TIDMVLS
RNS Number : 0388Z
Velocys PLC
15 May 2019
News release
Velocys plc
("Velocys" or "the Company")
15 May 2019
Final results for the year ended 31 December 2018
Velocys plc (VLS.L), the advanced biofuels company, is pleased
to announce its final audited results for the year ended 31
December 2018.
Highlights
-- Transformed and focused the management team with the
appointment of Henrik Wareborn as the new CEO and Andrew Morris as
the new CFO in November 2018 while eliminating the roles of CCO and
COO.
-- Restructured the rest of the Board with the appointment of
Philip Holland and Darran Messem as Non-Executive Directors (post
period end) with Philip taking on the role as Senior Independent
Director and Darran as Chairman of the Remuneration Committee. Dr
Pierre Jungels is announcing his intention to step down as Company
Chairman towards the end of this calendar year. Velocys has a well
prepared succession plan in place for the Board and further
announcements will be made in due course.
-- Streamlined and de-risked our two advanced biofuel projects
focusing on flow sheet standardisation, other synergies and
advancing both projects to FEED-ready stage:
-- Natchez, Mississippi biorefinery:
o Completed the Environmental Assessment required under the
National Environmental Policy Act.
o Completed 1,000 hours of integrated demonstration of
wood-chips to fuels with TRI at Durham, North Carolina at a rate of
four tonnes per day of dry Southern Yellow Pine wood chips allowing
us to demonstrate biofuel yields from representative feedstock and
actual syngas composition.
o Completed final product upgrade pilot run over 12 weeks at
Haldor Topsoe in Denmark generating final product samples for
further aviation fuel blending studies with our strategic partners
this year. Also generated drop-in diesel and blended infrastructure
compliant gasoline.
o Detailed due diligence and value-added engagement by potential
strategic partners continues.
o The project has been further optimised to achieve negative
lifecycle carbon emissions and reduce overall environmental impact
whilst maintaining 20 million gallons of sustainable aviation fuel
and gasoline blendstock production per year from 2024.
-- Immingham, UK waste to jet fuel biorefinery:
o Partner funding of GBP4.5m secured during the year for current
stage of the project, which we are developing in collaboration with
British Airways and Shell.
o Project awarded GBP434k from the UK Department for Transport
under the Future Fuels for Flight and Freight Competition
(F4C).
o A 100 acre site secured on the South Humberside for the
project with ideal infrastructure for feedstock and utilities
supply as well as product off-take.
o The project has been optimised to produce 15 million gallons
per year of sustainable aviation fuel eligible for double credits
as an advanced development fuel under RTFO.
o Engagement with the UK Government to secure sufficient and
stable policy support continues for the project to reach financial
close.
-- Red Rock Biofuels, Oregon biorefinery (RRB):
o Wood chips to sustainable fuel biorefinery commenced
construction. Notice to proceed issued to Velocys. GBP4.5 million
out of a total GBP9.2m has been received.
o Post period end amended contract to accelerate delivery of the
first of four reactors and first four charges of catalyst, reducing
the firm commitment for reactors from six to four but RRB will
retain an option to acquire reactors 5 and 6 until the end of 2020
at existing contract price.
-- ENVIA, Oklahoma, FT joint venture:
o Generation of Renewable Identification Numbers (RINs)
announced in January 2018, with RINs verified in March 2018 having
provided auditable data of the carbon intensity under the approved
pathway whilst running two Velocys FT reactors in parallel.
o Independent verification and confirmation that the reactor
leak detected in May 2018 was caused by a fault in the ancillary
coolant system and was not a result of any flaw in the core Velocys
technology.
o Plant continued to operate on one reactor until September to
prove out resilience of the second FT reactor after ancillary
cooling system had been re-designed.
o In September 2018, the JV partners deemed the technology
demonstration had been successfully completed.
o ENVIA obtained $2.3m insurance settlement in relation to the
cooling system damage to the FT reactor in late 2018 and early
2019.
o Post period end: A successful conclusion of the ENVIA JV with
Velocys reaching agreement with the JV partners on rights transfer
and payment due to Velocys of GBP3.26m with GBP1.66m received on
signing agreement and remainder following site clearance; the two
FT reactors returned to Velocys for post-demonstration
analysis.
-- 2018 Financial results:
o Revenue of GBP0.7m (2017: GBP0.8m).
o Operating loss of GBP18.6m, before exceptional items of
GBP10.1m (2017: GBP21.4m before exceptional items of GBP29.7m).
o Cash* at the year-end GBP7.0m (31 December 2017: GBP2.1m).
o Fundraises of approximately GBP18.4m (before expenses) in
January 2018 and GBP6m (before expenses) in July 2018.
o Impairment of GBP0.8m of the ENVIA investment in associate and
an impairment of the ENVIA loan note of GBP10.1m.
-- The Company confirms that it has adopted the QCA Corporate
Governance Code, which highlights its continued focus on good
governance and maintaining a high degree of trust and transparency
with its shareholders and other stakeholders.
* Defined as cash and cash equivalents.
Henrik Wareborn, CEO of Velocys, said:
"Velocys is now in the possession of our two full-scale
commercial FT micro-channel reactors with a combined cumulative
runtime of more than 5000 hours from the recently concluded ENVIA
technology demonstration in Oklahoma. These two reactors have
operated under a wide range of conditions with a relatively
challenging feedstock. We have collected a vast amount of
performance data from this demonstration allowing us now to further
optimise for resilience, volume and product quality directly
benefiting our two full-scale renewable fuels projects under
development in Natchez, Mississippi and Immingham, UK as well as
our first licensee; Red Rock Biofuels in Oregon.
Furthermore, we have conducted extensive post-operative analysis
on the reactors and catalyst from ENVIA at our technology centre in
Ohio allowing us to demonstrate to partners, such as strategic
investors and insurers, the robustness of the Velocys technology
offering. This also contributes greatly to the de-risking of the
Mississippi and Immingham projects and supports a broad range of
project finance approaches.
Red Rock Biofuels broke ground in June 2018. In February 2019 we
agreed to accelerate deliveries of Velocys FT reactors and catalyst
which included one reactor and 4 charges of catalyst delivered from
inventory and the remaining 3 reactors are now in the process of
being manufactured and delivered during the balance of 2019.
Velocys is within reach to offer a tangible solution to support
decarbonisation of air travel, a critical sector supporting the
global economy with very stringent fuel criteria and few
alternatives to hydrocarbon fuels. The aviation sector needs
renewable fuels which meet the complex standards of fossil fuels
for engine safety and performance reasons. I believe Velocys is
well positioned to create significant shareholder value already in
2019 from our unique position at the cutting edge of fossil-free
aviation.
I would like to thank all my colleagues at Velocys for their
continued commitment and relentless efforts during the intensive
phase of technology demonstration and project development during
2018.
I would also like to take this opportunity to thank Dr Pierre
Jungels for his continued support to me and the team during the
changes that were made to the senior management of the Company and
the Board in the last quarter of 2018 as well as for his
significant contribution to the Company over the last thirteen
years"
For further information, please contact:
Velocys
Henrik Wareborn, CEO +44 1235 838 621
Numis Securities (Nomad and joint broker)
Alex Ham
Stuart Skinner
Tom Ballard +44 20 7260 1000
Canaccord Genuity (Joint broker)
Henry Fitzgerald-O'Connor
Ben Griffiths +44 20 7523 8000
Camarco (Financial communications & PR)
Billy Clegg
Ben Woodford
Tom Huddart +44 20 3757 4983
Certain information contained in this announcement would have
constituted inside information (as defined by Article 7 of
Regulation (EU) No 596/2014) prior to its release as part of this
announcement.
Web | Twitter
Chairman's statement
Dr. Pierre Jungels, CBE
Introduction
Velocys is now an advanced biofuels company. This transition was
completed thanks to the technical proof point reached upon
completion of the commercial scale demonstration runs of our two
Velocys Fischer-Tropsch (FT) reactors at ENVIA, together with the
strong commercial progress at both the Immingham, UK waste to jet
fuel plant and the Natchez Mississippi biorefinery projects,
significant fundraising in support of the above and an overall
strengthening of the Executive team as well as the Board.
The ENVIA plant in Oklahoma has shown that Velocys'
micro-channel FT reactors and catalysts work well in a range of
conditions, inside the operating envelope, and generate high
quality renewable fuels with low carbon intensity evidenced by the
award of D3 RIN credits.
Velocys will now leverage all the learnings and experience from
running full cycle commercial operations at ENVIA into the two
commercial scale biorefinery projects in Natchez and Immingham in
collaboration with our financial and technology partners.
The demand for sustainable jet fuel could not be more obvious.
Velocys is in a unique position to offer a de-risked, scalable and
executable solution to convert solid waste feedstocks into
sustainable jet fuel with a minimal carbon intensity both in the US
and in the UK subject to continued shareholder and strategic
partner support.
Management and Board
In November 2018, we were delighted to welcome Henrik Wareborn
as Velocys' new CEO and Executive Director. Henrik's expertise
includes capital markets advisory, commodities trading, fund
raising and commodity finance from Goldman Sachs, BP Plc and
Natixis SA. Henrik holds an MBA from INSEAD and a BA in economics
from the Stockholm School of Economics. The Board considers that
his skill set and experience and his knowledge, background and
approach, are exactly what is demanded as Velocys moves into the
financing and commercialisation of both the project in Mississippi
and the UK waste to jet fuel project in Immingham.
In addition, we were pleased that Andrew Morris, who had been a
Non-Executive Director and Chairman of the Company's Audit and Risk
Committee since June 2017, accepted the position as Velocys' full
time Chief Financial Officer, remaining on the Board as an
Executive Director. Andrew has considerable experience in the power
and renewable energy, energy from waste and biofuels sectors, and
has significant involvement in financing and business development
for AIM companies, SMEs and private equity backed organisations.
Andrew's appointment as Velocys' Chief Financial Officer has
assisted the Board significantly in managing the Company's
finances.
We were also pleased to announce the appointment of two new
independent Non-Executive Directors to the Board with effect 1
January 2019. Philip Holland and Darran Messem both have
significant experience in industries, companies and projects with
direct relevance to Velocys. Philip has been appointed as a member
of the Audit & Risk, and Remuneration and Nomination
Committees, and has also been appointed as Senior Independent
Director, and Darran has been appointed as Chairman of the
Remuneration Committee, and as a member of the Audit & Risk and
Nomination Committees. The Board has already been able to benefit
from their respective contributions in the relatively short time
since their appointments.
David Pummell and Paul Schubert resigned as Directors in
December 2018 and John Tunison stepped down as interim Chief
Financial Officer in September 2018. On behalf of the Board I thank
them all for their contributions to the Company.
On behalf of the Board, I want to express our deep gratitude to
Julian West who stepped down from the Board as a Non-Executive
Director in February 2018 after several years of dedicated service
to Velocys as Senior NED.
