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Velocys PLC (VLS)

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Wednesday 18 September, 2019

Velocys PLC

Interim results

RNS Number : 6669M
Velocys PLC
18 September 2019
 

 

 

 

 

News release

 

Velocys plc     

 

("Velocys" or "the Company")

 

18 September 2019

 

Interim results for the six months ended 30 June 2019

Velocys plc (VLS.L), the sustainable fuels technology company, is pleased to announce its interim results for the six months ended 30 June 2019.

Henrik Wareborn, CEO of Velocys, said:

"2019 has been a positive year for the Company.  The demand for our Fischer Tropsch technology is growing on both sides of the Atlantic, which is why we have concentrated our efforts on project development and reactor manufacturing. These last six months have seen Velocys accelerate the move from concept to commercialisation - transitioning from research, development and testing, to focusing on commercial scale client delivery and operational excellence. 

 

We have delivered our first reactor and all catalyst charges to our client in Oregon (Red Rock Biofuels) and the manufacturing of the remaining reactors is advancing.  We are now focusing all our efforts on commercial delivery - for our client in Oregon and for our two projects in Mississippi, USA (Bayou Fuels) and Immingham, UK (Altalto).

 

None of this would have been possible without the recent support of our shareholders new and old along with the hard work and dedication that all our staff have put in to achieve the Company's goals.  I would like to make a personal thanks to Dr Pierre Jungels for his guidance of the Company over the years that he has been Chairman and wish him well for the future."

Operational Highlights:

·      Good progress has been made in delivering the sustainable fuels strategy.

·      The Bayou Fuels Mississippi project has been transformed during the period by changing the power source to solar and including CO2 capture, which has reduced the project's carbon intensity score, improving project returns significantly, creating an attractive differentiator for investment into this project.

·      The Immingham UK project has completed all pre-FEED work (Front End Engineering and Design) and has submitted its planning application.  Additional funding from our partners in the project, received post period end, has ensured that we can reach the FEED stage in the next few months.

·      Delivery of one reactor and all the catalyst to our client Red Rock Biofuels in the period.  Manufacture of the remaining reactors is underway.

Financial Highlights:

·      The commercial scale FT reactor demonstration in Oklahoma was safely and comprehensively concluded with complete decommissioning of the site, return of the two FT reactors to Velocys and sale of certain assets and return of the site to one of our JV partners for a total of 3.3m, which is now fully paid, with £1.7m paid during the period and £1.6m post period end.

·      Revenue of £22,000 (H1 2018: £392,000).

·      Operating loss of £5.2m, exceptional items of credit of £0.6m (H1 2018: £11.0m before exceptional items of £14.3m).

·      Cash* at period end £1.3m (31 December 2018: £7.0m).

·      H1 2019 cash outflow £5.1m (H1 2018: cash inflow £8.9m).

·      Fund raise of approximately £7m (before expenses) in July 2019 (post-period end).

·      Complementing commitments received by the Company from the Altalto Immingham waste-to-sustainable-fuels project's strategic partners, British Airways and Shell, of £2.8 million in total in July 2019 (post-period end).

* Defined as cash, cash equivalents and short-term investments.

Outlook

·      The revised, truly renewable focused profile of the Bayou Fuels Mississippi project is aiding discussions with partners and investors to progress to the next stage of development.

·      Advancing the Immingham UK project into FEED with industry partners Shell and British Airways and towards financial close in 2021 is a key objective.

·      Delivery of the remaining reactors in 2019 to our client Red Rock Biofuels is underway.

 

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

James Asensio

+44 20 7523 8000  

 

 

Camarco (Financial communications & PR)

Billy Clegg

Tom Huddart

+44 20 3757 4983

 

Field Consulting (General PR)

Robert Jeffery

 +44 20 7096 7730

 

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.

 

www.velocys.com 

 

 

 

 

Chairman's statement

Pierre Jungels, CBE

 

The new Executive team has re-positioned the Company to take advantage of the macro-trend of decarbonisation of fuels for heavy transport, for which we are uniquely well positioned.  Velocys' two principal waste-to-fuels projects, our Altalto Immingham facility in the UK and our Bayou Fuels Mississippi facility in the US have taken crucial steps forward, gaining support from our industrial partners as well as support from new and existing shareholders. 

