced by a new three-year Exclusive Purchase and Supply Agreement that we signed in October 2019. We have maintained regular contact with Nouryon throughout the period and have been delighted to welcome new senior members of their team to our regular quarterly updates. We have also initiated tri-partite discussions with Nouryon and another Carlyle Group entity to review MSAR® project opportunities.
MSAR® Market Background
The business development and project opportunities discussed below were undertaken during a period of significant change and volatility in the global liquid fuels markets. During the 2020 financial year, positive trends persisted for much of the first half of the period. However, from mid-February through to the end of April 2020 oil prices were severely impacted by the combination of the unfolding COVID-19 pandemic and the dispute between the KSA and Russia. Whilst prices started to recover from the end of April 2020, they remain at a discount of circa 30% overall to the average values seen in 2019. Fuel oil-gasoil spreads narrowed to $100-150/mt as fuel oil prices have remained uncharacteristically strong due to supply and demand. Whilst the recent short-term liquid fuels prices and volatility have negatively impacted MSAR® economics in some markets, in most regions they remain favourable and the longer-term trend is still very positive. MSAR®'s enhanced environmental performance will, we believe, be of increasing importance to both producers and consumers, alongside its substantial economic benefits. Despite the disruption caused by COVID-19, the use of high-sulphur fuels in combination with scrubbers will in our view be the de-facto lowest cost solution to meet the International Maritime Organization ("IMO") 2020 sulphur standard for the maritime sector, and national or World Bank regulations for utilities and industrial consumers. This provides a positive backdrop for Quadrise to work with refiners and fuel consumers to progress MSAR® projects, potentially combined with new Environmental, Social and Governance ("ESG") initiatives.
Project/Business Development Activities
Despite the unprecedented impact of COVID-19 on global economies, we made substantive progress in several areas as summarised below:
Industrial Applications
Morocco - Following the announcement on 30 November 2019, of the signature of the agreement with the major chemicals group in Morocco, rapid progress was made with site visits in both December 2019 and January 2020. This enabled the Quadrise team to review the specific facilities for the intended trials of MSAR® fuel; enabling the design and fabrication of the equipment to be used at the pilot kiln. This work was completed in February 2020 and the pumping and heating unit was commissioned and tested at QRF, alongside bespoke burner tips that were manufactured to a custom design by our in-house combustion experts. The final stage of the preparations in the UK was the production at QRF of over 1 tonne of MSAR® for the trial.
All the equipment and fuel required for the trial were shipped to Morocco in March 2020 and is safely stored on the client's site. Unfortunately, at this point our plans were severely impacted by COVID-19 and the site was closed to external visitors and to the clients own employees who were not essential for site operations from March 2020. Despite this setback, we were delighted with the responses to the challenges from the client and our Moroccan agent.
The first positive action taken by the Quadrise project team was to engage with the client to bring forward the second phase work that would have followed the successful completion of the trial on the pilot kiln facility. The client reaffirmed the importance of this project and were happy to agree to this. Whilst this work was undertaken at our risk, with payment being conditional on progressing to phase two, most of the work has been undertaken by our in-house project team.
Since that time, regular project and steering group meetings have taken place and we now plan to complete the trial in October 2020. This will, of course, be subject to the site remaining accessible for our team and safe procedures being provided by the client. Assuming the trial proceeds on this basis, the overall timetable will not have been extended significantly. Furthermore, the most recent discussions with the client have highlighted the potential to move straight to trials on their commercial kilns using around 20 tonnes of MSAR® fuel that can be produced at QRF, pumped into an ISO tank and shipped to the client site, together with the new pumping and heating unit and new bespoke burner tips. Other application trials on kilns, calciners and utility boilers are being discussed that could then follow.
Upstream Applications
· During Q1 2020 a Memorandum of Understanding ("MOU") was signed with Valkor Technologies ("Valkor"), to investigate the potential deployment of MSAR® technology in Utah, USA. These discussions continued during Q2 and we were delighted to announce on 18th August 2020, that we had signed a Commercial Trial Agreement ("CTA") with Greenfield Energy LLC ("Greenfield" - a joint-venture between Valkor and Tomco Energy plc), to undertake testing at the Petroteq Oil Sand Plant ("POSP") located at the Asphalt Ridge Facility in Utah, USA, which is operated and managed by Greenfield.
The first phase of the CTA ("Phase 1"), for which Quadrise is being paid $150,000 includes:
o Proof of Concept formulation and test work at the Quadrise Research Facility using oil samples supplied by Greenfield.
o Loan of Quadrise MSAR® commercial production equipment, MSAR® test equipment and supply of MSAR® additives.
o Supply of specialist services and personnel to assist Greenfield in completing the commercial scale demonstration trial to produce over 600 barrels (100mt) of power grade MSAR®.
Phase 1 work is expected to be completed during 2H 2020, subject to preparatory work and commissioning of the Asphalt Ridge facility by Greenfield, ahead of Quadrise receiving and testing of Utah oil samples at QRF, and our personnel accessing the site in Utah to assemble the MSAR® plant and complete the trial before the end of the year.
Pending a successful Phase 1, Quadrise will then work with Greenfield to develop plans for commercial MSAR® production facilities capable of treating 10,000 barrels of oil per day ("Phase 2") and to agree terms for the granting of a conditional MSAR® licence to Greenfield, once commercial terms have been agreed for Phase 2 and binding agreements entered into.
· The agreement with Merlin Energy Resources remains in place, however Quadrise is focused on the opportunities being explored in Utah through Greenfield - where progress has been rapid.
· Quadrise's discussions with stakeholders and government officials regarding an upstream heavy oil project in Africa, have not progressed due to the political situation in the country.
Power Applications, Refinery Refuelling, & Co-Development Opportunities
· Kingdom of Saudi Arabia - Quadrise management and our local partners Al Khafrah Holding Group ("AKHG") attended a meeting in Riyadh in March 2020 alongside representatives from the major power utility and a major boiler OEM to discuss resuming the planned 400MWe boiler trial using in-Kingdom MSAR® manufacture. Following this positive meeting, AKHG has maintained contact with the power utility and a further meeting was held via conference call, with follow-up over the summer. In parallel, we are jointly progressing contacts at the highest levels with other major stakeholders to promote MSAR®, with Quadrise supporting this through a significant enhancement to our profile in the region. In particular via the publication (in August 2020) and continued promotion of a White Paper (in both English and Arabic) outlining the significant economic and environmental advantages that MSAR® use and fuel production in-Kingdom would deliver to KSA and the Middle East. The Quadrise website has also recently been launched in Arabic for regional stakeholders.
· South America (Freepoint Commodities) - This is an excellent example of how Quadrise's longstanding business development experience can lead to project opportunities progressing very rapidly from a "standing start". QFI and Freepoint jointly met with senior management of the national oil company in Ecuador in early January 2020 to review an exciting MSAR® opportunity for refinery refuelling, leading to domestic power generation and export opportunities that would reduce energy costs and emissions for the country. This is a refinery well known to Quadrise, as we had worked on a project there several years earlier, that would, however, have required very significant investment and working capital. Following the initial meeting, a three-person team from Quadrise visited the sites and the adjacent power utility in early March 2020. During the next two months there was extensive dialogue with the client's technical and economic teams, following which Quadrise remotely presented its extensive Techno-Economic Study to the client team. This was positively received and Quadrise and the client are reviewing the next steps, including proof of concept testing at QRF and trialling MSAR® use at the refinery, as a precursor to commercial implementation on success. In parallel we have initiated a programme to investigate upstream applications for MSAR® in the country, commencing with a recent presentation to the Society of Petroleum Engineers Ecuador.
· Mexico (Redliner & Freepoint Commodities) - MSAR® opportunities in Mexico are wide-ranging and include upstream, refinery refuelling, domestic power generation and fuel exports that also reduce imports. Our principal activities are with our agents Redliner, who have been progressing opportunities with the national oil company and have successfully engaged with stakeholders at very senior levels. Despite this, as a result of delays by the client in the essential sharing of information during COVID-19, we have not been able to undertake the techno-economic study for multiple refineries as planned. Whilst this is frustrating, it is not unusual in this market and we continue to work with Redliner to progress activities as there is a clear economic rationale. Most recently MSAR® briefings were submitted directly by Redliner to the Energy Secretary and key Directors (Upstream and Refining) of the national oil company.
Further discussions with the major independent power project developer, who is supportive of MSAR® fuel's economic and environmental advantages for new build power projects in the region, are pending progress with the national oil company.
· European Refiner - As we outlined in late 2019, the client is comparing the economics of MSAR® with another refinery solution to enable IMO 2020 compliant fuel supply; though the complex refinery testing that was due to be carried out during Q2 and Q3 2020 has not been completed due to COVID-19 complications and associated impacts to refinery margins. We are awaiting clarification from the client as to when this evaluation work will be completed but expect this to be delayed to 2021 after which we will be informed of the decision to proceed with the MSAR® solution or otherwise.
· Nouryon - Following the positive initial discussions with Nouryon regarding business collaboration opportunities between Quadrise, Nouryon and related companies within the Carlyle Group, Quadrise has continued to review the medium and long-term opportunities to leverage the strongly aligned interests of all participants. We have progressed our regular updates very effectively with Nouryon using MS Teams.