In line with recent Corporate Governance linked to the tenure of
Chairmen, I am announcing that, since I have served as Chairman of
Velocys from 2006, I plan to step down as Company Chairman towards
the end of this calendar year. Velocys has a well prepared
succession plan in place for the Board and further announcements
will be made in due course after appropriate due diligence and
shareholder consultations.
Fundraising
In January 2018, approximately GBP18.4m (before expenses) was
raised through a Placing and Open Offer, principally to help fund
the development of our Mississippi biorefinery project, and to
secure strategic investment into it. We included an open offer
element in this fundraising round to enable all eligible
shareholders an opportunity to participate. Our existing major
shareholders again demonstrated their considerable support, but at
the same time we were pleased by our ability to extend our
shareholder base.
We completed a further fundraise of GBP6m (before expenses) in
July 2018, primarily through the support of existing shareholders,
who we thank for their continued support. Net proceeds of the
Placing were used predominantly to: (i) strengthen the Company's
balance sheet; (ii) fund our portion of the pre-Front End
Engineering Design ("FEED") development costs for the Immingham UK
waste to jet fuel project; (iii) allow us to complete our
commercial scale reactor demonstration run at ENVIA; and (iv)
support the process for on-boarding one or more strategic investors
to provide development funding for our biorefinery projects.
In November 2018, we served conversion notices to the holders of
the GBP9 million nominal convertible loan notes which had been
issued on 1 June 2017, converting these plus accrued interest into
an aggregate of 20,100,000 new ordinary shares at a conversion
price of GBP0.50 per share.
The Board recognises that additional funding is required to
reach final close for both our biorefinery projects. Further
details are given in the Financial review and note 2.
Outlook
Velocys has transformed from its research and development
(R&D) focus to providing a solution for supplying advanced
biofuels at commercial scale using abundant feedstocks causing no
land-use change.
The Velocys team in Harwell (UK), Ohio and Texas (US) has driven
this pivot into advanced biofuels fuels with an unyielding
commitment to quality, safety and excellence. Our biorefinery
technology integration is designed to perform over many years at
high yields in order to offer a sound return to investors and a
significant decarbonisation impact.
The next phase of the business during 2019 will be to conclude
all pre-Front End Engineering Design (FEED) for our two projects
and reach final agreements with our strategic partners on the
funding of the two-phase FEED to allow both projects to reach
Financial Close during 2020.
Chief Executive's report
Henrik Wareborn
2018 was the year investors grasped the full opportunity of
decarbonisation. After many years of chronic oversupply and low
prices, the European Emissions Allowance market sprung back to
life. The EUA credits were among the best performing financial
assets in the world in 2018, as the imperative need of
decarbonisation finally started to dawn on corporate risk managers
as well as financial investors.
Velocys is on the cusp of providing a scalable decarbonisation
solution for the challenging sector of high energy density
renewable fuels such as sustainable jet fuel for aviation, road
diesel for heavy goods transport, and marine fuels for the global
shipping industry.
Our two biorefinery projects under development in Immingham, UK
and Natchez, US will each process over 300 thousand tonnes of dry
solid waste feedstock per year (from municipal/commercial &
industrial waste and forest residues respectively), converting them
into 60-80 million litres of renewable fuels per year with a carbon
intensity between zero and 30% of that of comparable fossil
fuels.
The pathway from gasification of solid waste feedstocks, through
synthesis gas clean-up and Velocys' Fischer Tropsch synthesis into
FT liquids for final upgrading to ultra clean fuels is compatible
with existing infrastructure and using well proven upgrading
technology. The Velocys FT reactors completed a commercial scale
production run in Oklahoma during the year, producing in total 1.6
million litres of fuels, which means that all components of our
biorefinery technology integration in Immingham and Natchez have
now been demonstrated and financed at commercial scale.
If global policymakers are serious about the Paris Agreement
targets, a rising price on carbon is inevitable. The limited
capacity in the atmosphere to store more CO(2) without adverse
effects, is the ultimate scarce resource and will be priced
accordingly. The economics of our US biorefinery project benefit
from strong policy support, especially in California via the Low
Carbon Fuel Standard incentivising decarbonisation of road and
aviation fuels. Likewise, our UK biorefinery project benefits from
the new Renewable Transport Fuel Certificates for development
fuels, awarding double credits for advanced sustainable aviation
fuels from waste feedstocks.
During the year, we undertook a rigorous evaluation of a range
of suitable sites for our Immingham UK project which concluded in
the announcement of the site in November. The site scored very
highly on all our criteria such as feedstock supply, rail, road,
port and pipeline access as well as its location in the "Energy
Estuary" of the South Humberside with a wealth of highly skilled
workers in this field. We have commenced the planning and
permitting process with a public consultation opening shortly.
The Natchez, MS biorefinery project completed planning,
permitting and pre-FEED engineering successfully and is currently
under due diligence by strategic partners invited to the formal
funding process for the final FEED stage.
The two projects have benefitted from the application of a
standardised technical flow sheet as far as possible given the
slightly different nature of the feedstock and other local
conditions. The volume of dry feedstock, liquid products produced
and expected returns are therefore now very similar for both
projects thanks to the similar level of aggregate policy support
afforded to each project.
We are grateful for all the strategic and technical support we
have received during the year from British Airways and Shell as we
work to prove this new sustainable pathway for scalable advanced
biofuels which do not induce land use change.
We are also pleased to be supporting Red Rock Biofuels (RRB) as
technology licensors for their biorefinery project in Oregon
converting woody biomass to sustainable jet fuel and diesel. RRB
announced FID in early 2018 and gave Velocys notice to proceed to
deliver four FT reactors and four charges of catalyst for their
project to be delivered in 2019. Velocys has provided a
site-licence to RRB to operate up to six Velocys FT reactors at the
site and we offer engineering services for the FT island including
commissioning and start-up services in due course.
It was also very satisfying to instigate the repurposing of the
ENVIA plant into a Renewable Natural Gas (RNG) plant as recently
announced, post-period. For this purpose, one of our JV partners
has acquired a number of assets from ENVIA for a payment of $4.15
million to Velocys and the two Velocys FT reactors have been
transferred back to Velocys upon the completed demonstration run at
that site. In return, Velocys has agreed to lift its liens on all
ENVIA assets. Velocys will also receive any surplus cash from ENVIA
post decommissioning as well as any potential additional payments
from the sale of remaining assets from ENVIA not required for the
RNG repurposing.
Velocys takes the safety and well-being of its employees very
seriously and has created a passionate and holistic culture of
safety, health and environmental responsibility that extends from
the CEO to all employees. Each employee is encouraged to actively
participate in and take responsibility for their own safety and
health by participating in Job Safety Analyses (JSA), Process
Hazard Analyses (PHA), and Design and Process Failure Mode and
Effects Analyses (DFMEA/PFMEA) with the goal to proactively prevent
incidents. To this end, Velocys has only had one lost-time accident
since September 2000, which occurred in July 2018. In 2018, two
near misses were reported and investigated and one more near miss
occurred in early 2019.I want to conclude by thanking our
shareholders, employees and public sector stakeholders for all the
determined support during these years of research and product
development required to launch such a transformational technology
in support of the global cause of decarbonising aviation and heavy
duty land and sea transport.
Financial review
Revenues
Velocys plc is managed as a single operation and referred to as
"the Company" throughout the strategic report. "Company" results
represent the Consolidated results and Velocys plc results are for
the parent company only. The Company recognised revenue of GBP0.7m
(2017: GBP0.8m). The revenue was primarily the result of the lease
of catalyst related to the ENVIA project. Gross Profit was flat at
GBP0.4m (2017: GBP0.4m).
On 1 January 2018, the Company adopted IFRS 15. In accordance
with guidance in IFRS 15, the revenues from Red Rock Biofuels will
be recognised in future periods, as discussed in notes 3 and 14 to
the accounts.
Operating losses were GBP18.6m, before exceptional items of
GBP10.1m related to impairments (2017: GBP21.4m before exceptional
items of GBP29.7m). The reduction of the operating loss is
principally the result of reducing administrative expenses as set
out below.
Expenses and income
Administrative expenses before exceptional items reduced to
GBP19.1m and GBP29.1m after exceptional items (2017: GBP21.9m
before and GBP53.4m after exceptional items). The reduction before
exceptional items comes from a number of elements including the
lower number of staff employed by the Company after the closure of
the UK R&D facility which was completed in June 2017 and the
completion of the work on the project development of the
Mississippi project in Q3 2018.
The reduction in administrative expenses after exceptional items
is largely due to the scale of the impairment taken in 2017 which
has meant that no further impairment is required in 2018, other
than for the loan to ENVIA, our associate company. The Board of
ENVIA decided to suspend operations in September 2018 (see
Impairment on assets and investments below), as a result of this
decision there is little chance of the Company receiving repayment
of the loan, so it has been fully impaired by GBP10.1m (2017:
GBPnil).
Other income before exceptional items during the year consisted
of the sale of assets and a return on deposit adding to GBP0.04m,
(assets sold in 2017 associated with the closure of the UK R&D
facility provided other income of GBP0.2m). No further income was
recorded in 2018. Exceptional items were recorded in 2017 of
GBP1.75m relating to the increased equity share and voting rights
in ENVIA following the exit of NRG. No such exceptional items were
recorded in 2018.
Assets and Cash
The net assets of the Company were GBP5.4m which is down from
the GBP14.7m in 2017. This decrease was largely due to the
impairment of the Company's loan and investment in ENVIA of
GBP10.9m and the operating loss before exceptional items of
GBP18.6m off-set by the GBP22.4m (net of expenses) raised from
share issuances in January and August 2018.
The cash inflow to the Company in 2018 was GBP4.3m (2017:
GBP16.0m cash outflow) principally being the net receipts of
GBP23.0m after the two fund raises that were successfully completed
during the year, less GBP6.3m cash used in investing activities and
GBP12.4m used in operating activities. The Company continues to
carefully manage its underlying cost base and spend prudently on
strategy implementation.
The company incurs much of its expenses in US dollar and has
exposure to the US dollar exchange rate. This is hedged to the
extent possible by holding cash reserves in US dollars. In
addition, the majority of the Company's income is invoiced in
dollars.
Impairment on assets and investments
In September 2018 the Board of Directors of ENVIA decided to
suspend operations and undertake a review of strategic alternatives
at the ENVIA plant. As a result of this decision there is little
chance of us receiving full repayment of the loan. The Company
recorded an impairment of GBP10.1m with respect to the loan to
ENVIA and GBP0.9m with respect to the investment as a result of an
increase in the credit risk arising from the Board of Directors of
ENVIA's decision. In addition, the Company analysed the total value
of the Company's equity as at 31 December 2018 and determined that
despite a decrease in share issue price, no further impairment was
warranted on top of the impairment recorded in 2017.
With respect to the impairment assessment in 2017, the
recoverable amount was determined based on the fair value less
costs of disposal ("fair value"), by reference to the total value
of the parent Company's equity (i.e. market capitalisation). For
2017 the Company recorded an impairment of GBP31.5m against a range
of assets, including goodwill and in-process technology. The Board
has assessed whether any additional impairment is required in 2018
and based on consideration of operational performance and market
capitalisation at 31 December 2018, we do not consider there to be
any impairment required in 2018.
