Final Results

RNS Number : 6629Q

Quadrise Fuels International PLC

24 October 2011

 



Quadrise Fuels International plc

("Quadrise", "QFI" or "the Company")

Final Results for the year ended 30 June 2011

Quadrise Fuels International plc (AIM: QFI), the emerging manufacturer and supplier of MSAR® emulsion fuels, a low cost alternative to heavy fuel oil (one of the world's largest fuel markets utilising over 600m tonnes per annum) in the global shipping, refining and steam and power generation markets, today announces its results for the year ended 30 June 2011 and gives notice for the convening of an Annual General Meeting ("AGM") of the Company to be held 12 December 2011.

Operational highlights

·     Quadrise MSAR® Marine Fuels:     Royalty Agreement signed with A P Møller-Mærsk ("Mærsk") for future commercial sales.

Fuel formulation and land based trial programme proceeded as planned under joint development with Mærsk and AkzoNobel Surface Chemistry AB ("AkzoNobel").

Programme scope extended to engine manufacturers, refiners, the shipping Industry, and regulatory bodies.

·     In Saudi Arabia further reviews of implementing MSAR® technology in existing refineries and new refinery projects were completed by client specialists, confirming the techno-economic feasibility of MSAR® at several locations.

·     The Mexican refinery based project proposal and associated contract terms were the subject of extensive commercial, technical and legal review by PEMEX. An agreed project programme is anticipated for implementation in 2012.

·     In Canada, Optimal Resources Inc. began oil field testing of its Enhanced Oil Recovery technology, having achieved highly promising results in extensive laboratory trials. 

Financial highlights

·     No debt and £4.0 million (2010: £1.6 million) in cash reserves at 30 June 2011 following a successful fund raising in March 2011. The Company now has sufficient funds for the full commercial phase.

·     Loss after tax of £6.6 million (2010: £3.9 million) arising principally from non-cash charges of £4.8 million (2010: £2.8 million) for the amortisation and impairment charges of intangible assets and available for sale investments.

·     Cumulative tax losses of £29.6 million (2010: £27.4 million) available for set-off against future profits, which should enable the Group to mitigate substantial tax charges anticipated in the earlier years of sustainable revenue.

·     Net assets of £19.2 million at 30 June 2011 (2010: £22.0 million).

Significant events post year end

·     Contracts were closed with Orlen Lietuva, Mærsk and AkzoNobel for the Sorø Mærsk sea trial programme to start before end 2011. This follows a series of land based trials completed under the Joint Development Agreement involving several major engine manufacturers. On confirmation of performance, the programme will be extended during 2012 to a wider range of ship and engine combinations representative of the global marine fleet. The extended fleet programme will mark the beginning of the commercial phase of the Quadrise Marine MSAR® business.

·     The Group ordered its first commercial-scale 1,000 tonnes per day MSAR® Manufacturing Unit from AkzoNobel - to be delivered by end 2011.

·     The Saudi Arabian proposal has been presented by the multi-department client team to senior management for budget approval before end 2011, with signing of associated agreements anticipated thereafter.

·     Expectation is that the project programme with PEMEX will be formally approved before end 2011 and the refinery demonstration project should be commissioned during the second half of 2012.

·     The Memorandum of Understanding with PowerSeraya Limited of Singapore was extended for a further 12 months to investigate opportunities for Quadrise MSAR® fuel supply to their 750MWe thermal power plant on Jurong Island.

·     Optimal Resources Inc. advises that results in early field trials of their Enhanced Oil Recovery technology trend towards the 30% increased recovery of oil in place achieved in simulated reservoirs in the laboratory programme.  

Commenting on the results Ian Williams, Executive Chairman of QFI said:

"The Company has made important progress over the past year on many fronts. We have the momentum now to move into the commercial phase and secure sales and revenue during calendar 2012.

The management team has been highly focussed on our core programmes. Together with our partners, we have collectively achieved remarkable results in fuel formulations which have set new standards of emulsion fuels performance. This bodes very well for the future.

Gratifying, too, is the growing appreciation of the potential and prospects for Quadrise MSAR® technology application by the refining industry. Both general awareness and the level of serious enquiry have increased markedly. In the marine sector, in particular, there is also an appreciation of the role our fuels could play in providing affordable solutions to meeting new emissions standards.

The Group finances have been stabilised over the past year and based on present projections the Company has sufficient funding to move through to sustainable revenues.

A great effort all round by the board, management, staff and our partners and contractors has resulted in a much improved Quadrise Group with really exciting prospects ahead in 2012".

Notice of Annual General Meeting

The Annual General Meeting ("AGM") of the Company to be held at Pelham Bell Pottinger, 6^th Floor, 330 High Holborn, London, WC1V 7QD on 12 December 2011 at 12.00 noon

For additional information, please contact:

Quadrise Fuels International plc

Ian Williams

Hemant Thanawala

[phone]

Smith & Williamson

Dr Azhic Basirov / Siobhan Sergeant

[phone]

Chairman's Statement and Business Review

I am pleased to present this Annual Report for Quadrise Fuels International plc ( "Quadrise", "Company", "Group", "QFI" ) for the year ended 30 June 2011.

Business Overview

Excellent progress has been achieved in our programmes during this period, notably in the Marine Fuels sector. These advances were also complemented in Canada with the important achievements of our associate companies in the development and trial application of new technologies.

Quadrise is targeting the large existing global fuel oil market, some 600 million tonnes, of which the marine market makes up approximately one third. The combination of defined markets and proven benefits assures the opportunity to add value. The Quadrise MSAR® technology can thus be viewed as a "game changer", by increasing the refinery yield of high value distillate fuels and - at the same time - offering consumers a lower priced substitute for fuel oil.

In the oil-based economies of Mexico and Saudi Arabia, there are national imperatives to reduce distillate fuels imports and improve domestic oil refinery production of higher value products relative to lower value fuel oil. In both cases these imports and exports take place on a very large scale. MSAR® has the potential to meet both these imperatives by increasing local refinery yields of high value product and eliminating the distillate content in exported fuel oil. Quadrise also adds value for our venture partners by identifying and securing buyers for MSAR® fuels in the power and marine sectors.

If MSAR® emulsion fuel replaces even a modest percentage of these oil movements, there is a significant business opportunity for the Company and our partners. Considering the inter-product price spreads of circa US$300 per tonne between gas oil (diesel) and fuel oil that have become the norm, the value-add equates to many million dollars on the volume base involved.

The Company is not dependent on growth to create a market for our products. In this sense Quadrise is shielded from current global economic pressures. Indeed, in our selected programmes the advantages offered by MSAR® fuels play to the unrelenting pressures currently affecting the fuel consuming and oil processing industries to lower their costs and stretch or supplement margins.

Consensus among informed forecasters predicts a continuing and widening differential in global demand for diesel fuel and fuel oil. Diesel demand will be driven by the developing economies, while fuel oil markets will decline due to fuel substitution. However the important exception is the marine bunker market which is expected to show modest growth.

These factors presage a future scenario which supports continued high inter-product value spreads where Quadrise will be exceptionally well positioned.

Due care has been taken to preserve competitive advantage and commercial benefits for Quadrise and the associate companies responsible for leading these developments, given their potential to replace long established business practice and add tremendous value.

The revised Group corporate structure implemented in 2010, together with continued discipline in our "select and focus" policy, has served to stabilise and contain costs without impairing key programmes. Aside from these priority projects, the Company has identified specific qualifying opportunities in other geographic areas. While these represent potential for substantial future expansion, active business development has been deferred to conserve resources to progress our current programmes to fully commercial operations. In this regard, the Company policy of requiring client contributions to development and demonstrations has been accepted for all current programmes and provides both assurance of serious intent and reduced pressure on Company funds.