· Kuwait - This project has been directly impacted by COVID-19, with no substantive progress having been made. We remain actively engaged with our local agents Hawazin and they will be assisting Quadrise in progressing this during 2020, aligned with our Middle East White Paper and associated activities in the region.
Marine Applications
· The implementation of IMO 2020 compliance was the main focus for shipping companies and operators during most of the period, though from early March, COVID-19 had a material adverse operational impact. The sector, has however, benefitted from significant reductions in fuel costs (which in the container segment represent around 70% of operating costs), regardless of the operators' positions on compliance options. There remains a general consensus that scrubbers alongside the use of high-sulphur fuels is the lowest cost solution for operators; though scrubber installation activity was reduced from Q2 onwards, as a result of the impact of COVID-19 on shipyard/drydock availability. We have continued to progress opportunities with two major shipping companies, each with large fleets and leading positions in scrubber implementation in their segments of the shipping industry. These discussions have continued with their technical, operational and senior management teams to progress MSAR® Letter Of No Objection ("LONO") testing and we are working towards the implementation of agreements with the respective companies during 2020.
· We have continued to evaluate the opportunity to establish or link with a physical bunker fuel supplier, to provide a supply network for high sulphur fuels in parallel with MSAR® for the LONO testing opportunities we are seeking to progress. These have not progressed as rapidly as we initially hoped, as the bunker market has been adversely impacted by COVID-19. However, this is a market opportunity that we will continue to review, albeit it is not considered a high priority at this time. As noted previously, any decision to enter this market would be alongside trusted counterparties who can manage the commodity price risk, provide the working capital requirements and counterparty credit facilities and manage the logistics of a physical bunkering operation.
Other
After the reporting period Quadrise signed an agency agreement in August 2020 with Energy & Petroleum Consultants ("E&PC") for specific territories in Central and South America that consume fuel oil. The principals of E&PC are seasoned energy and emulsion fuel project specialists that previously worked with Jason Miles in the PDVSA Bitor Orimulsion fuel business.
There are no material updates to report on opportunities with the European Oil Major, Bitumina, API Poly-GCL or Maersk Line.
New Environmental, Social and Governance Initiatives
Quadrise has always had strong environmental credentials, though we recognised in 2019/20 that we had not highlighted this as clearly as the economic case. As a result, we have focused significant effort into setting out the environmental benefits, as well as our social and governance credentials much more clearly. We are fully aware that renewables will play an increasing role in meeting the world's energy needs. However, there will be a long transition period, during which fossil fuels will continue to play an important role - and our MSAR® technology enables this to be done in a manner which minimises the impact on the environment through significantly reducing emissions compared with the "standard" solutions currently being used. To highlight this, we have materially increased our focus on this aspect in marketing and investor relations materials and, more recently, created a distinct Environmental, Social and Governance ("ESG") section on our website.
Alongside highlighting the broader benefits of our MSAR® technology, we have launched a body of work that upon success will fundamentally increase its intrinsic ESG credentials. Examples include:
· Green MSAR® - Our Research, Development and Innovation ("RDI") team have been investigating opportunities to reduce emissions of SOx and CO2 from MSAR® by enabling sustainable fuel sources to be incorporated into MSAR® to further enhance its environmental benefits. Whilst this work is at an early stage, positive progress has been made on formulations which incorporate sustainable fuels into MSAR® increasing its economic value as a fuel and materially reducing SOx and CO2 emissions. We look forward to providing shareholders with more information on this initiative in due course.
· Gas Scrubbers - An agency agreement was signed in July 2020 with Pacific Green Technologies, Inc ("PGT") Group, a company that is becoming a world leader at providing sustainable cleantech solutions for climate change, green energy and emissions control. Their gas scrubbers have applications in the marine, power and industrial sectors that we are developing and, as agent, Quadrise will receive an agency fee based on sales of PGT technology linked to MSAR® projects. The use of MSAR® alongside these solutions enables customers to fund these environmental improvements, whilst ensuring that the local communities are able to benefit from the significant reduction in emissions.
· Metals Recovery - Quadrise is collaborating with a UK technology and engineering company that specialise in process plant development, project risk analysis, and engineering and design. They design and license technology for the extraction and recovery of metals (particularly vanadium and nickel - with the former having increasing use in the production of batteries that are essential for large-scale adoption of renewable energy solutions) from ashes, minerals, refinery residues, spent catalyst and industrial by-products. There is a strong synergy with MSAR® fuel ash, as the almost complete burnout of carbon concentrates the metals in the ash which makes the metals recovery significantly cheaper.
· JGC - We are in discussions with JGC regarding a new joint initiative for MSAR® to reduce Japanese refinery emissions of CO2 using combined heat and power diesel technology to replace residue-fired boilers.
Delivery of Key Business Objectives
Our broad spread of activities has really come to the fore in 2020, with material progress achieved across several core markets. As a result, we believe that we have continued to deliver on one of our key objectives; to rebuild shareholder confidence and demonstrate that their long-term support continues to be justified.
With the substantial funding put in place during autumn 2019, we secured our ability to pursue our business development activities through to mid-Q2 calendar 2021. Since then we have made significant progress in several markets, which brings the Company closer to being able to advance towards commercial revenues and profitability.
Changes to the Board during the year.
On 1 February 2020 the Company announced the promotion of Jason Miles to Chief Executive Officer (from Chief Operating Officer) and Mark Whittle's promotion to Chief Operating Officer from his previous role as Head of Projects. Jason and Mark have been key to the Company's business and project development initiatives and I look forward to working alongside them in their new roles as the Company progresses into its next stage.
Two non-executive directors stepped down during the year, with Hemant Thanawala resigning effective 31 December 2019 to pursue other business interests and Bryan Sanderson leaving on 14 July 2020 to assist the Company with its cost reduction initiatives. We thank Hemant and Bryan for their service and wish them well in their future endeavours.
Response to the COVID-19 Pandemic and Cost Reduction Actions
COVID-19 Mitigations
As we reported at the time of our interim results, we put in place pragmatic and measured initiatives to protect our staff, their families and the business. These ensured that we could continue to operate QRF throughout the year, with no direct impact on planned testing and operational support activities. Initially QRF was closed to all external access, including staff from our London office but with appropriate COVID-19 procedures and social distancing measures in place activities have returned to normal.
Our London office remained closed until August 2020, though most staff continue to work effectively from home. This has had limited impact on our activities, with very effective use being made of in-country agents/representatives, together with web-based conferencing communications. A recent example being QFI's use of remote conferencing to deliver a presentation on MSAR® to the Society of Petroleum Engineers Ecuador.
As noted above whilst it was not possible, from mid-March 2020, to access the customer site in Morocco, we have been able to progress our activities with minimal impact to the overall timetable for the planned pilot facility trial. We are now preparing to be able to resume face to face meetings and site visits during 2020, provided it can be done in a way which is safe for our staff, and we are appreciative of the client's commitment and flexibility in this regard.
The planned trial in Utah later this year will also be reliant on Quadrise staff being able to access the site and we are putting appropriate plans in place, though these will be subject to being able to comply with any restrictions on UK residents being able to travel to the US.
Despite the global disruption caused by COVID-19, Quadrise has continued to progress business development activities on multiple fronts, and the levels of engagement with partners, prospective clients and project stakeholders have generally increased. We believe that this is a result of the economic and environmental advantages that MSAR® offers being more widely known in the market and that these advantages are even more crucial now.
Cost Reduction Actions
We continue to operate with a small but well-formed team at Quadrise and being very mindful that all our activities are currently funded directly from cash reserves, we have always had a keen eye on costs, and acted very early, ahead of the general lockdown to have a further close review of our cost base. As a result, we took the decision to exercise the break clause in the lease at our current London Office, allowing the Company to locate to lower cost and more flexible premises at the end of Q1 2021. Given the timing of cost reductions, administrative expense savings are expected to be more fully reflected during the current financial year.
We have utilised the furlough scheme for a small number of our London and QRF based staff as appropriate and we continue to review staffing levels and overall costs to maximise the use of remaining cash reserves.
Following a thorough review of the Company's cost base, which included the reduction of lease commitments and non-exec director's fees discussed above, alongside the significant reduction in our travel-related expenses from mid-March 2020 onwards Quadrise was able to extend its period of operation on the current cash reserves from 31 December 2020 (as announced at the time of completing the fundraising in October 2019 to mid-Q2 calendar 2021
RDI and Operations Activities
Research, development and innovation ("RDI") activities remain a core function and underpin our technology-led offering, with QRF our hub for these activities. During the first half of the period, work was focused on the fabrication and commissioning of a new lab mill that is suitable for both development and testing work on heavier residues that require higher working temperatures and pressures for MSAR® manufacture. During Q1 calendar 2020, preparation for the trial in Morocco was the main activity and included the design, fabrication and commissioning of the pumping and heating unit, testing of a bespoke in-house designed burner tip and production of the fuel for the trial. All of which was completed on time, enabling the equipment and fuel to be available on site as planned, before the COVID-19 lockdown prevented trial commencement.