There has been no change in the Board's assessment of the
long-term potential of the assets. The impairments made, except for
Goodwill, could be reversed in future if there is a change in the
estimates used to determine the asset's recoverable amount,
particularly in relation to the share price of the parent Company.
At 31 December 2018, the Board did not consider there has been a
change in circumstances that would justify reversal of the
impairments recorded in 2017.
The parent Company has both equity and debt investments in its
subsidiaries, which are compared to the recoverable amount. On this
basis, the impairment assessment indicated that the carrying value
of the investments in subsidiaries was higher than the recoverable
amount in 2017, determined by fair value less costs of disposal. As
a result, an impairment of GBP33.3m (2017: GBP57.3m) was
recognised. This impairment was eliminated on consolidation.
ENVIA
The loans and investment into ENVIA have been impaired in this
year's accounts due to the suspension of activities at the site and
the laying off of nearly all the staff. The Company completed
negotiations in April 2019 with one of the remaining partners and
the landfill gas supplier to sell some of the assets and remove the
Company's liens associated with its loans to ENVIA from the Company
and release the site to the landlord so that they can pursue their
own business from the site in return for a payment of GBP3.26m.
This will be referred collectively as the ENVIA settlement and is
considered a best outcome from the loans made of GBP15.8m and the
positive results from the activity with ENVIA including all the
operating and management data secured from the operations.
Fundraises
In January 2018 Velocys raised a total of approximately GBP18.4m
(before expenses) via a firm placing and open offer. Both funding
elements were strongly supported by existing major shareholders.
Over half of the firm placing shares were placed with the Company's
existing shareholders and the rest with a number of significant new
shareholders.
In July 2018 Velocys secured additional funding of GBP6.0m
(before expenses). The net proceeds of both capital raisings have
been used predominantly for:
-- strengthening the Company's balance sheet, providing for
working capital and central operating costs;
-- funding the Company's portion of the pre-FEED development
costs for its Immingham UK waste to jet fuel project; and
-- funding the continuing development costs for the Natchez,
Mississippi biorefinery project before securing one or more
strategic investors.
Via our two placings, we have seen a mix of both strong support
from our existing shareholders, for which we are grateful, as well
as investment from new shareholders who demonstrated significant
support for our strategy.
Future funding
The financial statements have been prepared on the going concern
basis, which assumes the Company will have sufficient funds
available to enable it to continue to trade for the foreseeable
future. The cash forecast includes the following assumptions: (i)
the receipts from the ENVIA settlement; (ii) the completion of the
current stage of the UK waste to jet fuel project prior to securing
funding for the next stage of development to financial close; (iii)
the completion and delivery of reactors to our customer Red Rock
Biofuels; (iv) the continued process of on-boarding one or more
strategic investors to provide the final stages of development
funding for the Mississippi biorefinery project; (v) the current
overhead cost run rate.
The Company's plan is to secure investment by one or more
strategic partners into either or both of the UK Immingham project
and the Mississippi project in the second half of 2019. The Company
will assess its cash requirements from these activities and
determine at what stage it needs to raise additional funding during
the second half of 2019 or early 2020.
This funding may be achieved from one or a combination of a
capital raising (including the possibility of a placement of
ordinary shares within the next 12 months) or the realisation of
certain assets; selling additional technology licences (such as the
licence recently sold to Red Rock Biofuels); and selling non-core
intellectual property.
The Board will be proposing a Special Resolution at the
forthcoming Annual General Meeting to approve the disapplication of
the pre-emption rights equal to 15% of the issued share capital,
compared to the level of 10% which has been approved by
shareholders in previous years. This may assist the Company in
securing additional working capital in the year to come.
Following financial close of one or both of the projects in late
2020 or early 2021, the Company's funding requirements will depend
on the final structure of each of the biorefinery project
consortiums and on the Company's strategy to develop and fund other
projects.
As such, these conditions indicate the existence of a material
uncertainty that may cast significant doubt on the Company and
Velocys plc's ability to continue as a going concern.
The financial statements do not include the adjustments that
would arise if the Company and Velocys plc were unable to continue
as a going concern.
Consolidated income statement
for the year ended 31 December 2018
2018 2018 2018 2017 2017 2017
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------ ------------ ---------
Before Exceptional Before Exceptional
exceptional items exceptional items
(note (note
Note items 2) Total items 2) Total
------------------------- ----- ------------ ------------ --------- ------------ ------------ ---------
Revenue 3 664 - 664 759 - 759
Cost of sales (273) - (273) (409) - (409)
------------------------- ----- ------------ ------------ --------- ------------ ------------ ---------
Gross profit 391 - 391 350 - 350
Administrative
expenses (19,060) (10,067) (29,127) (21,930) (31,486) (53,416)
Other income 5 36 - 36 163 1,750 1,913
------------------------- ----- ------------ ------------ --------- ------------ ------------ ---------
Operating loss (18,633) (10,067) (28,700) (21,417) (29,736) (51,153)
Share of loss
of investments
accounted for
using the equity
method 9 (1,717) (848) (2,565) (1,784) (2,736) (4,520)
------------------------- ----- ------------ ------------ --------- ------------ ------------ ---------
Loss before net
finance (costs)/income (20,350) (10,915) (31,265) (23,201) (32,472) (55,673)
Finance income 4 993 - 993 730 - 730
Finance costs (628) - (628) (399) - (399)
------------------------- ----- ------------ ------------ --------- ------------ ------------ ---------
Net finance income 365 - 365 331 - 331
------------------------- ----- ------------ ------------ --------- ------------ ------------ ---------
Loss before income
tax (19,985) (10,915) (30,900) (22,870) (32,472) (55,342)
Income tax credit 317 - 317 739 - 739
------------------------- ----- ------------ ------------ --------- ------------ ------------ ---------
Loss for the
financial year
attributable
to the owners
of Velocys plc (19,668) (10,915) (30,583) (22,131) (32,472) (54,603)
------------------------- ----- ------------ ------------ --------- ------------ ------------ ---------
Loss per share
attributable
to the owners
of Velocys plc
Basic and diluted
loss per share
(pence) 6 (5.75) (8.95) (15.19) (37.47)
------------------------- ----- ------------ ------------ --------- ------------ ------------ ---------
Consolidated statement of comprehensive income
for the year ended 31 December 2018
2018 2018 2018 2017 2017 2017
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------ ------------ --------- ------------ ------------ ---------
Before Exceptional Before Exceptional
exceptional items exceptional items
(note (note
items 2) Total items 2) Total
-------------------------------------- ------------ ------------ --------- ------------ ------------ ---------
Loss for the year (19,668) (10,915) (30,583) (22,131) (32,472) (54,603)
-------------------------------------- ------------ ------------ --------- ------------ ------------ ---------
Other comprehensive (expense)/income
Items that may be reclassified
to the income statement
in subsequent periods
Foreign currency translation
differences 897 - 897 (4,411) - (4,411)
-------------------------------------- ------------ ------------ --------- ------------ ------------ ---------
Total comprehensive (expense)/income
for the year attributable
to the owners of Velocys
plc (18,771) (10,915) (29,686) (26,542) (32,472) (59,014)
-------------------------------------- ------------ ------------ --------- ------------ ------------ ---------
Consolidated statement of financial position
as at 31 December 2018
(Restated)
2018 2017
Note GBP'000 GBP'000
-------------------------------------- ----- ---------- -----------
Assets
Non-current assets
Intangible assets 7 357 755
Property, plant and equipment 8 1,819 1,801
Trade and other receivables 10 281 10,284
Investment in associate 9 - 2,580
--------------------------------------- ----- ---------- -----------
2,457 15,420
-------------------------------------- ----- ---------- -----------
Current assets
Inventories 11 1,438 388
Trade and other receivables 10 4,404 416
Current income tax asset 862 546
Restricted cash 12 - 620
Cash and cash equivalents 12 6,964 2,070
--------------------------------------- ----- ---------- -----------
13,668 4,040
-------------------------------------- ----- ---------- -----------
Total assets 16,125 19,460
--------------------------------------- ----- ---------- -----------
Liabilities
Current liabilities
Trade and other payables 13 (3,018) (2,898)
Borrowings (289) (268)
Other liabilities (2,092) -
Deferred revenue 14 (579) (618)
--------------------------------------- ----- ---------- -----------
(5,978) (3,784)
-------------------------------------- ----- ---------- -----------
Non-current liabilities
Trade and other payables (90) (98)
Borrowings - (273)
Deferred revenue 14 (4,634) (620)
--------------------------------------- ----- ---------- -----------
(4,724) (991)
-------------------------------------- ----- ---------- -----------
Total liabilities (10,702) (4,775)
--------------------------------------- ----- ---------- -----------
Net assets 5,423 14,685
--------------------------------------- ----- ---------- -----------
Capital and reserves attributable to
owners of Velocys plc
Called up share capital 1,913 1,468
Share premium account 182,208 149,964
Merger reserve 369 369
Convertible loan/"other" reserve - 9,421
Share-based payments reserve 16,143 16,085
Foreign exchange reserve 3,551 2,654
Accumulated losses (198,761) (165,276)
--------------------------------------- ----- ---------- -----------
Total equity 5,423 14,685
--------------------------------------- ----- ---------- -----------
Consolidated statement of changes in equity
for the year ended 31 December 2018
Share Convertible
Called premium loan/'other' Share-based Foreign
up share account Merger reserve payment exchange Accumulated Total
capital (Restated) reserve reserve reserve losses equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Balance at 1
January
2017 1,438 149,275 369 - 15,843 7,065 (110,252) 63,738
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Loss for the
year - - - - - - (54,603) (54,603)
Other
comprehensive
expense
Foreign
currency
translation
differences - - - - - (4,411) - (4,411)
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Total
comprehensive
expense - - - - - (4,411) (54,603) (59,014)
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Transactions -
with
owners
Share-based
payments
- value of
employee
services - - - - 242 - - 242
Proceeds from
share
issues 30 689 - - - - - 719
Convertible
loan
notes - - - 9,000 - - - 9,000
Interest on
convertible
loan note - - - 421 - - (421) -
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Total
transactions
with owners 30 689 - 9,421 242 - (421) 9,961
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Balance at 31
December
2017 1,468 149,964 369 9,421 16,085 2,654 (165,276) 14,685
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Adjustment on
adoption
of IFRS 9 - - - - - - (2,274) (2,274)
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Balance at 1
January
2018 1,468 149,964 369 9,421 16,085 2,654 (167,550) 12,411
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Loss for the
year - - - - - - (30,583) (30,583)
Other
comprehensive
expense
Foreign
currency
translation
differences - - - - - 897 - 897
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Total
comprehensive
expense - - - - - 897 (30,583) (29,686)
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Transactions
with
owners
Share-based
payments
- value of
employee
services - - - - 58 - - 58
Proceeds from
share
issues 243 22,397 - - - - - 22,640
Convertible
loan
notes 180 8,820 - (9,000) - - - -
Interest on
convertible
loan note 22 1,027 - (421) - - (628) -
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Total
transactions
with owners 445 32,244 - (9,421) 58 - (628) 22,698
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Balance at 31
December
2018 1,913 182,208 369 - 16,143 3,551 (198,761) 5,423
---------------- --------- ----------- --------- ------------- ------------ --------- ------------ ---------
Consolidated statement of cash flows
for the year ended 31 December 2018
(Restated)
2018 2017
Note GBP'000 GBP'000
------------------------------------------------------ ----- --------- -----------
Cash flows from operating activities
Operating loss (28,700) (51,153)
Depreciation and amortisation 659 2,893
Gain on bargain purchase for ENVIA - (1,750)
Loss on disposal of property, plant and equipment - 83
Loss on disposal of intangible assets 7 627 152
Impairment of assets 2 - 31,486
Impairment of loan to associate ENVIA 2 10,067 -
Impairment of inventory - 340
Impairment of assets under construction - 31
Amortisation of leased inventory - 92
Share-based payments 58 242
Changes in working capital (excluding the effects
of exchange
differences on consolidation)
Trade and other receivables (220) 358
Trade and other payables (1,125) 914
Other liabilities 2,092 -
Deferred revenue 14 5,213 -
Inventory (1,050) -
------------------------------------------------------ ----- --------- -----------
Cash consumed by operations (12,379) (16,312)
Tax credits received - 1,047
------------------------------------------------------ ----- --------- -----------
Net cash used in operating activities (12,379) (15,265)
------------------------------------------------------ ----- --------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (509) (34)
Purchase of intangible assets (349) (335)
Loan to associate ENVIA (5,531) (9,788)
Interest received 74 62
Net cash used in investing activities (6,315) (10,095)
------------------------------------------------------ ----- --------- -----------
Cash flows from financing activities
Proceeds from issues of shares and convertible
loan notes 25,172 10,160
Costs of issuing shares and convertible loan
notes (1,904) (443)
Interest paid (13) (17)
Repayment of borrowings (252) (308)
------------------------------------------------------ ----- --------- -----------
Net cash generated from financing activities 23,003 9,392
------------------------------------------------------ ----- --------- -----------
Net increase/(decrease) in cash and cash equivalents 4,309 (15,968)
Cash and cash equivalents at beginning of year 12 2,070 18,124
Exchange movements on cash and cash equivalents 585 (86)
------------------------------------------------------ ----- --------- -----------
Cash and cash equivalents at end of year 12 6,964 2,070
------------------------------------------------------ ----- --------- -----------
Notes to the consolidated financial statements
1. Accounting policies
The principal accounting policies applied in the preparation of
these consolidated financial statements are summarised below. The
policies have been consistently applied to each year presented
unless otherwise stated.