 

The Altalto project will be Europe's first commercial scale waste-to-fuels plant and will take household waste as feedstock to produce sustainable fuel for aircraft, whereas the Bayou Fuels project will produce sustainable fuels for heavy duty trucks and aviation from waste woody biomass.  

 

The support from shareholders enabled Velocys to carry out a successful fundraising of £7 million in July, underpinned by a further £2.8 million from Shell and International Airlines Group, the owner of British Airways.

 

If we are to limit damaging global temperature rises and reach net zero emissions by the middle of the century, innovative and scalable solutions are urgently required. The recent fundraise was evidence of the growing appetite to invest in solutions that seek to overcome this challenge, by curbing carbon and particulate emissions in hard-to-decarbonise sectors. 

 

I am proud that Velocys has developed a proven, scalable technology for producing substantially lower-carbon and lower-emission heavy transportation fuels after recently completing commercial scale demonstrations in the US. Our facilities will take solid feedstocks - either waste woody biomass in the US or household and commercial waste in the UK - and convert it into sustainable fuel that can be used without adaptation in conventional combustion engines. Unlike agricultural plant based feedstocks, this will not require land use change. Indeed, the UK facility will divert waste from landfills so will have wider environmental benefits. 

 

As indicated at the Annual General Meeting, after thirteen years as Chairman and Director of Velocys, I will be retiring in December of this year. After proper due diligence we have decided to appoint Phil Holland, at present our Senior Independent Director (SID), as Chairman of the Board when I step down. Phil brings with him to the Chairman's position 40 years of experience in managing the front-end development, design/construction and start-up of major capital projects worldwide ensuring Velocys remains focused on capital discipline, and successful delivery of its US and UK projects.  Darran Messem will become Chair of the Audit and Risk Committee with immediate effect, and Sandy Shaw will return to Chair the Remuneration Committee and, in December, also become the SID when Phil Holland becomes Chairman. 

 

Having been Chairman for the past thirteen years, I have seen Velocys develop, refine and demonstrate a technology solution that society will not be able to do without in a net zero world. We are now ready for full-scale commercialisation and production at a time when demand for our solution, from Government, industry and the wider public, is growing. 

 

I wish all of the Executives and you as the shareholders all the very best in these exciting times and would like to thank you for your support over the years. 

 

Dr Pierre Jungels

Chairman

 

 

Chief Executive's Report

Henrik Wareborn

 

2019 has been a positive year for Velocys. The demand for our Fischer Tropsch technology is growing on both sides of the Atlantic, which is why we have concentrated our efforts on project development and reactor manufacturing. These last six months have seen Velocys accelerate the move from concept to commercialisation - transitioning from research, development and testing and on to commercial scale client delivery and operational excellence.

 

We have achieved this with zero hours lost due to Health, Safety, Social and Environmental (HSSE) issues. This is of paramount importance to me, which is why I have overseen a review and renewal of all our safety procedures as well as ensuring full Board disclosure of even the slightest near-miss incidents.

 

Looking at client service, in Oregon, USA we have delivered our first reactor and all catalyst charges to our client Red Rock Biofuels (RRB) and the manufacturing of the remaining reactors is advancing.  We are now focusing all our efforts on commercial delivery - for our client in Oregon and for our two projects in Mississippi, USA and Immingham, UK.

 

In Mississippi, we have concentrated our efforts on driving down the carbon intensity of the project while significantly improving the expected returns. The facility will be supplied by 100% fossil-free feedstock in the form of waste woody biomass, the power supply will be 100% renewable, and the CO2 emissions from our conversion process will be captured and sequestered.

 

The pre-Front End Engineering Design (FEED) learnings from this project were applied to the Altalto Immingham waste-to-fuels project, which significantly reduced the time and cost of the pre-FEED work, culminating in a validated planning application announced on 20 August. We expect to move into the FEED stage of the project in the next few months, subject to planning approval and funding commitments.

 

None of this would have been possible without the dedicated support from our shareholders. As noted by the Chairman, we were delighted by the strong demand for our recent Placing on the London AIM market, in which existing and new shareholders participated extensively. In particular, we were pleased to invite major Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) investors in this round.

 

We have completely re-designed our website, have decided to relocate our UK headquarters back to Oxford (in the Oxford Science Park) later this year and significantly upgraded our investor and public relations functions. Thanks to this, the announcement on the Immingham planning application attracted global media attention from the Sydney Morning Herald, to The New York Times, to Forbes in prominent editorial coverage.