The ability to utilise QRF to produce relatively small volumes of MSAR® fuel (up to 20 tonnes) has proved to be instrumental in our work to progress the trials in Morocco (without needing to involve a third-party refiner for fuel production). This will continue to be of critical importance as part of our plan to mobilise on site during 2020 and to seek to mitigate the impact of the delay to the start of the on-site work on the overall project programme.
Testing of the oil samples from Greenfield will be a priority, ahead of planned on-site trial activities in Utah towards the end of 2020. Operational support activities for this project during the remainder of calendar 2020 will be focused, initially, on ensuring that all equipment is adequately prepared for the challenges of working in the very cold winter conditions in Utah.
As described above, during 2020 and to date, the RDI team have completed initial testing and scoping for a new programme of work at QRF to further improve the environmental performance and credentials of MSAR® using sustainable fuel sources. Positive progress has been made in this regard and work will continue for the remainder of the year and potentially into 2021. Some of the opportunities being investigated offer novel patent opportunities to enhance Quadrise's Intellectual Property portfolio.
PR/IR Activities
During the year the Company maintained its commitment to communicating effectively with its stakeholders.
In addition to enhanced shareholder engagement across a number of platforms, the Company's targeted approach to commercial engagement saw the preparation, publication and active promotion of the White Paper on the MSAR® opportunity in the Middle East; including the new section on the website in both English and Modern Standard Arabic ("MSA") - this work will be expanded during calendar 2020 to provide a "lite" version of our website in MSA - reinforcing our longstanding presence and commitment to the region, as well as similar content in Spanish.
Results for the Year
The consolidated after-tax loss for the year to 30 June 2020 was £4.8m (2019: £3.0m).
Production and development costs of £1.4m (2019: £1.5m) comprise the costs of the Group's operational staff and consultants, QRF running costs, equipment and consumables and depreciation expense amongst others. These costs have decreased slightly as the 2019 charges include residual costs of decommissioning the Group's MSAR® manufacturing unit and associated equipment at the Cepsa refinery.
Administration expenses of £1.8m (2019: £1.5m), comprise the Group's corporate staff and directors' costs, professional advisor fees, PR/IR costs and head office costs. The increase of £0.3m has arisen due to increased professional fees incurred as a result of the fundraising activities during the year and an increase in executive directors' bonus payments as none were awarded in the prior year.
Fair value adjustment charges to the Convertible Securities of £1.1m (2019: nil) have arisen during the year (see note 10). Non-cash share option charges of £0.5m (2019: £0.2m) have increased due to the award of share options to staff and directors in the prior year which are expensed over the vesting period (see note 11). The increase in finance costs to £146k (2019: £6k) is due to a £140k finance fee arising as part of the Convertible Securities instrument (see note 10), which was settled by issuance of shares.
Basic and diluted loss per share was 0.49p (2019: 0.34p).
Statement of Financial Position
At 30 June 2020, the Group had total assets of £6.3m (2019: £5.1m). The most significant balances were intangible assets of £2.9m (2019: £2.9m), property, plant and equipment of £0.6m (2019: £0.7m), and cash of £2.4m (2019: £1.1m). Further information on intangible assets is provided in note 8 below.
Cash Flow
The Group ended the year with £2.4m of cash and cash equivalents (2019: £1.1m). In September 2019, the Group raised £2.0m through the issuance of the Convertible Security to Bergen and gross proceeds of £2.56m via the fully underwritten open offer and accompanying subscription. £3.1m was utilised in operating activities during the year (2019: £2.7m).
Capital Structure
The Company had 922,711,895 ordinary shares of 1p each in issue at 30 June 2019. On 22 August 2019, 3,888,889 new ordinary shares were issued at 3.6p per share and a further 4,500,000 new ordinary shares were issued at par as part of the Convertible Security transaction announced on 23 August 2019 (see note 10). A further 64,656,051 new ordinary shares were issued at 3.96p per share on 1 October 2019 as a result of the Open Offer and Subscription announced on 9 September 2019. Upon exercise of conversion rights over the Convertible Security, new ordinary shares were issued to Bergen as follows:
Date | Number of shares | Conversion price (£) |
24 March 2020 | 8,333,333 | 0.012 |
16 April 2020 | 8,333,333 | 0.012 |
23 June 2020 | 22,727,273 | 0.011 |
20 August 2020 | 18,750,000 | 0.016 |
7 September 2020 | 23,529,412 | 0.017 |
The Company's current issued share capital stands at 1,077,430,186 ordinary shares of 1p each, all with voting rights
Taxation
The Group has tax losses arising in the UK of approximately £53.7m (2019: £51.0m) that are available, under current legislation, to be carried forward against future profits. £26.6m (2019: £23.5m) of the tax losses carried forward represent trading losses within Quadrise Fuels International plc, £25.8m (2019: £25.8m) represent non-trade deficits arising on intangible assets within Quadrise International Limited, £0.6m (2019: £0.9m) represent pre-trading losses incurred by subsidiaries, £0.8m (2019: £0.8m) represent management expenses incurred by Quadrise International Limited, and £0.1m (2019: £0.1m) represent capital losses within Quadrise Fuels International plc.
Outlook - Current trading and prospects.
The Quadrise team has been able to build on the platform created in 2019 and has created significant momentum, despite the COVID-19 pandemic.
The final quarter of 2020 will be a very busy period, as we are poised to complete two critical trials/tests; first in Morocco and then in Utah, USA. Whilst these timings could be subject to revision in the light of further controls relating to the COVID-19 pandemic in the UK, Morocco or the US, and in the case of the test in the US, confirming the required MSAR® formulation from the Asphalt Ridge oil samples to be supplied during the planned November 2020 start-up. We remain confident in our ability to complete these critical projects in 2020.
Alongside these activities, in the industrial and upstream markets we have undertaken significant work to underpin the substantial opportunities in KSA and the wider Middle East region, with the publication of the Middle East White Paper and having key segments of our website now available in Arabic.
In Central and South America, we are continuing to progress the opportunities in Ecuador and Mexico and have added further to our roster of agents in this important region, to complement the activities of Freepoint and Redliner.
In the marine market, we are seeking to conclude LONO trial agreements with major shippers in the container/bulker markets. The physical bunker market has been significantly impacted by the COVID-19 pandemic and we will not be progressing this opportunity in 2020.
Our ability to respond rapidly to the opportunity with Greenfield/Valkor is, we believe, a clear demonstration of how our proven project management and RDI expertise enables us to engage with leading companies and reduces the delivery risk to our project activities.
The significant commitment to PR/IR activities during 2020 will continue through the rest of the year and into 2021, with a White Paper focused on the Latin American market and a Spanish version of the main portions of our website being planned for Q4 2020. We will also continue to use a broad spread of routes to engage with shareholders, including interviews with Proactive Investors, presentations at retail investor forums and events, and the use of Investor Meet Company to provide regular updates and Q&A sessions for our substantial and loyal retail shareholder base.
Whilst global commerce remains significantly impacted by COVID-19, we remain confident that we can meet the challenging timetables we have put in place for the trials in Morocco and Utah, USA, though there may be challenges along the way. Successful delivery of these critical trials/tests will fundamentally de-risk Quadrise's business across all end-user and geographic markets and provide, we believe, a clear path to commercial revenues.
QFI has a small, but very capable team and our continued progress is only possible through the significant contribution of everyone working within the business and I would like to thank them all for their continued dedication and professionalism. Finally, I would like to thank, once again, our shareholders for their support which as always will remain fundamental to the long-term success of Quadrise.
Mike Kirk
Chairman
2 October 2020
Strategic Report
For the year ended 30 June 2020
Principal Activity
The principal activity of the Company is to develop markets for its proprietary emulsion fuel ("MSAR®") as a low-cost substitute for conventional heavy fuel oil ("HFO") for use in power generation plants, industrial applications and marine diesel engines.
Business Review and Future Developments
A full review of the Group's activities during the year, recent events and future developments is contained in the Chairman's Statement.
Key Performance Indicators
The Group's key performance indicators are:
· Development and commercial performance against the Group's business model and project timetables established with partners and clients, and
· Financial performance and position against the approved budgets and cashflow forecasts.
The Board regularly reviews the Group's business model, with a business development review being held fortnightly between the Executive Directors and two of the Group's Non-Executive Directors. The commercial performance of the Company and discussion of each of the Company's key projects and business development opportunities is discussed at length in the Chairman's Statement.
Each year, a detailed two-year budget and cash forecast is prepared by the Executive Directors and the Head of Finance, and following an extensive review process, is then approved by the Board. Performance against budget and updated cash projections are included within the monthly management accounts which are issued to and reviewed by the board. Further information regarding performance against budget and the cost savings measures introduced during the year, which have extended the Group's projected period of operation from 31 December 2019 to mid Q2 calendar 2021, is included in the Chairman's Statement.
Going Concern
The Group had a cash balance of £2.4m as at 30 June 2020. The Directors acknowledge that this cash balance is only sufficient to cover the Group's operating requirements up to mid Q2 calendar 2021. These conditions indicate the existence of material uncertainty regarding the Group's and Company's ability to continue as a going concern.