Basis of preparation
The results shown for the years ended 31 December 2018 and 31
December 2017 are audited. The consolidated financial information
contained in this announcement does not constitute statutory
accounts within the meaning of Section 434 of the Companies Act
2006. Statutory accounts of the Company in respect of the financial
year ended 31 December 2018 were approved by the Board of directors
on 14 May 2019 and will be delivered to the Registrar of Companies
in due course. The report of the auditors on those accounts was
unqualified and did not contain an emphasis of matter paragraph nor
any statement under Section 498 of the Companies Act 2006.
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU,
hereafter referred to as "IFRS"), IFRS Interpretations Committee
(IFRS IC) Interpretations and the Companies Act 2006 applicable to
companies reporting under IFRS. The statements have been prepared
under the historical cost convention as modified by the revaluation
of certain financial assets and liabilities (including derivative
instruments) at fair value, where relevant.
The preparation of financial statements to conform to IFRS
requires the use of certain critical accounting estimates and the
exercise of management's judgement in the application of the
Company's accounting policies. Areas involving a higher degree of
judgement or complexity, and areas where assumptions and estimates
are significant to the financial statements are referenced in notes
3, 7, 9 and 10.
Going concern
The financial statements have been prepared on the going concern
basis, which assumes that the Company and Velocys plc will have
sufficient funds available to enable them to continue to trade for
the foreseeable future.
The Company expects to develop its projects, in particular,
progressing the Mississippi biorefinery and Immingham UK waste to
jet fuel projects, which will require significant development and
capital expenditure.
The nature of the Company's strategy means that the timing of
milestones and funds generated from developments are difficult to
predict. The directors have prepared financial forecasts to
estimate the likely cash requirements of the Company and Velocys
plc over the next 12 months from the date of approval of the
financial statements.
The forecasts show that the Company and Velocys plc require
additional external funding within the 12-month forecast period to
be able to continue as a going concern. The directors anticipate
that this will come from one, or a combination of, the following
three sources, with agreements being actively sought from third
parties:
-- Strategic investment of development capital into both the
Mississippi and Immingham biorefinery projects, which are expected
during 2H 2019.
-- Placement of Company ordinary shares, which may occur within the next twelve (12) months.
-- Additional third-party licence sales, such as the Red Rock Biofuels project.
The Directors are confident that the funding required for the
Company and Velocys plc to continue as a going concern and have
therefore prepared the financial statements on a going concern
basis.
However, as at the date of approval of the financial statements
no additional funding is committed. Should additional funding not
be secured, the Company and Velocys plc would not be a going
concern. As such, these conditions indicate the existence of a
material uncertainty that may cast significant doubt on the Company
and Velocys plc's ability to continue as a going concern.
The financial statements do not include the adjustments that
would arise if the Company and Velocys plc were unable to continue
as a going concern.
Accounting developments
New and amended standards adopted by the Company
The Company has applied the following standards and amendments
for the first time for the annual reporting period commencing 1
January 2018:
-- IFRS 9 Financial Instruments
-- IFRS 15 Revenue from Contracts with Customers
-- Classification and Measurement of Share-based Payment Transactions - Amendments to IFRS 2
-- Transfers to Investment Property - Amendments to IAS 40
-- Interpretation 22 Foreign Currency Transactions and Advance Consideration
The company also elected to adopt the following amendments
early:
-- Annual Improvements to IFS Standards 2015 - 2017 Cycle.
IFRS 9 Financial Instruments
The Company and its subsidiaries adopted International Financial
Reporting Standard 9, Financial Instruments ("IFRS 9"), on 1
January 2018. IFRS 9 replaces the provisions of International
Accounting Standard 39, Financial Instruments: Recognition and
Measurement ("IAS 39"), that relate to the recognition,
classification and measurement of financial assets and financial
liabilities, derecognition of financial instruments, impairment of
financial assets and hedge accounting. The Company has elected to
apply the limited exemption if IFRS 9 related to transition for
classification and measurement, and impairment. Accordingly, the
Company has not restated comparative period in the year of initial
application.
IFRS 9 introduces principle-based requirements for the
classification of financial assets, using the following measurement
categories:
-- Amortised cost
-- Fair value through Other Comprehensive Income ("OCI")
("FVOCI") with cumulative gains and losses reclassified to profit
or loss upon derecognition
-- Fair value through profit loss ("FVPL")
The classification depends on the Company's business model for
managing the financial assets and the contractual terms of the cash
flows.
All financial liabilities are measured at amortised cost, except
for financial liabilities at fair value through profit or loss.
After initial recognition, an entity cannot reclassify any
financial liability.
IFRS 9 also introduces a new impairment model, the expected
credit loss ("ECL") model. This model applies to debt instruments
measured at amortized cost or at FVOCI, as well as trade
receivables. The Company applies the IFRS 9 simplified approach to
measuring estimated ECL which uses a lifetime expected loss
allowance for all trade receivables, and the general approach to
measuring estimated ECL with respect to the ENVIA loan.
Under the simplified approach, the Company is not required to
track changes in credit risk, but instead is required to recognize
a lifetime ECL at all times for trade and other receivables that do
not contain significant financing components.
Under the general approach, the Company will recognise a loss
allowance on either a 12-month ECL or lifetime ECL. IFRS 9
prescribes three stages related to impairments. In stage 1, a
12month ECL is recorded as a result of probability of default are
possible within the next 12 months. In stage 2, a lifetime ECL is
recorded if a loans credit risk has significantly increased since
initial recognition and is not considered low. In stage 3, a
lifetime ECL is recorded if a loans credit risk increases to the
point where it is considered credit impaired. The changes in loss
allowance balances are recognised in the income statement as an
impairment gain or loss. For credit exposure where there have not
been significant increases in credit risk since initial
recognition, a 12-month ECL is required. For credit exposure where
there have been significant increases in credit risk since initial
recognition, a lifetime ECL is required.
At December 31, 2018, the following balance sheet items were
impacted by the adoption of IFRS 9.
-- short-term trade receivables, and
-- the ENVIA loan.
IFRS 15 Revenue from Contracts with Customers
The Company and its subsidiaries adopted IFRS 15 Revenue from
Contracts with Customers on 1 January 2018 on a full retrospective
transition method. The comparative figures in the Company's audited
financial statements for the year ended 31 December 2017 were not
required to be restated as a result of the adoption of IFRS 15.
IFRS 15 introduces a five-step model which is applied to
determine when to recognise revenue, and at what amount. The five
steps consist of (i) identifying the customer, (ii) identifying all
of the performance obligations within the contract, (iii) determine
the transaction price, (iv) allocating the price to the performance
obligations and (v) recognizing revenue as the performance
obligations are fulfilled. Revenue is recognised when (or as) a
company transfers control of goods or services to a customer at the
amount to which the company expects to be entitled. Depending on
whether certain criteria are met, revenue is recognised either over
time, in a manner that best reflects the company's performance, or
at a point in time, when control of the goods or services is
transferred to the customer.
Change in accounting policies
On 1 January 2018, the Company adopted IFRS 9 and performed an
analysis of its trade receivables and loan receivables to determine
if a provision should be recorded. The Company's loan receivable
consisted of a loan to ENVIA.
GBP'000
-------------------------------------------- --------
Opening balance at 1 January 2018 - IAS
39 10,284
Increase in loan receivable loss allowance
recognized in impairment expense (2,274)
--------------------------------------------- --------
Closing balance at 1 January 2018 - IFRS
9 8,010
--------------------------------------------- --------
The Company applied the simplified approach to providing an ECL
prescribed by IFRS 9, which permits the use of the lifetime
expected loss allowance for trade receivables. Trade receivables
represent assets that are held for collection of contractual cash
flows and those cash flows represent solely payments of principal
and interest. To measure the expected credit losses, trade
receivables were grouped based on shared credit risk and the days
past due. Based on this ECL model, the Company did not record a
loss allowance with respect to trade receivables as it was not
material.