 

Given the transition we have made from concept to commercialisation, and the expenditure this has entailed, we are naturally not cash-flow positive. However, cash-inflows from operations and the recent successful Placing have been significant.  In addition, our Administrative Expenses have reduced by more than half compared with H1 2018. For more detail on this, please see the Finance report below.

 

I continue to be impressed on a daily basis by the dedication and ingenuity of the transatlantic Velocys team, formed from two research organisations in the USA and UK over ten years ago.

 

There are undoubtedly challenges ahead but I am confident that activity so far this year has laid the firm foundations which will enable Velocys to become a global leader in delivering technology solutions for the next generation of sustainable transport fuels.

 

Financial review

 

 

Revenues

The company recognised revenue of £22,000 (H1 2018: £392,000).  The revenue was primarily from the provision of engineering services and Catalyst lease revenue related to the ENVIA agreement.

 

On 1 January 2018, the Company adopted IFRS 15.  In accordance with guidance in IFRS 15, most of the revenues of RRB will be recognised in future periods, as discussed in notes 5 and 12 to the accounts.

 

Operating losses were £5.2m before exceptional items of credit of £0.6m (H1 2018: £11.0m before exceptional items of £14.3m).  The decrease in operating loss is principally the result of a decrease in administrative expenses period over period.

 

 

 

Expenses and income

Administrative expenses before exceptional items reduced to £5.2m before exceptional items of credit £0.6m (H1 2018: £11.2m before and £25.5m after exceptional items).  The reduction is principally the result of reduced spending on overhead, consulting costs and the development of the Mississippi Biorefinery Project.

 

Other expenses were (£29k) (H1 2018: income £75k). This was principally the net result of a sale of equipment of £82k from the Oklahoma Project and lease interest expense (£111k) associated with IFRS 16.

 

Assets and cash

The net assets of the Company were £628,000 at 30 June 2019 (31 December 2018: £5.4m).  The decrease was principally the result of cash spent on the development of the Immingham UK waste-to-sustainable-fuels project; testing and analysis work on the Fischer-Tropsch reactors and the catalyst from the recently completed full-scale demonstration run in Oklahoma; completing the development capital fund-raising and initial stages of development of the Front End Engineering Design (FEED) for the Mississippi Biorefinery Project.

 

The Company used £5.8m cash in operations (H1 2018: £6.0m) principally in the pursuit of the commercial projects as set out above, which has driven the net loss of the Group.  The Company had a £295,000 increase in deferred revenue (H1 2018: £3.8m) principally as a result of the delivery of catalyst and a reactor in accordance with the agreements with Red Rock Biofuels LLC. The Company continues to carefully manage its underlying cost base and spend prudently on the implementation of its strategic projects.

 

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 US dollars.

 

Impairment

No impairment was recorded as of 30 June 2019.  In June 2018, the Company recorded an impairment of £14.3m with respect to the loan to ENVIA and £0.9m with respect to the investment into ENVIA.

 

Fundraises

·    No fund raises were completed during the period to 30 June 2019.

·    In July 2019 Velocys raised a total of £7.0m (before expenses).  We have received strong support from existing and new institutional investors.

·    This complements the commitments by Shell and British Airways to co-fund the remaining pre-FEED project work to bring the Immingham UK waste-to-sustainable-fuels project to the same state of pre-FEED completion as our Mississippi Biorefinery Project.

 

Net proceeds of the capital raising are being used to:

·    Complete the development capital fund raising and preparation of the FEED for the Mississippi Biorefinery Project;

·    Strengthen and extend the Company's intellectual property portfolio;

·    Analyse and test catalyst and Fischer-Tropsch reactors from the recently completed full-scale demonstration in Oklahoma; and

·    Fund the Company's working capital and central operating costs.

 

Future funding requirements

As discussed in note 1 below, the Company has prepared these statements on a going-concern basis although its forecasts show that the Company requires additional external funding within the 12-month forecast period to be able to continue as a going concern.