The Directors have determined that the continuation of the Group as a going concern is dependent upon successfully raising sufficient funds in the short term, and that they have a reasonable expectation that such funds will be raised, although no binding funding agreements are in place at the date of this report. The Directors therefore have determined that it is appropriate to prepare the financial statements on a going concern basis. For further details behind the judgments and estimations used by the Directors in reaching this determination, refer to note 2.
Principal Business Risks
Each year in the second quarter, the Audit Committee assists the Executive Team in a structured zero-based re-assessment of the Company's emerging and principal risks. This is conducted for each operational sector and organisational level including the Company's research and development facility, QRF, and then aggregated for the Company as a whole. The risk level is determined by its probability, impact on the Company, and whether the risk has increased or decreased over the last 12 months. A summary of "Principal Risks and Uncertainties" is reviewed at a board meeting. Subsequently a Risk Mitigation Strategy and Action Plan is incorporated into the annual Business Planning exercise conducted in June.
The principal risks identified during this exercise, ranked in order of the likelihood of occurrence, are set out below. These may not include all of the risk factors that could affect future results. Actual results could differ materially from those anticipated as a consequence of these and various other factors, and those set forth in the Group's other periodic and current reports filed with the authorities from time to time.
Delay in commercialisation of MSAR® and funding risks due to COVID-19
There is a risk that the commercialisation of MSAR® could be delayed further due to the global COVID-19 pandemic, or unforeseen technical and/or commercial challenges. This could mean that the Group may need to raise further equity funds to remain operational. Depending on market conditions and investor sentiments, there is a risk that the Group may be unable to raise the required funds when necessary. The Group mitigates this risk by maintaining strong control over its pre-revenue expenditure, keeping up the momentum on its key projects and maintaining regular contact with the financial markets and investor community. Further discussion of the impact of COVID-19 on the Group and the Group's mitigating action is included in the Chairman's Statement.
Market risk
The marketability of MSAR® fuels is affected by numerous factors beyond the control of the Group. These include variability of price spreads between light and heavy oils, the relative competitiveness of oil, gas and coal prices both for prompt and future delivery, and the future use of hydrocarbons for energy, utilities, transportation, petrochemicals and industrial applications. The Group mitigates this risk by continuing to promote the environmental contribution of MSAR and explaining the assured contribution of hydrocarbons to the global energy mix. The Company further mitigates this risk by increasing the potential applicability of MSAR® technology to various sectors, as evidenced by applications in the upstream and industrial sections announced during the year and discussed in the Chairman's Statement.
Feedstock sourcing
There is a risk in respect of appropriately located and ongoing price competitive availability of heavy oil residue feedstock as oil refiners seek to extract more transportation fuels from each barrel of crude using residue conversion processes. The Group mitigates this risk where possible by utilising its deep understanding of the global refining industry, targeting qualifying suppliers matched to prospective major consumers. A commercial contract would motivate candidate feedstock suppliers to expedite feedstock supply.
Commercial risks
There is a risk the Group will not achieve a commercial return due to major unanticipated change in a key variable or, more likely, the aggregate impact of changes to several variables which results in sustained depressed margins.
The competitive position could be affected by changes to the fuel oil-gasoil spreads, government regulations concerning taxation, duties, specifications, importation and exportation of hydrocarbon fuels and environmental aspects. Freight costs contribute substantially to the final cost of supplied products and a major change in the cost of bulk liquid freight markets could have an adverse effect on the economics of the fuels business. The Group would mitigate this risk through establishing appropriate flexibilities in the contractual framework, offtake arrangements and price risk management through hedging.
Technological risk
There is a risk that the technology used for the production of MSAR® fuel may not be adequately robust for all applications in respect of the character and nature of the feedstock and the particular parameters of transportation and storage pertaining to a specific project. This risk may jeopardise the early commercialisation of the technology and subsequent implementation of projects; or give rise to significant liabilities arising from defective fuel during plant operations. The Group mitigates this risk by ensuring that its highly experienced key personnel are closely involved with all areas of MSAR® formulation and manufacture, and that the MSAR® fuel is thoroughly tested before being put into operational use.
Competition risks
There is a risk that new competition could emerge with similar technologies sufficiently differentiated to challenge the MSAR® process, although at the date of this report no evidence of significant competition has been noted. Were such competition to emerge, this could result, over time, in further price competition and pressure on margins beyond that assumed in the Group's business planning. This risk is mitigated by the limited global pool of expertise in the emulsion fuel market combined with an enhanced R&D programme aimed at optimising cost and performance and protection of intellectual property. The Group also makes best use of scarce expertise by developing close relationships with strategic counterparties such as Nouryon while ensuring that key employees are suitably incentivised.
Other Business Risks
Dependence on key personnel
The Group's business is dependent on obtaining and retaining the services of key personnel of the appropriate calibre as the business develops. The success of the Group will continue to be dependent on the expertise and experience of the Directors and the management team, and the loss of personnel could still have an adverse effect on the Group. The Group mitigates this risk by ensuring that key personnel are suitably incentivised and contractually bound.
Environmental risks
The Group's operations are subject to environmental risks inherent in the oil processing and distribution industry. The Group is subject to environmental laws and regulations in connection with all of its operations. Although the Group ensures compliance with all applicable environmental laws and regulations, there are certain risks inherent to its activities, such as accidental spills, leakages or other circumstances that could expose the Group to potential liability.
Further, the Group may require approval from the relevant authorities before it can undertake activities which are likely to impact the environment. Failure to obtain such approvals may prevent or delay the Group from undertaking its desired activities. The Group is unable to predict definitively the effect of additional environmental laws and regulations, which may be adopted in the future, including whether any such laws or regulations would materially increase the Group's cost of doing business, or affect its operations in any area of its business. The Group mitigates this risk by ensuring compliance with environmental legislation in the jurisdictions in which it operates, and closely monitoring any pending regulation or legislation to ensure compliance.
No profit to date
The Group has incurred aggregate losses since its inception and it is therefore not possible to evaluate its prospects based on past performance. There can be no certainty that the Group will achieve or sustain profitability or achieve or sustain positive cash flow from its activities.
Corporate and regulatory formalities
The conduct of petroleum processing and distribution requires compliance by the Group with numerous procedures and formalities in many different national jurisdictions. It may not in all cases be possible to comply with or obtain waivers of all such formalities. Additionally, functioning as a publicly listed company requires compliance with the stock market regulations. The Group mitigates this risk through commitment to a high standard of corporate governance and 'fit for purpose' procedures, and by maintaining and applying effective policies.
Economic, political, judicial, administrative, taxation or other regulatory factors
The Group may be adversely affected by changes in economic, political, judicial, administrative, taxation or other regulatory factors, in the areas in which the Group operates and conducts its principal activities.