At 1 January 2018, the Company reviewed its loan to ENVIA in
accordance with IFRS 9. The Company considered the credit
worthiness of ENVIA and determined that the loan would be the
equivalent of Ca-C rating using the Moody global long-term rating
scale. The company considers historical loss rates for each
category of customers, and adjusts for forward looking
macroeconomic data where necessary. This aligns with managements
expectation of a high credit risk. Based on this assessment, the
Company calculated a Stage 3 ECL based on a lifetime probability of
default. In the IFRS 9 ECL model, two scenarios were considered and
individual weightings were assigned based on management's best
estimate of current and future risks of the ENVIA plant. Based on
the IFRS 9 ECL model, the Company recorded a loss allowance on a
lifetime ECL basis of GBP2,274,000 in the Consolidated income
statement.
In accordance with IFRS 9, the Company continued to assess the
ENVIA loan for impairment throughout the reporting period. See note
10 for the year end ECL position.
2. Exceptional items
Items that are significant by virtue of their size or nature,
which are considered non-recurring and which are excluded from the
underlying profit measures used by the Board to monitor and measure
the underlying performance of the Company are classified as
exceptional operating items. Exceptional operating items are
included within the appropriate Consolidated income statement
category but are highlighted separately in the notes to the
financial statements.
The following exceptional items have been included in the
Consolidated income statement.
2018 2017
GBP'000 GBP'000
-------------------------------------------------- --------- ---------
Administrative expenses:
Intangible assets impairment - (28,760)
Property, plant and equipment impairment - (2,185)
Inventories impairment - (541)
Impairment of loan receivable (10,067) -
(10,067) (31,486)
Impairment in carrying value of equity accounted
associate (848) (2,736)
Other income:
Gain on bargain purchase - 1,750
--------------------------------------------------- --------- ---------
(848) 986
-------------------------------------------------- --------- ---------
Total (10,915) (32,472)
--------------------------------------------------- --------- ---------
Administrative expenses
During 2018, the Board of Directors of ENVIA announced its
intentions to suspend operations. As a result of this decision,
Velocys impaired its loan to associate. The Company has recorded an
impairment of its loan to ENVIA of GBP10,067,000 (2017: nil).
At varying points during 2017, the carrying value of the
Company's net assets exceeded the market capitalisation indicating
a potential impairment at year end. This conclusion was supported
by the fundraise in January 2018, which was discounted to 10p per
share, and which prompted the share price to drop to 10p
immediately afterwards. As a result, an impairment of GBP31.5
million was recorded against a range of assets, as described in
note 7. The assets impacted by the impairment were Intangible
assets, Inventories and Property, plant and equipment. Critical
estimates and judgements are included in note 7.
Impairment in carrying value of equity accounted
associate
The Company is required to assess, at the end of each reporting
period, whether there is any indication that an asset may be
impaired. If any such indication exists, the entity shall estimate
the recoverable amount of the asset. During 2018, the Board of
Directors of ENVIA announced its intentions to suspend operations.
As a result of this decision, Velocys impaired its loan to
associate (detailed above) and the investment in associate account.
The Company has recorded an impairment of its investment in
associate in the amount of GBP848,000 (2017: GBP2,736,000).
Other income
In September 2017, Velocys increased its equity share and voting
rights at ENVIA following the exit of NRG from the joint venture,
for no consideration. The voting rights for the three remaining
joint venture members, including Velocys, were accordingly
increased to 33% each. The increased interest in the associate has
been acquired through an increase in an existing stake. Velocys
applied the 'cost approach', whereby there is a requirement to
assess the fair value of both the consideration and the net assets
being acquired. The fair value of the net assets being acquired was
determined by its value in use, assessed by the estimated future
cash flows discounted to their present value using an appropriate
pre-tax discount rate model. The Company has recorded a gain on
bargain purchase of GBP1,750,000 in respect of this step
acquisition during 2017 and no change has occurred with the Velocys
shareholding in ENVIA during 2018. See note 9 for more
information.
3. Revenue
The Company adopted IFRS 15 on 1 January 2018, using the full
retrospective transition method. The comparative figures in the
Company's audited financial statements for the year ended 31
December 2017 were not required to be restated as a result of the
adoption of IFRS 15.
The Company generates revenue through contracts in which it (i)
sells Fischer-Tropsch reactors, (ii) leases or sells
Fischer-Tropsch catalyst, (iii) provides license agreements and
(iv) performs engineering services. In general, contracts with the
Company provide a license agreement for the use of its intellectual
property associated with the catalyst, which is used in
specifically designed reactors. The majority of the Company's
revenue is derived from a small number of significant commercial
customers and development partners.
Determining whether the services provided are considered
distinct performance obligations can require significant judgment.
The Company's agreements, in some instances, could have a single
performance obligation which would result in the deferral of
revenue until the performance obligation is satisfied. This is the
case when the entity promises an integrated package of services and
where the customer is receiving a combined output (for example, an
engineering service that results in operational technology at a
particular site). In other instances, there will be no integration
service and each good or service will be considered separately.
When there are multiple performance obligations, revenue is
allocated to the respective performance obligations based on
relative transaction prices and is recognised as services are
delivered to the customer or in some instance, as when the catalyst
is leased, revenue is recognised over the estimated life of the
catalyst. Revenue is measured as the amount of consideration
expected to be received in exchange for the services delivered.
Revenue is recognised when the Company satisfies a performance
obligation by transferring promised goods or services to a
customer. In 2018, there was no reactor or licence fee revenue. In
instances in which catalyst is leased to the customer, sales income
is recognised monthly over the term of the arrangement. Otherwise,
the sales income related to sales of catalyst will be recognised as
the performance obligations are satisfied. Revenue from engineering
services is earned on a time and materials basis and is recognised
as the work is performed.
If the entity is providing a single performance obligation in
the form of an integrated set of activities, each contract is
assessed to determine if it meets the criteria for recognition over
time. This would require the contract to either transfer control of
the combined output over time or for the entity to have an
enforceable right of payment for the performance completed to date
for activities that do not create an asset with alternative use. In
2018, there is one contract that has been assessed as a combined
performance obligation and it was determined that none of these
criteria are met. As such, all consideration received has been
deferred and revenue will be recognised when the final project is
completed and control is transferred to the customer.
Contract modifications are accounted for prospectively or as a
cumulative catch-up adjustment depending on the nature of the
change. Revenue from engineering services is recognised as services
are delivered to the customer.
2018 2017
GBP'000 GBP'000
---------------------------------- -------- --------
FT reactor, catalyst and licence 508 484
Engineering services 156 275
----------------------------------- -------- --------
Total 664 759
----------------------------------- -------- --------
FT reactor, catalyst and license revenue in the amount of
GBP508,000 for the year ended December 31, 2018 consisted of lease
revenue related to the ENVIA agreement (2017: GBP484,000).
4. Finance income
2018 2017
GBP'000 GBP'000
---------------------------------- -------- --------
Interest income on bank deposits 76 61
Interest on loan to associate 732 669
Foreign exchange gains 185 -
---------------------------------- -------- --------
Total 993 730
----------------------------------- -------- --------
In 2018, the Company stopped recognising interest on loan to
associate as a result of the impairment of the investment in
ENVIA.
5. Other income
Other income consists of items such as sales of fixed assets,
contractual and legal settlements and any other operating income
recognised outside of commercial activities. Other income derived
from sales of fixed assets and non-commercial activities is
recognised on an accruals basis. Legal settlements are recognised
as income when a final judgement is received.
2018 2017
GBP'000 GBP'000
--------------------------------------------- -------- --------
Before exceptional items:
Return on deposits 22 -
Sale of fixed assets 14 163
---------------------------------------------- -------- --------
Total other income before exceptional items 36 163
Exceptional items (see note 2):
Gain on bargain purchase - 1,750
Total other income exceptional items - 1,750
---------------------------------------------- -------- --------
Total 36 1,913
---------------------------------------------- -------- --------
6. Loss per share
The basic loss per share is calculated by dividing the loss
attributable to owners of the parent company by the weighted
average number of ordinary shares in issue during the year.
2018 2017
-------------------------------------------- ------------ ------------
Loss attributable to owners of Velocys plc
(GBP'000s) (30,583) (54,603)
Weighted average number of ordinary shares
in issue 341,867,109 145,729,727
--------------------------------------------- ------------ ------------
Basic and diluted loss per share (pence) (8.95) (37.47)
--------------------------------------------- ------------ ------------
Diluted loss per share is calculated by adjusting the weighted
average number of shares in issue to assume conversion of all
potential dilutive shares. Share options have not been included in
the number of shares used for the purpose of calculating diluted
loss per share since these would be anti-dilutive for the period
presented. At the end of 2018 and 2017 there were no other
potentially dilutive instruments.
7. Intangible assets Significant accounting policies Cost or
valuation and amortisation
Goodwill
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Company's share of the identifiable
assets acquired and liabilities and contingent liabilities assumed
at the date of acquisition. Goodwill is not amortised. In the
balance sheet at 1 January 2017, GBP5,445,000 of the Goodwill
balance related to the acquisition of Velocys, Inc. in 2008 and
GBP2,668,000 to the acquisition of Velocys Project Solutions, LLC
(VPS) in 2014. The Goodwill balance was written down to nil in 2017
(see Impairment below).
In-process technology
In-process technology consists of purchased intangibles and
capitalised development costs and arose from the acquisition of
Velocys, Inc. and Velocys Project Solutions, LLC (VPS).
In respect of intangible assets acquired as part of a business
combination, the Company recognises these as distinct from Goodwill
provided, they are separable or arise from contractual or other
legal rights, and their fair value can be measured reliably.
Intangible assets are initially recognised at fair value, which is
regarded as their cost. They are subsequently held at cost less
accumulated amortisation and impairment losses.
Prior to 2017, amortisation was charged using the
units-of-production method based on useful economic lives of the
assets projected over future sales of 1,400 four-core reactors.
Amortisation began in 2015 based on the manufacture of the first
commercial reactors. From 1 January 2017, following an update to
the Company's business model, whereby it is concentrating on the
development of biorefineries rather than the licensing of
technology to third parties, the expected pattern of consumption of
the future economic benefits has been revised. The Company
estimates that the total useful economic life of the asset is 20
years, from the completion of the first two reactors in August
2015. Amortisation is charged on a straight-line basis over the
remaining estimated useful economic life of the asset, being 18.7
years from 1 January 2017 resulting in an increase of the
amortisation charge for the year of GBP1,577,000. Subsequently in
2017, the Company fully impaired the In-process technology asset,
as a result there was no amortization charge in 2018.
Research costs are recognised as an expense in the Income
statement as they are incurred.
Development costs, where the related expenditure is separately
identifiable and measurable, and management are satisfied as to the
ultimate technical and commercial viability of the project and that
the asset will generate future economic benefit based on all
relevant available information, are recognised as an intangible
asset. Capitalised development costs are carried at cost less
accumulated amortisation and impairment losses. Amortisation is
charged over periods expected to benefit, typically up to 20 years,
commencing with launch of the product. Development costs not
meeting the criteria for capitalisation are expensed as
incurred.
