Annual Report and - Hydrodec

Hydrodec Group plc

Annual Report and Financial Statements 2015

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Overview & 2015 Highlights

Contents

Strategic Report1 Overview & 2015 Highlights

2 At a Glance

3 Chairman’s Statement

4 Market Opportunity

5 Our Strategy

6 Our Business

7 How Our Business Works

8 Executive Review

11 Key Performance Indicators

12 Principal Risks and Uncertainties

Governance14 Board of Directors

16 Report of the Directors

20 Corporate Governance Report

24 Remuneration Committee Report

27 Audit Committee Report

Financial Statements28 Independent Auditor’s Report

to the Members of Hydrodec Group plc

29 Consolidated Income Statement

29 Consolidated Statement of Comprehensive Income

30 Consolidated Statement of Financial Position

31 Consolidated Statement of Cash Flow

32 Consolidated Statement of Changes in Equity

33 Notes to the Financial Statements

56 Company Balance Sheet

57 Company Statement of Cash Flows

58 Company Statement of Changes in Equity

59 Notes to the Company Financial Statements

Other Information63 Directors and Advisers

Hydrodec Group plc is a clean-tech industrial oil re-refining Group with operations in the USA and Australia. We apply proprietary technology to re-refine used oil to produce, market and distribute SUPERFINETM transformer oil and naphthenic base oil.

Our technology is a proven, highly efficient, oil re-refining process, initially targeted at the multi-billion-dollar market for transformer oil used worldwide in electricity generation. Used oil is currently processed at two plants in Canton, Ohio, USA and Bomen, New South Wales, Australia respectively, with distinct competitive advantage. Our process delivers very high recoveries (> 99%), producing transformer oil that tests ‘better than new’ at competitive cost and without environmentally harmful emissions. The process also completely eliminates PCBs, a toxic additive banned under international law.

1Hydrodec Group plc


Financial Statements

Governance

Strategic Report

Strategic summary

• 2015 was a challenging year for the Company due to the collapse in the world oil price and difficult market conditions particularly in the UK, whilst in the USA the Company faced delays and cost overruns in the commissioning of its rebuilt and expanded plant at Canton. These factors were combined with senior management changes and the need to put in place additional working capital facilities.

• The Company has acted decisively in response to these challenges. Decisions were made at the end of 2015 to grow our core transformer oil re-refining business in order to drive the Company to profitability in 2016 through a rigorous focus on our market-leading transformer oil re-refining technology, cost savings and a successful ramp-up of sales in the USA. This is being undertaken against a current increase in the price for both base oil and transformer oil products in the US market.

• All six trains in Canton are now operational. Product has achieved the key ‘500hr’ oil status industry test, and Canton achieved record monthly production in February 2016 followed by a further monthly production record of 2.56 million litres in March 2016.

• Commenced tolling under the outsourcing arrangement with Southern Oil in Australia in April 2015; product achieving ‘500hr’ oil status.

• In view of the current oil price environment and its economic impact on the UK collection business, the Group disposed of Hydrodec’s UK Operations, including borrowings of approximately £1.2 million, in March 2016 for £1, whilst retaining an economic interest in the proposed UK lubricant oil re-refining project and, to the extent the project is developed, an agreement to recover the Company’s incurred costs associated with the re-refinery.

Financial summary

• Total income decreased to US$43.8 million (2014: US$54.7 million).

• Total sales volumes increased to 62.1 million litres (2014: 48.6 million litres), with the acquisition of the business and assets of Eco-Oil Limited in April 2015.

• Gross profit of US$1.1 million (2014: US$14.3 million); reflects limited revenues from the Canton facility, lost production in Australia following its relocation to Bomen, and the adverse impact of the lower global oil price on the UK recycling business.

• Group Operating EBITDA(1) loss, after restructuring costs and recommissioning, of US$12.8 million in 2015 (2014: US$1.6 million gain); reflects production delays in the US, costs associated with the relocation of operations in Australia; the effects of the decline in the world oil price and changing market conditions on margins in the UK recycling business.

• In order to reinforce the Company’s working capital headroom, on 11 April 2016, the Company entered into an agreement to extend its £2 million secured second working capital facility with Andrew Black, a Non-Executive Director, which was announced on 1 December 2015, by a further £2.25 million to £4.25 million.

(1) EBITDA excluding growth expenditure of US$1.8 million (2014: US$2.3 million), including acquisition costs of US$0.4 million (2014: nil).

2Hydrodec Group plcAnnual Report and Financial Statements 2015

At a Glance

We apply proprietary technology to re-refine used oil to produce, market and distribute SUPERFINETM transformer oil and naphthenic base oil at the following locations:

USA Australia

Plant location

Canton, Ohio Bomen, New South Wales

Process / products Re-refining used transformer oil to produce SUPERFINETM transformer oil and naphthenic base oil

Re-refining used transformer oil to produce SUPERFINETM transformer oil and naphthenic base oil

Existing operating capacity Nameplate capacity of 45 million litres of SUPERFINETM per annum

Nameplate capacity of 6.5 million litres of SUPERFINETM per annum under outsourced tolling arrangement

Partners / value chain As at 31 December 2015, G&S is a 25% partner in Hydrodec of North America, having initially invested in 2013. G&S is a leading New Jersey-based electricity transformer recovery services group

Outsourced tolling arrangements with Southern Oil Refinery and its partner JJ Richards who are leading collectors and re-refiners of used lubricant oils in Australia

Future growth opportunities Key opportunities to build-out our transformer oil re-refining business in the US, Mexico, Japan, the EU and United Kingdom

45million litres SUPERFINE™

6.5million litres SUPERFINE™

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Governance

Strategic Report

Chairman’s Statement

2016 will be an important year for Hydrodec. As a Board, our focus is clear. Following three months of corporate restructuring, we are committed to drive the Company to profitability through a rigorous focus on our market-leading transformer oil re-refining technology and operational performance.”

December 2015 saw the beginning of an intensive three-month turnaround programme for the Group driven by the Company’s Chief Executive, Chris Ellis. As part of this process, the Board undertook a detailed strategic review of the Company’s UK collections business and proposed UK lubricant oil re-refining project, following a significant collapse in the Brent crude oil price from US$115 per barrel at the time we acquired the business and assets of the OSS Group in September 2013 to US$37 per barrel on 31 December 2015. The Board reviewed all available options and concluded that, in the challenging market conditions, despite the implementation of extensive restructuring and cost-saving measures during 2015, it was in the best interests of the Company to dispose of those operations, which it did in March this year. The Board considers that this divestment, whilst retaining a material economic and strategic interest in the UK lubricant oil re-refining project and, to the extent the project is developed, an agreement to recover the costs we had invested in the project, was a necessary step and best promotes shareholder value, addressing, as it did, the significant downside risk to the Group from the UK Operations.

By concentrating on significantly growing our market-leading transformer oil technology and business, our objective is to grow that business within the US$2 billion+ global transformer oil market. The Canton plant achieved record levels of production in March 2016 and we expect to improve significantly on this during 2016. Continued operational performance, product quality in both base oil and transformer oil, supported by a strong marketing team, underpin our strategy for growth in the US. Record levels of production confirm the improvement in operability and rateability of the plant as we continue to rebuild market share in the US, increase the production ratio of transformer oil against base oil and build margins. We also continue to review opportunities to develop re-refining capability in other jurisdictions.

The appointment of Chris Ellis as Acting Chief Executive in December 2015 and then as Chief Executive in March 2016 reflects the whole Board’s focus on execution, delivering improved operational performance and efficiencies and driving the Company to profitability. The appointment of Dr. Caroline Brown to the Board as Senior Independent Director and Chair of the Audit Committee during the year also strengthens our financial governance framework. Caroline brings an important financial and governance experience to the Board and reinforces the Board’s ability to support the development of the Hydrodec business going forward. I would also like to take this opportunity to thank Alan Carruthers, who is retiring from the Board, for his commitment to Hydrodec and the valuable and informed contribution he has made over the last four years. As a long-standing member of the Board, he has been integral to the development of Hydrodec. We all wish him well for the future.

We remain confident that the rebuilt and expanded Canton plant has a unique market proposition and is well placed in 2016 to leverage the production of the highest quality transformer oil produced in the US. As we continue to turn the corner our focus is on delivering operational performance and efficiencies, continuing to implement a rigorous cost reduction programme, and on driving the Company to a profitable 2016.

Lord MoynihanChairman12 April 2016


North America

Development Growth

Mar

ket V

olum

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Maturity Decline

ROW

Europe

Asia-Paci�c

Market Opportunity

Transformer oil market life cycle, by geography

Source: Expert Interviews, MarketsandMarkets Analysis

1 Source: MarketsandMarkets, ‘Transformer Oil Market by Type (Mineral, Naphthenic and Paraffinic), by Application (Small Transformers, Large Transformers, Utility & Others), & by Region (Asia-Pacific, North America, Europe, ROW) – Global Trends & Forecasts to 2020’

2 Source: Allied Market Research, ‘World Transformer Oil Market – Opportunities and Forecasts, 2014-2020’3 Source: Markets and Markets: ‘Transformer oil market, Global Industry Trends & Forecast to 2018’

Transformer oil

Transformer oils are mineral insulating oils which are used predominantly in electrical power transformers. Transformer oils are stable at high temperature, and serve two important functions in a transformer, suppression of arcing and dissipation of heat generated in the transformer. Transformers are found in every aspect of an electricity transmission system and have enabled the development of the high voltage, oil-filled power units that facilitate the electricity transmission and distribution systems in use today. Transformer oils are critical to that power infrastructure.

The marketThe global transformer oil market is a specific market within the broader oil market. It is projected to grow from US$1.98 billion in 2015 to US$2.79 billion by 2020 at a compound annual growth rate (CAGR) of 7.14%1. Indeed, other research has projected that this may reach as high as US$3.4 billion by 20202. In terms of volume, the global transformer oil market was estimated at 1.4 billion litres in 2014 and is projected to rise to 1.8 billion litres in 20183.

Asia-Pacific and North America remain key markets. The extensive demand for electricity, especially in China and India, is driving the expansion of electricity networks. The installation and upgrade of transformers in turn increase the demand for transformer oil. These growing transmission and distribution networks across the globe are a key driver for transformer oil market growth. Conversely, in mature markets, such as North America and Europe, the focus is on replacing old/mature transformers at the end of their useful life and on developing new ‘green’ technologies. By way of illustration, it is estimated that 70% of all US transformers are more than twenty-five years old.

5Hydrodec Group plc



Governance

Strategic Report

Our Strategy

Our strategic priorities

In operating our business model, our strategic priorities are:

1 Safe, reliable and compliant operations We are focused on maintaining safe and healthy working conditions for our employees and for the communities near to our operations, on protecting the environment and on promoting a lower-carbon future.

2 Organic growth Our priority is to drive returns and organic growth through profitable US and Australian transformer oil re-refining businesses. In the short term, our focus is on maximising the production and sale of transformer oil into the US market from Canton and the volumes processed under our outsourced tolling arrangements in Australia.

3 Rigorous focus on delivery We will drive performance, efficiency and growth through a rigorous focus on health & safety, operational performance, financial management and delivery.

4 Exploiting future market opportunities The projected US$2.79 billion global market for transformer oil by 2020 offers a significant market opportunity to scale and replicate our re-refining businesses both in the US and in other jurisdictions, and whether directly or through the licensing of our technology.

5 Risk reduction / value-chain consolidation Our priority is to deliver business growth through our proven technology, with a specific focus on risk reduction through partnership, collaboration and/or integration along value chains.

6 IP protection We are focused on protecting and securing appropriately our proprietary technology and intellectual property. Whilst our existing US patent for transformer oil re-refining expires in September 2016, we filed a further international patent application on 2 July 2014 relating to operating and design innovations to our transformer oil technology and with national phase applications filed in Australia, Europe, Japan, Mexico and USA.


Our Business

Our objective is to deliver significant growth, profitability and long-term shareholder value through the re-refining of used oil to produce and sell sustainable, high quality oils.

Our objective: To deliver significant growth, profitability and long-term shareholder value

Our business: The re-refining of used transformer oil to produce and sell sustainable, high quality oils

Our culture: Safe, reliable and compliant operations

Leadership: Entrepreneurial management subject to oversight by a strong and experienced Board

Market drivers:Transformer oil critical to global power infrastructure

High quality transformer oil margins among best available in oil industry

Increasing importance of re-refining in waste management

Key differentiators:

Proven, proprietary ‘best in class’ technology

High recoveries, sustainable & access to carbon offset credit

High quality products for original purpose, as good or better than original

Integrated feedstock and value chain business model

Strategic priorities:Organic growth in USA and Australia

Rigorous focus on performance & delivery

IP ProtectionRisk reduction/ value chain consolidation

Delivering profitability

Growth accelerators:Scaling re-refining operations in existing & new markets

Entry into new markets through joint venture/licensing of proprietary technology

Value creation

Our business model

Our re-refining business model is founded on:

Proven proprietary technology

Integrated value chains to secure the supply of competitively priced feedstock.

Advantaged locations in the USA and Australia with proximity to markets.

Defined sales channels to a globally short market for transformer oil.

The availability of attractive margins from the sale of high quality transformer oil.

Delivering profitability and value creation

Key differentiator Key drivers Output

7Hydrodec Group plc



Governance

Strategic Report

How Our Business Works

Transformer oil re-refining process.

Our proprietary, best in class technology re-refines used naphthenic transformer oil, both non-PCB and PCB-regulated, into sustainable, high quality SUPERFINETM oils for re-use for original purpose.