Corporate Structure and Financial 

The restructuring to segregate "directly managed" and "non-managed" interests was completed during 2010. This has improved focus and aligned interests between the Company and management within the Group. The opportunity was also used to ensure effective equity participation for key senior executives in the "managed" portfolio and to link compensation directly to associated Company financial performance.

QFI undertook two equity funding programmes during the financial year to 30 June 2011 raising a net £4.45 million. The principal funding was a combined placing and open offer to raise £3.0 million which closed late March and was oversubscribed.  This was the first time that QFI has formally approached the institutional market, albeit on a selective basis.

The QFI policy has been to limit dilution by only raising sufficient funds to take the Company through to its projected early revenue phase, by which time the de-risked enterprise value is expected to increase substantially. Once in revenue, improved terms should be possible for further equity funds then considered necessary to accelerate development or change the mode of business. For example, this might be progressing from principally licensed operations to selective toll processing contracts in which Quadrise would own and operate the manufacturing plant.

Spending levels were reduced and pre-revenue development costs contained through a combination of re-structuring, changes to compensation policy and client contributions to project development programmes. International Energy Group AG, the largest shareholder, continued to assist the Company by waiving certain fees and charges through the period. This assistance, which has extended longer than originally anticipated, will not continue beyond year end 2011 as the Company is adequately funded to meet its obligations.

The recovery in the QFI share price through late 2010 to the time of reporting has been encouraging. While the market rating still falls well short of the value suggested by informed financial analysts, conditions have been challenging and the market remains risk averse. Caution on the part of investors is understandable but the Company has increased the level of investor relations and market communication activity. This has the objective of creating a better level of understanding of our objectives and the future potential of our exciting "game changing" business.

The loss of £8.4 million over the year was in line with expectations but affected by the decision to revise the value of certain of our non-managed interests due to changes in their prime activities and prospects. The Company remains debt free and is currently funded to deliver the planned pre-commercial programmes through to the early revenues anticipated late 2012.

In the "non-managed" portfolio a further restructuring was undertaken by Quadrise Canada Corporation ("Quadrise Canada" or "QCC") early in 2011. This involved the merger of Sparky Energy Corporation ("Sparky") with Optimal Resources Inc. ("Optimal"). The two companies were previously partners in a joint venture in which Sparky contributed Enhanced Oil Recovery (EOR) technology licensed from Quadrise Canada, and Optimal contributed oil field assets in Lloydminster plus field operating facilities and expertise. The boards of the respective companies agreed that a merged entity would be better placed to take the business forward and the companies were combined on 1 January 2011 to form Optimal Resources Inc. ("ORI"). On merger, QFI remained the largest single shareholder with some 9.45% of the equity. This share of equity is expected to be diluted when ORI raises further funds to progress to full commercial operations. There are currently no plans or funds allocated for further equity investments in the non-managed Canadian associate companies.

Directly Managed Interests

These interests are owned and managed by Quadrise International Limited ("QIL"), a 100% owned subsidiary of QFI and the entity contracted to AkzoNobel Surface Chemistry AB ("AkzoNobel") under a long standing Alliance Agreement.

Subsidiaries of QIL have been formed for the individual project programmes - for example, Quadrise Marine (Mærsk project) and Quadrise KSA (Saudi project). It is possible that these companies will form associations with local partners where appropriate to progress the respective programmes. Whilst negotiations with client companies are in progress, commercial agreements have yet to be formalised with some of these local associates.

It is of note however, that QIL is developing projects with very large national and independent oil companies, as well as A.P.Møller-Mærsk ("Mærsk"), the largest container ship operator in the world. In all cases, programmes involve changing long established practises in major industries through application of our "game changing" MSAR® technology. On reflection, we should not be surprised that it has taken several years to reach this stage of advanced pre-commercial development. We are very fortunate to be progressing these programmes with some of the largest companies in their respective industries, who have the will, vision and commitment to change these established practices for sound business reasons. The incentive for all is, of course, to realise the substantial financial benefits associated with displacing fuel oil with MSAR® without impacting security of supply and operations. In the marine project, the Company has also benefitted from considerable publicity in the specialised industry trade press on the environmental challenges ahead, where Marine MSAR® can make a considerable contribution.

Marine MSAR®

The international marine bunker fuel oil market is currently around 200 million tonnes per annum. This is a very large scale, long term, bulk fuels business serving an industry that is facing a range of pressures from intense competition in freight rates to challenging progressive emissions standards. To compete effectively vessel owners need to drive utilisation up and drive costs down. In the context of fuels and emissions, a key objective is "most affordable compliance".

The Company identified an opportunity for development of a Quadrise Marine MSAR® fuel formulation which could offer significant advantages as a substitute for bunker fuel oil by addressing both cost and emissions issues. A Joint Development Agreement (JDA) was concluded with Mærsk early in 2010. Mærsk is an industry leader in marine innovations.

The JDA sets out a programme for the development of a suitable Marine MSAR® fuel formulation combining the capabilities and expertise of the Quadrise team with those of our alliance partner, AkzoNobel, and with specialists from the Mærsk organisation. Other parties necessarily involved in various stages of the programme have included oil refining companies and the major marine engine manufacturers. The programme has included formulation, processing and testing activities involving a number of leading oil refiners, marine engine test facilities, research and development laboratories, and industry stakeholders across several countries.

The marine fuels performance specifications have set the most exacting application standards for Marine MSAR® fuel such that it is directly interchangeable with conventional fuel oil and distillates. This has represented a major technical challenge to the combined talents of the programme team. It is to their credit that an intense period of development, which drew heavily on the specialised knowhow and capabilities of AkzoNobel, has produced novel Marine MSAR® formulations. Previous performance standards have been step-changed and all key requirements have been met in a series of land based engine trials. To have progressed to this stage over 18 months is quite remarkable.

As QFI announced on 27 September 2011, the programme has progressed to "seaborne trials" for which associated contracts have been closed covering the manufacture of the Marine MSAR® fuel and the obligations and responsibilities of all parties involved in the production and supply chain. The AB Orlen Lietuva ("Orlen") refinery at Mazeikiai owned by the Polish conglomerate PKN Orlen will host the AkzoNobel MSAR® Manufacturing Unit ("MMU") to produce the initial trial quantity for seaborne evaluation on the Sorø Mærsk, the results of which are expected during the first half of 2012. The forward plan, beyond a successful seaborne trial, anticipates progressive "interim" commercial quantities of Marine MSAR® will be produced during 2012 to allow the wider evaluation of performance across a representative range of vessels. Beyond this, commercial supply of Marine MSAR® could extend to the Maersk-operated fleet (which totals over 700 vessels) as well as third parties. On 1 August 2011, the Company announced the purchase from AkzoNobel of a new 1,000 ton per day MSAR® unit that could service the interim 2012 demand as well as commercial MSAR® demonstrations planned elsewhere.

To better appreciate the scope and prospects for Quadrise Marine MSAR®, the following developments and marine market features are relevant:

·           The pressure on exhaust emission of SO₂ has evoked a complex debate on fuel switching implications, the limits to oil refining supply of lighter ultra-low sulphur fuels or natural gas supply infrastructure for LNG, and the role of "on board" marine exhaust scrubbers. Current indications are that the combination of fuel oil and scrubbing will be the most affordable solution given the price spread (circa US$300 per ton) between bunker fuel oil and distillate alternatives. As a lower cost substitute for bunker fuel oil, the combination of Marine MSAR® and on board scrubbing looks to offer the "most affordable compliance" option in this context.