Patents, licences and trademarks
Patents and trademarks are recorded at cost less accumulated
amortisation and impairment losses. Amortisation is charged on a
straight-line basis over a period of 20 years, which is their
estimated useful economic life. Residual values and useful lives
are reviewed annually and adjusted if appropriate. The Company
decided to abandon certain non-core patents in 2018 and 2017. This
resulted in a loss on disposal of patents of GBP627,000 (2017: loss
of GBP152,000).
Customer contracts
Customer contracts are carried at cost less impairment losses.
The customer contract value that had been fully impaired in 2015
related to an expected project development fee negotiated during
the acquisition of VPS in 2014. Its value was contingent on
achieving a final investment decision on the Ashtabula project in
2015, which did not happen. The customer contracts were written off
in 2017.
Software
Purchased software is recorded at cost less accumulated
amortisation and impairment losses. Amortisation is charged on a
straight-line basis over its estimated useful life of three
years.
Impairment
Intangible assets are reviewed for impairment annually and
whenever events or changes in circumstances indicate their carrying
value may not be recoverable. To the extent carrying value exceeds
recoverable amount, the difference is recognised as an expense in
the income statement. The recoverable amount used for impairment
testing is the higher of value in use and fair value less costs of
disposal. For the purpose of impairment testing, assets are
generally tested individually or at a Cash Generating Unit (CGU)
level which represents the lowest level for which there are
separately identifiable cash inflows that are largely independent
of cash inflows from other assets or groups of assets. The Company
has one CGU on the basis that the key end use market is that of
synthetic fuels production. At this stage, the synthetic fuels
segment represents 100% of the business and therefore represents
the only material segment. Based on management's judgement, all
products and services offered within the operating segment have
similar economic characteristics.
An impairment loss in respect of Goodwill is not reversed. An
impairment loss in respect of intangible assets (excluding
Goodwill) is reversed if the subsequent increase in recoverable
amount can be related objectively to an event occurring after the
loss was recognised, or if there has been a change in the estimate
used to determine the recoverable amount. A loss is reversed only
to the extent that the asset's carrying amount does not exceed that
which would have been determined, net of depreciation or
amortisation, if no impairment loss had been recognised.
Were the fair value of the business to change in the coming 12
months, due to an increase or further decrease in the market
capitalisation of Velocys plc, the impairment disclosed in this
note would be reversed or the Company's assets would be further
impaired accordingly. Upon analysis performed at 31 December 2018,
the Company determined that no reversal of prior year impairments
was required or additional impairment required. This assessment
also considered the operating performance of the Company during
2018 which included the ENVIA plant shutting down but progress
being made on other projects, new funding obtained and customer
agreements signed. This 2018 performance, including both negative
and positive factors, was also not considered indicative of
incremental impairment or reversal of previous impairment.
Critical estimates and judgements
In assessing whether there is any indication that an asset may
be impaired, an entity shall consider, as a minimum, a number of
indicators of potential impairment. In 2018, the Company
considered:
-- At varying points during 2018, if the carrying amount of the
Company's net assets exceeded Velocys plc's market capitalisation;
and
-- Significant decreases in the market price of the asset; and
-- Significant adverse changes in the extent or manner in which an asset is being used.
Based on the 2018 analysis, the Company concluded that no
impairment or reversal of previous impairment was required.
To assess the recoverability of the intangible assets, the
recoverable amount is calculated at a CGU level, which represents
the lowest level for which there are separately identifiable cash
inflows that are largely independent of cash inflows from other
assets or groups of assets. As detailed in the accounting policy
set out above, the Company is considered to operate as a single
CGU. Due to the early stage of the Company's strategy, its
biorefinery development plans are still at too early a stage to
provide reliable revenue forecasts for long-term discounted cash
flow analysis. Consequently, the CGU's recoverable amount has been
determined based on its fair value less costs of disposal (fair
value), by reference to the total value of the parent company's
equity based on the AIM-listed shares of the parent company,
consistent with the impairment assessment performed in the prior
year.
In 2017, the Company recorded an impairment of its intangibles.
The Company considered that using a fair value less cost of
disposal value of GBP33.1m, based on the share price of 10 pence
from the equity raised on 15 January 2018 to the enlarged share
capital, for the 31 December 2017 impairment assessment would imply
that the combined business would be in excess of this at the date
of the fundraise in January 2018, following the cash injection. The
assessment reflected the decrease in the share price resulting from
the January 2018 fundraise, and applied a per share value of 10p to
the number of shares in issue at 31 December 2017. This gave a
valuation of GBP14.7m and, a control premium was not applied, as
most of the Company's significant investors were participating in
the January 2018 fundraise at the discounted price. As a result of
this fair value assessment, the Company recorded an impairment
charge of GBP31.5m in 2017.
The method of allocation of the impairment in 2017 was as
follows:
-- Write down Goodwill to nil, resulting in an impairment of GBP7,398,000.
-- The other assets in the CGU on a pro rata basis, based on the
carrying amount of each asset in the CGU. However, within this
allocation framework, each asset is reduced only to the highest
of:
(i) Its fair value less costs of disposal, if measurable.
(ii) Its value in use, if this can be determined.
(iii) Nil.
This resulted in the following impairment allocation in
2017:
-- In-process technology GBP20,610,000.
-- Patents, licence and trademarks GBP752,000.
-- Property, plant and equipment GBP2,185,000.
-- Inventories GBP541,000.
Patents,
licence
In-process and
Goodwill technology trademarks Software Total
2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------- --------- ----------- ----------- --------- --------
Cost
At 1 January 2018 7,398 23,681 2,159 96 33,334
Additions - - 349 - 349
Disposals - - (956) - (956)
Foreign exchange movement - - 28 - 28
--------------------------- --------- ----------- ----------- --------- --------
At 31 December 2018 7,398 23,681 1,580 96 32,755
--------------------------- --------- ----------- ----------- --------- --------
Accumulated amortisation
and impairment
At 1 January 2018 7,398 23,681 1,404 96 32,579
Charge for the year - - 96 - 96
Disposals - - (329) - (329)
Foreign exchange movement - - 52 - 52
--------------------------- --------- ----------- ----------- --------- --------
At 31 December 2018 7398 23,681 1,223 96 32,398
--------------------------- --------- ----------- ----------- --------- --------
Net book amount
At 31 December 2018 - - 357 - 357
--------------------------- --------- ----------- ----------- --------- --------
Patents,
licence
In-process and Customer
Goodwill technology trademarks contracts Software Total
2017 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------- --------- ----------- ----------- ---------- --------- --------
Cost
At 1 January 2017 8,113 25,942 2,248 1,473 101 37,877
Additions - - 335 - - 335
Disposals - - (282) - - (282)
Write-off of customer
contracts - - - (1,473) - (1,473)
Foreign exchange movement (715) (2,261) (142) - (5) (3,123)
--------------------------- --------- ----------- ----------- ---------- --------- --------
At 31 December 2017 7,398 23,681 2,159 - 96 33,334
--------------------------- --------- ----------- ----------- ---------- --------- --------
Accumulated amortisation
and impairment
At 1 January 2017 - 1,628 678 1,473 63 3,842
Charge for the year - 1,577 144 - 36 1,757
Disposals - - (130) - - (130)
Write-off of customer
contracts - - - (1,473) - (1,473)
Impairment 7,398 20,610 752 - - 28,760
Foreign exchange movement - (134) (40) - (3) (177)
--------------------------- --------- ----------- ----------- ---------- --------- --------
At 31 December 2017 7,398 23,681 1,404 - 96 32,579
--------------------------- --------- ----------- ----------- ---------- --------- --------
Net book amount
At 31 December 2017 - - 755 - - 755
--------------------------- --------- ----------- ----------- ---------- --------- --------
8. Property, plant and equipment
Property, plant and equipment is stated at historical cost, net
of depreciation and any provision for impairment. Cost includes the
original purchase price of the asset and the costs attributable to
bringing the asset to working condition for its intended use.
Depreciation is provided on all property, plant and equipment at
rates calculated to write off the cost, less estimated residual
value, of each asset on a straight-line basis over its expected
useful life, which for plant and machinery is three to ten years.
No depreciation is provided on land or assets under
construction.
Residual values and useful lives are reviewed annually. Values
are estimated using benchmark prices at the balance sheet date;
useful lives are estimated based on management expectations of
future project requirements and operational assessment of the state
of assets.
Assets are reviewed for impairment annually and also whenever
events or changes in circumstances indicate their carrying value
may not be recoverable. To the extent the carrying value exceeds
the recoverable amount, the difference is recorded as an expense in
the Income statement. The recoverable amount used for impairment
testing is the higher of the value in use and fair value less costs
of disposal. For the purpose of impairment testing, assets are
generally tested individually or at a CGU level, which represents
the lowest level for which there are separately identifiable cash
inflows, which are largely independent of cash inflows from other
assets or groups of assets. Property, plant and equipment were
included in the list of items to which an impairment was applied
subsequent to the impairment review (see note 7). The value of the
impairment was GBPnil (2017: GBP2,185,000).
Expenditure funded by research partners is only capitalised
where there are no significant rights acquired by the third party
over the asset and the asset has a clear enduring use beyond the
specific funding project, these are regularly reviewed.
Assets Plant
under and
construction Land machinery Total
2018 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------- ------------- -------- ---------- --------
Cost
At 1 January 2018 51 1,212 8,731 9,994
Additions 476 - 33 509
Disposals (4) - (1,492) (1,496)
Transfers to plant and machinery (16) - 16 -
Foreign exchange 25 73 553 651
----------------------------------- ------------- -------- ---------- --------
At 31 December 2018 532 1,285 7,841 9,658
----------------------------------- ------------- -------- ---------- --------
Accumulated depreciation and
impairment
At 1 January 2018 31 666 7,496 8,193
Charge for the year - - 563 563
Disposals - - (1,466) (1,466)
Foreign exchange 2 40 507 549
----------------------------------- ------------- -------- ---------- --------
At 31 December 2018 33 706 7,100 7,839
----------------------------------- ------------- -------- ---------- --------
Net book amount
At 31 December 2018 499 579 741 1,819
----------------------------------- ------------- -------- ---------- --------
Assets Plant
under and
construction Land machinery Total
2017 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------- ------------- -------- ---------- --------
Cost
At 1 January 2017 104 1,330 12,200 13,634
Additions 18 - 16 34
Disposals - - (2,545) (2,545)
Transfers to plant and machinery (64) - 64 -
Foreign exchange (7) (118) (1,004) (1,129)
----------------------------------- ------------- -------- ---------- --------
At 31 December 2017 51 1,212 8,731 9,994
----------------------------------- ------------- -------- ---------- --------
Accumulated depreciation and
impairment
At 1 January 2017 - - 7,997 7,997
Charge for the year - - 1,136 1,136
Disposals - - (2,462) (2,462)
Impairment 31 666 1,519 2,216
Foreign exchange - - (694) (694)
----------------------------------- ------------- -------- ---------- --------
At 31 December 2017 31 666 7,496 8,193
----------------------------------- ------------- -------- ---------- --------
Net book amount
At 31 December 2017 20 546 1,235 1,801
----------------------------------- ------------- -------- ---------- --------
As at 31 December 2018, the Company had entered into contractual
commitments for the acquisition of property, plant and equipment
amounting to GBPnil (2017: GBP2,000).