In 1992, the Australian government-backed Commonwealth Scientific and Industrial Research Organisation (‘CSIRO') conducted research for the nation’s power industry to find a way to deconstruct the potential cancer-causing organic compounds, polychlorinated biphenyls (PCBs) from used naphthenic transformer oil. The result was nothing short of remarkable:

• The hydrogenation process cleans and restores the hydrocarbon molecule.

• An almost zero emission process (de minimis in the US) producing no hazardous waste products.

• Industry-leading recovery rates (>99%), and good operating efficiency.

• A clean, consistent transformer oil product which is ‘as good if not better’ than new transformer oil, and meets all relevant industry standards for unused transformer oil.

Hydrodec was formed in 2001 with global rights to commercialise the technology and the knowledge behind it. The technology is currently in operation at Hydrodec’s two facilities at Bomen, New South Wales, Australia and Canton, Ohio, USA. The Hydrodec hydrogenation re-refining technology is a catalytic process. Used naphthenic oil is added into a recirculating hydrogen stream. Hydrodec’s patented hydrogen treatment mix is heated to a reaction temperature in a direct contact heater and this mix is passed down through a hydro-treating catalyst within the main reactor. This is where the

refining occurs. The catalyst is a spectator to the reaction and is neither consumed nor wasted. The mix leaves the catalyst and the excess Hydrogen is separated and recirculated back to the beginning of the process for re-use. The refined oil is then quenched, water washed and de-watered to produce sustainable, high quality SUPERFINETM oils for re-use for original purpose.

This is a re-refining process. Refining oil restores the molecular structure of the base oil molecules. Requiring moderate heat and pressure with the presence of a catalyst and hydrogen, refining is a hydro-treatment that removes acids, oxidation products and hetero atoms.

Feedstock

Transformer oilUsed transformer oil sourced directly from utilities, or indirectly from hardware salvage, repair and service companies and used oil collectors/traders.

Cost influenced by prevailing diesel price (given potential alternative uses of used oil)

and polychlorinated biphenyls (PCB) contamination levels (higher PCB material available at nil/negative cost).

Our technology

Re-refining process

Transformer oilHydrodec’s proprietary and industry-leading hydrogenation re-refining technology. The process deconstructs PCBs and recovers more than 99 per cent of the used oil as new oil with de minimis air emissions and no hazardous waste by-products.

Sales

Transformer oilPremium SUPERFINETM transformer oil sold directly to original equipment manufacturers (‘OEMs') (i.e. manufacturers of transformer hardware for ‘first fill’) and utilities (new oil replacing old oil), or indirectly via distributors.

Premium SUPERFINETM base oil sold directly or indirectly to other industrial users.

Price influenced by ICIS benchmark index for Pale 60 base oil.

Once used oil can be returned as feedstock


Executive Review

“The challenges faced by many companies in our industry in 2015 are well known and documented. In many ways the extended commissioning of the Canton plant, the relocation of the Australian operations in the first half of the year coupled with the decline in the price of oil from the end of 2014, created a ‘perfect storm’ for the Group. Responding to this environment the Company took decisive measures at the end of 2015 to turnaround Hydrodec and set it on a firm, growth strategy for profitability in 2016.”

Strategic developments(i) Disposal of UK waste oil collections business (‘HUK') and proposed

UK re-refinery project (‘HRR')In late 2015 and January 2016, the Company undertook a detailed strategic review of its UK waste oil collections business and proposed UK lubricant oil re-refining project, following a significant deterioration in its UK Operations. This deterioration was driven predominately by the rapid decline in global oil prices and continued challenging market conditions which resulted in HUK generating an increasing level of significant losses. Despite implementing extensive restructuring and cost-saving measures during 2015 (including an approximate 38% reduction in UK headcount), Hydrodec remained exposed to the impact of the global oil price decline and the UK Operations remained unprofitable. Given the significant cash consumption and limited cash resources available to the Company (in the absence of a significant further fundraising), the Directors of the Company reviewed all available options and concluded that it was in the best interests of the Company to dispose of the UK Operations.

Following a strategic auction process conducted by an independent third-party financial adviser, the Company sold its UK Operations to Andrew Black, a Non-Executive Director and substantial shareholder, (the ‘Buyer’) on 4 March 2016 for a consideration of £1 in cash, including the transfer to the Buyer of circa. £1.2 million of existing third-party indebtedness in HUK and involving the injection of working capital into HUK. In addition, the Buyer granted Hydrodec a contractual right to receive a proportion of the Buyer’s entitlement to any future profits of the UK re-refining project on the following waterfall basis: (a) first, the Buyer, as primary risk taker, to recover the costs of its investment in the UK re-refining project; (b) then, the next tranche to be applied 70:30 between Hydrodec and the Buyer respectively until Hydrodec has recovered its costs incurred to date in connection with the UK re-refining project; and (c) finally, the balance of any profits to be shared 90:10 between the Buyer and Hydrodec. The Buyer will bear all risk and responsibility for developing the UK lubricant oil re-refining project going forward, with Hydrodec retaining only a passive economic interest under these profit share arrangements. The UK re-refining project also offers a potential opportunity to develop transformer oil re-refining capacity in the UK. The impact on the Company of all of the above is described in note 25 to the consolidated financial statements on pages 54 to 55.

(ii) USAThe rebuild of the Canton plant was completed during the year, re-establishing a plant with a nameplate capacity significantly higher at 45 million litres compared to 27 million litres prior to the incident in December 2013. It is safer, easier to maintain, and we consider capable of producing the highest quality transformer oil in the US.

The recommissioning of the plant did, however, take longer than planned and, whilst commissioning issues are not unusual, the issues experienced with the plant’s new heat exchangers, to which over 100 days of potential lost production can be attributed, were material and negatively impacted the performance of the business in 2015. Since then, all six trains at Canton were brought in production by the end of December 2015.

Further significant progress on operability and reliability has meant that Canton achieved an all-time monthly production record of 2.56 million litres in March 2016. Operational performance is a key platform for our strategy of growth in the US and these production records confirm the improvement in operability and rateability of the plant as we continue to rebuild market share in the US.

(iii) AustraliaThe relocation of Hydrodec’s Australian operations from Young to Southern Oil’s used lubricant oil re-refinery in Bomen, New South Wales was completed at the end of March 2015, a month later than envisaged. First commercial oil sales were made shortly thereafter. As a result of relocation, the plant now benefits from operating efficiencies under a single operating structure, which also offers better logistics and other locational advantages. Hydrodec continues to own the transformer oil re-refining plant and the proprietary technology, and controls all the commercial activity related to the branded SUPERFINE™ oil.

Total income and operational performance Full year total income was lower than the prior year at US$43.8 million (2014: US$54.7 million), driven principally by the later than planned start of production in Canton and the decline in the overall headline selling price of oil. Overall total oil sales were 62.1 million litres (2014: 48.6 million litres) of which 14.4 million related to the re-refining businesses (2014: 12.0 million litres) and 47.7 million litres related to the UK Operations (2014: 36.6 million litres). Additionally, in the first quarter, the re-refining business benefited from the remaining business interruption income of US$1.5 million received under the settlement negotiated at the end of 2014.

Sales volumes in the re-refining business increased to 14.4 million litres at a gross margin of -6.9% (2014: 12.0 million litres at a pro forma gross margin of 30%), a 20% increase in volume over the prior year reflecting the commencement of production at Canton during the year whilst the deterioration in gross margin was a function of the low utilisation rate attributable to the commissioning process. Sales volumes in the recycling business increased to 47.7 million litres after the acquisition of Eco-Oil at a margin of 5.3% (2014: 13.6%) and contributed US$1.8 million gross profit (2014: US$4.7 million), 38% down on 2014. This was despite the implementation of strategies to improve margins and accommodate lower global oil prices, including the renegotiation of feedstock pricing mechanisms with suppliers following the rapid decline in oil prices from the end of 2014.

Administrative expenses fell by 6% compared to the prior year to US$20.7 million (2014: US$22.1 million). The key driver (US$3.8 million) being a reduction in employee cost due to the relocation of the Australian operation offset by an increase in costs from the acquisition of the business of Eco-Oil in the UK. Costs as a percentage of total income increased to 47% (2014: 40%) given the lower levels of total income driven by the decline in the oil price impacting sales revenue and the later than planned start up in Canton.

9Hydrodec Group plc



Governance

Strategic Report

The operating loss, before impairment, after charging restructuring costs (US$1.3 million), increased to US$19.5 million (2014: US$7.9 million).

In accordance with accounting standards, the Board has reviewed the carrying value of goodwill and other intangible assets across the Group in light of current trading, prospects and progress towards achieving the Group’s strategic plans. Following this review, the Company charged a total of US$11.1 million (2014: US$0.8 million) for the impairment of such assets. This impairment charge comprised two key elements. The first related to the disposal of the UK Operations for £1 in March 2016 (see note 25 to the consolidated financial statements on pages 54 to 55) giving rise to a charge of US$3.6 million for the relevant plant and equipment (2014: US$0.8 million) and US$4.1 million in respect of intangible assets. The second related to the net assets of the Company’s non-trading subsidiary, Virotec International plc, which had a carrying value of goodwill of US$3.4 million which has been impaired to nil.

Finance costsNet financial expense was US$0.5 million (2014: US$0.2 million) and relates to the interest payable under the lease in the US and interest payable on the shareholder loans in the UK.

Operating cash flow and working capitalIn 2015, the Group had net cash outflow from operating activities of US$13.7 million, compared to a US$6 million net cash inflow in 2014. The movement in working capital of US$1.7 million net cash inflow was a result of a reduction in inventory levels both in the US and UK, a reduction in trade receivables (including a reduction in prepayments for oil purchased from G&S (US$1.2 million)), and a reduction in trade and other payables consisting principally of the payment of Group insurance of US$1.5 million, payment of the basic engineering design package of US$0.5 million under the CEP licence, fuel duties of US$0.5 million and a reduction in the level of payables in the UK recycling business driven by market contraction.

The amount of working capital required by the Group’s operations continues to be closely monitored and controlled, and forms a key part of the management information. Credit management remains robust with no bad debts written-off during the year.

Liquidity and financing activitiesThe Group’s principal financing facility is a seven-year US$10 million finance lease arrangement with First Merit fully drawn and repayment under which commenced on 1 October 2015, as well as shareholder loans from Andrew Black, a substantial shareholder and Non-Executive Director, of US$6.2 million as at 31 December 2015 (of which US$4 million was utilised as at 31 December 2015), repayable on 31 December 2017. The Company also has a lease financing arrangement of US$1.4 million with its partner in Australia, Southern Oil, in respect of the infrastructure costs incurred for the establishment of its facilities at the site in Bomen. Additional working capital has been provided by overdraft facilities in the USA and Australia. Borrowings associated with the UK business were divested as part of the sale arrangements for the UK Operations on 4 March 2016.


Executive Review continued

Capital expenditure in 2015 totalled US$14.9 million (2014: US$19.0 million), primarily incurred in the US in relation to both the rebuild and expansion of the plant at Canton. Rebuild capital expenditure in Canton has been funded through a combination of operating cash flow, the insurance proceeds received during 2014, and the finance lease arrangement referred to above, whilst the two expansion trains have been funded equally by Hydrodec and its partner G&S.

Outside of the US, the Group started to incur capital costs in relation to the establishment of the UK re-refinery, primarily in relation to site preparation and the acquisition of the basic engineering design package from CEP, such costs being funded out of Group cash reserves prior to the disposal of the UK Operations. A mechanism to potentially recoup these costs was agreed as part of the disposal of the UK Operations and is detailed in note 25 to the consolidated financial statements.

Financial reportingThe financial information has been prepared under IFRS and in accordance with the Group’s accounting policies. There have been no changes to the Group’s accounting policies during the year ended 31 December 2015.

Going concernAs set out in note 1 of the consolidated financial statements, taking into account the Group’s current forecasts and projections and recent progress in re-establishing market share in the US, and considering the uncertainties described in note 1 of the consolidated financial statements, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least the next 12 months. Accordingly, the Directors continue to adopt the going concern basis in preparing the Annual Report and financial statements.

At 31 March 2016, after divesting the UK Operations, the Group’s overdraft and committed loan facilities (excluding finance lease liabilities) provided headroom over the Group’s actual borrowing requirement. However, as referred to in the outlook section below, the next six months are likely to see the Group’s working capital needs increase before sustained monthly cash generation reduces the working capital requirements. Therefore on 11 April 2016, the Group signed a further £2.25 million facility agreement to allow for the working capital needs to be met while also providing further headroom against downside risk. Further details of the new loan facility are set out in note 25 to the consolidated financial statements.

Progress on delivering our strategy and outlookAs was recognised by the market generally, 2015 was an extremely difficult year in the oil and gas sector and this was no different for Hydrodec. Following the review commenced at the end of 2015, the successful disposal of the UK Operations in early March was the first step in my strategy to implement a fundamental turnaround for the Company to refocus on our core transformer technology business.

The next stage of this plan is to deliver operational performance and efficiencies, continuing to implement a rigorous cost reduction programme and to drive to a profitable 2016. In both the US and Australia, we will continue aggressively to build market share, ensure product quality and maximise margins following significant service interruption with the plant re-build in Canton and relocation of our operations in Australia. Market dynamics remain difficult and regaining momentum will be challenging in the first half of the year. However, progress to date in the US is strong: the business delivering a monthly production record in March producing 2.56 million litres having already posted a production record in February of 2.45 million litres. The quality of the product the business produces is also of the highest standard and our objective is now to strengthen margins as we grow market share whilst ensuring rigorous cost control.