·           The international bunker fuels market is concentrated in a small number of "bunkering hubs" (such as Rotterdam and Singapore) which are also refining centres. A modest share of this large market would represent substantial business for Quadrise but requires relatively few fuel supply bases. The Marine MSAR® team have been in discussions with a number of major oil refining companies regarding possible supply collaboration during the next phase of commercial Marine MSAR® supply. The oil refining industry in these regions continues to be a challenging low margin business (as evidenced by the number of recent oil refinery sales or closures), and a low-capex means of improving profitability or indeed survival could be a compelling feature of MSAR® technology implementation going forward.

·           "Black Soot" from engine exhaust emissions, particularly in the shipping industry, has recently been identified as a major contributor to global warming and related climate change. Studies indicate that the impact is second only to CO₂ and much greater than methane. Unlike heavy fuel oils, MSAR® fuels offer virtually complete carbon burn-out because the oil residue content is milled to 'superfine' particle sizes of typically 5 microns. There is negligible unburned carbon or "Black Soot" particulate emissions from MSAR® fuels combustion.

The Company has confidence that the combination of lower costs, improved profitability, affordable compliance and elimination of "Black Soot" could make Marine MSAR® the fuel of choice for candidate oil refineries and a large number of ship operators in the near future. Quadrise would truly be the "game changer" and success in the marine market, alone, would put the Company on a strong sustainable growth path.

Saudi Arabia and Mexico - High Growth Oil Based Markets

A decision was taken in 2008 to 'select and focus' on these two priority markets. This in the knowledge that with no established access and prior relationships, QFI was likely to take some time to earn credibility as a company, and for the merits of our MSAR® technology to be recognised. Although this has taken a number of years, this credibility has now been earned and the business prospects are better defined. The board and management remain convinced that the correct path was chosen.

The two markets have common features which are relevant to our business:

·           Oil based economies continue to use large volumes of heavy fuel oil for thermal power generation, and other applications such as desalination and cement manufacturing.

·           Large scale oil production and domestic refining sectors with world class plants of which several have process configurations well suited to MSAR® technology application.

·           Imbalances between domestic distillate demand and local production requiring large-scale diesel imports - and high volume surplus heavy fuel oil exports. These offer major financial incentives to change current practice overlaid with national interest implications.

·           National oil companies have a scale of operations and resources beyond those of the multi-national oil majors, but where policy is generally driven by and aligned with national interest.

In both Mexico and Saudi Arabia the Quadrise team has worked with local associates to reach the stage where detailed programmes have been defined, agreed and documented with the client / partner organisations concerned. Both Mexico and Saudi Arabia are expected to clear final technical and legal review and proceed to execution by authorised senior management before the end of 2011.

Mexico - PEMEX

The programme now documented will involve installing a pilot plant in a selected PEMEX refinery for the production of MSAR® fuel. This will be tested in refinery and other applications as part of the pre-commercial phase. Completion of the pilot is targeted for mid-2012 and, on success, the commercial development programme will be finalised and confirmed. The installation of the first commercial facility in Mexico will follow. The commercial plant operation will mark the start of the 'revenue phase' for Quadrise in Mexico.

The Company expects also to finalise local partner arrangements for the Mexican business programme during 2012.

Saudi Arabia (KSA)    

The Company has identified a range of opportunities in the Saudi refinery portfolio, and the stage now reached and the go-forward programme are very similar to Mexico. Associated contracts are expected to be executed before the end of 2011. The earlier anticipated lead time for the Saudi project has extended as a result of increased scope for potential applications within KSA, independent technical review and verification of the economic evaluations by client specialists from a number of departments. These detailed exercises have, however, raised the level of awareness and confidence, strengthening the credibility of Quadrise representations.

An interesting feature of the KSA economy is that the monetary benefit of reducing diesel/distillate imports is considerably higher on a US dollar per tonne basis than would apply in western markets. This is because import costs reflect world market prices, while oil product prices (for petrol, diesel etc.) in the domestic market are among the lowest in the world. As a result the aggregate cost of subsidising the price differential runs to billions of dollars per annum. Applying Quadrise MSAR® technology to divert distillates from use in fuel oil to domestic market distillate fuel consumption has a very high value to KSA at a national level. For this reason the country is a prime focus for Quadrise business development in the refining sector, especially given its high oil products demand growth and active refining capacity expansion plans.

Asia /Singapore

QIL has been working with PowerSeraya management for the term supply of Quadrise MSAR® fuel to their thermal power generation plant in Jurong.

The memorandum of understanding ("MOU") for this joint investigation programme (undertaken at their cost) has recently been extended. A number of candidate source refineries have been approached and assessed but no firm programme has yet been committed. The publicity associated with the marine fuels programme has stimulated the interest of oil refiners within the SE Asia and the Middle East regions.

Board and Management

The Company has continued to benefit from the services and dedicated efforts of our two key specialists, Jason Miles and Dr Simon Craige. They are supported by specialist consultants whose services are secured on a retainer plus consultancy time basis to ensure their availability on reasonable notice when required. Dr Craige was appointed to the board of QIL as Technical Director shortly after the restructuring. Jason Miles continues to serve on both the QFI and QIL boards.

Since last reporting, the QFI board has been strengthened by the appointment of Mr Dilip Shah whose considerable experience across a range of international business interests has added useful perspectives in board deliberations.

I would like to record particular appreciation for the continued services of our non-executive directors Mr Laurie Mutch and Dr Ian Duckels who continued to chair, respectively, the Audit and Compensation committees. Their contributions during this challenging period extended well beyond the "normal course of duty". Their hard work in support of the Company is sincerely appreciated.

Business Associates and Partners

Quadrise is very appreciative of the importance of our Alliance Agreement and associated relationship with AkzoNobel. Their contribution has been vital to the major technical advances made over the review period, especially in the complex area of Marine MSAR® formulations.

Of special note is the very cordial, constructive and co-operative nature of our relationship. This clearly plays a major part in explaining the unique results we have achieved together, in many cases a level of success previously considered improbable, if not impossible!

We are also very mindful of AkzoNobel's well-deserved reputation for safeguarding intellectual property and for defence of related rights. We expect that this will become increasingly important as the Quadrise commercial phase accelerates and our activity levels and profile are raised.

The JDA programme has involved a very close collaboration with Mærsk who we have found to be an exemplary partner in the process. The team from Mærsk, while clear on their own objectives and interests, have consistently shown a constructive appreciation of the challenges posed during the Marine MSAR® development process. Their positive and supportive approach has been very refreshing, and we have come a long way in a short time together.

Canadian Developments

Following the restructuring, QFI now directly holds all of the Group interests in the non-managed unlisted Canadian associate companies.

Quadrise Canada Corporation ("Quadrise Canada" or "QCC")

QFI continues to be the largest single shareholder with a 20.4% holding. Quadrise Canada has transformed from its original intended role of manufacturer and supplier of emulsion fuels, into a technology and service company conducting business with associates and third party clients.

Quadrise Canada has invested heavily in specialised Research and Development over an extended period and holds an extensive range of patented intellectual property together with a deep specialised expertise base. The principal Quadrise Canada role is now to identify and incubate business opportunities leveraged off its proprietary technologies. The intention is to 'spin off' specialised businesses in which its shareholders benefit from pro-rata initial equity participation. The most recent example of this has been the creation of Sparky Energy which subsequently became Optimal Resources Inc.