9. Investment in associate
This investment relates solely to Velocys' holding in ENVIA
Energy, LLC (ENVIA), located at 1021 Main Street, Suite 1000
Houston, TX 77002. ENVIA is a US company and is the holding company
for the project located in Oklahoma (the ENVIA project). The
Company first invested in ENVIA in 2014 as entry into a joint
venture to develop GTL plants in the US using a combination of
renewable biogas (including landfill gas) and natural gas. The
first of these plants, ENVIA Oklahoma City produced its first
product in 2017.
Associates are all entities over which the Company has
significant influence but not control, generally accompanying a
shareholding of between 20% and 50% of the voting rights. In
January 2016, Velocys entered into a financing arrangement with
ENVIA under which it contributed additional equity finance of $2.6m
and committed to provide loan finance of up to $9.3m. As a result
of the new funding arrangement, Velocys increased its ownership
share and was awarded additional voting rights, taking its share of
voting rights from 9% to 28%. The investment has since been
recognised as an Investment in associate, reflecting the
significant influence that Velocys holds in ENVIA, including voting
rights exceeding 20% and a seat on ENVIA's board. The Company
recorded the transaction as a step acquisition under the equity
method in 2016.
Investments in associates are accounted for using the equity
method of accounting from the date on which it becomes an
associate. Under the equity method, a cost approach is followed
whereby the cost of all purchases are accumulated, including
transaction costs, to determine the amount of the investment. The
notional purchase price allocation, including Goodwill arising on
the purchase of the additional stake, is calculated using fair
value information at the date when the additional interest is
acquired. Goodwill is calculated as the excess of the cost of the
investment over the Company's share of the net fair value of the
investee's identifiable assets and liabilities and included in the
carrying amount of the investment. During 2017 Velocys committed to
a series of extensions to the loan, which increased the facility to
$13.8m (GBP10.3m) (see note 10), however these extensions did not
result in a change in the Company's ownership interest or voting
rights. In September 2017, one of the joint venture partners, NRG,
withdrew its interest and assigned its ownership and voting units
to the remaining partners such that each was left with voting
rights of 33%. No consideration was given in respect of this
transfer. The Company recorded the transaction as a step
acquisition under the equity method in 2017.
The Company's share of post-acquisition profit or loss is
recognised in the Income statement based on its economic interest.
There are no post-acquisition movements in Other comprehensive
income in the Company's investments in associates. Distributions
received from an associate reduce the carrying amount of the
investment. The carrying amount of the investment is adjusted to
recognise the investor's share of the change in net assets of the
investee after the date of acquisition.
Gains and losses resulting from upstream and downstream
transactions between the Company and its associate are recognised
in the financial statements only to the extent of unrelated
investors' interests in the associates. Unrealised losses are
eliminated unless the transaction provides evidence of an
impairment of the asset transferred. Accounting policies of
associates have been changed where necessary to ensure consistency
with the policies adopted by the Company. There have been no
dilution gains and losses arising in investments in associates.
The Company determines at each reporting date whether there is
any objective evidence that the investment in the associate is
impaired. If this is the case, the Company calculates the amount of
impairment as the difference between the recoverable amount of the
associate and its carrying value and recognises the amount adjacent
to share of profit/(loss) of associates in the income
statement.
Critical estimates and judgements
For 2017 Change in ownership rights - fair value assessment of
ENVIA's net assets
In September 2017 Velocys increased its equity share and voting
rights at ENVIA following the exit of NRG from the joint venture,
for no consideration. The voting rights for the three remaining
joint venture members, including Velocys, were accordingly
increased to 33% each. The increased interest in the associate was
acquired through an increase in an existing stake. There is an
accounting policy choice available for the acquisition of an
associate in stages (step acquisition). Velocys applied the 'cost
approach', whereby there is a requirement to assess the fair value
of both the consideration and the net assets being acquired. The
fair value of the net assets being acquired was determined by its
value in use, assessed by the estimated future cash flows
discounted to their present value using an appropriate pre-tax
discount rate model, which requires the use of a number of key
assumptions. The Company recorded a gain on bargain purchase of
GBP1,750,000 in 2017 in respect of the step acquisition.
Impairment of the investment in ENVIA
The calculations use projections derived from cash flow
forecasts developed by Velocys, covering the two-year period from
2018 to 2019, and subsequently extrapolated to 2037, which is
considered to be the economic life of the asset, using the
estimated long-term growth rate. The cash flow forecast relies on
the intimate working knowledge of the plant that Velocys has gained
since the beginning of the start-up process. Ongoing uncertainties,
for example, with the availability and price of RINs, are taken
into account by using a number of different scenarios in the model.
IAS 36 requires that when performing an impairment review that risk
is incorporated into the impairment model. This can be done either
in the cash flows or through the discount rate. The Company has
incorporated risk through the cash flow forecasts by assessing a
number of potential outcomes and assigning a probability of the
likelihood of each of these outcomes occurring. The range of the
value in use based on these potential outcomes is significant,
which reflects the early stage nature of the venture. The key
assumptions included in calculating the recoverable amount are set
out below.
(i) Sales volume
The plant capacity is 250 barrels per day (bpd) production and
the model assumes 200 bpd average actual production at the plant
due to varied reduction in availability due to time out for
catalyst regeneration, catalyst change out or other maintenance. It
assumes that a large majority of the product will qualify for RINs.
There are offtake agreements in place for all products that exceed
five years for 100% of products produced and there is a six-month
contract in place for all of the available RIN credits generated;
therefore, the sales volume risk is solely based on operational
availability. As indicated above, sensitivity analysis reveals that
a decrease to 186 bpd from the 200 bpd modelled availability (which
is over 25 bpd below operating plan) would be required in order to
generate a material change in the cash flows. The impact of
aggressive sensitivity modelling of RIN availability does not have
a material impact on cash flows.
(ii) Sales price/RIN credits
The model is based on an oil price (WTI) of $57.50 per barrel
and a RIN price of $2.40 per gallon until October 2018 and then
$3.05 per gallon, with scenarios looking at an increase or
reduction in these prices of 10%. The prices of diesel, naphtha and
wax are all indexed to the oil price and/or rack pricing that is
highly correlated to the price of oil. Although volatility of oil
price could significantly vary revenues, the price has been
relatively stable for the past 12 months and, based on current WTI
futures, is projected to trade in this range for the remainder of
2018. There is a possibility within the range of modelled scenarios
for RIN pricing to result in a material impact on cash flows, but
not on a risk-adjusted basis, as the current forward outlook shows
price recovery.
(iii) Long-term growth rates
A long-term growth rate of 2% was used to extrapolate the cash
flows for the period from 2020 to 2037. This is based on the US
long-term GDP growth rates, the principal country in which ENVIA
operates, and in preference to an industry average rate, given the
early stage of development in the industry and resulting
uncertainty. A reduction in the growth rate to 0% would not result
in a material reduction in the gain on bargain recorded, or to the
impairment recognised.
(iv) Discount rate
The discount rate is based on an estimate of ENVIA's weighted
average cost of capital (WACC) being the average rate of return
ENVIA expects to compensate all its investors. ENVIA has both
equity and debt capital in the form of the loan from Velocys. At
September 2017 (step acquisition) and December 2017 (impairment
assessment) a post-tax discount rate ('discount rate') of 10.95%
was applied to the model. It is a reasonable assumption that the
discount rate might vary in a range up to 12.7%; this would not
result in a material change to the value of ENVIA's net assets.
Impairment assessments
In September 2018, the Board of Directors of ENVIA announced its
intentions to suspend operations at the Oklahoma City plant and to
undertake a review of strategic alternatives in order to preserve
the value inherent in the facility. This decision was driven by
financial circumstances following a leak at the plant, which was
established not to be caused by Velocys' FT technology, as
announced on 15 May 2018. ENVIA's investigation into the leak
identified the ancillary coolant system as the root cause, which
was independently verified through a third-party insurance company.
Based on the Board of Directors of ENVIA decision to suspend
operations, the Company determined that its investment in ENVIA
should be fully impaired. As a result, the Company recorded an
impairment of GBP848,000 in 2018.
During 2017 the first saleable products using Velocys' reactors
and catalyst had been produced to customer specification and the
offtakers had begun taking delivery of the waxes, diesel and
naphtha. Despite these milestones, ENVIA's recoverable amount,
based on its value in use, calculated using a discounted cash flow
model, had decreased significantly, predominantly driven by a lower
revenue forecast based on a revision of product and RIN pricing
produced by the Company. The recoverable amount of the investment
was determined by its value in use, assessed by the estimated
future cash flows discounted to their present value using an
appropriate pre-tax discount rate model, which required the use of
a number of key assumptions. These are included in the 'Change in
ownership rights - fair value assessment of ENVIA's net assets'
section above. The Company recorded an impairment of GBP2,736,000
in 2017.
Critical judgements
Share of ENVIA's identifiable assets and liabilities and its
share of profit and loss
Under the equity method the profit or loss of the investor
includes its share of the profit or loss of the investee. The
Company bases the calculation of its share of ENVIA's identifiable
assets and liabilities and its net losses on a value distribution
model developed by ENVIA that uses the LLC agreement agreed with
each of the other parties that hold ownership units. The resulting
percentage share differs to both the Company's proportion of
ownership units held in ENVIA and its proportion of voting units.
This value distribution is considered a more appropriate measure of
the Company's economic interest in ENVIA.
2018 2017
GBP'000 GBP'000
-------------------------- -------- --------
Investment in associate
At 1 January 2,580 5,865
Gain on bargain purchase - 1,750
Share of loss (1,717) (1,784)
Impairment (848) (2,736)
Foreign exchange (15) (515)
--------------------------- -------- --------
At 31 December - 2,580
--------------------------- -------- --------
Summarised financial information for ENVIA
Set out below is the unaudited summarised financial information
for ENVIA. The information below reflects the amounts presented in
the financial statements of ENVIA adjusted for differences in
accounting policies between the Company and ENVIA. ENVIA financial
statements are not prepared under IFRS but management does not
consider US GAAP to be materially different from IFRS for this
purpose. The unaudited amounts below represent the book values and
exclude any fair value adjustments that may be required.
2018 2017
(unaudited) (unaudited)
ENVIA Energy, LLC GBP'000 GBP'000
-------------------------------------------- ------------ ------------
Summarised balance sheet
Non-current assets 55,823 57,667
Current assets 2,609 2,978
Current liabilities (242) (435)
Non-current liabilities (17,231) (10,966)
--------------------------------------------- ------------ ------------
Net assets 40,959 49,244
--------------------------------------------- ------------ ------------
Summarised statement of comprehensive loss
Revenue 445 409
Loss from continuing operations (12,282) (7,851)
--------------------------------------------- ------------ ------------
Total comprehensive loss (12,282) (7,851)
--------------------------------------------- ------------ ------------
10. Trade and other receivables
Trade receivables represent assets that are held for collection
of contractual cash flows and those cash flows represent solely
payments of principal and interest. Other receivables consist of
vendor deposits and deferred costs associated with an ongoing
project. Loan receivable represents the outstanding loan and
related interest associated with the loan to ENVIA. The interest
receivable associated with the ENVIA loan is calculated using the
effective interest rate method. The Company's trade receivables and
loan receivable are classified and measured at amortised cost.