The recent price rises posted by producers of base oil and transformer oil in the US are encouraging indications of a move towards price stabilisation, and I expect that over time the progress we have made in the first few months of this year will enable us to grow the business as envisaged prior to the incident in Canton, and expand further in the US and into other geographical markets as we seek to enlarge our global footprint in a profitable and capital efficient manner.

Chris EllisChief Executive Officer12 April 2016

11Hydrodec Group plc



Governance

Strategic Report

2013 2014 2015

62.1

2012

48.637.022.5

2012 2013 20142011

54.740.126.122.4

2012 2013 2014

30

2011

142316

210

220

2012 2013 2014

1.6

2011

0.2-2.8-2.2

Million litres

US$ million

Margin %

US$ million

Re-re�ning Recycling



2012 2013 2014

48.6

2011

3722.520.3

2013 2014 20152012

43.854.740.126.1

2013 2014 2015

-11.2

2012

1.60.2-2.8

Million Litres

US$ Million

Margin %

US$ Million



2013 2014 20152012

-7302321514160


2012 2013 2014

48.6

2011

3722.520.3

2013 2014 20152012

43.854.740.126.1

2013 2014 2015

-11.2

2012

1.60.2-2.8

Million Litres

US$ Million

Margin %

US$ Million



2013 2014 20152012

-7302321514160


2012 2013 2014

48.6

2011

3722.520.3

2013 2014 20152012

43.854.740.126.1

2013 2014 2015

-11.2

2012

1.60.2-2.8

Million Litres

US$ Million

Margin %

US$ Million



2013 2014 20152012

-7302321514160


Key Performance Indicators

The Group monitors and measures performance against its KPIs, a number of which are highlighted below. These KPIs are in line with the strategic priorities of the Group and provide a means of evaluating how well the Group is operating to deliver the long-term strategy.

Strategic performance

Total volume

+23%

Financial performance

Total revenue

–20%Underlying EBITDA

US$–11.2m

Gross margin

2.6%

PurposeTo identify directional trend in sales volumes and evaluate the ability of the Group to grow its customer base

TargetTo grow sales volumes year-on-year

PerformanceVolumes grew 28% in 2015 (mainly driven by acquisition of the business of Eco-Oil)

PurposeTo identify directional trend in sales revenue and evaluate the ability of the Group to grow its customer base

TargetTo grow revenue year-on-year

PerformanceTotal revenue and other income has declined 20% in 2015

PurposeTo evaluate the profitability and financial health of the Group. A relative measure of each US$ of revenue remaining after all direct costs have been incurred

TargetTo maintain and improve gross margin

PerformanceRe-refining gross margin declined from 80% to -7% reflecting low utilisation against a relatively fixed production cost base

PurposeTo evaluate the operational performance and profitability of the Group

TargetTo outperform year-on-year

PerformanceSignificant decline in 2015 reflects production delays in the US, costs associated with the relocation of operations in Australia and the effects of the decline in the oil price and changing market conditions on margins in the UK recycling business


How we manage riskThe effective management of risk is a core function of the Board and executive management, who regularly review and monitor the key risks involved in operating the business. The table below sets out identified key risks which are believed by the Board to be the most significant to the achievement of the Group’s strategic business objectives. They do not comprise all of the risks that the Group may face and are not listed in any order of priority. There may be other risks which are currently unknown to the Group or which may become material in the future. We have also identified relevant mitigating factors which are designed to provide a reasonable (but not absolute) level of protection against the impact of the events in question.

Risk Description Mitigation

Strategic and commercial risks

Plant utilisation dependant on feedstock availability

In the US and Australia, the Group is dependent on sourcing used oil feedstock from which to manufacture

its SUPERFINETM products. Historically, this has provided the main operational challenge due to competing uses for used transformer oil and/or long-established practices around waste incineration.

We closely monitor feedstock availability in the markets in which we operate. In the US, the strategic partnership with G&S has significantly de-risked security of feedstock supply and underpins expansion in the key US market. We are exploring various opportunities to increase feedstock to our Australian operations.

Key executives and personnel The Group’s future success is substantially dependent on the continued services and performance of its core management team and key operational staff experienced in operating the Group’s proprietary technology.

The Remuneration Committee reviews the employment terms for executives and key operational management with the aim of attracting, motivating and retaining key personnel for the Group.

Relationships with partners and key third parties

The Group operates in the USA through a joint venture structure and in Australia under an outsourced tolling arrangement. To maximise such arrangements requires ongoing commercial alignment between the Group and its third-party partners, which is made more challenging in difficult market conditions.

Procedures are in place to maintain close on-going relationships with G&S and Southern Oil respectively.

Commercialising our IP The Group’s current operations and potential for growth rest on the successful commercial deployment of our proprietary technology and know-how to the re-refining of used oils. The original US patent expires in September 2016.

Submitted provisional patent applications in 2014 to protect operating and design innovations to our transformer oil technology. We regularly review our patents and the patent application process is on-going.

Health, safety and environmental risks

Health, safety and environmental compliance

The activities of the Group involve a range of health, safety and environmental risks. Managing these risks is the top priority for all Directors, managers and employees across the Group.

All Group subsidiaries operate health, safety and environmental management systems appropriate to the nature and scale of their risks.

The establishment of the Safety and Technology Committee under the leadership of Dame Mary Archer DBE and with external representation from Marsh Risk Consulting further reinforces the high priority the Board attaches to health, safety and environmental matters.

Insurance cover is maintained at Group level for significant insurable risk.

Principal Risks and Uncertainties




Governance

Strategic Report

Risk Description Mitigation

Operational risk

Operational reliability and product quality

The Group operates from two sites and is therefore dependent on their continuing operations. Further, the Group is dependent on the continuing reliability of, and product quality from, Canton, and under the tolling arrangement with Southern Oil Refinery in Australia, with associated risk of loss of revenue and reputation for non-performance.

The Group continues to invest in operational and capital expenditure, including management resource, in order to maintain and improve operational reliability and product quality.

In addition, during 2016, the Safety and Technology Committee will undertake a detailed review of the process for commissioning the six trains at the Canton plant in 2015.

Business interruption insurance is in place.

Competitors The Group may face competition including from global competitors with large capital resources.

The Group’s technology is its key differentiating factor. The Group also benefits from a commercial first mover advantage provided by its proprietary know-how and trade secrets.

Market conditions/pricing risk The pace and execution at which the Canton plant builds back market share and margin in the US transformer oil market remains a key underlying risk for the Group. The overall growth and demand for the Group’s products is subject to the drivers of commercial activity. Demand can be unpredictable and the nature of the business is such that there is relatively low visibility of future orders from its customers. The market is also impacted by the global oil price.

Management prepares regular forecasts and reviews that focus on remedial action plans required to deliver performance. In addition, the Board has approved measures to deliver improved operational performance and efficiencies. A rigorous cost reduction programme is ongoing.

Financial risk

Liquidity risk The slower ramp up of production at Canton, difficult market conditions in Australia, and future growth and expansion of the Group’s operations all place demand on the Group’s cash resources. The Group’s cash position remains subject to the availability of working capital, overdraft and finance lease facilities on commercially acceptable terms, the ability to realise value from redundant assets and continued shareholder support.

Management monitors the Group’s financial performance closely with strong focus on cash control. Securing additional significant financing in Q4 2015 and Q1 2016 has strengthened the Group’s ability to withstand market conditions. The Group has benefited from the support of its major shareholder.

Foreign exchange risk The Group is exposed to foreign exchange risk. Since our principal operations are in the USA, increases in the strength of sterling against the US dollar would impact the ability of the US operations to contribute to Group overhead.

The Group’s policy is to match, as far as possible, its principal projected cash flows by currency. Currently, no hedging instruments are used. The Group keeps under review the extent of its exposure to currency fluctuations. In addition, the Company remains focused on further reductions to its Group overhead.

The Strategic Report was approved by the Board of Directors on 12 April 2016 and was signed on its behalf by:

Chris Ellis Chief Executive Officer


Board of Directors

Lord MoynihanNon-Executive Chairman

Chris EllisChief Executive Officer

Dr. Caroline BrownSenior Independent Director

Background and experienceLord Moynihan was previously Executive Chairman and Chief Executive of Consort Resources Limited and Executive Chairman of Clipper Windpower Europe Limited. Colin was a Member of Parliament in the UK for 10 years, serving as Minister for Energy from 1990 to 1992. Colin stood down as Chairman of the British Olympic Association in 2012 after seven years, during which time he oversaw Team GB’s successful performance in the Beijing and London Olympic Games. He was a Rowing Silver Medallist in the 1980 Olympic Games.

Background and experienceChris is a qualified chartered accountant and has more than 20 years of Board level finance and management experience, running a range of large, complex international businesses as well as small and medium-sized ventures, including a significant period within GE Capital. From 2009 to 2012, he served as Global Chief Financial Officer of PPC Worldwide, a global healthcare business within UnitedHealth Group Inc.

Background and experienceCaroline is an experienced Executive and Non-Executive Director, has managed early stage companies and divisions of FTSE 100 companies in the energy and technology sectors and has worked as a corporate finance adviser to governments and energy companies with banks including Merrill Lynch, UBS and HSBC. Caroline holds a First-Class degree and Ph.D. in Chemistry from the University of Cambridge, an M.B.A. in Finance from the Cass Business School, is a fellow of the Chartered Institute of Management Accountants and is a Chartered Director.

Date of appointmentColin joined the Board and became Chairman in October 2012.

Date of appointmentChris joined the Board in July 2012 as CFO. He became CEO in March 2016.

Date of appointmentCaroline joined the Board in September 2015 as a Non-Executive Director and was appointed Senior Independent Director in December 2015.

External appointmentsColin is Chairman of Buckthorn Capital LLP and a Director of a number of renewable energy companies.

External appointmentsNone.

External appointmentsCaroline is currently the Chief Operating Officer and Chief Financial Officer of The Penspen Group Limited. She is also a Non-Executive Director and Chairs the Audit and Risk Committee of Intelligent Energy Holdings plc.

Committee membershipsColin serves on the Board’s Audit, Remuneration, Nomination and Safety & Technology Committees.

Committee membershipsChris serves on the Board’s Safety & Technology Committee.

Committee membershipsCaroline Chairs the Audit Committee and serves on the Board’s Remuneration, Nomination and Safety & Technology Committees.

IndependenceThe Board considers Colin to be an independent Director. To take account of ISS requirements to be considered ‘independent’, Lord Moynihan waived his historic one-off option grant on 6 April 2016.

IndependenceExecutive – non-independent.

IndependenceThe Board considers Caroline to be an independent Director.




Governance

Strategic Report

All Directors shall retire at the Annual General Meeting. All Directors shall put themselves forward for re-election.

Andrew BlackNon-Executive Director

Dame Mary ArcherNon-Executive Director

Background and experienceAndrew is the co-founder of Betfair, the world’s leading online betting exchange and FTSE 100 constituent, having devised its unique betting exchange model. He was a Director of the Betfair Group from 1999 to 2010.

Background and experienceDame Mary studied chemistry at St Anne's College, Oxford, and physical chemistry at Imperial College, London, before becoming a lecturer at Cambridge University. She was awarded the Energy Institute's Melchett Medal in 2002 and the Eva Philbin Award of the Institute of Chemistry of Ireland in 2007. Dame Mary has held prominent leadership roles in the NHS. She was appointed DBE in 2012 for services to the NHS.

Date of appointmentAndrew joined the Board in July 2011.

Date of appointmentDame Mary joined the Board in November 2014.

External appointmentsAndrew is a Director of Hydrodec (UK) Limited and Hydrodec Re-Refining (UK) Limited. Andrew also holds Board seats at a number of companies unrelated to the activities of the Group.

External appointmentsDame Mary holds multiple external appointments including as Chairman of the Science Museum Group, Cambridge Healthcare Limited and Imperial College Health Partners Expert Advisory Board. Dame Mary is also President of the National Energy Foundation and the UK Solar Energy Society.

Committee membershipsAndrew serves on the Board’s Remuneration and Nomination Committees.

Committee membershipsDame Mary Chairs the Board’s Safety & Technology Committee.

IndependenceNon-independent due to significant shareholding.

IndependenceThe Board considers Dame Mary to be an independent Director.


Report of the Directors

The Directors present their Annual Report on the affairs of the Group, together with the financial statements and auditor’s report for the year ended 31 December 2015. The Corporate Governance Report set out on pages 20 to 23 forms part of this report. Details of significant events since the balance sheet date are contained in note 25 to the consolidated financial statements on pages 54 to 55. The Group has no branches outside the United Kingdom.

Strategic ReportDetails of the Group’s strategy and business model during the year and the information that fulfils the requirements of the Strategic Report can be found in the Strategic Report on pages 1 to 13. An indication of likely future developments in the business of the Group, and details of research and development activities are included in the Strategic Report, which are deemed to form part of this report by reference.

Results and dividendsThe consolidated income statement for the year is set out on page 29. No dividend has been declared or is proposed by the Company for the year.

Capital structureDetails of the issued share capital, together with details of the movements in the Company’s issued share capital during the year are shown in note 15 to the consolidated financial statements on page 49. The Company has one class of Ordinary Shares which carry no right to fixed income. Each Ordinary Share carries the right to one vote at general meetings of the Company. There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. Details of employee share schemes are set out in note 17 to the financial statements on page 50. Any shares held by the Hydrodec Group Employee Benefit Trust abstain from voting.