 

 

Henrik Wareborn

Chief Executive Officer

 

 

 

 

 

 

 

 

Consolidated income statement

for the six months ended 30 June 2019

 

 

 

6 months ended

 30 June 2019

(unaudited)

6 months ended

30 June 2019

(unaudited)

6 months ended

30 June 2019

(unaudited)

6 months ended

30 June 2018

(unaudited)

6 months ended

30 June 2018

(unaudited)

6 months ended

30 June 2018

(unaudited)

 

 

£'000

£'000

£'000

£'000

£'000

£'000

 

 

Before

Exceptional

 

Before

Exceptional

 

 

 

exceptional

items

 

exceptional

items

 

 

Note

items

(note 3)

Total

items

(note 3)

Total

Revenue

5

22

-

22

392

-

392

Cost of sales

 

(8)

-

(8)

(281)

-

(281)

Gross profit

 

14

-

14

111

-

111

Administrative expenses

 

(5,203)

577

(4,626)

(11,191)

(14,281)

(25,472)

Other (expense)/income

 

(29)

-

(29)

75

-

75

Operating loss

 

(5,218)

577

(4,641)

(11,005)

(14,281)

(25,286)

Share of loss of investments accounted for using the equity method

 

-

-

-

(1,674)

(861)

(2,535)

Loss before net finance (costs)/income

 

(5,218)

-

(4,641)

(12,679)

(15,142)

(27,821)

Finance income

6

20

-

20

2,792

-

2,792

Finance costs

 

-

-

-

(7)

-

(7)

Net finance income

 

20

-

20

2,785

-

2,785

Loss before income tax

 

(5,198)

577

(4,621)

(9,894)

(15,142)

(25,036)

Income tax credit

 

286

-

286

170

-

170

Loss for the financial year attributable to the owners of Velocys plc

 

(4,912)

577

(4,335)

(9,724)

(15,142)

(24,866)

Loss per share attributable to the owners of Velocys plc

 

 

 

 

 

 

 

Basic and diluted loss per share (pence)

7

(1.20)

 

(1.06)

(2.94)

 

(7.53)

 

 

 

 

Consolidated statement of comprehensive income

for the six month ended 30 June 2019

 

 

6 months

ended

30 June 2019

(unaudited)

6 months ended

30 June 2019

(unaudited)

6 months ended

30 June 2019

(unaudited)

6 months ended

30 June 2018

(unaudited)

6 months ended

30 June 2018

(unaudited)

6 months ended

30 June 2018

(unaudited)

 

£'000

£'000

£'000

£'000

£'000

£'000

 

Before

Exceptional

 

Before

Exceptional

 

 

exceptional

items

 

exceptional

items

 

 

items

(note 3)

Total

items

(note 3)

Total

Loss for the year

(4,912)

577

(4,335)

(9,724)

(15,142)

(24,866)

Other comprehensive (expense)/income

 

 

 

 

 

 

Items that may be reclassified to the income statement in subsequent periods

 

 

 

 

 

 

Foreign currency translation differences

(475)

-

(475)

(1,695)

-

(1,695)

Total comprehensive (expense)/income for the year attributable to the owners of Velocys plc

(5,387)

577

(4,810)

(11,419)

(15,142)

(26,561)

 

 

 

 

 

Consolidated statement of financial position

as at 30 June 2019

 

 

 

 

 

 

 

30 June 2019

(unaudited)

31 December 2018

(audited)

 

 

Note

£'000

£'000

Assets

 

 

 

 

 

 

 

 

 

8

499

357

 

 

2,940

1,819

 

9

-

281

 

 

 

3,439

2,457

Current assets

 

 

 

 

 

10

2,842

1,438

 

9

3,119

4,404

 

 

160

862

Cash and cash equivalents

 

 

1,278

6,964

 

 

 

7,399

13,668

Total assets

 

 

10,838

16,125

Liabilities

 

 

 

 

 

 

 

 

 

 

(765)

(3,018)

 

 

(145)

(289)

 

11

(3,283)

(2,092)

Deferred revenue

 

12

(4,554)

(579)

 

 

 

(8,747)

(5,978)

Non-current liabilities

 

 

 

 

 

14

(509)

(90)

Deferred revenue

 

12

(954)

(4,634)

 

 

 

(1,463)

(4,724)

Total liabilities

 

 

(10,210)

(10,702)

Net assets

 

 

628

5,423

Capital and reserves attributable to owners of Velocys plc

 

 

 

 

 

 

1,913

1,913

 

 

182,208

182,208

 

 

369

369

 

 

16,158

16,143

 

 

3,076

3,551

Accumulated losses

 

 

     (203,096)

(198,761)

Total equity

 

 

628

5,423

 

The financial statements were approved by the Board of directors and authorised for issue on 18 September 2019. They were signed on its behalf by:

 

 

 

 

 

 

 

Henrik Wareborn

Chief Executive Officer

 

Company number 05712187

 

 

Consolidated statement of changes in equity

for the six months ended 30 June 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Called up share

capital

Share premium

account

Merger

reserve

 

Convertible loan/'other'

reserve

Share-based payment

reserve

Foreign exchange

reserve

Accumulated

losses

Total

equity

 

 

 

 

£'000

£'000

£'000

£'000

£'000

£'000

 £'000

£'000

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 1 January 2019

 

1,913

182,208

369

-

16,143

3,551

(198,761)

5,423

Loss for the year

 

-

-

-

-

-

-

(4,335)

(4,335)

Other comprehensive expense

 

 

 

 

 

 

 

 

 

Foreign currency translation differences

 

-

-

-

-

-

(475)

-

(475)

Total comprehensive expense

 

1,913

182,208

369

-

16,143

3,076

(203,096)

613

Transactions with owners

 

 

 

 

 

 

 

 

 

Share-based payments - value of employee services

 

-

-

-

 

-

15

-

-

15

Total transactions with owners

 

-

-

-

-

15

-

-

15

Balance at 30 June 2019

 

1,913

182,208

369

-

16,158

3,076

(203,096)

628

 

 

 

Consolidated statement of cash flows

for the six months ended 30 June 2019

 

 

 

 

 

 

 

 

6 months ended

30 June 2019

(unaudited)

 

6 months ended

30 June 2018

(unaudited)

 

 

Note

£'000

£'000

 

Cash flows from operating activities

 

 

 

 

Operating loss

 

(4,335)

(25,036)

 

Depreciation and amortisation

8

344

137

 

Loss on disposal of intangible assets

 

-

422

 

Impairment of assets

 

-

15,142

 

Impairment of loan to associate ENVIA

9

-

-

 

Amortisation of leased inventory

 

-

33

 

Share-based payments

 

15

15

 

Changes in working capital (excluding the effects of exchange

 

 

 

 

differences on consolidation)

 

 

 

 

Trade and other receivables

 

(255)

(1,511)

 

Trade and other payables

 

(322)

1,125

 

Altalto Liability

11

(1,143)

-

 

Deferred revenue

12

295

3,827

 

Inventory

 

(693)

(310)

 

Cash consumed by operations

 

(6,094)

(6,156)

 

Tax credits received

 

286

170

 

Net cash used in operating activities

 

(5,808)

(5,986)

 

Cash flows from investing activities

 

 

 

 

Purchase of property, plant and equipment

 

(453)

(63)

 

Purchase of intangible assets

8

(211)

(136)

 

Payment from/(loan to) associate ENVIA

 

1,681

(3,773)

 

Equity investment in ENVIA

9

-

1,674

 

Interest received

6

20

-

 

Net generated from/(cash used) in investing activities

 

1,037

(2,298)

 

Cash flows from financing activities

 

 

 

 

Proceeds from issues of shares and convertible loan notes

 

-

17,322

 

Interest paid

 

(101)

(5)

 

Principle element of lease payments

 

(124)

-

 

Repayment of borrowings

 

(144)

(131)

 

Net cash (used in)/generated from financing activities

 

(369)

17,186

 

Net (decrease)/increase in cash and cash equivalents

 

(5,140)

8,902

 

Cash and cash equivalents at beginning of year

 

6,964

2,070

 

Exchange movements on cash and cash equivalents

 

(546)

(2,310)

 

Cash and cash equivalents at end of period

 

1,278

8,662

 

 

 

 

 

Notes to the unaudited interim financial statements

For the six months ended 30 June 2019

 

1.  General information, basis of preparation and accounting policies

Velocys plc operates through a number of subsidiaries in the UK and the US, and collectively they are referred to in these unaudited interim financial statements as the "Company" or "Velocys", with Velocys plc as "Velocys plc" or the "parent company".

 

The unaudited interim financial statements have not been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union (IFRSs as adopted by the EU), IFRS Interpretations Committee Interpretations, or the Companies Act 2006 applicable to companies reporting under IFRS and Article 4 of the IAS Regulation.  They do not include all the statements required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Company as at 31 December 2018.

 

Accounting policies

The unaudited interim financial statements have been prepared using the same accounting policies adopted in the Company's financial statements for the year ended 31 December 2018, except as described below.