Mike Kirk
Chairman
2 October 2020
Consolidated Statement of Comprehensive Income
For the year ended 30 June 2020
| Notes
| Year ended 30 June 2020 £'000s | Year ended 30 June 2019 £'000s |
Continuing operations |
|
|
|
Revenue |
| - | 22 |
Production and development costs |
| (1,357) | (1,475) |
Other administration expenses |
| (1,821) | (1,462) |
Fair value adjustments arising on Convertible Securities | 10 | (1,133) | - |
Share option charge | 11 | (474) | (154) |
Warrant charge | 12 | (65) | (105) |
Foreign exchange gain/(loss) |
| (1) | 10 |
Operating loss | 4 | (4,851) | (3,164) |
Finance costs |
| (146) | (6) |
Finance income |
| 7 | 3 |
Loss before tax |
| (4,990) | (3,167) |
Taxation | 5 | 147 | 184 |
Loss and total comprehensive loss for the year from continuing operations to owners of the parent | (4,843) | (2,983) | |
|
|
|
|
Loss per share - pence |
|
|
|
Basic | 6 | (0.49)p | (0.34)p |
Diluted | 6 | (0.49)p | (0.34)p |
Consolidated Statement of Financial Position
As at 30 June 2020
| Notes
| As at 30 June 2020 £'000s | As at 30 June 2019 £'000s |
Assets |
|
|
|
Non-current assets |
|
|
|
Property, plant and equipment | 7 | 582 | 730 |
Intangible assets | 8 | 2,924 | 2,924 |
Non-current assets |
| 3,506 | 3,654 |
|
|
|
|
Current assets |
|
|
|
Cash and cash equivalents |
| 2,380 | 1,060 |
Trade and other receivables |
| 213 | 169 |
Prepayments |
| 112 | 106 |
Stock |
| 61 | 61 |
Current assets |
| 2,766 | 1,396 |
TOTAL ASSETS |
| 6,272 | 5,050 |
Equity and liabilities |
|
|
|
Current liabilities |
|
|
|
Trade and other payables |
| 198 | 288 |
Convertible Securities | 10 | 2,045 | - |
Current liabilities |
| 2,243 | 288 |
|
|
|
|
Equity attributable to owners of the parent |
|
|
|
Issued share capital |
| 10,351 | 9,227 |
Share premium |
| 75,431 | 74,438 |
Share option reserve |
| 3,927 | 3,455 |
Warrant reserve |
| 1,122 | 105 |
Reverse acquisition reserve |
| 522 | 522 |
Accumulated losses |
| (87,324) | (82,985) |
Total shareholders' equity |
| 4,029 | 4,762 |
TOTAL EQUITY AND LIABILITIES |
| 6,272 | 5,050 |
Consolidated Statement of Changes in Equity
For the year ended 30 June 2020
|
£'000s |
£'000s | Share option reserve £'000s |
Warrant reserve £'000s | Reverse acquisition reserve £'000s |
Accumulated £'000s |
£'000s |
1 July 2018 | 8,622 | 73,642 | 3,432 | - | 522 | (80,133) | 6,085 |
Loss and total comprehensive loss for the year | - | - | - | - | - | (2,983) | (2,983) |
Share option charge | - | - | 154 | - | - | - | 154 |
Transfer of balances relating to expired share options | - | - | (131) | - | - | 131 | - |
Warrant charge | - | - | - | 105 | - | - | 105 |
New shares issued | 605 | 908 | - | - | - | - | 1,513 |
Share issue costs | - | (112) | - | - | - | - | (112) |
30 June 2019 | 9,227 | 74,438 | 3,455 | 105 | 522 | (82,985) | 4,762 |
1 July 2019 | 9,227 | 74,438 | 3,455 | 105 | 522 | (82,985) | 4,762 |
Loss and total comprehensive loss for the year | - | - | - |
| - | (4,843) | (4,843) |
Fair value adjustments arising on Convertible Securities | - | - | - | - | - | 502 | 502 |
Share option charge | - | - | 474 | - | - | - | 474 |
Transfer of balances relating to expired share options | - | - | (2) | - | - | 2 | - |
Warrant charge | - | - | - | 65 | - | - | 65 |
Warrants issued as part of Open Offer and Subscription | - | (816) | - | 816 | - | - | - |
Shares and warrants issued as part of Convertible Securities transaction. | 84 | 101 | - | 136 | - | - | 321 |
New shares issued | 647 | 1,914 | - | - | - | - | 2,561 |
Share issue costs | - | (263) | - | - | - | - | (263) |
Shares issued upon exercise of Convertible Security | 393 | 57 | - | - | - | - | 450 |
30 June 2020 | 10,351 | 75,431 | 3,927 | 1,122 | 522 | (87,324) | 4,029 |
Consolidated Statement of Cash Flows
For the year ended 30 June 2020
| Notes
| Year ended 30 June 2020 £'000s | Year ended 30 June 2019 £'000s |
Operating activities |
|
|
|
Loss before tax from continuing operations |
| (4,990) | (3,167) |
Fair value adjustments arising on Convertible Securities | 10 | 1,133 | - |
Convertible Securities finance fee (non-cash) | 10 | 140 | - |
Depreciation | 7 | 172 | 230 |
Loss on disposal of fixed assets |
| - | 25 |
Finance costs paid |
| 6 | 6 |
Finance income received |
| (7) | (3) |
Share option charge | 11 | 474 | 154 |
Warrant charge | 12 | 65 | 105 |
Working capital adjustments |
|
|
|
(Increase)/decrease in trade and other receivables |
| (44) | 19 |
(Increase)/decrease in prepayments |
| (6) | 16 |
Decrease in trade and other payables |
| (90) | (112) |
Cash utilised in operations |
| (3,147) | (2,727) |
|
|
|
|
Finance costs paid |
| (6) | (6) |
Taxation received | 5 | 147 | 184 |
Net cash outflow from operating activities |
| (3,006) | (2,549) |
|
|
|
|
Investing activities |
|
|
|
Finance income received |
| 7 | 3 |
Purchase of property, plant and equipment | 7 | (24) | (24) |
Net cash outflow from investing activities |
| (17) | (21) |
|
|
|
|
Financing activities |
|
|
|
Issue of ordinary share capital |
| 2,606 | 1,513 |
Issue costs |
| (263) | (112) |
Increase in Convertible Securities | 10 | 2,000 | - |
Net cash inflow from financing activities |
| 4,343 | 1,401 |
|
|
|
|
Net increase/(decrease) in cash and cash equivalents |
| 1,320 | (1,169) |
Cash and cash equivalents at the beginning of the year |
| 1,060 | 2,229 |
Cash and cash equivalents at the end of the year |
| 2,380 | 1,060 |
Notes to the Financial Information
1. Basis of Preparation and Significant Accounting Policies
The financial information for the year ended 30 June 2020 set out in this announcement has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS).
The financial information has been prepared on the historical cost basis, except for the revaluation of certain financial instruments. Details of the accounting policies applied are set out in the financial statements for the year ended 30 June 2020.
The financial information is prepared in Pounds Sterling and all values are rounded to the nearest thousand Pounds (£'000) except where otherwise indicated.
The financial information contained in this announcement does not constitute the Company's statutory financial statements for the year ended 30 June 2020 but has been extracted from them. These financial statements will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The auditors have reported on these financial statements, and their report was unqualified and did not contain any statement under section 498(2) or (3) Companies Act 2006.
Statutory financial statements for the year ended 30 June 2019 have been delivered to the Registrar of Companies. The auditor's report on these financial statements was unqualified and did not contain any statement under section 498(2) or (3) Companies Act 2006.
The Directors do not propose a dividend in respect of the year ended 30 June 2020 (2019: nil).
This announcement was approved by the Board on 2 October 2020.
Interim results to 31 December 2019
The interim results to 31 December 2019 showed a total comprehensive loss for the period of £3.11m, which included warrant charges of £816k relating to warrants issued to participants in the Open Offer and Subscription announced on 9 September 2019. These warrants fulfil the criteria to be recognised as an equity instrument under IAS 32 (see note 12). The warrant charge of £816k is therefore no longer included within total comprehensive loss for the year and has instead been recognised in equity.
The interim results for the six-month period ended 31 December 2020 will therefore include restated comparative results for the six-month period ended 31 December 2019, which will incorporate the adjustment referred to above.
2. Going Concern
As at 30 June 2020, the Group had a cash balance of £2.4m, which is sufficient to fund the Group to mid Q2 calendar 2021.The continuation of the Group as a going concern beyond mid Q2 calendar 2021 is therefore dependent upon successfully raising additional funds prior to this date. There is thus a material uncertainty which may cast doubt about the Group's and Company's ability to continue as a going concern.
On preparing the financial statements on a going concern basis, the Directors believe the Group has a realistic expectation of raising funds prior to mid Q2 calendar 2021. The assumptions used as the basis for this judgement are that:
· The Group can put forward a positive investment case to the market, demonstrating that it has an active business development programme which will result in the generation of commercially sustainable revenues in the near term.
· The market will then be receptive to this investment case and be willing to provide the funding required prior to mid Q2 calendar 2021.
The basis for these assumptions is, as outlined in the Chairman's Statement, the demonstrable progress made during 2019-20. The Group's business development programme, led by the Executive Directors, has generated a portfolio of project opportunities, most recently demonstrated by the signature of the commercial trial agreement with Greenfield Energy LLC and the agreement with the industrial and chemicals company in Morocco. In addition, active discussions continue relating, amongst others, to the opportunities in the KSA, Ecuador, Mexico and the Marine market. The board is actively involved with the business development programme, and regularly appraised of progress, with fortnightly business development update meetings held between the Executive Directors and two of the Group's Non-Executive Directors, as well as regular full board meetings of which there were 16 during the 2019-20 financial year.
The board regularly review the Group's business model and financial projections. The business model shows total forecast Group cashflows up to 30 June 2031 and forms the basis of the investment case for the Company, anchored by the Group budget and business plan which covers the next two financial years in detail. The model comprises the financial forecasts associated with each project opportunity deemed to have a realistic chance of progressing, with assumptions made about i) the operating mode (licence, tolling or merchant), ii) the equity percentage held in the venture, iii) the cost of chemicals and equipment, iv) margins and v) rates of growth. These assumptions are based on the latest market information, agreements with counterparties and the status of discussions. The Directors have a reasonable basis for assuming the business development programme outlined above will result in the generation of commercially sustainable revenues in the near term.
The Directors carry out a detailed risk assessment process each year, with key risks and mitigating actions identified. The outbreak of the COVID-19 pandemic in early 2020 had the potential to undermine the view that progress of the business development programme towards commercially sustainable revenues would be demonstrated in the near-term. However, despite the global disruption caused by COVID-19, the Group has continued to progress its business development activities utilising a combination of web-conferencing and, where possible, in-person meetings with the Group's in-country agents and representatives. This was demonstrated most recently by the August 2020 signature of the Greenfield MSAR® Commercial Trial Agreement in the midst of COVID-19 related disruption in the USA. COVID-19 has had minimal impact on the Group's normal UK operations, with London based staff working remotely and QRF remaining fully operational throughout 2020, albeit with social-distancing measures in place and highly restricted acceptance of third-party visitors. Significant cost savings have also been made since the outbreak of COVID-19 through careful management of discretionary expenditure and human resources.
The Directors also note the positive and sustained levels of engagement with partners, prospective clients and project stakeholders worldwide during the course of 2020, despite global COVID-19 disruption. Existing and prospective commercial partners make decisions based on long-term considerations, and the Directors believe that the economic and environmental advantages that MSAR® offers are increasingly attractive in periods of global uncertainty as counterparties look to both generate savings and further improve their environmental performance.