With regard to the appointment and replacement of Directors, the Company is governed by its Articles of Association, the AIM Rules of the London Stock Exchange, the Companies Act 2006 and related legislation. The powers of Directors are described in the Corporate Governance Report set out on pages 20 to 23.

Directors and their interestsThe Directors who served during the year are set out below, together with their beneficial interests in the Ordinary Shares of the Company. Biographical details are included on pages 14 and 15.

31 December 2015 31 December 2014

Ordinary Shares of 0.5p each

Shareoptions

Ordinary Shares of 0.5p each

Shareoptions

Dame Mary Archer (appointed 1 November 2014) – – – –Andrew Black 183,574,858 181,824,857 –Dr. Caroline Brown (appointed 23 September 2015) – – – –Alan Carruthers 1,733,434 1,733,433 –Chris Ellis 2,498,330 1,346,838 –Gillian Leates (resigned 22 September 2015) 226,929 500,000 226,929 500,000Mark McNamara (ceased 9 June 2015) 271,464 1,500,000 271,464 6,500,000Lord Moynihan 10,874,783 1,000,000 9,897,749 1,000,000Ian Smale (resigned 4 December 2015) 1,981,436 – 928,014 –

The number, exercise price and earliest and latest dates of exercise of options over Ordinary Shares in the Company held by Directors at the end of the year were as follows:

Share options

Exerciseprice

(pence)

Earliestexercise

date

Latestexercise

date

Gillian Leates* (resigned 22 September 2015) 500,000 15.00p n/a 1 Oct 2017Mark McNamara (ceased 9 June 2015) 1,500,000 33.25p 24 Jan 2010 24 Jan 2018Lord Moynihan** 1,000,000 8.50p n/a 24 Oct 2022

* Options issued to Gillian Leates are only exercisable on the attainment of predetermined share price targets. ** To take account of ISS requirements to be considered ‘independent’, Lord Moynihan waived his historic one-off option grant on 6 April 2016.

Further details regarding the share options and the Executive Director’s interests in the Company’s Long-Term Incentive Plan are provided in the Remuneration Committee Report on pages 24 to 26.




Governance

Strategic Report

The following Directors have a beneficial interest in warrants to subscribe for Ordinary Shares:

31 December 2015 31 December 2014

16p exerciseprice

8p exerciseprice

16p exerciseprice

8p exerciseprice

Andrew Black 13,000,000 7,000,000 13,000,000 7,000,000Lord Moynihan 1,500,000 – 1,500,000 –

These warrants were granted in connection with subscriptions for the Company’s fixed rate secured loan note instruments, all of which have now been repaid. The warrants exercisable at 8p per Ordinary Share may be exercised at any time prior to 14 June 2016. The warrants exercisable at 16p per Ordinary Share may be exercised at any time prior to 19 December 2017. The grants of these warrants are unconnected with the relevant Directors’ appointment to the Board.

Directors’ indemnity and insuranceThe Company has made qualifying third-party indemnity provisions, as defined by section 236 of the Companies Act 2006, for the benefit of its Directors which remain in force at the date of this report. The Company has also arranged Directors’ and officers’ liability insurance.

Substantial shareholdingsAs at 31 December 2015 the Company has been notified of the following beneficial interest in 3% or more of its issued voting share capital:

Shareholder % holding

Andrew Black 24.58%Aviva plc (and subsidiaries) 15.85%Thesis Asset Management plc 12.20%Royal London Asset Management Limited 4.91%

On 18 March 2016, Royal London Asset Management Limited notified the Company that it had reduced its shareholding to 3.28%. During the period between 31 December 2015 and as at the date of this report the Company has not received any other notifications of beneficial interest in 3% or more of its issued voting share capital.

Related-party transactionsRelated-party transactions are disclosed in note 23 to the financial statements on page 53.

Occupational health and safety and environment (‘OHSE’)The Group operates complex industrial plants involving hazardous conditions, substances and materials. As a consequence, we place great emphasis on our environmental performance and the safety of our employees and our broader communities and strive continuously to further improve in these areas. We have dedicated OHSE personnel providing advice and support to staff, customers, suppliers and other visitors, as well as coordinating the fulfilment of the Group’s regulatory obligations. Further details on the composition, scope and activities of the Safety and Technology Committee are set out on page 23.

Disabled employeesApplications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees.

Change of controlThere are a number of contracts which enable the counterparties to alter or terminate those arrangements in the event of a change of control of the Company. These arrangements are commercially sensitive and confidential and their disclosure could be seriously prejudicial to the Group.

The Group does not have any agreement with a Director or officer that would provide compensation for loss of office or employment resulting from a takeover, except that provisions of the Group’s share plans may cause options and awards granted under such plans to vest on a takeover.


Report of the Directors continued

Political donationsThe Group’s policy is not to make political donations. Neither the Company nor its subsidiaries, during the financial year, made any political donation to a political party, other political organisation or independent election candidate, or incurred any political expenditure or made any contribution to a non-EU political party.

Articles of AssociationThe Articles of Association of the Company may be amended by special resolution of shareholders.

Statement of Directors’ responsibilitiesThe Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange the Directors are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • for the Parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material

departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will

continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Financial risk management objectives and policiesThe main risks arising from the Group’s financial instruments are currency risk, interest rate risk, credit risk and liquidity risk. The Directors review the policies for managing each of these risks on an on-going basis and they are summarised in note 18 to the consolidated financial statements on pages 50 to 51. These policies have remained unchanged from previous years.

Going concernAs set out in Note 1 to the consolidated financial statements, taking into account the Group’s current forecasts and projections and recent progress in re-establishing market share in the US, and considering the uncertainties described in note 1 to the consolidated financial statements, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least the next 12 months. Accordingly, the Directors continue to adopt the going concern basis in preparing the Annual Report and financial statements.

Statement of disclosure of information to auditorsIn accordance with Section 418(2) of the Companies Act 2006, each Director who held office at the date of approval of this Directors’ Report confirms that: (a) so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware; and (b) the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

AuditorKPMG LLP were appointed the Company’s external auditors at the Company’s Annual General Meeting on 9 June 2015, following a tender process which took place in the second half of 2014.




Governance

Strategic Report

Forward-looking statementsThese reports and financial statements contain certain forward-looking statements which are subject to assumptions, risks and uncertainties; actual future results may differ materially from those expressed in or implied in such statements. Many of these assumptions, risks and uncertainties relate to factors that are beyond the Group’s ability to control or estimate precisely. The forward-looking statements reflect the knowledge and information available at the date of preparation of this report, and will not be updated during the year. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout these reports and financial statements and include statements regarding the current intentions, beliefs or expectations of the Directors or the Group concerning, among other things, the results of operations, financial condition, prospects, growth, strategies, and dividend policy of the Group and the industry in which it operates. In particular, the statements regarding the Group’s strategy and other future events or prospects are forward-looking statements. Nothing in this Annual Report should be construed as a profit forecast.

Annual General MeetingAll holders of Ordinary Shares are entitled to attend the Annual General Meeting of the Company (‘AGM’). All holders of Ordinary Shares on the register at the relevant record date are entitled to receive Notice of the AGM which is posted at least 20-working days before the AGM. They are also entitled to speak at general meetings of the Company, to appoint one or more proxies or, if they are corporations, corporate representatives, and to exercise voting rights. Shareholders may vote and appoint proxies electronically. The notice of meeting specifies deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be put to the AGM.

This year’s AGM will be held on 7 June 2016. The results of the voting on resolutions will be made available to shareholders on the Group’s website after the meeting. At the meeting, the Chairman, the Chief Executive and the Chairmen of the Board Committees will be present to answer questions on any matters relating to the Group’s business. Shareholders will also have an opportunity to meet the Directors informally after the meeting. In addition, we intend to hold a further presentation for retail investors in September.

Approved by the Board and signed on its behalf by:

Chris EllisChief Executive Officer12 April 2016


Corporate Governance Report

Dear Shareholder,

Good governance, transparency, communication and accountability are integral to strong and effective shareholder relations and the delivery of growth in shareholder value. On the following pages, we have set out the key features of the corporate governance structures which the Company has in place. Further details are also set out on the activities of the Audit Committee on page 27, the Remuneration Committee on pages 24 to 26 and the Nomination Committee on page 23.

Effective governance requires sound decision-making processes backed by the right balance of skills, experience, independence and knowledge on the Board. In addition, given the Group’s stage of development, it is important that the Board promotes an entrepreneurial environment within which management can operate; whilst the Board itself maintains appropriate oversight to ensure that risk is appropriately managed in line with the Company’s strategy and appetite for risk.

At Hydrodec we seek to ensure that the Company retains an experienced, diverse and effective Board, both fitting for the Company’s current size and its future development. A year ago, the Board numbered eight people. We now have five Directors, which we believe is commensurate with the size and skill set required by the Company. The appointment of Dr. Caroline Brown to the Board as Senior Independent Director and Chair of the Audit Committee during the year is a demonstration of that. Caroline brings a wealth of financial and governance experience to the Board and reinforces the Board’s ability to support the development of the Hydrodec business going forward.

I also believe firmly in the importance of maintaining a broad and consistent dialogue with shareholders, both institutional and retail, and I look forward to continuing to engage with you over the coming months as we pursue our objective of delivering a profitable 2016.

Lord MoynihanChairman12 April 2016




Governance

Strategic Report

Corporate governanceResponsibility for good governance lies with the Board. This Corporate Governance Report details the corporate governance arrangements which the Company currently has in place and the steps being taken to develop good governance within the Company and the Group.

Compliance statementAs the Company is listed on the Alternative Investment Market it is not required to comply with the provisions of the UK Corporate Governance Code (the ‘Code’) issued in September 2014 and, having taken account of the additional costs and practicalities involved in doing so and the current size and structure of the Company, it does not do so. The Company is a member of the Quoted Companies Alliance (‘QCA’), an independent membership organisation that champions the interests of small to mid-sized quoted companies. The Board considers that the QCA’s Corporate Governance Code for Small and Mid-Size Quoted Companies 2013 (‘QCA Code’) provides the most appropriate guidance in respect of best corporate governance practice and disclosure for a company such as the Company. The Board currently draws upon, and benchmark’s itself against, this best practice. We believe this approach to the Code and the QCA Code is in the best interests of shareholders.

LeadershipHow we govern the CompanyOur governance structure comprises the Board and various committees detailed below, supported by the Group’s standards, polices and controls, which are described in more detail in this report.

Data to come

Chairman

Board

Audit Committee Remuneration Committee Nomination Committee Safety and Technology Committee

The BoardAs at 31 December 2015, the Board of Directors was made up of six members, whilst as at the date of this report, the Board of Directors was made up of five members, comprising the Chairman, one Executive Director and three Non-Executive Directors. The full Board holds meetings quarterly and at any other times as may be necessary to address specific significant matters that may arise.

The Board’s primary role is the protection and enhancement of long-term shareholder value. To fulfil this role, the Board is responsible for the overall management and corporate governance of the Company including its strategic direction, establishing goals for management and monitoring the achievement of these goals.

From time to time the Board may delegate or entrust to any Executive Director such of its powers, authorities and discretions for such time and on such terms as it thinks fit. The Board has adopted a Delegation of Board Authority which establishes those matters which it considered appropriate to remain within the overall control of the Board (or its committees) and those which are delegated to the Chief Executive (or onwards as appropriate). In addition to overall strategy, the Board approves the annual budget and retains control over corporate activity (mergers, acquisitions, joint ventures, material disposals and investments) and material contract and financing decisions (over and above set value/credit-risk limits). Management’s role is to implement the strategic plan established by the Board and to work within the corporate governance and internal control parameters established by the Board.

Division of responsibilitiesThe roles of Chairman and Chief Executive are separate and there is a clear division of responsibilities. The Chairman is responsible for leadership of the Board, ensuring its effectiveness and setting the agenda for Board meetings. Once strategic objectives have been agreed by the Board, it is the Chief Executive’s responsibility to ensure they are delivered and to be accountable to the Board. The Chief Executive works closely with the executive management team. The day-to-day operations of the Company are managed by the executive management team.


Corporate Governance Report continued

Conflicts of interestIn line with the requirements of the Companies Act 2006, each Director has notified the Company of any situation in which he or she has, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company (a situational conflict). These were considered and approved by the Board in accordance with the Company’s Articles of Association on 22 September 2015 and each Director was informed of the authorisation and any terms on which it was given. A register of those situational conflicts is maintained and reviewed by the Board on an on-going basis. Where the Board believes that a significant conflict exists, the Director concerned is either not present or does not take part in discussions and voting at the meeting whilst the item is considered.

Committees of the Board The Board has established a number of committees to assist in the discharge of its duties and the formal terms of reference for the principal committees, approved by the Board, can be found on the Company’s website at www.hydrodec.com. The terms of reference are reviewed annually and updated where necessary. Membership of the principal committees is shown on pages 14 and 15. The Company Secretary acts as Secretary to all Board committees. Meetings between the Non-Executive Directors, both with and without the presence of the Chief Executive, are also scheduled in the Board’s annual programme.

EffectivenessThe Composition of the BoardThe composition of the Board is determined using the following principles:• a majority of the Board should be Non-Executive Directors;• the role of Chairman is to be filled by a Non-Executive Director;• the Board should have enough Directors to serve on various committees of the Board without overburdening the Directors or making it difficult

for them to fully discharge their responsibilities;• the Company Secretary should not be a member of the Board but should attend meetings and should report directly to and advise the Chairman

on corporate governance matters; and• Directors appointed by the Board are subject to election by shareholders at the following Annual General Meeting and thereafter Directors are

subject to re-election every year.