 

One new standard has been adopted for the first time for the current period, IFRS 16 "Leases"The Company has updated its accounting policies to reflect the impact of this standard, which has not resulted in a restatement of prior period comparatives.

 

Items included in the unaudited interim financial statements of each of the Company's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in sterling (£).

 

Judgements and estimates

In preparing these unaudited interim financial statements, the significant judgements made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were as stated within the consolidated financial statements for the year ended 31 December 2018, except for IFRS 16 "Leases". See note 14.

 

Going concern

The unaudited interim financial statements have been prepared on the going concern basis, which assumes that the Company 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 the Immingham UK waste-to-renewable 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 over the next 12 months from the date of approval of the financial statements.

 

The forecasts show that the Company requires 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 biorefinery and Immingham UK waste-to-renewable jet fuel projects.

·      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 will be raised and have therefore prepared the financial statements on a going concern basis.

 

However, as at the date of approval of the unaudited interim financial statements no additional funding is committed beyond the £2.8m additional investment into the Immingham UK waste-to-renewable jet fuel project by our partners BA and Shell and the £7m fundraise announced and received in August 2019. Should additional funding not be secured, the Company 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's ability to continue as a going concern.

 

The unaudited interim 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

The Company has applied IFRS 16 "Leases" for the first time for the annual reporting period commencing 1 January 2019.

 

IFRS 16 was issued in January 2016. It will result in almost all leases being recognized on the balance sheet by lessees, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use leased item) and a financial liability to pay rents are recognised. The only exceptions are short-term and low-value leases. The impact of the adoption of IFRS 16 is further detailed in Note 14.

 

2.  Publication of non-statutory accounts

The unaudited interim financial statements presented in this document have not been audited or reviewed and do not constitute Group statutory accounts as defined in section 434 of the Companies Act 2006. Group statutory accounts for the year ended 31 December 2018 were approved by the Board of Directors on 14 May 2019 and delivered to the Registrar of Companies. The comparative figures for the year ended 31 December 2018 have been derived from the statutory accounts for that year. The auditors' report on those accounts, which was not modified, drew attention to the adequacy of the disclosure made in the financial statements concerning Velocys' ability to continue as a going concern, under section 498(2) or (3) of the Companies Act 2006.

 

3.  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 of Directors 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.

 

 

 

6 months ended

30 June

2019

(unaudited)

6 months ended

30 June 2018

(unaudited)

 

 

£'000

£'000

Administrative expenses:

 

 

 

ENVIA loan provision

 

-

(14,281)

Reversal of deferred revenue from ENVIA

 

577

 

 

 

577

(14,281)

Impairment in carrying value of equity accounted associate

 

-

(861)

 

 

577

(861)

Total

 

577

(15,142)

 

4.  Segmental information

Business segments

At 30 June 2019 the Company is organised as a world-wide business comprising a single segment.

 

Geographic segments

The Company's business operates in three main geographical areas. Revenue is allocated based on the country in which the customer is located.

 

 

 

 

6 months ended

30 June 2019 (unaudited)

 

6 months

ended

30 June 2018

(unaudited)

 

 

£'000

£'000

Europe

 

-

134

Americas

 

22

247

Asia Pacific

 

-

11

Total revenue

 

22

392

 

Revenue recognised during the six months ended 30 June 2019 is related to catalyst leasing and engineering services. 

 

 

 

5.  Revenue

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. 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.

 

 

 

 

6 months

ended

30 June 2019 (unaudited)

6 months

ended

30 June 2018 (unaudited)

 

 

£'000

£'000

FT reactor, catalyst and licence

 

-

247

Engineering services

 

22

145

Total

 

22

392

 

 

 

6.  Finance income

 

 

6 months

ended

30 June 2019

(unaudited)

6 months

ended

30 June 2018

(unaudited)

 

 

£'000

£'000

Interest income on bank deposits

 

20

23

Interest on loan to associate

 

-

533

Foreign exchange gains

 

-

2,236

Total

 

20

2,792

 

In 2018, the Company stopped recognising interest on loan to associate as a result of the impairment of the investment in ENVIA.

 

7.  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.