Several other proprietary technologies are candidates for a similar development path, but resource limitations and economic cycle considerations have constrained their current development. However, the original intended emulsion fuels business, while delayed, has not been abandoned. Conditions could change in the longer term that would again support the use of Quadrise MSAR® fuels as an energy source for steam generation in Canadian heavy oil field production operations.

Optimal Resources Inc. ("ORI")

ORI holds an exclusive license for the application of the Quadrise Canada proprietary Enhanced Oil Recovery ("EOR") technology in clastic oil reservoirs. QFI held a 9.6% share of ORI until September 2011. ORI has since undertaken a seed financing programme which will close in November 2011. Although QFI invested CAD$1 million in the Sparky seed financing during 2010. the Company must now conserve funds for its directly managed business programme and will not be participating in the ORI placing. In the event the ORI financing is fully subscribed the QFI holding will be diluted to circa 6.5%.

The EOR technology performed very well in laboratory based simulations of oil field production, indicating an ability to step-change oil recovery factors in qualifying clastic heavy oil reservoirs of the type present in the ORI Lloydminster oil field. Typically, primary production will only result in approximately 10% recovery of the measured oil in place. Indications are that the Quadrise Canada EOR application could increase this to between 20% and 30%. There are very large quantities of retained oil in candidate oil reservoirs - including those either currently classified as depleted or where existing production is declining. The potential for application also extends well beyond Canada since qualifying prospects exist in many of the large global 'oil provinces'.

The focus of activity in 2011 has been the trial application of the EOR technology in Lloydminster. Unfortunately, a combination of setbacks, including unusually severe weather conditions, have limited progress and stretched resources. Notwithstanding this, a representative programme of initial application modes has been completed and results to date align and trend very well with the laboratory findings and performance.

The intention is that ORI remains an oil production company, in that it secures and retains ownership of resources and benefits from oil sales revenues. Looking forward, this could include owned independent production, joint ventures with owners of qualifying oilfield assets, or contractual application service arrangements which assure ORI fees plus an equity share of incremental production.

The outlook for ORI is positive. Exploratory discussions with potential joint venture partners are encouraging. There is some way to go, however, before independently certified performance of the EOR technology becomes available and the future of ORI can be assured. 2012 will be an important year for ORI and QFI expects to have a much improved view of the potential medium term value of this investment by mid year.

In 'commercial mode' the projected growth of license and service fees payable by ORI becomes very material to the value of our holding in Quadrise Canada.

Porient Fuels Corporation ("PFC")

QFI holds 16.9% of PFC and, as with our initial holding in ORI (via Sparky), the shareholding was allotted through a pro rata allocation by Quadrise Canada with no direct funds invested.

The intention is for PFC to act as a commercial development vehicle, under license, for one or more of the Quadrise Canada proprietary technologies when such a venture is judged viable. The opportunity initially identified, and subject of a development agreement with several major partners, aimed at the production of marine fuel oils using Alberta heavy oil (potentially including the MSAR® emulsion fuels process). The plan was to ship the product from central Alberta to the Canadian west coast market. This programme was suspended as the intended viability was negatively affected by an unanticipated and abnormal change in near term inter-product price spreads. Whilst these are forecast to correct, PFC is unlikely to be fully re-activated until ORI moves into a fully commercial phase with its own technical resource base. This will then relieve the pressures on Quadrise Canada support resources. Quadrise Canada should then have the capacity to promote further ventures to commercialise a number of other proprietary technologies for which applications and markets have been identified

Paxton Corporation ("Paxton")

The QFI holding, at 3.8%, is modest and unlikely to fit in the portfolio in the longer term as a passive investment. Nevertheless, developments are positive.

Paxton has become more closely associated with Clean Energy Systems Inc ("CES") in which it now holds some 30%. CES has very promising proprietary combustion and steam generation technology and received a US$30 million development grant from the US Department of Energy ("DOE") in 2010 to progress its zero emissions power generation programme.

Considerable synergies have been identified between CES and the Paxton core business of oilfield steam and CO₂ flooding for enhanced oil recovery with full carbon sequestration.

CES has also entered into agreements with Siemens for the development of scale optimised power generation turbines to couple with the CES generator. CES has sold a license to Mærsk Oil and Gas for use of its 'steam gun' zero emissions technology for application in Middle-East oil fields for the conversion of associated gas to electrical power. Paxton has certain rights associated with the marketing of the CES hardware. In addition, CES has acquired an idle AES Corporation power plant at Placerita, California which will act as 'home' for the high pressure, high temperature turbine development being funded by the DOE grant.

Paxton recently advised shareholders of an MOU with Paramount Resources, a large Canadian oil and gas production company. This is for the deployment of the combined CES steam and gas generator technology in an enhanced oil recovery programme at the Paramount Hoole Grand Rapids Oil Sands Project. Paxton and CES have recently concluded a Heads of Agreement which grants Paxton marketing exclusivity in Canada for the integrated CES generator in a Paxton proprietary process chain for more general application in steam and CO₂ oil production enhancement. A perpetual non-exclusive license for marketing outside of Canada is also included.

Future Outlook

All of our selected projects have now reached an advanced pre-commercial phase. The Marine MSAR® fuel programme is now committed contractually to proceed with interim commercial validation and supply activities in 2012 preparatory to the full commercial roll-out anticipated during early 2013.

The Saudi and Mexican programmes are substantially defined and agreed to a level of considerable detail. Client technical specialists have endorsed these projects both in terms of process fit and prospective return on investment. The associated contracts are expected to be executed shortly, and this will allow the Company to provide more detail on the contracting parties, the initial scope and the future prospects.

The Company has identified refineries and associated 'supply envelopes' which fit the Quadrise MSAR® fuels model. We are now receiving enquiries from a range of industry participants from majors to independents. This is very positive as we expect that residue sourcing will be the key to accelerated growth in the near future.

The Group is funded to deliver the current business plan based on a 'license model' requiring limited capital expenditure and working capital. Other business modes will be possible in the future once our MSAR® fuels become recognised 'specification' products for the purpose of inventory and transaction trade finance. Future possibilities include the ownership and operation of strategically placed 'merchant plants'. These would be sized to match the demand of defined markets with buyers committed to term off-take agreements.

While progression to such operations would require substantial equity and project debt financing, this mode of business would elevate QFI to a very different scale of activity and profitability. This in turn would promote the Company in the process to the mid-cap league on an accelerated trajectory.

In the immediate future the team is committed to finalising key agreements, installing the demonstration plants, delivering test results and moving on to the commercial phase with term contracts, assured current revenues and future prospects.

Ian Williams

Chairman

21 October 2011

Financial Review

Overview

As stated in the Chairman's Statement and Business Review, the main thrust for the Group and its management during the year under review was to continue to make progress in its core business activity with its principal prospects and leads whilst continuing to maintain a low operational overhead base. At the same time, major steps have been taken to raise awareness of the Group and its business prospects within the investor community, on a selective basis.

The Group started off last year with a cash balance of £1.6 million and raised a further £4.8 million during the year. Of this, £2.4 million was spent during the year, leaving a cash balance of £4.0 million at the year end. Given the current business plan and prospects, it is anticipated that this cash reserve should enable the Group to move into a sustainable revenue phase.

Results for the Year

The consolidated after-tax loss for the year to 30 June 2011 was £6.6 million (2010: £3.9 million). This included a charge of £4.8 million (2010: £2.8 million) for the amortisation and impairment of intangible assets and available for sale investments, corporate restructuring, operational and general administration expenses of £1.8 million (2010: £1.2 million) and bank deposit interest income of £0.02 million (2010: £0.05 million).

Basic and diluted loss per share was 1.19p (2010: 0.86p).