The appointment of Dr. Caroline Brown as Senior Independent Director in December 2015 further strengthens the Company’s corporate governance framework, working closely with the Chairman and supporting the relationship between the Company and its major shareholders.

Meeting attendance The following table shows the attendance of Directors at meetings of the Board, Audit, Remuneration and Safety and Technology Committees during 2015:

BoardRemuneration

CommitteeAudit

CommitteeSafety and Technology

Committee

Number of meetings

Number attended

Number of meetings

Number attended

Number of meetings

Number attended

Number of meetings

Number attended

Dame Mary Archer 6 6 – – – – 4 4Andrew Black 6 6 2 2 – – – –Dr. Caroline Brown* 2 2 1 1 1 1 1 1Alan Carruthers 6 6 2 2 3 3 – –Chris Ellis 6 6 – – – – 4 4Gillian Leates** 4 4 1 1 2 2 – –Mark McNamara*** 2 1 – – – – – –Lord Moynihan 6 6 2 2 3 3 4 4Ian Smale**** 5 5 – – – – 3 3

* Appointed as a Director on 23 September 2015** Resigned as a Director on 22 September 2015*** Ceased to be a Director on 9 June 2015**** Resigned as a Director on 4 December 2015

Information, support and developmentThe agenda for Board meetings is prepared in conjunction with the Chairman. Submissions are circulated in advance. For the regular quarterly Board meetings the agenda will include operational and financial updates together with papers relating to specific agenda items. Senior executives are involved in Board discussions and Directors have other opportunities, including visits to operations, for contact with a wider group of employees.

Each Director has the right of access to all relevant Company information and to the Company’s executives and, subject to prior consultation with the Chairman, may seek independent professional advice at the Company’s expense. A copy of any advice received by the Director is to be made available to all other members of the Board. In accordance with best practice, the Chairman monitors the developmental needs of the Board as a whole, with a view to further developing its effectiveness as a team.




Governance

Strategic Report

Nomination CommitteeThe key objective of the Nomination Committee is to ensure that the Board comprises individuals with the necessary skills, knowledge and experience to ensure that it is effective in discharging its responsibilities. The members of the Nomination Committee for 2015 were Alan Carruthers (Chairman), Lord Moynihan, Andrew Black, Gillian Leates (resigned on 22 September 2015) and Ian Smale (resigned on 4 December 2015). The Company Secretary also attends meetings. The Nomination Committee did not meet formally during 2015, however, its members discuss relevant matters informally and the business of the Nomination Committee was otherwise addressed by its members in the forum of the Group Board meetings.

AccountabilityFinancial and Business ReportingManagement prepare regular finance reports which allow the Board to assess the Company’s activities and review its performance.

Risk Management and Internal ControlThe Board is ultimately responsible for the Company’s system of internal control and for reviewing its effectiveness. The Board has reviewed and updated the process for identifying and evaluating the significant risks affecting the Company and the policies by which these risks are managed. Internal control systems are designed to meet the Company’s particular needs and the risks to which it is exposed. Accordingly, the internal control systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against misstatement and loss.

Audit Committee The Audit Committee is responsible for assisting the Board with the discharge of its responsibilities in relation to financial reporting, including reviewing the Company’s annual and interim financial statements and accounting policies, reviewing and monitoring the scope of the annual audit and the extent of the non-audit work undertaken by external auditors, advising on the appointment of external auditors and reviewing the effectiveness of the internal controls systems in place within the Group. The report of the Audit Committee is set out on page 27. The Chairman of the Audit Committee will attend the AGM to respond to any shareholder questions that might be raised on the Audit Committee’s activities. The Company’s auditors are also invited to attend the AGM and are available for discussion in relation to the Company’s financial statements.

Safety and Technology CommitteeThe Safety and Technology Committee is responsible for assisting the Board with the discharge of its oversight responsibilities in relation to the Group’s strategy with respect to health, safety, environmental, quality and technology (‘HSEQT’) matters. The members of the Safety and Technology Committee for 2015 were Dame Mary Archer (Chairman), Lord Moynihan, Dr. Caroline Brown (appointed on 23 September 2015), Ian Smale (resigned on 4 December 2015) and Chris Ellis. Marsh Risk Consulting has been appointed to provide advisery services to the Committee. In particular, the Safety and Technology Committee is scheduled during 2016 to undertake a detailed root-cause technical analysis and review of the commissioning issues experienced by the Canton plant during 2015.

RemunerationRemuneration Committee The Remuneration Committee is responsible for making recommendations to the Board on remuneration policy, and determining the specific remuneration packages for the Chairman, Executive Directors and senior management. The Remuneration Committee comprises Alan Carruthers (Chairman), Lord Moynihan, Andrew Black, Gillian Leates (resigned on 22 September 2015) and Dr. Caroline Brown (appointed on 23 September 2015). The report of the Remuneration Committee is set out on pages 24 to 26.

Communicating with shareholdersDialogue with shareholdersThe Board aims to ensure that shareholders are informed of all major developments affecting the Company. The Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the Company’s strategy and goals.


Remuneration Committee Report

OverviewThe Remuneration Committee is formally constituted with written terms of reference which can be found on the Company’s website at www.hydrodec.com.

ObjectivesThe key objectives of the Remuneration Committee are to:• ensure that the Company’s Directors and senior executives are fairly rewarded for their individual contributions to the Company’s overall

performance by determining their pay and other remuneration; and• demonstrate to all shareholders that the general policy relating to, and actual remuneration of, individual senior executives of the Company is set

by a committee of the Board who have no personal interest in the outcome of the decisions and who will give due regard to the interests of shareholders and to the financial and commercial health of the Company.

CompositionThe Remuneration Committee is solely comprised of Non-Executive Directors: Alan Carruthers (Chairman), Lord Moynihan, Andrew Black, Gillian Leates (resigned on 22 September 2015) and Dr. Caroline Brown (appointed on 23 September 2015). The Company Secretary acts as secretary to the Remuneration Committee. The Chief Executive may be invited to attend meetings of the Remuneration Committee at the discretion of the Remuneration Committee.

Advisers to the Remuneration CommitteeNew Bridge Street provided periodic independent advice to the Remuneration Committee on various aspects of the Directors’ remuneration packages during the year. ‘New Bridge Street’ is a trading name of Aon Hewitt Limited, part of Aon plc. They are members of the Remuneration Consultants Group and their work is governed by the Code of Conduct in relation to executive remuneration consulting in the UK.

Remuneration Committee meetingsThe Remuneration Committee met two times during the year. The attendance of its members at those meetings is set out in the table on page 22. The agenda for Remuneration Committee meetings is prepared in conjunction with the Chairman. Submissions are circulated in advance and may include remuneration benchmark surveys and guidance on best practice together with papers relating to specific agenda items.

Remuneration policyThe Remuneration Committee intends that its policy and practice should align with, and support the implementation of, the Group’s strategy, be in line with the Group’s approach to risk management and promote the long-term success of the Group. The policy is intended to motivate the right behaviours and to ensure that any risk created by the remuneration structure is acceptable to the Remuneration Committee and within the strategy and risk appetite of the Company.

Remuneration packages for the Executive Directors currently comprise a combination of annual salary, annual performance bonus (part cash and part deferred into Ordinary Shares through a Joint Share Ownership Plan (‘JSOP’)) and interests in a Long-Term Incentive Plan (‘LTIP’).

Implementation of the policySalaryThe Remuneration Committee continues to review the salaries of Executive Directors against appropriate benchmarks for Executive Directors of AIM and FTSE SmallCap companies of a similar scale. The level of salaries are considered by the Remuneration Committee to be appropriate to help attract, retain and motivate high calibre Executive Directors and reflect the experience of the individuals concerned and the current phase of the Group. The base salaries of the Executive Directors and other members of the senior executive management team were increased by an average of 4.4% with effect from 1 January 2015.

Annual bonusExecutive Directors and other members of the senior executive management team are entitled to participate in an annual bonus scheme pursuant to which they can earn up to 100 per cent of their base annual salary. The performance parameters for the 2015 bonus were structured with:• a 50% weighting towards ‘delivering the plan safely’ with reference to EBITDA, sales and safe operations; • a 30% weighting towards ‘key milestones’, including delivering a successful transition of Australian operations to Bomen, delivering a rebuilt and

expanded Canton facility as well as various other operational milestones; and • a 20% weighting towards ‘strategic milestones’ to position the Group for growth.

No bonus awards were made to the Executive Directors in respect of the 2015 financial year.




Governance

Strategic Report

Long-term incentive planAwards were granted to selected members of the senior executive team under the Hydrodec Group plc 2012 Long-Term Incentive Plan (the ‘2012 LTIP’) effective 15 January 2012 and, in the case of Chris Ellis, on his appointment on 7 July 2012. The awards entitled the relevant executives to a fixed proportion of a share pool and were conditional, inter alia, on the achievement of certain share price targets for a consecutive 90-business-day period prior to 15 January 2015 (the ‘Share Price Thresholds’). The Executive Directors who were granted awards, and their proportion of the share pool, were as follows: Ian Smale (33.33%), Chris Ellis (20.00%) and Mark McNamara (13.33%). Since the Share Price Thresholds were not achieved, the 2012 LTIP expired on 15 January 2015 without vesting.

Following a thorough review of executive remuneration arrangements by the Remuneration Committee in conjunction with remuneration consultants, New Bridge Street, the Company adopted a new long-term incentive plan for senior executives, the Hydrodec Group plc 2015 Long-Term Incentive Plan (the ‘2015 LTIP’), at its Annual General Meeting on 9 June 2015. The 2015 LTIP is designed to simplify the existing incentive arrangements and further align the Executive Directors with both the interests of shareholders and the Company’s business strategy.

Participants in the 2015 LTIP are awarded a new class of Ordinary Shares in a wholly-owned subsidiary of the Company, Hydrodec Holdco Limited (‘Flowering Shares’). The Flowering Shares have minimal rights at award, however, they become exchangeable for Ordinary Shares in the Company if specified hurdles relating to the average mid-market closing price for the Company’s Ordinary Shares listed on AIM (each a ‘Hurdle’) are met prior to 9 June 2018. The Hurdles have been set at 14 pence and then in 2 pence increments up to a maximum threshold of 25 pence. Each Hurdle will be satisfied if the average mid-market closing price for the Company’s Ordinary Shares listed on AIM over any 20 consecutive trading days within the performance period exceeds the relevant Hurdle. At that time, that Hurdle is deemed satisfied, although the award will only vest at the end of the three-year term of the 2015 LTIP, subject to the participants remaining eligible at that point.

The number of Ordinary Shares in the Company that may be received on exchange for the Flowering Shares after the three-year vesting period (the ‘Parent Share Pool’) is dependent on the extent to which the Company’s share price exceeds the Hurdles and is calculated by reference to the increase in the Company’s share price as against an initial base price of 11.25 pence. Participants will be entitled to a fixed proportion of the Parent Share Pool to the extent that the Flowering Shares have vested (and become exchangeable). Initial awards under the 2015 LTIP were made to Ian Smale (42%) and Chris Ellis (33%) with the other 25% remaining unallocated and reserved for the purposes of attracting and retaining high-calibre personnel to the Company. If the Hurdles are not met, the relevant Flowering Shares must be transferred to the Company for nil consideration. This happened to Ian Smale’s Flowering Shares upon him ceasing to be an employee of the Company on 4 December 2015.

The 2015 LTIP is subject to specific dilution limits in that the aggregate nominal amount of new shares in respect of which rights may be granted under the 2015 LTIP may not, when added to the nominal amount of any new shares allocated in the previous 10 years under all employee share schemes of the Group, exceed 10% of the equity share capital of the Company. Unvested awards under the 2015 LTIP are also subject to ‘malus’ provisions.

Directors’ remunerationThe following table shows emoluments paid to Directors during the financial year, applying the average exchange rates (AUD to USD and GBP to USD) used in the financial statements.

Salary/feesUSD’000

BonusUSD’000

Total emoluments

2015USD’000

Total emoluments

2014USD’000

Directors:Dame Mary Archer (Non-Executive) 69 – 69 121

Andrew Black (Non-Executive) 53 – 53 58Dr. Caroline Brown (Non-Executive)2 183 – 18 –Alan Carruthers (Non-Executive)4 53 – 53 58Chris Ellis 407 – 407 544Gillian Leates (Non-Executive) 655 – 65 58Mark McNamara 1356 – 135 355Lord Moynihan (Non-Executive Chairman) 107 – 107 115Ian Smale 1,0197 – 1,019 615

1,926 – 1,926 1,815

1 From appointment on 1 November 20142 In consideration of her role as Senior Independent Director, Dr. Caroline Brown is entitled to a further £10,000 per annum, pro-rated from the date of her appointment as Senior

Independent Director on 4 December 2015 (currently unpaid). 3 From appointment on 23 September 20154 In consideration of his role as Chair of the Remuneration Committee and the Nomination Committee, entitled to a further £15,000 per annum (currently unpaid). 5 To cessation on 22 September 2015. Includes notice payment of US$26,253.6 To cessation on 9 June 20157 Includes severance payment of US$547,000 following termination on 4 December 2014.