 

 

 

6 months ended

30 June 2019

(unaudited)

6 months ended

30 June 2018

(unaudited)

Loss attributable to owners of Velocys plc (£'000s)

 

(4,335)

(24,866)

Weighted average number of ordinary shares in issue ('000)

 

410,423

330,323

Basic and diluted loss per share (pence)

 

(1.06)

(7.53)

 

 

 

8.  Intangible assets

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. In the period to 30 June 2019, the Company did not abandon any non-core patents (H1 2018: £422,000 was recorded as a loss on disposal).

 

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.  The Company did not impair its intangibles for the six months ended 30 June 2019.  The table below presents a rollforward of intangible assets.

 

 

 

 

Patents,

 

 

 

 

In-process

licence and

 

 

 

Goodwill

technology

trademarks

Software

Total

6 months ended 30 June 2019 (unaudited)

£'000

£'000

£'000

£'000

£'000

Cost

 

 

 

 

 

At 1 January 2019

7,398

23,681

1,580

96

32,755

Additions

-

-

206

-

206

Foreign exchange movement

-

-

5

-

5

At 30 June 2019

7,398

23,681

1,791

96

32,966

Accumulated amortisation and impairment

 

 

 

 

 

At 1 January 2019

7,398

23,681

1,223

96

32,398

Charge for the year

-

-

67

-

67

Foreign exchange movement

-

-

2

-

2

At 30 June 2019

7,398

23,681

1,292

96

32,467

Net book amount

 

 

 

 

 

At 30 June 2019

-

-

499

-

499

 

 

 

 

 

Patents,

 

 

 

 

In-process

licence and

 

 

 

Goodwill

technology

trademarks

Software

Total

31 December 2018

£'000

£'000

£'000

£'000

£'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

7,398

23,681

1,223

96

32,398

Net book amount

 

 

 

 

 

At 31 December 2018

-

-

357

-

357

 

 

 

9.  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, deferred costs associated with an ongoing project or tax receivables from VAT refunds or R&D Tax credits.  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.

 

 

 

 

30 June 2019

(unaudited)

 

31 December 2018

(audited)

 

 

£'000

£'000

Trade and other receivables - non-current

 

-

281

Trade and other receivables - current

 

1,326

930

Loan receivable

 

1,793

3,474

Total

 

3,119

4,685

 

The Company applies the IFRS 9 simplified approach to measuring expected credit loss ("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 12 month ECL is recorded as a result of probability of default possible within the next 12 months.  In stage 2, a lifetime ECL is recorded if a loan's credit risk has significantly increased since initial recognition and is not considered low.  In stage 3, a lifetime ECL is recorded if a loan's 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. Based on the analysis performed, an adjustment of £2,274,000 was made to reflect the lifetime expected credit loss against this receivable. At 31 December 2018 a further review of the IFRS 9 ECL analysis for its loan with ENVIA was performed.  Based on the 2018 year end ECL analysis, the company recorded an additional impairment on a lifetime ECL basis of £10,067,000. 

  

Presented below is the loan receivable balance as at 30 June 2019.

 

 

Amortised Costs

(unaudited)

 

 

£'000

1 January 2019

 

3,474

Payments received against loan

 

(1,681)

30 June 2019

 

1,793

 

 

 

Impairment losses are presented in administrative expenses in the consolidated income statement.

 

 

 

10.        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.

 

 

 

30 June 2019

(unaudited)

 

31 December 2018

(audited)

 

 

£'000

£'000

Raw materials and consumables

 

1,824

1,043

Work in progress

 

            599

-

Finished goods

 

419

395

Total

 

2,842

1,438

 

The Company had no impairments related to inventory for the period ending 30 June 2019. In the period ended 30 June 2019, the Company reversed the 2017 impairment of an inventory reactor in the amount of £311,000. This reactor was sold to Red Rock Biofuels in the period and recorded in deferred revenue.

 

 

 

11.        Other liabilities

Other liabilities include the following:

 

·      Development funding received from industry partners and the UK Department for Transport related to the next stage of the Immingham UK waste to jet project, £952k at 30 June 2019 (31 December 2018: £2.1m).

·      The current portion of lease liabilities in accordance with IFRS 16, £412k, at 30 June 2019 (31 December 2018: nil).

·      Accruals related to internal compensation and purchases of £1.9m at June 30, 2019 (31 December 2018: £1.8m).

 

 

 

12.        Deferred revenue

The Company recognised the following liabilities associated with contracts with customers:

 

 

 

 

 

 

£'000

 

Catalyst

Reactor

License

Total

At 1 January 2018

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 incurred

369

526

-

895

   Revenue recognised in the period

(600)

-

-

(600)

At 30 June 2019 (unaudited)

1,834

2,475

1,199

5,508

 

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.