Statement of Financial Position

At 30 June 2011, the Group had net assets of £19.2 million (2010: £22.0 million). The most significant balances were intangible assets of £6.7 million (2010: £8.8 million), available for sale investments of £8.3 million (2010: £11.3 million) and cash of £4.0 million (2010: £1.6 million). Further information on the intangible assets and available for sale investments is provided in notes 14 and 15 to the Group Financial Statements.

Cash Flow

The Group ended the year with £4.0 million of cash and cash equivalents (2010: £1.6 million). The Group continues to remain debt free.

Capital Structure

The Company had 635,043,391 ordinary shares of 1p each in issue, out of its authorised share capital of 1,000,000,000 ordinary shares, at 30 June 2011. As announced on 3 September 2010, the Company issued a further 87,500,000 new ordinary shares raising £875,000. The subscribers were also granted warrants on a one-for-one basis, also priced at £0.01 per share, exercisable by 30 June 2011. The warrant holders elected to exercise their rights prior to the expiry date, resulting in the receipt of a further £875,000 through the issue of 87,500,000 new Ordinary Shares, which were admitted to trading on 7 July 2011. The shares placed and warrants issued fell within the authorities granted to the Board under sections 551 and 570 of the Companies Act 2006 at the last Annual General Meeting ("AGM") of 9 December 2010 and the previous AGM of 10 December 2009. These authorities will be reviewed again at the next AGM, as appropriate. The Company's current issued share capital stands at 722,543,391 ordinary shares of 1p each all with voting rights.

Treasury and Financial Risk Management

Control over treasury and financial risk management is exercised by the Board and its Audit Committee through the setting of policies and the regular review of forecasts and financial exposures. Presently, the Group's financial instruments consist principally of available for sale investments, cash and liquid resources and other items such as accounts receivable and payable, which arise directly from its operations. It is still the Group's policy not to undertake any trading activity in financial instruments, including derivatives.

The principal risks arising from the Group's financial instruments are those associated with interest, liquidity and foreign exchange. The Board reviews and establishes appropriate policies for the management of such risks and monitors them on a regular basis.

Taxation

At 30 June 2011, the Group had tax losses arising in the UK of approximately £29.6 million (2010: £27.4 million) that are available indefinitely against future taxable profits under current legislation. £7.3 million (2010: £6.5 million) of the tax losses carried forward represent trading losses within Quadrise Fuels International plc, £22.3 million (2010: £20.8 million) represent non-trade losses arising through the impairment of intangible assets within Quadrise International Limited and £0.1 million (2010: £0.1 million) represent non-trade losses within Quadrise Fuels International plc. A deferred tax asset of approximately £7.8 million (2010: £7.7 million) has not, however, been recognised in the financial statements as a result of the uncertainties of its realisation in the foreseeable future.

Outlook

Following the reorganisation of the business and raising of further equity funding during the year, the Group is well placed to take its core business activity into the sustainable revenue phase. We shall, however, continue to place effective cash management at the forefront of our near term financial management strategy to ensure that the current business development programme momentum is not compromised due to financial constraints.  

Hemant Thanawala

Finance Director

21 October 2011

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2011

	Notes	Year ended 30 June 2011 £'000	Year ended 30 June 2010 £'000
Continuing operations
Other income	4	35	67
Raw materials, consumables, transportation, tank rental and analysis costs		(10)	-
Amortisation of intangible assets	11	(1,368)	(2,637)
Impairment of intangible assets	11	(716)	(176)
Impairment of available for sale investments	12	(2,705)	-
Other administration expenses		(1,833)	(1,177)
Foreign exchange (loss)/gain		(7)	63
Operating loss	5	(6,604)	(3,860)
Finance costs	6	(55)	(3)
Finance income	7	17	45
Loss before tax		(6,642)	(3,818)
Taxation	8	51	(131)
Loss for the year from continuing operations		(6,591)	(3,949)
Other Comprehensive Income
Changes in fair value of available for sale investments		(934)	4,797
Other comprehensive (loss)/income for the year net of tax		(934)	4,797
Total comprehensive (loss)/income for the year		(7,525)	848
Loss for the year attributable to:
Owners of the Company		(6,526)	(3,949)
Non-controlling interest		(65)	-
Total comprehensive income / (loss) attributable to:
Owners of the Company		(7,460)	848
Non-controlling interest		(65)	-
Loss per share - pence
Basic	9	(1.19)p	(0.86) p
Diluted	9	(1.19)p	(0.86) p

Consolidated Statement of Financial Position

As at 30 June 2011

	Notes	As at 30 June 2011 £'000	As at 30 June 2010 £'000
Assets
Non-current assets
Property, plant and equipment	10	9	-
Intangible assets	11	6,748	8,832
Available for sale investments	12	8,269	11,269
Non-current assets		15,026	20,101
Current assets
Cash and cash equivalents		3,962	1,634
Trade and other receivables		195	212
Prepayments		45	30
Current assets		4,202	1,876
TOTAL ASSETS		19,228	21,977

Equity and liabilities
Current liabilities
Trade and other payables		148	127
Current liabilities		148	127
Equity attributable to equity holders of the parent
Issued share capital		7,225	4,617
Share premium		55,780	53,634
Revaluation reserve		4,429	5,363
Share option reserve		1,009	1,009
Reverse acquisition reserve		522	522
Accumulated losses		(49,821)	(43,295)
Total shareholders' equity		19,144	21,850
Non-controlling interests		64	-
TOTAL EQUITY AND LIABILITIES		19,228	21,977

Consolidated Statement of Changes in Equity

For the year ended 30 June 2011

                                                Attributable to owners of the parent                 

	Issued capital £'000s	Share premium £'000s	Revaluation reserve £'000s	Share option reserve £'000s	Reverse acquisition reserve £'000s	Accumulated losses £'000s	Total £'000s	Non controlling interest £'000s	Total   equity £'000s
1 July 2009	4,617	53,634	566	1,009	522	(39,346)	21,002	-	21,002
Loss for the year	-	-	-	-	-	(3,949)	(3,949)	-	(3,949)
Total comprehensive loss for the year	-	-	-	-	-	(3,949)	(3,949)	-	(3,949)
Fair value adjustments	-	-	4,797	-	-	-	4,797	-	4,797
30 June 2010	4,617	53,634	5,363	1,009	522	(43,295)	21,850	-	21,850
1 July 2010	4,617	53,634	5,363	1,009	522	(43,295)	21,850	-	21,850
Loss for the year	-	-	-	-	-	(6,526)	(6,526)	(65)	(6,591)
Fair value adjustments	-	-	(934)	-	-	-	(934)	-	(934)
Total comprehensive loss for the year	-	-	(934)	-	-	(6,526)	(7,460)	(65)	(7,525)
New shares issued	2,608	2,146	-	-	-	-	4,754		4,754
Disposal of non-controlling interests without change in control	-	-	-	-	-	-	-	1	1
30 June 2011	7,225	55,780	4,429	1,009	522	(49,821)	19,144	(64)	19,080

Consolidated Statement of Cash Flows

For the year ended 30 June 2011

	Notes	Year ended 30 June 2011 £'000	Year ended 30 June 2010 £'000
Operating activities
Loss before tax from continuing operations		(6,642)	(3,818)
Finance costs	6	55	3
Finance income	7	(17)	(45)
Other income - QCC warrants		(1)	(25)
Amortisation of intangible assets	11	1,368	2,637
Impairment of intangible assets	11	716	176
Impairment of available for sale investments	12	2,705	-
Working capital adjustments
Decrease/(increase) in trade and other receivables		17	(26)
Increase in prepayments		(15)	-
Increase/(decrease) in trade and other payables		21	(188)
Cash utilised in operations		(1,793)	(1,286)
Finance costs	6	(55)	(3)
Taxation received	8	51	-
Net cash outflow from operating activities		(1,797)	(1,289)
Investing activities
Finance income	7	17	45
Purchase of Fixed assets	10	(9)	-
Purchase of available for sale securities	12	(637)	-
Net cash inflow from investing activities		(629)	45
Financing Activities
Issue of ordinary share capital		4,754	-
Net cash inflow from financing activities		4,754	-
Net increase /(decrease) in cash and cash equivalents		2,328	(1,244)
Cash and cash equivalents at the beginning of the year		1,634	2,878
Cash and cash equivalents at the end of the year		3,962	1,634

Notes to the Financial Statements

1.   Basis of Preparation and Significant Accounting Policies

The financial information for the year ended 30 June 2011 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 2011.