Share optionsIn 2005 the Company established an unapproved share option scheme (the ‘2005 Scheme’) pursuant to which certain Directors and other senior members of staff were granted share options. The 2005 Scheme expired during the year and a new unapproved share option scheme, the Hydrodec Group plc Unapproved Share Option Scheme 2015 (the ‘2015 Scheme’), was adopted on 22 September 2015. Options granted under the 2005 Scheme typically have a vesting schedule of between two to three years and exercise prices corresponding to the market price of a share at the date of grant. No options were awarded under the 2015 Scheme at the date of this report. With the exception of historic awards to Mark McNamara, none of the Executive Directors were granted options pursuant to these schemes.

The number, exercise price and earliest and latest dates of exercise of options over Ordinary Shares in the Company held by Directors at the end of the year were as follows:

Shareoptions

Exercise price(pence)

Earliest exercisedate

Latest exercisedate

Gillian Leates* (resigned 23 Sept. 2015) 500,000 15.00p n/a 1 Oct 2017Mark McNamara (ceased 9 June 2015) 1,500,000 33.25p 24 Jan 2010 24 Jan 2018Lord Moynihan** 1,000,000 8.50p n/a 24 Oct 2022

* Options issued to Gillian Leates are only exercisable on the attainment of predetermined share price targets. ** To take account of ISS requirements to be considered ‘independent’, Lord Moynihan waived his historic one-off option grant on 6 April 2016.

Other than 5,000,000 options held by Mark McNamara which lapsed on 29 April 2015, no options were granted to Directors during the year and no options held by Directors were exercised, lapsed or forfeited during the year.

Service contractsChris Ellis has a service contract with the Group that is terminable by either party on not less than 12-months prior notice.

Pensions and private healthcareThere are no pension arrangements in place for Directors, except for any mandatory contributions for superannuation required by regulations in Australia. There is private healthcare arrangement for Chris Ellis.

Directors’ share interestsThe Directors’ shareholdings in the Company are set out in the Report of the Directors on page 16.

Alan CarruthersChairman of the Remuneration Committee12 April 2016

Remuneration Committee Report continued




Governance

Strategic Report

Audit Committee Report

OverviewThe Audit Committee is formally constituted with written terms of reference which can be found on the Company’s website at www.hydrodec.com.

ObjectivesThe key objectives of the Audit Committee are to assist the Board with the effective discharge of its responsibilities for financial reporting, internal accounting and financial controls and to review the performance of the Company’s external auditors.

CompositionThe Audit Committee is solely comprised of Non-Executive Directors: Dr. Caroline Brown (Chairman) (from 23 September 2015), Gillian Leates (former Chairman, resigned 22 September 2015), Alan Carruthers and Lord Moynihan. The Company Secretary acts as secretary to the Audit Committee.

Audit Committee MeetingsThe Audit Committee met three times during the year. The attendance of its members at those meetings is set out in the table on page 22. Representatives from the external auditors, Grant Thornton UK LLP (‘Grant Thornton’) (resigned on 9 June 2015) and KPMG LLP (‘KPMG’) (from 9 June 2015), the Chief Executive, the Chief Financial Officer and other members of senior management are regularly invited to attend meetings, although the Audit Committee also reserves time for discussion without invitees present.

Role of the Audit CommitteeThe role of the Audit Committee is one of oversight. The Audit Committee has no executive powers with regard to its recommendations and does not relieve the Executive Directors of their responsibilities for these matters. The agenda for Audit Committee meetings is prepared in conjunction with the Chairman. Submissions are circulated in advance and may include drafts of interim and annual financial statements, related papers from management, audit planning and key issues memoranda prepared by the external auditors and other papers relating to specific agenda items.

Activities of the Audit CommitteeKey financial reporting activities during 2015During the year, the Audit Committee considered specifically those matters with the potential likelihood to have the greatest significant impact on the financial statements. These included: • accounting treatment for the Eco-Oil acquisition on 2 April 2015;• the treatment of intangibles and investments in the balance sheet, especially in light of the UK disposal on 4 March 2016; • the treatment of the liquidation of Virotec International plc; and• the projections forming the basis of the Directors’ assessment of going concern, including the facilities available to the Group for the

projection period.

Other activities during 2015In addition, during the year, the Audit Committee also undertook the following key activities:• review and approval of the 2014 audited financial statements;• review and approval of the 2015 unaudited interim financial statements; and• review and approval of the 2015 audit plan.

External auditorsKPMG were appointed as the Group’s external auditors at the Annual General Meeting of the Company on 9 June 2015, following a tender process which took place in the second half of 2014.

Auditor independence and provision of non-audit servicesThe Audit Committee reviews with management the engagement of the external auditor for non-audit services and the level of associated non-audit fees. For the year to 31 December 2015, the auditor did not earn any non-audit fees. The Audit Committee is satisfied as to the independence of the auditor.

Risk management and internal controlThe Group’s approach to risk management, identified principal risks and the steps taken to manage those risks are outlined on pages 12 to 13.

Dr. Caroline BrownChairman of the Audit Committee12 April 2016


We have audited the financial statements of Hydrodec Group plc for the year ended 31 December 2015 set out on pages 29 to 62. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (‘IFRSs') as adopted by the EU. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 18, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate.

Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2015 and of the

Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; • the Parent Company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from

branches not visited by us; or • the Parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit.

Lynton RichmondSenior Statutory Auditorfor and on behalf of KPMG LLPStatutory AuditorChartered Accountants15 Canada SquareLondonE14 5GL

12 April 2016

Independent Auditor’s Report to the Members of Hydrodec Group plc




Governance

Strategic Report

Consolidated Statement of Comprehensive IncomeFor the year ended 31 December 2015

Consolidated Income StatementFor the year ended 31 December 2015

2015USD’000

2014USD’000

Total loss for the year (31,138) (8,452)Other comprehensive incomeItems that may be reclassified to profit and loss:Exchange differences on translation of foreign operations (1,361) (2,670)Capital contribution from NCI – 1,234Items that will never be reclassified to profit and loss:Revaluation of property, plant and equipment (496) 548

Total comprehensive loss for the year (32,995) (9,340)

Other comprehensive income for the year attributable to:Non-controlling interests (1,004) 986

Owners of the Parent (31,991) (10,326)

Total comprehensive loss for the year (32,995) (9,340)

The accompanying accounting policies and notes form an integral part of these financial statements.

Note2015

USD’0002014

USD’000

Revenue 2 42,314 46,185Other income 2.5 1,523 8,552

Total income 43,837 54,737Cost of sales (42,694) (40,445)

Gross profit 1,143 14,292

Administrative expenses (20,672) (22,147)

Operating loss before impairment (19,529) (7,855)

Impairment of property, plant and equipment and intangibles 2.3 (11,073) (809)

Operating loss after impairment (30,602) (8,664)

Finance costs 4 (527) (236)Finance income 5 45

Loss on ordinary activities before taxation (31,124) (8,855)

Income tax (charge)/benefit 5 (14) 403

Loss for the year (31,138) (8,452)

Loss for the year attributable to:Non-controlling interests 22.2 (1,004) 986Owners of the Parent (30,134) (9,438)

Total loss for the year (31,138) (8,452)

Loss per share – basic/diluted 6 (4.17) cents (1.14) cents



Consolidated Statement of Financial PositionAs at 31 December 2015

Note2015

USD’0002014

USD’000

Non-current assetsProperty, plant and equipment 7 45,645 36,790 Intangible assets 8 9,616 20,387

55,261 57,177

Current assetsTrade and other receivables 9 6,799 8,310 Inventories 10 1,282 1,721 Cash and cash equivalents 2,064 15,559

10,145 25,590 Current liabilitiesBank overdraft (2,367) (613)Trade and other payables 11 (10,489) (13,327)Provisions 12 – (319)Other interest-bearing loans and borrowings 13 (6,195) (3,309)

(19,051) (17,568)

Net current (liabilities)/assets (8,906) 8,022

Non-current liabilitiesEmployee obligations (46) (143)Provisions 12 (1,776) (507)Other interest-bearing loans and borrowings 13 (13,091) (367)Deferred taxation 14 (1,827) (1,453)Other non-current liabilities – (1,000)

(16,740) (3,470)

Net assets 29,615 61,729

Equity attributable to equity holders of the ParentCalled-up share capital 15 6,200 6,620 Share premium account 16 130,539 130,539 Merger reserve 16 48,940 48,940 Treasury reserve 16 – (44,186)Employee benefit trust 16 (1,150) (1,239)Foreign exchange reserve 16 (9,174) (2,915)Share option reserve 16 883 7,556 Revaluation reserve 16 – 548 Capital redemption reserve 16 420 – Profit and loss account (152,662) (90,234)

23,996 55,629

Non-controlling interests 5,619 6,100

Total equity 29,615 61,729

The financial statements of the Group (Hydrodec Group plc – 5188355) were approved by the Board of Directors on 12 April 2016 and were signed on its behalf by:






Governance

Strategic Report

Consolidated Statement of Cash FlowAs at 31 December 2015

2015USD’000

2014USD’000

Cash flows from operating activitiesLoss before tax (31,124) (8,855)Net finance costs 522 191Amortisation, depreciation and impairment 13,439 7,445Gain on disposal of fixed assets (760) (1,473)Impairment of goodwill 3,433 –Share-based payment expense 31 324Asset revaluation 496 –Other non-cash movements (2,389) –Foreign exchange movement 884 (47)

Operating cash flows before working capital movements (15,468) (2,415)

Decrease/(increase) in inventories 835 (149)Decrease in trade and other receivables 4,041 6,986(Decrease)/increase in trade and other payables (3,268) 2,143Increase/(decrease) in provisions 270 (480)Taxes paid (133) (40)

Net cash (outflow)/inflow from operating activities (13,723) 6,045

Cash flows from investing activitiesAcquisition of ECO Assets (3,575) –Purchase of property, plant and equipment (14,937) (19,023)Purchase of other intangible assets – (1,000)Proceeds from disposal of property, plant and equipment 2,536 1,851Proceeds from sale of investment – 1,695 Interest received 5 45

Net cash outflow from investing activities (15,971) (16,432)

Cash flows from financing activitiesIssue of new shares – 17Proceeds from loans 15,404 3,000Capital contribution from NCI 850 2,468Interest paid (527) (236)Repayment of lease liabilities (573) (1,667)

Net cash inflow from financing 15,154 3,582

Decrease in cash and cash equivalents (14,540) (6,805)

Movement in net cashCash and cash equivalents 14,946 21,902Effect of movements in exchange rates on cash held (709) (151)

Opening cash and cash equivalents 14,237 21,751Decrease in cash and cash equivalents (14,540) (6,805)

Closing cash and cash equivalents (303) 14,946

Reported in the consolidated statement of financial position as:Cash and cash equivalents 2,064 15,559Bank overdraft (2,367) (613)

Net cash balance (303) 14,946



Consolidated Statement of Changes in EquityFor the year ended 31 December 2015

Share capital

Share premium

Revaluation reserve

Merger reserve

Treasury reserve

Employee benefit

trust

Foreign exchange

reserve

Capital redemption

reserve

Share option reserve

Profit and loss account

Total attributable

to owners of the Parent

Non-controlling

interestTotal

equity

At 1 January 2014 6,619 130,524 – 48,940 (44,186) (1,312) 2,850 – 7,330 (85,454) 65,311 3,872 69,183

Exchange differences* – – – – – 73 (81) – – – (8) 8 –Share-based payment – – – – – – – – 635 – 635 – 635Issue of shares 1 15 – – – – – – – – 16 – 16Capital contribution from NCI – – – – – – – – – – – 1,234 1,234

Transactions with owners 1 15 – – – 73 (81) – 635 – 643 1,242 1,885

Exchange differences – – – – – – (5,684) – (409) 3,423 (2,670) – (2,670)PPE revaluation – – 548 – – – – – – – 548 – 548Capital contribution from NCI – – – – – – – – – 1,234 1,234 – 1,234Loss for the period – – – – – – – – – (9,438) (9,438) 986 (8,452)

Total comprehensive income – – 548 – – – (5,684) – (409) (4,781) (10,326) 986 (9,340)

At 31 December 2014 6,620 130,539 548 48,940 (44,186) (1,239) (2,915) – 7,556 (90,234) 55,629 6,100 61,729

Change in exchange rates – – – – – 58 (56) – – – 2 (2) –Issue of shares – – – – – 31 – – – – 31 – 31Cancelled shares (420) – – – 44,186 – – 420 – (44,186) – – –Capital contribution from NCI – – – – – – – – – 325 325 525 850

Transactions with owners (420) – – – 44,186 89 (56) 420 – (43,861) 358 523 881

Change in exchange rates – – (52) – – – (6,203) – (359) 5,253 (1,361) – (1,361)Share options lapsed – – – – – – – – (6,314) 6,314 – – –PPE revaluation – – (496) – – – – – – – (496) – (496)Loss for the period – – – – – – – – – (30,134) (30,134) (1,004) (31,138)

Total Comprehensive Income – – (548) – – – (6,203) – (6,673) (18,567) (31,991) (1,004) (32,995)

At 31 December 2015 6,200 130,539 – 48,940 – (1,150) (9,174) 420 883 (152,662) 23,996 5,619 29,615

* Restated

Exchange differences on transactions with owners arise on the presentation of sterling denominated reserves balances in US dollars.

A description of each reserve is set out in note 16.





Governance

Strategic Report

Notes to the Financial StatementsFor the year ended 31 December 2015

1. Accounting policiesThe Group’s principal activities are grouped into the following principal service lines:• re-refining of used transformer oil into, and sale of, new SUPERFINETM oil; and• collection and treatment of waste lubricant oil and the sale of recycled oil products.