 

 

 

13. Movement in equity

Share capital and share premium include ordinary shares in Velocys plc issued to shareholders and options that have been exercised by employees and associated consultants.

 

 

Number of

shares*

(thousands)

 

Ordinary

shares

£'000

 

Convertible    loan/'other'

reserve

 

 

Share Premium

(restated)

 

£'000

£'000

At 1 January 2018

146,860

1,468

149,964

9,421

Proceeds from share issues

243,463

243

22,397

-

Convertible loan notes

18,000

180

8,820

(9,000)

Interest on convertible loan notes

2,100

22

1,027

(421)

At 31 December 2018

410,423

1,913

182,208

-

At 30 June 2019 (unaudited)

410,423

1,913

182,208

-

 

*   All shares have been issued, authorised and fully paid.

 

For the six months ended 30 June 2019, the Company did not issue any shares or complete any fundraises, which would have resulted in the issuance of shares.  However, the Company did complete a fundraise in the second half of 2019. See note 16.

 

 

 

14. Changes in accounting policies

This note explains the impact of the adoption of IFRS 16 Leases on the Company's financial statements and discloses the new accounting policies that have been applied from 1 January 2019.

 

The Company has adopted IFRS 16 retrospectively from 1 January 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.

 

The Company's leasing activities

The Company leases various offices and equipment. Rental contracts are typically made for fixed periods of 3 to 8 years but may have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants.

 

Until the 2018 financial year, leases of property, plant and equipment were classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.

 

From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Company. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

 

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: fixed payments (including in-substance fixed payments), less any lease incentives receivable.

 

The lease payments are discounted using the incremental borrowing rate.  The incremental borrowing rate represents the rate that the Company would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

 

Right-of-use assets are measured at cost comprising the following:

 

·      The amount of the initial measurement of lease liability

·      Any lease payments made at or before the commencement date less any lease incentives received

·      Any initial direct costs, and

·      Restoration costs.

 

Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise of leases with a value less than £5,000.

 

Extension and termination options are included in certain property and equipment leases. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Company and not by the respective lessor. Approximately 0% of the total lease payments made in 2019 were optional.

 

Adjustments recognised on adoption of IFRS 16

On adoption of IFRS 16, the Company recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 20%.

 

At 1 January 2019, the Company didn't have any leases that would be classified as finance leases.

 

 

 

 (unaudited)

 

 

 

£'000

Operating lease commitments disclosed as at 31 December 2018

 

1,592

Discount based on incremental borrowing rate at 1 January 2019

 

(505)

(Less): short term/low value leases recognised on a straight line basis as expense

 

(42)

 

Lease liability recognised as at 1 January 2019

 

1,045

 

 

 

 

Of which are:

 

 

 

Current liabilities

 

412

 

Non-current liabilities

 

633

 

 

 

1,045

 

The associated right-of-use assets for property leases were measured on a retrospective basis as if the new rules had always been applied. Other right-of use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

 

The change in accounting policy affected the following items in the balance sheet on 1 January 2019:

 

·      Property, plant and equipment - increase by £1,045,682

·      Right-of-use assets - increase by £0

·      Deferred tax assets - increase by £0

·      Prepayments - decrease by £0

·      Borrowings -  decrease by £0   

·      Lease liabilities - increase by £1,045,682

 

 

15. Post period end events

On 15 July 2019, Velocys plc announced a gross fundraise of £7 million (£6.6 million net of fees and expenses).  This constitutes a firm placing of 233,333,335 Ordinary shares at a placing price of 3 pence per share with certain existing shareholders and new institutional investors, representing 36.2% of the enlarged Ordinary share capital.

 

Net proceeds of the capital raising are being used to:

·      Complete the development capital fund raising and preparation of the FEED for the Mississippi Biorefinery Project

·      Strengthen and extend the Company's intellectual property portfolio

·      Analyse and test catalyst and Fischer-Tropsch reactors from the recently completed full scale demonstration run in Oklahoma, and

·      Fund the Company's working capital and central operating costs.

 

The placing complements commitments received by the Company from the Immingham UK waste-to-sustainable-fuels project's strategic partners, British Airways and Shell, of £2.8 million in total.

 


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 [email protected] or visit www.rns.com.
 
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