The Directors acknowledge that project activities that require being on site at client premises have been delayed and could be subject to further delays depending upon the status of the pandemic and restrictions put in place by governments in the months ahead. Whilst these delays do not inherently affect the longer-term business case which forms the basis for investment in the Group, the revenues resulting from projects may be impacted. Although the Group is not presently reliant upon any such revenues and the resultant positive cash flows to fund its operations, it is reliant upon existing shareholder funds and the ability to raise further funds until such a time when the Group is commercially self-sustaining.
The Group has an active programme of public and investor relations with high levels of shareholder engagement across a range of platforms. From a low of 1.18p in June 2019 the share price has increased to a steady range of 2.68p-3.75p in the period to the date of this report following positive news flow during that period including the announcement of the Greenfield MSAR® Commercial Trial Agreement on 18 Aug 2020. The Directors continue to explore all possible funding opportunities and maintain regular active dialogue with the Group's joint brokers, advisors and potential strategic and funding partners. The finance committee of the board (comprising the Executive Directors and two of the Group's Non-Executive Directors) meets fortnightly, immediately after a business development review, to discuss the Group's plans for a financing programme and its timing relative to business development progress. The Directors are therefore able to make a realistic assessment of likely market and investor reaction to a strong investment case and the likelihood that funding will be provided.
The Directors also note that the Group has a history of being able to successfully raise funds, as it has done so on a number of occasions during recent years, including most recently in autumn 2019, with the receipt of £4.3m (net of costs) from an open offer, subscription and the issue of the first £2m tranche of Convertible Securities to Bergen Global Opportunity Fund, LP. A second tranche of Convertible Securities, with a nominal value of up to £2.15 million is conditionally available from Bergen with a subscription price of up to £2.0 million (subject to the aggregate nominal value not exceeding 3.5% of the Company's market capitalisation on issue) from November 2020.
The Directors are therefore comfortable with the assumption that the market will be receptive to a positive investment case and will be willing to provide the funding required to allow the Group to progress towards sustainable revenues and continue as a going concern.
Based on the rationale for the key assumptions outlined above, the Directors have therefore made the judgement that the financial statements should be prepared on a going concern basis, despite no binding funding agreement being in place at the date of this report.
3. Segmental Information
For the purpose of segmental information, the reportable operating segment is determined to be the business segment. The Group principally has one business segment, the results of which are regularly reviewed by the Board. This business segment is a business to produce emulsion fuel (or supply the associated technology to third parties) as a low cost substitute for conventional heavy fuel oil ("HFO") for use in power generation plants and industrial and marine diesel engines.
Geographical Segments
The Group's only geographical segment during the year was the UK.
4. Operating Loss
Operating loss is stated after charging: | Year ended 30 June 2020 £'000s | Year ended 30 June 2019 £'000s |
|
|
|
|
|
|
Fees payable to the Company's auditor for the audit of the Company's annual accounts. Fees payable to the Company's auditor and its associates for other services: | 23 | 16 |
Audit of accounts of subsidiaries Tax compliance services | 23 3 | 16 5 |
Consultants and other professional fees (including legal) | 286 | 238 |
Depreciation of property, plant and equipment | 172 | 230 |
Research and development costs | 241 | 178 |
5. Taxation
| Year ended 30 June 2020 £'000s | Year ended 30 June 2019 £'000s
|
UK corporation tax credit | (147) | (184) |
Total | (147) | (184) |
No liability in respect of corporation tax arises as a result of trading losses.
Tax Reconciliation | Year ended 30 June 2020 £'000s
| Year ended 30 June 2019 £'000s |
Loss on continuing operations before taxation | (4,990) | (3,167) |
Loss on continuing operations before taxation multiplied by the UK corporation tax rate of 19% (2019: 19%) |
(948) |
(602) |
Effects of: |
|
|
Non-deductible expenditure | 208 | 40 |
R&D tax credit | (147) | (184) |
Temporary differences | (13) | - |
Tax losses carried forward | 753 | 562 |
Total taxation credit on loss from continuing operations | (147) | (184) |
The Group has tax losses arising in the UK of approximately £53.7m (2019: £51.0m) that are available, under current legislation, to be carried forward against future profits. £26.6m (2019: £23.5m) of the tax losses carried forward represent trading losses within Quadrise Fuels International plc, £25.8m (2019: £25.8m) represent non-trade deficits arising on intangible assets within Quadrise International Limited, £0.6m (2019: £0.9m) represent pre-trading losses incurred by subsidiaries, £0.8m (2019: £0.8m) represent management expenses incurred by Quadrise International Limited, and £0.1m (2019: £0.1m) represent capital losses within Quadrise Fuels International plc.
A deferred tax asset representing these losses and other temporary differences at the statement of financial position date of approximately £10.2m (2019: £8.7m) has not been recognised as a result of existing uncertainties in relation to its realisation.
6. Loss Per Share
The calculation of loss per share is based on the following loss and number of shares:
| Year ended 30 June 2020
| Year ended 30 June 2019
|
Loss for the year (£'000s) | (4,843) | (2,983) |
Weighted average number of shares: |
|
|
Basic | 982,793,918 | 888,728,557 |
Diluted | 982,793,918 | 888,728,557 |
|
|
|
Loss per share: |
|
|
Basic | (0.49)p | (0.34)p |
Diluted | (0.49)p | (0.34)p |
Basic loss per share is calculated by dividing the loss for the year from continuing operations of the Group by the weighted average number of ordinary shares in issue during the year.
For diluted loss per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potential dilutive options over ordinary shares. Potential ordinary shares resulting from the exercise of share options have an anti-dilutive effect due to the Group being in a loss position. As a result, diluted loss per share is disclosed as the same value as basic loss per share. The 29.3m dilutive share options and the 45.2m dilutive warrants issued by the Company and which are outstanding at year-end could potentially dilute earnings per share in the future if exercised when the Group is in a profit making position.
7. Property, plant and equipment
Consolidated | ||||||
| Leasehold Improvements | Computer Equipment | Software | Office Equipment | Plant and machinery | Total |
| £'000s | £'000s | £'000s | £'000s | £'000s | £'000s |
Cost |
|
|
|
|
|
|
Opening balance - 1 July 2019 | 181 | 91 | 43 | 16 | 1,390 | 1,721 |
Additions | - | 4 | - | - | 20 | 24 |
Disposals | - | - | - | - | - | - |
Closing balance - 30 June 2020 | 181 | 95 | 43 | 16 | 1,410 | 1,745 |
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|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
Opening balance - 1 July 2019 | (166) | (78) | (41) | (16) | (690) | (991) |
Depreciation charge for the year | (15) | (11) | (2) | - | (144) | (172) |
Disposals | - | - | - | - | - | - |
Closing balance - 30 June 2020 | (181) | (89) | (43) | (16) | (834) | (1,163) |
|
|
|
|
|
|
|
Net book value at 30 June 2020 | - | 6 | - | - | 576 | 582 |
Consolidated | ||||||
| Leasehold Improvements | Computer Equipment | Software | Office Equipment | Plant and machinery | Total |
| £'000s | £'000s | £'000s | £'000s | £'000s | £'000s |
Cost |
|
|
|
|
|
|
Opening balance - 1 July 2018 | 166 | 91 | 43 | 16 | 1,428 | 1,744 |
Additions | 15 | - | - | - | 9 | 24 |
Disposals | - | - | - | - | (47) | (47) |
Closing balance - 30 June 2019 | 181 | 91 | 43 | 16 | 1,390 | 1,721 |
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
Opening balance - 1 July 2018 | (109) | (63) | (36) | (16) | (559) | (783) |
Depreciation charge for the year | (57) | (15) | (5) | - | (153) | (230) |
Disposals | - | - | - | - | 22 | 22 |
Closing balance - 30 June 2019 | (166) | (78) | (41) | (16) | (690) | (991) |
|
|
|
|
|
|
|
Net book value at 30 June 2019 | 15 | 13 | 2 | - | 700 | 730 |
| ||||||
8. Intangible Assets
Consolidated
| QCC royalty payments | MSAR® trade name | Technology and know-how | Total |
| £'000s | £'000s | £'000s | £'000s |
Cost |
|
|
|
|
Balance as at 1 July 2019 and 30 June 2020 | 7,686 | 3,100 | 25,901 | 36,687 |
|
|
|
|
|
Amortisation and Impairment |
|
|
|
|
Balance as at 1 July 2019 and 30 June 2020 | (7,686) | (176) | (25,901) | (33,763) |
|
|
|
|
|
Net book value as at 30 June 2020 | - | 2,924 | - | 2,924 |
Cost |
|
|
|
| |||
Balance as at 1 July 2018 and 30 June 2019 | 7,686 | 3,100 | 25,901 | 36,687 |
| ||
|
|
|
|
|
| ||
Amortisation and Impairment |
|
|
|
|
| ||
Balance as at 1 July 2018 and 30 June 2019 | (7,686) | (176) | (25,901) | (33,763) |
| ||
|
|
|
|
|
| ||
Net book value as at 30 June 2019 | - | 2,924 | - | 2,924 |
| ||
Intangible assets comprise intellectual property with a cost of £36.7m, including assets of finite and indefinite life. Quadrise Canada Corporation's ("QCC's) royalty payments of £7.7m and the MSAR® trade name of £3.1m are termed as assets having indefinite life as it is assessed that there is no foreseeable limit to the period over which the assets would be expected to generate net cash inflows for the Group, as they arise from cashflows resulting from Quadrise and QCC gaining a permanent market share. The assets with indefinite life are not amortised, but the QCC royalty payments intangible asset became fully impaired in 2012.