Hydrodec Group plc is incorporated and domiciled in England and Wales and situated at 6 Hay’s Lane, London, SE1 2HB. The Group’s shares are admitted to trading on the Alternative Investment Market of the London Stock Exchange.

Basis of preparationThe Group’s consolidated financial statements are prepared in accordance with the principal accounting policies adopted by the Group as set out below and International Financial Reporting Standards (‘IFRS') and International Financial Reporting Interpretations (‘IFRC') as adopted for use in the European Union (‘EU'), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Company has elected to prepare its Parent Company financial statements in accordance with FRS 101; these are presented on pages 56 to 62.

The following standards have been amended or became effective during the year. The Group’s consolidated financial statements have been prepared in accordance with these changes where relevant.• IFRS 10 Consolidated Financial Statements (effective 1 January 2014)• IFRS 11: Joint arrangements (effective 1 January 2014)• IFRS 12: Disclosures of interest in other entities (effective 1 January 2014)• IAS 27 (Revised), Separate Financial Statements (effective 1 January 2014)

Application of these standards did not result in any impact on the financial statements for 2015.

Standards issued but not yet effectiveIn addition, the following is a list of standards that are in issue but are not effective in 2015, and have not yet been endorsed for use in the EU, together with the effective date of application to the Group:• IFRS 9: Financial instruments (IASB effective date 1 January 2018)

The Directors do not anticipate that the adoption of these standards will have a material impact on the Group’s reported results.

The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from those estimates.

Restatement of 2014 balancesIn preparing the 2015 financial statements certain balances in respect of 2014 have been restated without any overall impact on net assets. Cash and overdrafts have been disclosed separately as no legal set off exists. As well, the retranslation of certain reserve accounts has been reversed so as to present the reserve accounts at their historical position as at 1 January 2014. It has not been possible to restate back to the original opening position, but any impact is within reserves and deemed immaterial.

Going concernThe Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 1 to 13. The principal risks that could potentially have a significant impact on the Group in the future are set out on pages 12 to 13. In particular, the Group operates from two sites and is therefore dependent on their continuing operational reliability and rateability. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Chief Executive’s Report on pages 8 to 10. In addition, note 18 to the consolidated financial statements on pages 50 to 51 includes details of the Group’s approach to managing its capital and its exposures to interest rate, credit, currency and liquidity risk.

As described in the Chief Executive’s Report on pages 8 to 10 the Group has reported a loss for the year, after impairment, of US$31.1 million resulting principally from delays and cost overruns in commissioning the Canton plant and from its UK Operations (disposed of on 4 March 2016) which were adversely affected by the significant decline in the oil price during the year. The disposal of the UK Operations on 4 March 2016 resulted in, amongst other matters, an improved net current liability position for the Group, compared with that at 31 December 2015, and this has been used as the basis for the Group’s working capital projections. The current economic environment for the Group remains challenging. Accordingly, and in the context of the risks highlighted above, the pace and execution at which the Canton plant builds back market share in the US transformer oil market remains a key underlying risk for the Group. Whilst the Directors have instituted measures to deliver improved operational performance and efficiencies and to implement a rigorous cost reduction programme, the US transformer oil market and the Group’s speed of re-entry thereto will continue to be affected by market conditions giving rise to uncertainties over future trading results and cash flows. However, current pricing for transformer oil shows signs of steady improvement from the lows of 2015 and the Canton plant has now established a reliable operating record over the last three months with all six of its trains running. The new Australian operations are stable and plans are underway to increase the level of feedstock to the Australian business. The base case projections, for assessing going concern, through to June 2017 for the combined US and Australian operations, which reflect a degree of downside risk on revenues, show a steadily improving position and achieving a monthly cash breakeven position in Q3 of 2016 for the Group. At 31 March 2016, the Group’s indebtedness (excluding finance lease liabilities) was US$7.3 million and the base case projections indicate this increasing over the next six months before steadily improving through to the end of the projection period in June 2017 as a result of the measures taken.


Notes to the Financial Statements continuedFor the year ended 31 December 2015

1. Accounting policies continued

At 31 March 2016, the Group’s indebtedness (excluding finance lease liabilities) was funded by a combination of overdraft facilities in the USA and Australia, amounting to US$2.6 million, and a committed loan facility of £4.135 million ($5.8 million at a rate of $1.4/£1). In order to fund additional working capital requirements over the next six months and provide headroom to cater for additional downside risk in the period covered by the projections, a further committed facility was entered into on 11 April 2016 for £2.25 million ($3.15 million at a rate of $1.4/£1), further details of which are set out in note 25. The key risks considered by the Directors in making their assessment as to the adequacy of headroom include a reduction in volume of production and a decline in projected revenue.

After making enquiries, taking into account the Group’s current projections, financial position, its loan and overdraft facilities and recent progress in re-establishing market share in the US with record production in February and March 2016, and considering the uncertainties described above, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least the next 12 months from the date of approval of these financial statements. Accordingly, the Directors continue to adopt the going concern basis in preparing the Annual Report and financial statements.

Presentational currencyThe Group presents its financial statements in US dollars translated at the closing rate each year, as the Group’s business is influenced by pricing in international commodity markets which are primarily dollar based.

Basis of consolidationSubsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance.

Transactions eliminated on consolidationIntra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Business combinationsAll business combinations are accounted for by applying the acquisition method. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. The Group measures goodwill at the acquisition date as:• the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; plus• the fair value of the existing equity interest in the acquiree; less• the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.

Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred.

Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not re-measured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss.

On a transaction-by-transaction basis, the Group elects to measure non-controlling interests, which have both present ownership interests and are entitled to a proportionate share of net assets of the acquiree in the event of liquidation, either at its fair value or at its proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the acquisition date. All other non-controlling interests are measured at their fair value at the acquisition date.

Non-controlling interestNon-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

GoodwillGoodwill, representing the excess of the fair value of the consideration paid over the fair value of the identifiable net assets of subsidiary undertakings at the date of acquisition, is initially recognised as an asset at its fair value and is subsequently measured at cost less any accumulated impairment losses. If the fair values of identifiable net assets exceed fair value of consideration paid, the excess amount (i.e. gain on a bargain purchase) is recognised in profit or loss immediately.




Governance

Strategic Report

Investments in associates Investments in associates are initially recognised at cost and subsequently accounted for using the equity method. Any goodwill or fair value adjustment attributable to the Group’s share in the associate is not recognised separately and is included in the amount recognised as investment in associates. The carrying amount of the investment in associates is increased or decreased to recognise the Group’s share of the profit or loss and other comprehensive income of the associate, adjusted where necessary to ensure consistency with the accounting policies of the Group. Unrealised gains and losses on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in those entities. Where unrealised losses are eliminated, the underlying asset is also tested for impairment.

Measurement conventionThe financial statements are prepared on the historical cost basis except where stated otherwise in accounting policies.

Foreign currency translationThe individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). The presentational currency for the consolidated financial statements is US dollars at the rate of exchange ruling at the consolidated statement of financial position date, and at the average rate for the statement of comprehensive income where this approximates to the actual rate. Any differences arising from this procedure have been included in other comprehensive income.

Foreign currency transactionsTransactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the statement of financial position date. All differences are taken to profit or loss with the exception of differences on translation of the net investment in a foreign Group entity. These are taken directly to other comprehensive income until the disposal of the net investment, at which time they are re-classified from equity to profit or loss.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign operations and translated at the closing rate.

Revenue recognitionRevenues are recognised at fair value of the consideration receivable net of the amount of value added taxes.

Sale of goodsSales revenue comprises revenue earned (net of returns, discounts and allowances) from the sale of re-refined and recycled oil to entities outside the consolidated entity. Sales revenue is recognised when the risks and rewards of ownership of the goods passes to the customer, which is normally upon delivery, and when the amount of revenue can be measured reliably.

Government grantsThe Australian Government provides an incentive for product stewardship of used oil which is recognised at the point of delivery of the associated revenue stream.

Other incomeThe Group has business interruption insurance which provides coverage if business operations are suspended because of the loss of use of property and equipment resulting from a covered loss. Insurance income relating to compensation for loss of profits has been recognised over the expected rebuild of the Canton plant. Refer to Note 2.5.

Financing income and expensesFinancing expenses comprise interest payable, finance charges on shares classified as liabilities and finance leases recognised in profit or loss using the effective interest method, unwinding of the discount on provisions, and net foreign exchange losses that are recognised in the income statement (see foreign currency accounting policy). Financing income comprise interest receivable on funds invested, dividend income, and net foreign exchange gains.

Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity’s right to receive payments is established. Foreign currency gains and losses are reported on a net basis.



Property, plant and equipmentProperty, plant and equipment are generally measured at cost less accumulated depreciation and impairment charges.

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, and any other costs directly attributable to bringing the asset to a working condition for its intended use.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The cost of the day-to-day servicing of property, plant and equipment are recognised as an expense as incurred.

Depreciation is provided at rates calculated to write-off the cost of property, plant and equipment, less their estimated residual value, over the expected useful lives on a diminishing value basis. The rates used vary between 5% and 33% per annum and residual values and useful economic lives are re-assessed annually.

PatentsAll costs incurred in maintaining patents are expensed in the period in which they are incurred, unless they meet the recognition criteria under IAS 38, in which case they are capitalised.

Growth costsThe Group identifies certain costs as growth costs as the business continues to invest in long-term strategic growth initiatives focused on geographic expansion and research and development.

Expenditure on growth costs is classified into two key categories:

Market expansion costsExpenditure on extending existing products or operations into new markets is recognised as an expense in the period in which it is incurred.

New product development costsExpenditure on new product development is recognised as an expense in the period in which it is incurred.

Development costs incurred on specific projects are capitalised when all the following conditions are satisfied:• completion of the intangible asset is technically feasible so that it will be available for use or sale;• the Group intends to complete the intangible asset and use or sell it;• the Group has the ability to use or sell the intangible asset;• the intangible asset will generate probable future economic benefits. Among other things this requires that there is a market for the output from

the intangible asset or for the intangible asset itself, or, if it is to be used internally, the asset will be used in generating such benefits;• there are adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and• the expenditure attributable to the intangible asset during its development can be measured reliably.

Costs incurred which do not meet the above criteria are expensed as incurred.

Intangible assets and goodwillIntangible assets acquired separately from a business are capitalised at cost and amortised over their useful lives. Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill if the fair value can be measured reliably on initial recognition. Intangible assets, excluding development costs, created within the business are not capitalised and expenditure is charged against profits in the year in which it is incurred.

The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

Intangible assets, other than goodwill, are amortised over their estimated useful economic life of 3-15 years.

GoodwillGoodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee.





Governance

Strategic Report

Impairment excluding inventories and deferred tax assets Financial assets (including receivables)A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

Non-financial assetsThe carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the ‘cash-generating unit’). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units, or (‘CGU'). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination.

An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

Non-derivative financial instrumentsNon-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.

Trade and other receivablesTrade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses.

Trade and other payablesTrade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.

Cash and cash equivalentsCash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose only of the cash flow statement.

Interest-bearing borrowingsInterest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method, less any impairment losses.



Employee benefits Share-based payment transactionsShare-based payment arrangements in which the Group receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Group.

The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

Share-based payment transactions in which the Group receives goods or services by incurring a liability to transfer cash or other assets that is based on the price of the Group’s equity instruments are accounted for as cash-settled share-based payments. The fair value of the amount payable to employees is recognised as an expense, with a corresponding increase in liabilities, over the period in which the employees become unconditionally entitled to payment. The liability is re-measured at each balance sheet date and at settlement date. Any changes in the fair value of the liability are recognised as personnel expense in profit or loss.

WarrantsThe Group issued equity-settled warrants in connection with fixed rate loan notes. Equity-settled warrants are measured at fair value of the instruments granted (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period (or until fixed rate loan notes are repaid), based on the Group’s estimate of the shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions.

InventoriesInventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of selling expenses.

The cost of inventories is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing locations and condition.

ProvisionsProvisions are recognised when:• the Group has a present legal or constructive obligation as a result of a past event;• it is probable that an outflow of resources will be required to settle the obligation; and• a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation.

Trade and other receivablesTrade receivables, which generally have 30-day terms, are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method less provisions for impairment. Provision against trade receivables is made when there is objective evidence that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows.

LeasingOperating lease paymentsPayments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense.

Finance lease paymentsMinimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.





Governance

Strategic Report

TaxationCurrent tax is the tax currently payable based on taxable profit for the year.

Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries and joint ventures is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets.

Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.

Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the consolidated income statement, except where they relate to items that are charged or credited directly to other comprehensive income or equity in which case the related deferred tax is also charged or credited directly to other comprehensive income or equity.

Employee Benefit TrustThe assets and liabilities of the Employee Benefit Trust (‘EBT') have been included in the Group accounts. Any assets held by the EBT cease to be recognised on the Group balance sheet when the assets vest unconditionally in identified beneficiaries.

The costs of purchasing own shares held by the EBT are shown as a deduction against equity. The proceeds from the sale of own shares held increase equity. Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the consolidated statement of comprehensive income.

Key judgements in applying the Group’s accounting policiesIn the process of applying the Group’s accounting policies, which are described in this note, management was required to make a judgement considered to have a significant effect on the amounts recognised in the financial statements as detailed below:

Accounting for business interruption incomeThe allocation of proceeds received in respect of the settlement of the insurance claim in Canton has been derived from the loss adjustment documentation used as the basis for the settlement agreement. Given the anticipated timing of the recommissioning of the Canton plant for the start of Q2 2015, this resulted in a deferral of US$1.5 million of income to 2015.