2018 2017
GBP'000 GBP'000
------------------------------------------- -------- --------
Trade and other receivables - non-current 281 -
Trade and other receivables - current 930 416
Loan receivable 3,474 10,284
-------------------------------------------- -------- --------
Total 4,685 10,700
-------------------------------------------- -------- --------
The Company applies the IFRS 9 simplified approach to measuring
ECL which uses a lifetime expected loss allowance for trade
receivables. To measure the expected credit losses, trade
receivables have been grouped based on shared credit risk
characteristics and the days past due. As part of the ECL analysis,
it was noted that trade receivables are considered to be both short
term and low credit risk and as such any provision would be
trivial.
Under the general approach, the Company recognises a loss
allowance on either a 12-month ECL or lifetime ECL. IFRS 9
prescribes three stages related to impairments. In stage 1, a
12month ECL is recorded as a result of probability of default are
possible within the next 12 months. In stage 2, a lifetime ECL is
recorded if a loans credit risk has significantly increased since
initial recognition and is not considered low. In stage 3, a
lifetime ECL is recorded if a loans credit risk increases to the
point where it is considered credit impaired. The changes in loss
allowance balances are recognised in profit and loss as an
impairment gain or loss. For credit exposure where there have not
been significant increases in credit risk since initial
recognition, a 12-month ECL is required. For credit exposure where
there have been significant increases in credit risk since initial
recognition, a lifetime ECL is required.
As required by IFRS 9, the Company determined that the ENVIA
receivable at 1 January 2018 was credit impaired (stage 3) based on
management's view of the current and expected circumstances,
requiring the Company to calculate a lifetime ECL. Two scenarios
were considered relevant at 1 January 2018 - the Upside scenario
with a probability weighting of 25% and a Downside scenario with a
probability weighting of 75%. In calculating the expected credit
loss rates, the company determined the probability of default using
historical loss rates, and adjusted (where necessary) for forward
looking data and information and the expected loss given default
(LGD) under each scenario to the outstanding loan balance (exposure
at default - EAD). Overall this resulted in an adjustment of
GBP2,274,000 to reflect the lifetime expected credit loss against
this receivable.
In September 2018, the Board of Directors of ENVIA announced its
intentions to suspend operations at the Oklahoma City plant and to
undertake a review of strategic alternatives in order to preserve
the value inherent in the facility, which resulted in the Downside
scenario now having a probability weighting close to 100%. At year
end a further review of the IFRS 9 ECL analysis for its loan with
ENVIA was performed, updating the key inputs mentioned above. Based
on the year end ECL analysis, the company recorded an additional
impairment on a lifetime ECL basis of GBP10,067,000. The
outstanding balance of the loan at 31 December 2018 is therefore
GBP3,474,000. The loan agreement with ENVIA resulted in a total
committed limit of GBP15,815,000 and was terminated in May
2019.
The loss allowance provision related to loan receivables as at
31 December 2018 reconciles to the opening loss allowance for that
provision as follows:
Loss allowance
provision
GBP'000
-------------------------------------------- ---------------
1 January 2018 - IAS 39 -
Increase in loan receivable loss allowance
recognised in impairment expense 2,274
--------------------------------------------- ---------------
Opening allowance at 1 January 2018 - IFRS
9 2,274
--------------------------------------------- ---------------
Increase in loan receivable loss allowance
recognised in impairment expense 10,067
--------------------------------------------- ---------------
At 31 December 2018 - IFRS 9 12,341
--------------------------------------------- ---------------
Presented below is a roll forward of the loan receivable balance
as at 31 December 2018.
Amortised Costs
GBP'000
-------------------------------------------- ----------------
1 January 2018 - IAS 39 10,284
Increase in loan loss allowance recognised
in impairment expense (2,274)
--------------------------------------------- ----------------
Opening balance at 1 January 2018 - IFRS 9 8,010
Drawdowns on loan during 2018 5,531
Increase in loan loss allowance recognised
in impairment expense (10,067)
--------------------------------------------- ----------------
31 December 2018 - IFRS 9 3,474
--------------------------------------------- ----------------
Impairment losses are presented in administrative expense in the
Consolidated income statement.
11. Inventories
Inventories are stated at the lower of cost or net realisable
value less provision for impairment. Cost is determined on a
first-in, first-out basis and includes transport and handling
costs. In the case of manufactured products, cost includes all
direct expenditure including production overheads. Where necessary,
provision is made for obsolete, slow-moving and defective
inventories. Items purchased for use in externally funded research
and development projects are expensed to that contract immediately.
Items held for the Company's own development are also expensed when
acquired. Items purchased for ongoing commercial sale are held in
inventory and expensed when used or sold.
2018 2017
GBP'000 GBP'000
------------------------------- -------- --------
Raw materials and consumables 1,043 31
Finished goods 395 357
-------------------------------- -------- --------
Total 1,438 388
-------------------------------- -------- --------
Raw material and consumables consist primarily of material that
will be consumed in the manufacturing of reactors and catalyst.
There were no impairments recorded with respect to inventory in
2018. In 2017, the Company impaired GBP340,000 of inventory which
was primarily the value of a remaining inventoried reactor and an
immaterial amount of catalyst. The Company impaired the reactor as
a reflection of the fact that it is unlikely the Company will find
a buyer for this reactor due to subsequent advances in the reactor
design. As part of the impairment allocation described in note 2
the Company impaired GBP541,000 of inventories in 2017.
12. Cash and cash equivalents and restricted cash
Cash and cash equivalents includes cash in hand, deposits held
at call with banks and other short-term highly liquid investments
with original maturities of three months or less.
2018 2017
GBP'000 GBP'000
--------------------------- -------- --------
Cash and cash equivalents 6,964 2,070
Restricted cash - 620
---------------------------- -------- --------
Total 6,964 2,690
---------------------------- -------- --------
Restricted cash related to a letter of credit provided to ENVIA
under the first amendment to the loan agreement. This was
determined to be restricted on the basis that for a certain period
the funds could only be accessed by ENVIA. In September 2018, the
Company received notice that ENVIA filed the required paperwork to
draw down the standby letter of credit. In October 2018, the
standby letter of credit was drawn down by ENVIA
Cash and cash equivalents is denominated in UK sterling and US
dollars, and restricted cash is denominated in US dollars, as
follows.
2018 2017
GBP'000 GBP'000
---------------------------- -------- --------
Cash and cash equivalents
UK sterling denominated 5,130 1,245
US dollar denominated 1,733 825
Euro denominated 101
Restricted cash
US dollar denominated - 620
----------------------------- -------- --------
Total 6,964 2,690
----------------------------- -------- --------
13. Trade and other payables: current
2018 2017
GBP'000 GBP'000
------------------------------------ -------- --------
Trade payables 853 604
Other taxation and social security 395 52
Accruals 1,770 2,242
Total 3,018 2,898
------------------------------------- -------- --------
Due to their short maturity, the fair value of trade and other
payables is not considered to be materially different to their
carrying values, based on discounted cash flows.
All trade payables are due in 60 days or less (2017: 60 days or
less).
14. Deferred revenue
The Company recognised the following liabilities associated with
contracts with customers:
GBP'000 Catalyst Reactor License Total
------------------------------------ --------- -------- -------- ------
At 1 January 2017 1,721 - - 1,721
Contract liabilities incurred - - - -
Revenue recognised in the period (483) - - (483)
At 31 December 2017 1,238 - - 1,238
------------------------------------- --------- -------- -------- ------
Contract liabilities incurred 1,334 1,949 1,199 4,482
Revenue recognised in the period (507) - - (507)
At 31 December 2018 2,065 1,949 1,199 5,213
------------------------------------- --------- -------- -------- ------
Contract liabilities consist of deferred revenue as a result of
instances in which the Company's receives payments received prior
to the satisfaction of the performance obligation. Revenue is
allocated to the respective performance obligations based on
relative transaction prices and is recognised as services are
delivered to the customer or in some instance, as when the catalyst
is leased, revenue is recognised over the estimated life of the
catalyst.
15. Post financial position events
The following events took place after 31 December 2018
Appointment of directors
The appointments of Philip Holland and Darran Messem as
Non-Executive Directors to the Board of Velocys plc was made on
1(st) January 2019.
Red Rock Biofuels amendments
The Company agreed a series of amendments in its licensing
contracts on 12(th) February 2019, with Red Rock Biofuels LLC
(RRB), regarding RRB's license of Velocys Fischer-Tropsch reactors
and proprietary catalyst for the RRB biorefinery under construction
in Lakeview, Oregon, USA. The amendments are at RRB's request and
allow it to complete the biorefinery on their desired timeline. The
amended agreement will see Velocys accelerate delivery of the first
of four reactors and first four charges of catalyst. It will also
reduce the firm commitment for reactors from six to four but RRB
will retain an option to acquire reactors 5 and 6 until the end of
2020, for delivery at the existing contract price. These changes
have a positive impact on Velocys' near-term cash flow of an
estimated GBP1.4 million and a decrease in future revenue of nearly
GBP3.8 million (out of a total contract value of approximately
GBP19.1 million). Should RRB exercise its option to purchase the
two additional reactors the total contract value will return to
approximately GBP19.1 million. RRB remains committed to purchase a
total of six charges of catalyst in 2019.
ENVIA Settlement
The Company has completed negotiations in April 2019 with one of
the remaining partners and landfill gas supplier to sell some of
the assets and terminate the loan which has removed the Company's
liens associated with ENVIA from the Company and release the site
to the landlord so that they can pursue their own business from the
site for a total of GBP3.26m. Please see note 10 for additional
information regarding the ENVIA loan. This will be referred
collectively as the ENVIA settlement and is considered a best
outcome for the loans made of GBP15.8m and a positive result from
the activity with ENVIA including all the operating and management
data secured from the operation of this full scale operational FT
plant.
16. Statutory information
Copies of the 2018 Annual report and accounts will be posted or
emailed to shareholders at least 21 days before the Company's
Annual General Meeting and may be obtained, free of charge for one
month from the date of posting, from the registered office of
Velocys plc, Harwell Innovation Centre, 173 Curie Avenue, Harwell,
OX11 0QG, UK, as well as from the Company's website
www.velocys.com.
17. Annual General Meeting
The Annual General Meeting (AGM) is to be held on 12 June 2019.
Notice of the AGM will be dispatched to shareholders with the
Company's Annual report and accounts.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR LFFELEAISLIA
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May 15, 2019 02:01 ET (06:01 GMT)
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