The remaining intangibles amounting to £25.9m, primarily made up of technology and know-how, are considered as finite assets and were amortised over 93 months, being fully amortised in 2012. The Group does not have any internally generated intangibles.
MSAR® trade name intangible asset
In accordance with IAS 36 "impairment of assets" and IAS 38 "intangible assets", a review of impairment for indefinite life intangible assets is undertaken annually or at any time an indicator of impairment is considered to exist. The discount rate applied to calculate the present value is for the cash generating unit ("CGU"). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of the CGU is assessed by reference to the value in use ("VIU"), being the net present value ("NPV") of future cash flow expected to be generated by the asset, and fair value less costs to sell ("FVLCS").
The recoverable amount of the MSAR® trade name intangible asset has been determined using a VIU model. The expected future cash flows utilised in the VIU model are derived by quantifying the royalties that would result if the asset was licensed from a third party in order to determine the income stream directly attributable to the asset in isolation. The royalties are based on a percentage of projected future revenues up to 30 June 2031 with an assumed growth rate being used beyond that date.
The key assumptions used in this calculation are as follows:
| 2020 | 2019 |
Royalty rate (% of projected revenue) 1 | 0.5% | 0.5% |
Discount rate 2 | 20% | 20% |
Revenues forecast up to 3 | 30 June 2031 | 30 June 2035 |
Growth rate beyond forecast period 4 | 0% | 0% |
1) The royalty rate used upon initial recognition of this intangible asset was 0.33% of revenues determined as part of a third-party intangible asset valuation exercise. This was increased to 0.5% of revenues from 2011 onwards to reflect the wider awareness of the MSAR® trademark in the market..
2) The discount rate of 20% has been determined by management as conservative estimate based on the uncertainty inherent in the revenue forecasts. Management estimates the discount rates using pre-tax rates that reflect current market assessments of the time value of money and risks specific to expected future projects
3) The 2020 revenue forecast extends to 30 June 2031 which ensures that each project included within the forecast reaches full maturity. The revenue forecast prepared in the prior year extended to 30 June 2035 as a result of the projects included in that forecast taking until then to reach maturity.
4) No growth has been forecast beyond the forecast period due to the uncertainty inherent in the revenue projections beyond the stage of project maturity.
The revenue forecast is based on the latest Company business model, which is regularly reviewed by management. The basis for the inclusion of projects and the estimation of growth rates, margins and project lifespans within the business model is based on the latest agreements with counterparties, commodity and chemical prices and the most recent discussions with customers, suppliers and other business partners.
The 'base-case' impairment assessment based on the above inputs shows a recoverable amount for the asset that is in excess of the net book value of asset and therefore no impairment has been identified, with the VIU exceeding the carrying value by £3.4m (the 'headroom').
Management have performed sensitivity analyses whereby certain parameters were flexed downwards by reasonable amounts and certain scenarios were modelled for the CGU to assess whether the recoverable value would result in an impairment charge. In isolation, none of these scenarios would result in an impairment to the MSAR® Trade Name intangible asset. However, a combination of two or more of these scenarios could result in an impairment charge, but management do not consider this likely. The following sensitivities were applied
Results of sensitivity analysis
Scenario | Resulting headroom (£'m) | Scenario which would reduce headroom to nil |
Delayed revenues (1 year) | 2.20 | A 4 year delay to forecast revenues. |
Delayed revenues (2 years) | 1.19 | A 4 year delay to forecast revenues. |
Increase in discount rate to 30% | 0.12 | Increase in discount rate to 30.65%. |
Removal of projects which generate 50% of forecast revenues | 0.37 | Removal of projects which generate 53.7% of revenues. |
Finite company lifespan (to 30 June 2031). | 1.39 | Finite company lifespan (to 30 June 2030). |
Amortisation of Intangible Assets
The Board has reviewed the accounting policy for intangible assets and has amortised those assets which have a finite life. All intangible assets with a finite life were fully amortised as at 30 June 2020.
9. Investments
At the statement of financial position date, the Group held a 20.44% share in the ordinary issued capital of Quadrise Canada Corporation ("QCC"), a 3.75% share in the ordinary issued capital of Paxton Corporation ("Paxton"), a 9.54% share in the ordinary issued capital of Optimal Resources Inc. ("ORI") and a 16.86% share in the ordinary issued capital of Porient Fuels Corporation ("Porient"), all of which are incorporated in Canada.
QCC is independent of the Group and is responsible for its own policy-making decisions. There have been no material transactions between QCC and the Group during the period or any interchange of managerial personnel. As a result, the Directors do not consider that they have significant influence over QCC and as such this investment is not accounted for as an associate.
The Group has no immediate intention to dispose of its investments unless a beneficial opportunity to realise these investments arises.
Given that there is no active market in the shares of any of above companies, the Directors have determined the fair value of the unquoted securities at 30 June 2020. The shares in each of these companies were valued at CAD $nil on 1 July 2019 due to their business models being highly uncertain, with minimal possibility of any material value being recovered from their asset base. During the year there has been no indication that this situation has changed, therefore the directors have determined that the investments should continue to remain valued at CAD $nil at 30 June 2020
10. Convertible Securities
On 22 August 2019, the Company entered into an agreement with Bergen Global Opportunity Fund LP ('the Investor') whereby the Investor will provide up to £4.0 million of interest free unsecured funding, provided in two tranches through the issue by the Company of Convertible Securities with a nominal value of up to £4.3 million, convertible into Ordinary Shares.
An initial tranche of Convertible Securities with a nominal value of £2.15 million was subscribed for by the Investor for £2.0 million on 30 August 2019. A second tranche of Convertible Securities, with a nominal value of up to £2.15 million is conditionally available to the Company with a subscription price of up to £2.0 million. Both tranches have 24 month maturity dates from the dates of their respective issuance, and any Convertible Securities not converted prior to such dates will automatically convert into Ordinary Shares at such time.
The Company also issued 4.9 million 36 month warrants to subscribe for new Ordinary Shares to the Investor by way of a Warrant Instrument initially exercisable at 5.78p per Ordinary Share, subject to anti-dilution and exercise price reduction provisions.
In connection with the Agreement, on 30 August 2019 the Company also issued to the Investor 3,888,889 new Ordinary Shares in settlement of a commencement fee of £140,000 and a further 4,500,000 new Ordinary Shares to collateralise the Agreement subscribed for at nominal value by the Investor.
The Convertible Securities are only converted to the extent that the Company has corporate authority to do so, and it is a term of the agreement that the Company must retain sufficient authority to issue and allot (on a non-pre-emptive basis) a sufficient number of Ordinary Shares potentially required to be issued under the terms of the Agreement (and the Warrant Instrument).
Pursuant to the terms of the Agreement, the Company is required to obtain and maintain sufficient non-pre-emptive share issuance authority from its shareholders in relation to the Ordinary Shares that may be required to be issued pursuant to the Agreement and Warrant Instrument.
The Agreement was completed and the Initial Tranche funded to the Company on the basis of the remaining current Authority from the 2018 annual general meeting, and also on the basis that an updated authority must be obtained at a General Meeting of shareholders. Such authority was obtained at a General Meeting held on September 27, 2019.
Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities Under the terms of the Convertible Securities agreement of 22 August 2019, the Company has no obligation to repay the securities in cash (unless the Company defaults on the terms) and the number of shares which may be issued upon conversion is variable. As there is therefore no residual interest in the assets of the Company after conversion of the Convertible Securities, the Convertible Securities meet the criteria to be classified entirely as a financial liability.
The Convertible Securities instrument has been designated at fair value on initial recognition, with the fair value being assessed as £1.864m, being the nominal value of £2.15m less interest and warrant charges. The Convertible Securities have a 24 month expiry date, before which all Securities must be fully converted. Upon each exercise of conversion rights, the portion of the Convertible Securities converted is assessed at fair value, with the resulting fair value adjustment being recorded in the Statement of Comprehensive Income.
During the year ended 30 June 2020, the Investor exercised their conversion rights as follows:
Conversion date | Convertible Securities converted (£) | Conversion price (p) | No. of shares awarded upon conversion | Share price on conversion date | Fair value adjustment (£'000) |
23 March 2020 | 100,000 | 1.2 | 8,333,333 | 1.68 | 40 |
15 April 2020 | 100,000 | 1.2 | 8,333,333 | 1.64 | 36 |
22 June 2020 | 250,000 | 1.1 | 22,727,273 | 2.98 | 426 |
|
|
|
|
|
|
Total | 450,000 |
| 39,393,939 |
| 502 |
As at 30 June 2020, nominal value of £1.7m remains outstanding to the investor under the terms of the Convertible Security instrument. This balance has been assessed to have a fair value of £2.05m with the resulting fair value adjustment of £631k being recorded in the Statement of Comprehensive Income. The total fair value adjustment charge for the year is therefore £1.13m.