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 does not constitute the company's statutory financial statements for the year ended 30 June 2011 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 auditor's report on these financial statements was unqualified, did not contain any statement under section 498(2) or (3) Companies Act 2006, but did draw attention to the disclosure of a material uncertainty that may cast significant doubt about the Company's ability to continue as a going concern.

Statutory financial statements for the year ended 30 June 2009 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.

2.   Going Concern

The Group's business activities and financial position, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement.

The Directors have carried out a detailed assessment of going concern as part of the financial reporting process, taking into consideration a number of matters including the fundraising by way of the Placing and Open Offer announced on 8 March 2011, forecast cash flows, medium and long term business plans and expectations over timing of future revenues and realisability of investments.

On the basis of this assessment, the Directors have concluded that it is appropriate to prepare the financial statements on a going concern basis.

3.   Segment Reporting

For the purpose of segmental information the reportable operating segment is determined to be the business segment.  The Group principally has two business segments, the results of which are regularly reviewed by the Board: 

·        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 and

·        the holding of a portfolio of non-managed interests. 

Information regarding the results of each reportable segment is as follows:    

Business Segments

Year ended 30 June 2011	Emulsion fuel	Non-managed interests	Total
	£'000s	£'000s	£'000s
Revenue - sale to external customers	-	-	-
Segment result	(2,766)	(2,906)	(5,672)
Unallocated net corporate expenses			(932)
Operating loss			(6,604)
Finance costs			(55)
Finance income			17
Loss before tax			(6,642)
Taxation			51
Loss for the year from continuing operations attributable to equity holders of the Company			(6,591)

As at 30 June 2011	Emulsion fuel	Non-managed interests	Total
	£'000s	£'000s	£'000s
Assets and liabilities
Segment assets	8,854	8,269	17,123
Unallocated corporate assets			2,105
Total assets			19,228
Segment liabilities	56	-	56
Unallocated corporate liabilities			92
Total liabilities			148

Other segment information
Amortisation of intangible assets	1,368	-	1,368
Impairment of intangible assets	716	-	716

Year ended 30 June 2010	Emulsion fuel	Non-managed interests	Total
	£'000s	£'000s	£'000s
Revenue - sale to external customers	-	-	-
Segment result	(3,177)	33	(3,144)
Unallocated net corporate expenses			(716)
Operating loss			(3,860)
Finance costs			(3)
Finance income			45
Loss before tax			(3,818)
Taxation			(131)
Loss for the year from continuing operations attributable to equity holders of the Company			(3,949)

As at 30 June 2010	Emulsion fuel	Non-managed interests	Total
	£'000s	£'000s	£'000s
Assets and liabilities
Segment assets	9,022	11,269	20,291
Unallocated corporate assets			1,686
Total assets			21,977
Segment liabilities	30	-	30
Unallocated corporate liabilities			97
Total liabilities			127

Other segment information
Amortisation of intangible assets	1,368	-	1,368
Impairment of intangible assets	-	-	-

Geographical Segments

The Group's main geographical segments during the year were Europe and Canada.  The following table presents certain asset information regarding the Group's geographical segments.  

		30 June 2011	30 June 2010
		£'000s	£'000s
Non-current assets
Europe		6,757	8,832
Canada		8,269	11,269
Total		15,026	20,101

4.   Other Income

Other income includes:	Year ended 30 June 2011 £'000s	Year ended 30 June 2010 £'000s
Recoverable costs recharged to related parties	27	35
Other recoverable costs recharged	7	7
Warrants granted by QCC in lieu of Directors' fees (refer note 15)	1	25
Total	35	67

5.   Operating Loss

Operating loss is stated after charging:	Year ended 30 June 2011 £'000s	Year ended 30 June 2010 £'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:	30	23
Tax services	5	5
Advisory services	2	9
Consultants and other professional fees (including legal)	107	173
Depreciation of property, plant and equipment	-	-
Amortisation of intangible assets	1,368	2,637
Impairment of intangible assets	716	176

The parent company, Quadrise Fuels International plc, bears the audit costs of all the subsidiaries in the Group.

6.   Finance Costs

	Year ended 30 June 2011 £'000s	Year ended 30 June 2010 £'000s
Corporate finance fees	53	-
Bank charges	2	3
Total	55	3

7.   Finance Income

All finance income recognised during the current and prior year has arisen from interest on bank deposits.

8.   Taxation

	Year ended 30 June 2011 £'000s	Year ended 30 June 2010 £'000s
UK corporation tax (credit)/charge	(51)	131
Adjustment for prior year	-	-
Total	(51)	131

No liability in respect of corporation tax arises as a result of trading losses.

Tax Reconciliation	Year ended 30 June 2011 £'000s	Year ended 30 June 2010 £'000s
Loss on continuing operations before taxation	(6,642)	(3,818)
Loss on continuing operations before taxation multiplied by the UK corporation tax rate of 27.5% (2010: 28%)	(1,827)	(1,069)
Effects of:
Expenses not deductible for tax purposes	-	31
Non taxable income	-	32
Other tax adjustments	-	-
Losses not utilised	-	-
Surrender of tax losses for R&D credit	-	-
R&D tax credit	(51)	131
Tax losses carried forward	1,827	1,006
Total taxation (credit)/charge on loss from continuing operations	(51)	131

The Group has tax losses arising in the UK of approximately £29.6m (2010: £27.4m) that are available, under current legislation, to be carried forward against future profits. £7.3m (2010: £6.5m) of the tax losses carried forward represent trading losses within Quadrise Fuels International plc, £22.3m (2010: £20.8m) represent non-trade deficits arising on intangible assets within Quadrise International Limited and £0.1m (2010: £0.1m) represent capital losses within Quadrise Fuels International plc.

A deferred tax asset representing these losses and other timing differences at the statement of financial position date of approximately £7.8m (2010: £7.7m) has not been recognised as a result of existing uncertainties in relation to its realisation.  

9.   Loss Per Share

The calculation of loss per share is based on the following loss and number of shares:

	Year ended          30 June 2011	Year ended 30 June 2010
Loss for the year from continuing operations (£'000s)	(6,591)	(3,949)
Weighted average number of shares:
Basic	553,136,049	461,726,857
Diluted	553,136,049	461,726,857
Loss per share:
Basic	(1.19)p	(0.86) p
Diluted	(1.19)p	(0.86) 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 45.2m share options 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.

10.  Property, plant and equipment

Consolidated Plant and machinery Total £'000s £'000s Cost Opening balance - 1 July 2010 - - Additions 9 9 Closing balance - 30 June 2011 9 9 Depreciation Opening balance - 1 July 2010 - - Depreciation charge for the year - - Closing balance - 30 June 2011 - - Net book value at 30 June 2011 9 9

11  Intangible Assets 

	QCC royalty payments	MSAR® trade name	Technology and know-how	Total
	£'000s	£'000s	£'000s	£'000s
Cost
Opening balance - 1 July 2010	7,686	3,100	25,901	36,687
Additions	-	-	-	-
Closing balance - 30 June 2011	7,686	3,100	25,901	36,687
Amortisation and Impairment
Opening balance - 1 July 2010	(6,567)	(176)	(21,112)	(27,855)
Amortisation	-	-	(1,368)	(1,368)
Impairment	(716)		-	(716)
Closing balance - 30 June 2011	(7,283)	(176)	(22,480)	29,939
Net book value at 30 June 2011	403	2,924	3,421	6,748

	QCC royalty payments	MSAR® trade name	Technology and know-how	Total
	£'000s	£'000s	£'000s	£'000s
Cost
Opening balance - 1 July 2009	7,686	3,100	25,901	36,687
Additions	-	-	-	-
Closing balance - 30 June 2010	7,686	3,100	25,901	36,687
Amortisation and Impairment
Opening balance - 1 July 2009	(6,567)	-	(18,475)	(25,042)
Amortisation	-	-	(2,637)	(2,637)
Impairment	-	(176)	-	(176)
Closing balance - 30 June 2010	(6,567)	(176)	(21,112)	(27,855)
Net book value at 30 June 2010	1,119	2,924	4,789	8,832

Intangibles comprise intellectual property with a cost of £36.7m, including assets of finite and indefinite life. 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 are expected to generate net cash inflows for the Group.  The assets with indefinite life are not amortised. The remaining intangibles amounting to £25.9m, primarily made up of technology and know-how, are considered as finite assets and amortised over 93 months.  The Group does not have any internally generated intangibles.

The Board has reviewed the accounting policy and has amortised those assets which have a finite life as indicated in note 2.9.  As a consequence a non-cash charge of £1,368m (2010: £2.637m) has been recognised in the statement of comprehensive income during the year.

The Group tests intangible assets annually for impairment, or more frequently if there are indications that they might be impaired. The recoverable amount of intangible assets is determined based on a value in use calculation using cash flow forecasts derived from the most recent financial model information available.  These cash flow forecasts extend to the year 2026 to ensure the full benefit of all current projects is realised. The key assumptions used in these calculations include discount rates, turnover projections, growth rates, joint venture participation expectations and expected gross margins. 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.  For the MSAR® trade name and technology and know-how intangible, the growth rate used for the extrapolation of cash flows beyond budgeted projections is 2.5% (2010:2.5%) and the pre-tax discount rate applied to the cash flow projections is 12% (2010: 13%).  For QCC's royalty payments, the growth rate used for the extrapolation of cash flows beyond budgeted projections is 1.5% and the pre-tax discount rate applied to the cash flow projections is 35% (2010:25%) against which a further 35% (2010:50%)  probability factor has been applied. The probability factor of 35% reflects a reduction in the likelihood of royalty income arising from QCC, due to a shift in focus of its business away from royalty generating MSAR® activities, and towards support for its oil recovery technology operations.

A 5% increase in the discount rate used would result in an additional impairment charge of £164k for the QCC royalty payments intangible asset, and an additional impairment charge of £856k for the MSAR ® trade name intangible asset. No additional impairment charge would arise in the Technology and know-how intangible asset.

As 5% decrease in the discount rate used would result in no additional impairment charge.

Changes to the pre-tax discount rate applied to cash flow projections, and the probability factor used in 2010 have occurred as a result of management's updated assessment of the risks specific to expected future projects.

Taking all these factors into account, the Directors performed a review of the recoverable amount of the intangibles at 30 June 2011. As a result of this review, the Directors concluded that the QCC royalty payments intangible asset be written down to a recoverable amount of £0.4m.  This resulted in an impairment charge of £716k to the statement of comprehensive income for the year ended 30 June 2011.

Amortisation of Intangible Assets

The Board has reviewed the accounting policy for intangible assets and has amortised those assets which have a finite life.  A key asset that fits this description is the combination of rights secured under the AkzoNobel Alliance Agreement, together with other unpatented technologies, industry know-how and trade secrets, which drive the principal business case for Quadrise.  Under the prior year arrangements, while intended to continue on an evergreen basis, AkzoNobel or Quadrisecould effectively terminate, at 12 months notice, the AkzoNobel Alliance Agreement at any time after 20 December 2011.  On 15 April 2010, however, a further two year extension to the termination clause was agreed resulting in AkzoNobel or Quadrise being able to terminate the agreement, at 12 months notice, at any time after 20 December 2013.  Whilst the Directors believe that it is likely to be in the commercial best interests of both parties to continue the agreement beyond 20 December 2013, there can be no guarantee that this will occur.  The Directors have, accordingly, amortised this intangible asset over the remaining lifespan of the extended agreement.  At 30 June 2011, the remaining amortisation period for this intangible asset was 30 months.  The amortisation of this intangible has resulted in a non-cash charge of £1,368k (2010: £2,637k) to the statement of comprehensive income for the year ended 30 June 2011.  If this change in the amortisation period had not been applied, the amortisation charge for the year would have been higher by £1,602k (2010:£333k). 

12. Available for Sale Investments

	Consolidated	Consolidated
	30 June 2011 £'000s	30 June 2010 £'000s
Unquoted securities
Opening balance	11,269	6,447
Additions	638	25
Transfer from other group companies	-	-
Changes in fair value	979	4,797
Impairment of investment in QCC	(4,617)
Closing balance	8,269	11,269

Unquoted securities represent the Group's investment in Quadrise Canada Corporation ("QCC"), Paxton Corporation ("Paxton"), Optimal Resources Inc. ("ORI") and Porient Fuels Corporation ("Porient"), all of which are incorporated in Canada. 

In early June 2010, QCC advised shareholders of its success in developing new technologies and application opportunities by exploiting the intellectual property built up by QCC itself over a number of years. Shareholders approved a plan of arrangement whereby QCC shareholders were allocated shares in two new energy sector companies on a pro rata basis to their fully diluted holding in QCC. As a result, on 8 June 2010, the Group was allocated 3,682,500 shares in Sparky Energy Corporation ("Sparky") and 3,682,500 shares in Porient. 

On 14 July 2010, the Group subscribed for an additional 2,000,000 shares in Sparky at a price of CAD $0.50 per share for a total cost of CAD$1,000,000. This acquisition of shares increased the Group's shareholding in Sparky from 16.9% at the year end to 19.5%. On 1 January 2011, Sparky merged with Optimal Resources Inc "Optimal", resulting in the formation of ORI. QFI holds 5,682,500 shares in ORI, a shareholding of 9.54% as at the date of this report.

At the statement of financial position date the Group held a 20.44% share in the ordinary issued capital of QCC, a 3.75% share in the ordinary issued capital of Paxton, a 9.54% share in the ordinary issued capital of ORI and a 16.86% share in the ordinary issued capital of Porient. 

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 year 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.  Furthermore, QCC share options and warrants in issue at the statement of financial position date result in the Group having an effective diluted holding in QCC of 20.52%. 

The Group has no immediate intention to dispose of its available for sale 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 performed an impairment review of the unquoted securities at 30 June 2011 in accordance with IAS 39. In this regard, the Directors considered other factors such as past equity placing pricing and assessment of risked net present value of the enterprises to arrive at their conclusion on any impairment for all of the unquoted securities.