The fair value assessment was performed using a 'base case' model applying a factor for the propensity to convert, being a key assumption, equal to 4.5%. Management have performed a sensitivity analysis whereby this key parameter was flexed by reasonable amounts to assess the impact on the fair value.
An increase to this assumption by 0.5% would result in an increase of £604k in the fair value of the Convertible Security.
11. Share Options
Movement in the year:
The following table illustrates the number and weighted average exercise prices ("WAEP") of, and movements in, share options during the year:
|
Number 30 June 2020 | WAEP (pence) 30 June 2020 |
Number 30 June 2019 | WAEP (pence) 30 June 2019 |
|
|
|
|
|
Outstanding as at 1 July | 39,400,000 | 17.91 | 22,500,000 | 26.90 |
Granted during the year | - | - | 19,150,000 | 7.29 |
Repurchased by grantor during the year | - | - | - | - |
Expired during the year | (150,000) | 7.50 | (2,250,000) | 17.35 |
Exercised during the year | - | - | - | - |
Options outstanding as at 30 June | 39,250,000 | 17.95 | 39,400,000 | 17.91 |
Exercisable as at 30 June | 29,250,000 | 20.09 | 23,149,719 | 25.39 |
The weighted average remaining contractual life of the 39.3 million options outstanding at the statement of financial position date is 5.05 years (2019: 6.07 years). The weighted average share price during the year was 3.18p (2019: 3.15p) per share.
The expected volatility of the options reflects the assumption that historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The expected life of the options is based on historical data available at the time of the option issue and is not necessarily indicative of future trends, which may not necessarily be the actual outcome.
The Share Option Schemes are equity settled plans, and fair value is measured at the grant date of the option. Options issued under the Schemes vest over a two year or three year period provided the recipient remains an employee of the Group. Options also may be exercised within one year of an employee leaving the Group at the discretion of the Board.
The Company issued nil share options to directors and employees during the year (2019: 19.15m).
The fair value was calculated using the Black Scholes option pricing model. The weighted average inputs were as follows
|
|
| 2020 | 2019 |
Stock price: |
|
| - | 6.29p |
Exercise Price |
|
| - | 7.29p |
Interest Rate |
|
| - | 0.75% |
Volatility |
|
| - | 113.4% |
Expected term |
|
| - | 4 years |
12. Warrants
Movement in the year:
The following table illustrates the number and weighted average exercise prices ("WAEP") of, and movements in, warrants during the year:
|
Number 30 June 2020 | WAEP (pence) 30 June 2020 |
Number 30 June 2019 | WAEP (pence) 30 June 2019 |
|
|
|
|
|
Outstanding as at 1 July | 5,000,000 | 3.16 | - | - |
Granted during the year | 40,228,026 | 6.98 | 5,000,000 | 3.16 |
Exercised during the year | - | - | - | - |
Warrants outstanding as at 30 June | 45,228,026 | 6.56 | 5,000,000 | 3.16 |
Exercisable as at 30 June | 45,228,026 | 6.56 | 5,000,000 | 3.16 |
The table below shows a reconciliation of warrants in the year:
|
|
| No. of warrants | WAEP (pence) |
|
|
|
| £ |
As at 1 July 2019 |
|
| 5,000,000 | 3.16 |
Sep 2019 - Convertible Security warrants |
|
| 4,900,000 | 5.78 |
Sep 2019 - Open Offer and Subscription warrants |
|
| 32,328,026 | 7.48 |
Dec 2019 - Grant to Younes Mamaar |
|
| 3,000,000 | 3.53 |
As at 30 June 2020 |
|
| 45,228,026 | 6.56 |
|
|
|
|
|
The warrants are equity settled warrants which vest immediately on grant date. Fair value is measured at the grant date of the option using the Black Scholes pricing model. The inputs into this model are: Stock price at the date of grant, exercise price, interest rate, expected term and expected volatility. The expected volatility of the warrants reflects the assumption that historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The expected life of the warrants is based on historical data available at the time of the option issue and is not necessarily indicative of future trends, which may not necessarily be the actual outcome.
The warrants granted during the year, and the inputs into the Black Scholes pricing model for each grant are as follows
On 27 September 2019, the Company issued 4.9 million warrants with an exercise price of 5.78p and a term of 3 years to Bergen as part of the Convertible Security transaction announced on 23 August 2019 (see note 10). Inputs were as follows: Stock price 4.05p, exercise price 5.78p, interest rate 0.75%, volatility 128%, expected term 3.0 years. The resulting fair value of these warrants of £136k is assessed as part of the fair value of the Convertible Security instrument (see note 10).
On 30 September 2019, the Company issued 32.3 million warrants with an exercise price of 7.48p and a term of 2.94 years to participants in the Open Offer and Subscription announced on 9 September 2019. Inputs were as follows: Stock price 3.97p; exercise price 7.48p; interest rate 0.75%, volatility 128%, expected term 2.94 years. The warrants were attached to the shares purchased with one warrant being awarded for every two shares purchased and expire on 6 September 2022. The warrants therefore fulfil the criteria to be recognised as an equity instrument under IAS 32, with the fair value of £816k being taken to equity.
On 4 December 2019, the Company issued 3 million warrants to Younes Maamar pursuant to the Morocco Representation Agreement announced on 6 March 2019, giving him the right exercise at a price of 3.53p until 27 February 2022. Inputs were as follows: Stock price 3.33p, exercise price 3.53p, interest rate 0.75%, volatility 126%, expected term 2.24 years. A charge of £65k has been recognised in the income statement in respect of these warrants under IFRS 2.
The Company issued 40.2 million warrants during the year (2019: 5 million) with a weighted average exercise price of 6.98p and a weighted average fair value of 2.53p.
The weighted average inputs into the Black Scholes option pricing model were as follows:
|
|
| 2020 | 2019 |
Stock price: |
|
| 3.93p | 3.38p |
Exercise Price |
|
| 6.98p | 3.16p |
Interest Rate |
|
| 0.75% | 0.75% |
Volatility |
|
| 128% | 129% |
Expected term (years) |
|
| 2.89 | 1.75 |
The weighted average remaining contractual life of the 45.2 million warrants outstanding at the statement of financial position date is 1.99 years. The weighted average share price during the year was 3.18p (2019: 3.15p) per share.
11. Related Party Transactions
Non-executive Director Laurence Mutch is also a Director of Laurie Mutch & Associates Limited, which has provided consulting services to the Group. The total fees charged for the year amounted to £30k (2019: £nil). The balance payable at the statement of financial position date was £nil (2019: £nil).
QFI defines key management personnel as the Directors of the Company. Other than as above, there are no transactions with Directors, other than their remuneration as disclosed in the Report of Directors' Remuneration.
12. Events After the end of the Reporting Period
On 18 August 2020, the Company entered an MSAR® Commercial Trial Agreement with Greenfield Energy LLC , the joint venture between Valkor and Tomco Energy plc. Pursuant to this the parties have planned a phased implementation of MSAR® that covers:
· A commercial trial of MSAR® technology at the Petroteq Oil Sands Plant in Utah, USA, that is managed and operated by Greenfield; with a commercial value to Quadrise of US$150,000 and
· The development of commercial MSAR® plants of up to 10,000 barrels oil per day located at Utah facilities owned or operated by Greenfield.
On 20 August 2020 the Company issued 18,750,000 new ordinary shares following receipt of a notice of exercise in respect of the Convertible Security to convert £300,000 of the Convertible Security into new ordinary shares in the Company at a conversion price of 1.6p per new ordinary share
On 21 August 2020 the Company granted a total of 10,000,000 options over new ordinary shares of 1p each in the Company to directors of the Company in accordance with the provisions of (a) the Company's Enterprise Management Incentive Plan ("EMI Plan"), in respect of awards of an aggregate of 4,261,756 Options (the "EMI Options") and (b) the Company's Unapproved Option Scheme 2016 ("2016 Scheme") in respect of awards of an aggregate of 5,738,244 Options ("2016 Scheme Options").
Director | Number of Options | Plan | Exercise price |
Mike Kirk | 2,000,000 |
EMI Plan (1,261,756 Options) 2016 Scheme (738,244 Options)
| 7.5p |
Jason Miles | 5,000,000 | 2016 Scheme | 7.5p |
Mark Whittle | 3,000,000 | EMI Plan | 7.5p |
Total | 10,000,000 | - | - |
The EMI Options and the 2016 Scheme Options will vest as to 50% on the first anniversary of the grant and the remaining 50% shall vest on the second anniversary of the date of grant. All vestings are subject to the satisfaction of certain performance conditions prior to the vesting date. The 2016 Scheme Options and the EMI Options will be exercisable from vesting until the eighth and tenth anniversaries of grant respectively.
On 7 September 2020 the Company issued 23,529,412 new ordinary shares following receipt of a notice of exercise in respect of the Convertible Security to convert £400,000 of the Convertible Security into new ordinary shares in the Company at a conversion price of 1.7p per new ordinary share.
13. Copies of the Annual Report
Copies of the Annual Report (including the Notice of Annual General Meeting) will be posted to shareholders and will be available shortly from the Company's website at www.quadrisefuels.com and from the Company's registered office, Gillingham House, 38-44 Gillingham Street, London, SW1V 1HU.
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