The QCC shares were valued at CAD$3.17 at 1 July 2010. Shareholder communications received during the year indicate that QCC has shifted its business focus towards a different mix of activities, in particular supporting the ORI business development, to those indicated in the financial model used to revalue the shares to CAD$3.17 from CAD$3.00 in June 2010. In view of this, a revised NPV calculation was performed, using all available information from QCC and ORI, to determine whether there had been any material impairment to the carrying value of QCC shares as at 30 June 2011. Using discount rates ranging from 25% to 75%, and a further probability rate of 35% to the projected cashflows, an impairment charge of CAD$1.97 per share was arrived at.

Based on this, the Directors have concluded that the investment in QCC should be valued at CAD$1.20 per share as at 30 June 2011, resulting in an impairment charge of £4,617k. Of this, £1,912k is recorded as a reduction in the revaluation reserve, and the remaining £2,705k is included in the loss for the financial year. The total value of the QCC investment as at year end is £2,825k (2010: £7,388k).

The Paxton shares are currently valued at CAD$2.00 per share as a result of an impairment charge passed in the prior year, which reduced the value from CAD$3.00 per share. The Directors are not aware of any 'arms length' transactions in Paxton shares during the year. In its financial statements and business review for the reporting period of 31 March 2011, Paxton reported considerable progress in its business activities and a cash reserve of CAD$6.0m which indicates that there has been no further impairment to the value during the period. Based on this, the Directors have concluded that the Paxton investment should continue to be valued at CAD$2.00 per share as at 30 June 2011. The total value of the Paxton investment as at year end is £835k (2010: £827k).

3,682,500 Sparky shares were received by the Group on 8 June 2010 for nil consideration.  In order to determine the fair value of these shares, an enterprise NPV calculation was carried out on the most recent Sparky financial model and information made available by Sparky management at the time.  This NPV calculation showed all income associated with the business over the next 25 years, broken down into various phases from the initial pilot tests to the full scale commercial operations.  Applying a discount rate of 13% to the initial pilot tests, 60% to the first commercial project and, considering the risks and uncertainties associated with progression to the major commercial operations, excluding this phase from the valuation, it gave a value for Sparky of CAD$1.26 per share. 

On 14 July 2010, the Group subscribed for an additional 2,000,000 shares in Sparky at a price of CAD$0.50 per share. Since the placing price was established on the basis of seed financing through existing shareholders and associates and not on the basis of a placing to third party institutional investors, these shares were subsequently revalued to CAD$1.26 per share in line with the valuation of the existing shareholding. The merger of Sparky and Optimal on 1 January 2001 resulted in the formation of ORI.

During the current year, ORI management shared a number of economic models which provide a range of net present values for the shares from CAD$1.18 per share to CAD$1.57 per share. Based on this and in view of the successful trials of ORI's 'Enhanced Oil Recovery' technology during the year, there appears to be no indication of an impairment to the current carrying value of ORI investment. The Directors have therefore concluded that the 5,682,500 ORI shares held at 31 June 2011 should continue to be valued at CAD$1.26 per share. The total valuation of the 5,682,500 (2010: 3,682,500) shares held in ORI is £4,578k (2010: £3,026k).

The Porient shares were received by the Group on 8 June 2010 for no consideration.  As Porient was then in its very early stages of development and was yet to be defined into a business with active projects, it had very little market presence or value.  Based on this, the Directors concluded that the investment should be fair valued on acquisition to its nominal value of CAD$0.001 per share. As Porient is still in the early stages of its development, the Directors have concluded that the investment should continue to be valued at CAD$0.001 per share. The total value of the Porient investment as at year end is £2k (2010: £3k).

During the prior year, as part of its financial plan to preserve cash resources, QCC issued warrants to the Board in lieu of Directors fees. On 2 January 2009, Ian Williams, a non-executive Director of QCC, received 18,889 warrants as part of this plan. Each warrant entitles him to acquire one common share of QCC at a price of CAD$0.30 per common share. One third of the warrants vested immediately upon grant date, a further one third of the warrants vested on 2 January 2010 and the remaining one third vested on 2 January 2011. All warrants must be exercised by 2 January 2014. Ian Williams transfers his QCC Director fees to the Company. If all the warrants, granted to Ian Williams and transferred to the Company, were exercised at the statement of financial position date, the Group's holding in the issued share capital of QCC would increase from 20.44% to 20.52%. The total amount recognised in the statement of comprehensive income relating to these QCC warrants for the year ended 30 June 2011 is £1k (2010: £25k).

13   Related Party Transactions

Executive Directors Ian Williams and Hemant Thanawala provided services under a service agreement with International Energy Services Limited ("IESL"), a subsidiary of International Energy Group AG ("IEG"), the ultimate parent of Quadrise Fuels International plc.  The service charge for the year amounted to £175k (2010: £158k), out of which £69k (2010: £23k) was incurred for Directors' and employees' salaries and related costs, and £106k (2010: £135k) was charged for rent and other office costs.  Trade payables include £52k (2010: £7k) payable at the statement of financial position date to IESL relating to these services.

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 £98k (2010: £24k), out of which £57k (2010: £nil) was for consulting services and £41k (2010: £23k) for non-executive Director fees. The balance payable at the statement of financial position date was £20k (2010: £5k).

Ian Duckels is also a Director of Ritoil Associates Limited, which has provided non-executive director services to the Group.  The total fees charged for the year related to non-executive Director fees and amounted to £36k (2010: £23k), with a balance of £7k (2010: £5k) payable at the statement of financial position date.

Trade receivables of the Group include £155k (2010: £188k) receivable from other related parties, which consists of £155k (2010: £157k) from QFUS.  QFI has an agreement with the current shareholder of QFUS to hold a 76% interest in the entity in the future. Transactions with related parties are unsecured and made at normal market prices. The receivable from QFUS attracts interest at the US Prime rate plus 2% p.a effective from the date of the advance until repayment in full of the advance.

For the year ended 30 June 2011, the Company has recorded a provision for bad debt of £nil (2010: nil).  

The Company and IEG, the majority shareholder in the Company, entered into a Relationship Agreement on 22 March 2006.  Pursuant to the Relationship Agreement, IEG has agreed to exercise its rights only as a shareholder of the Company, so as to ensure the Company is capable of carrying on its business independently of IEG.  In addition IEG has agreed that neither it nor any proposed Director who is a Director or employee of IEG will participate in the deliberations of the board of Directors of the Company in relation to any proposal to enter into any commercial arrangements with IEG or its associates.

QFI defines key management personnel as the Directors of the Company.  There are no transactions with Directors, other than their remuneration as disclosed in the Report of Directors' Remuneration.

14.   Commitments and Contingencies

The Group and the Company had not entered into any finance or operating leases as at the statement of financial position date.  Additionally the Group and the Company have no capital commitments or contingent liabilities as at the statement of financial position date. 

15.   Events After the End of the Reporting Period

On 1 August 2011 an agreement has been concluded with AkzoNobel for the purchase of the first commercial scale 1,000 tonne (6,000 barrels) per day MSAR® Manufacturing Unit to be supplied to Quadrise International Limited.  

On 3 August 2011, the Company appointed Westhouse Securities Limited as its broker with immediate effect.

The service agreement with International Energy Services Limited ("IESL") for the provision of executive director services by Ian Williams and Hemant Thanawala expired on 30 June 2011. With effect from 1 July 2011, Ian Williams and Hemant Thanawala are employed by QFI in their capacity as executive directors.

16.   Copies of the Annual Report

Copies of the annual report will be available shortly on the Company's website at www.quadrisefuels.com and from the Company's registered office, Parnell House, 25 Wilton Road, London SW1V 1YD.

 

END

 

 

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