Key sources of estimation uncertaintyThe key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant effect on the amounts of assets and liabilities within the next financial year, are discussed below.

Valuation and amortisation of intangible assets and goodwillThe intangible assets carried forward relate to the intellectual property and goodwill acquired by the Group in 2004, through the acquisition of Virotec International plc and reclassification of a royalty prepaid in 2008. The original cost of £19.5 million is amortised over the estimated useful life of the asset. The intellectual property consists of know-how and trade secrets relating to the technology, some of which is covered in a patent. It is management’s view that the useful life of the intellectual property will extend far beyond the life of the patent and for the purposes of calculating the period over which the costs are amortised it has been estimated that the cost will be amortised over 15 years (note 8).

Impairment of goodwill and other intangiblesThere are a number of assumptions management have considered in performing impairment reviews of goodwill and intangible assets. In determining whether goodwill and intangible assets are impaired, an estimation of value in use of CGU to which goodwill and other intangible assets are allocated is made. The value in use calculation requires the Directors to estimate the future cash flows expected to arise from the CGU and a suitable discount rate in order to calculate present value (note 8).

Useful lives and impairment of property, plant and equipmentProperty, plant and equipment is depreciated over its useful life. The useful life is based on the management’s estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations in the carrying value and amounts charged to the income statement in specific periods (note 7).

In determining whether property, plant and equipment assets are impaired, if the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. The key assumptions under intangible assets and goodwill valuation are also applicable to property, plant and equipment. That reduction is an impairment loss with amounts charged to the comprehensive income statement in the relevant periods (note 7).

ProvisionsProvisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date. In making this assessment management have referenced third-party costs and the likelihood of the full cost being incurred (note 12).


2. Revenue and operating loss2.1. Segment analysisThe Group operates two operating segments:• Re-refining: principally the treatment of used transformer oil and the sale of SUPERFINETM oil• Recycling: principally the collection and treatment of waste lubricant oil and the sale of recycled oil products

The financial information detailed below is frequently reviewed by the Board (the Chief Operating Decision Maker) and decisions made on the basis of adjusted segment operating results.

Year ended 31 December 2015Re-refining

USD’000Recycling

USD’000Unallocated

USD’000Total

USD’000

Revenue 8,231 34,083 – 42,314Other income 1,521 2 – 1,523

Operating EBITDA (3,254) (2,855) (5,114) (11,223)Growth costs (1,246) (422) (92) (1,760)Recommissioning costs (302) – – (302)Restructuring costs (231) (1,028) – (1,259)Depreciation (1,310) (1,414) (11) (2,735)Amortisation (1,683) (1,381) – (3,064)Share-based payment costs – – (31) (31)Foreign exchange profit 784 3 58 845

Operating loss before impairment (7,242) (7,097) (5,190) (19,529)


USD’000Recycling


USD’000Total

USD’000

Revenue 11,505 34,680 – 46,185Other income 8,552 – – 8,552

Operating EBITDA 4,944 764 (4,098) 1,610Growth costs (1,772) – (506) (2,278)Depreciation (1,769) (2,092) 738 (3,123)Amortisation (2,246) (1,267) – (3,513)Share-based payment costs – – (324) (324)Foreign exchange loss (67) (88) (72) (227)

Operating loss before impairment (910) (2,683) (4,262) (7,855)


USD’000Recycling


USD’000Total

USD’000

Total assets 49,987 10,445 4,974 65,406 Total liabilities (18,023) (10,445) (7,323) (35,791)

Year ended 31 December 2014

Total assets 47,330 16,537 18,900 82,767 Total liabilities (11,435) (7,912) (1,691) (21,038)





Governance

Strategic Report

2.2. Geographic analysisThe Group’s revenues and other income from external customers and its non-current assets are divided into the following geographical areas:

2015 2014

Revenue andother income

USD’000

Non-currentassets

USD’000

Revenue andother income

USD’000

Non-currentassets

USD’000

UK 34,085 5,516 34,680 11,580USA 5,559 34,616 13,910 23,733Australia 4,193 11,855 6,147 13,078Unallocated – 3,274 – 8,786

43,837 55,261 54,737 57,177

Revenue and other income have been identified on the basis of the customers’ geographical location. Non-current assets are based on their physical location.

2.3. Loss on ordinary activitiesThe loss on ordinary activities before taxation is stated after (charging)/crediting the following amounts:

2015USD’000

2014USD’000

Grant income 941 1,641 Profit on disposal of property, plant and equipment 760 1,473 Cost of sales– inventory expensed (11,100) (11,058)– other direct costs (22,085) (20,313)– employee benefit expense (6,973) (6,493)– depreciation (2,536) (2,581)Amortisation (3,064) (3,513)Share-based payments (31) (324)Depreciation (199) (542)Impairment of property, plant and equipment and intangible assets (11,073) (809)Operating lease rentals – land and buildings (852) (804)Exchange (gain)/loss 845 (227)Fees payable to the Company's auditor for the audit of the annual accounts (67) (70)Fees payable to the Company's auditor and its associates for other services:– the audit of the Company's subsidiaries (113) (101)– tax & other services – (144)

Profit on disposal of assets in 2015 relate to the surplus generated from a sale and leaseback arrangement with TIP Europe.

Fees paid to the Group auditors and its associates for non-audit services to the Group are not disclosed in the individual accounts of Hydrodec Group plc because the Group’s consolidated financial statements are required to disclose such fees on a consolidated basis.

2015USD’000

2014USD’000

Capital expenditure – property, plant and equipment (14,937) (19,023)

2.4. Growth costsThe business continues to invest in long-term strategic growth initiatives focused on geographic expansion and research and development. These costs are analysed as follows:

2015USD’000

2014USD’000

Market expansion development costs 892 1,270New product development 446 1,008Transaction fees and onetime costs 422 –

Growth costs 1,760 2,278

2015USD’000

2014USD’000

Employee benefit expense 819 1,342Other costs 941 936

Growth costs 1,760 2,278


2. Revenue and operating loss continued

2.5. Other income – insurance proceedsOn 11 November 2014 the Group and its insurers settled the Group’s insurance claim arising from the incident at Canton in December 2013. The total gross value of the claim was agreed at USD 20,000,000, which after deduction of property damage and business interruption insurance excesses of USD 1,250,000 in aggregate, resulted in cash payments of USD 18,750,000 to the Group.

2015USD’000

Gross proceeds after deductibles 18,750

Proceeds recognised in 2013 7,596Proceeds recognised in 2014 9,658Proceeds recognised in 2015 1,496

18,750

2015USD’000

2014USD’000

Proceeds recognised 1,496 9,658Less asset disposal costs – (409)Less insurance claim related costs – (697)

Net income recognised 1,496 8,552

Net income recognised from insurance proceeds 1,496 8,552 Other income 27 –

Total other income 1,523 8,552

3. Directors and employeesStaff costs, excluding key management personnel (shown below), during the year were as follows:

2015USD’000

2014USD’000

Wages and salaries 13,862 15,493Payroll taxes 1,207 1,265Share-based payments 13 145

15,082 16,903

The average number of employees of the Group during the year was:

2015Number

2014Number

Operations 225 237Corporate office 13 13

238 250

The remuneration of the Group’s key management personnel (including Executive Directors), are set out below. Additional information on remuneration, share options and pension contributions can be found in the Remuneration Committee Report.

2015USD’000

2014USD’000

Wages and salaries 1,379 1,815Severance payments 547 –Payroll taxes 207 207Share-based payments 18 179

2,151 2,201

The highest paid Director received emoluments of USD 1,019,000, including a severance payment (2014: USD 615,000). Pension contributions for Directors totalled USD 7,000 (2014: USD 13,000).





Governance

Strategic Report

4. Finance costs2015

USD’0002014

USD’000

Bank overdrafts and leases 527 236

527 236

5. Income tax2015

USD’000

2014RestatedUSD’000

Current tax (133) (79)

Deferred taxReversal of temporary timing differences 83 389Adjustment for change in UK tax rate 36 93

119 482

Total tax (14) 403

Loss on ordinary activities before taxation (31,123) (8,855)Rate of corporation tax in the United Kingdom of 20.25% (2014: 21.5%) (6,302) (1,904)

Effects of:Expenses not deductible for tax purposes 2,525 804Adjustment for change in UK tax rate 36 93Tax losses not recognised 3,727 1,410

(14) 403

A deferred tax asset of approximately USD 22,681,000 (2014: USD 18,954,000) in respect of unused losses against future taxable profits is not recognised due to the uncertainty of future taxable profits.

6. Loss per shareThe calculation of the basic loss per share of 4.17 cents per share (2014: 1.14 cents loss per share) is based on the loss attributable to ordinary shareholders of USD 31,138,000 (2014: USD 8,452,000 loss) divided by the weighted average number of shares in issue during the year.

The weighted average number of shares used in the calculations are set out below:

2015Number of shares


Issued Ordinary Shares at beginning of year 803,356,138 803,231,138 Shares issued in the year (14/03/2014) – 125,000 Weighted average share issue – 100,342 Add back shares transferred out of EBT 2,583,333 –Add back treasury shares (cancelled in 2015) (59,256,666) (59,256,666)

Weighted average shares in issue 746,682,805 744,074,814

In 2014 and 2015, the share options and warrants’ exercise values are greater than the market price and diluted earnings per share is the same as basic. The calculation of the weighted average number of shares excludes shares which were held by a member of the Group in 2014 (which were treated as if they were treasury shares) and which were subsequently cancelled in 2015 following the liquidation of the relevant entity, and also shares held in 2014 by the Hydrodec Group Employee Benefit Trust.


7. Property, plant and equipmentLand and buildingsUSD’000

Plant and equipment

USD’000

Assets in course of construction

USD’000Total

USD’000

CostAt 31 December 2013 4,977 25,100 – 30,077 Change in exchange rates (146) (3,692) – (3,838)Additions 7 918 18,098 19,023 Revaluation – 548 – 548 Disposals – (1,424) – (1,424)

At 31 December 2014 4,838 21,450 18,098 44,386

Change in exchange rates (151) (635) – (786)Reclassification – 18,098 (18,098) –Additions 599 14,338 – 14,937 Acquisitions 742 3,104 – 3,846 Revaluation – (496) – (496)Disposals (10) (3,787) – (3,797)

At 31 December 2015 6,018 52,072 – 58,090

Accumulated depreciationAt 31 December 2013 330 7,084 – 7,414 Change in exchange rates (28) (2,298) – (2,326)Depreciation charge for the year 201 2,922 – 3,123 Impairment – 809 – 809 Disposals – (1,424) – (1,424)

At 31 December 2014 503 7,093 – 7,596

Change in exchange rates 5 75 – 80 Depreciation charge for the year 589 2,146 – 2,735 Impairment 742 3,318 – 4,060 Disposals (10) (2,016) – (2,026)

At 31 December 2015 1,829 10,616 – 12,445

Carrying amountAt 31 December 2015 4,189 41,456 – 45,645 At 31 December 2014 4,335 14,357 18,098 36,790

Buildings are depreciated at various rates depending on the estimated life of the item. The rates of depreciation vary between 2.5% and 10% per annum. Plant and equipment is depreciated at various rates depending on the estimated life of the item. The rates of depreciation vary between 5% and 33% per annum. The carrying amount of the Group’s plant and equipment includes USD 14,627,000 (2014: USD 925,000) in respect of assets held under finance leases. In 2015 the revaluation movement of USD 496,000 is a correction of a revaluation of certain plant and equipment in 2014 which was not in line with Hydrodec’s accounting policy.





Governance

Strategic Report

8. Intangible assetsRe-Refining Recycling

TotalUSD’000

RoyaltyUSD’000

Hydrodec Technology

USD’000GoodwillUSD’000

CEP LicenseUSD’000

ContractsUSD’000

Brand nameUSD’000

GoodwillUSD’000

CostAt 31 December 2013 5,010 25,859 6,725 – 2,354 2,201 – 42,149Exchange translation (417) (1,445) (376) (52) (131) (122) – (2,543)Additions – – – 2,000 – – – 2,000

At 31 December 2014 4,593 24,414 6,349 1,948 2,223 2,079 – 41,606

Exchange translation (503) (1,158) (301) (92) (106) (99) (127) (2,386)Acquisition – – – – – – 1,536 1,536Write-off – – (2,904) (953) – – – (3,857)Disposals – (389) – – – – – (389)

At 31 December 2015 4,090 22,867 3,144 903 2,117 1,980 1,409 36,510

Accumulated amortisation and impairment

At 31 December 2013 2,925 12,361 3,300 – 179 195 – 18,960Exchange translation (211) (785) (182) – (36) (39) – (1,253)Provided in the year 551 1,694 – – 607 660 – 3,512

At 31 December 2014 3,265 13,270 3,118 – 750 816 – 21,219

Exchange translation (199) (678) (503) – (59) (59) – (1,498)Provided in the year 110 1,573 – – 760 621 – 3,064Write-off – – (2,904) – – – – (2,904)Impairment – – 3,433 903 666 602 1,409 7,013

At 31 December 2015 3,176 14,165 3,144 903 2,117 1,980 1,409 26,894

Carrying amount At 31 December 2015 914 8,702 – – – – – 9,616At 31 December 2014 1,328 11,144 3,231 1,948 1,473 1,263 – 20,387

The Group tests intangible assets annually for impairment or more frequently if there are indications that the carrying value might be impaired. The Group considers it has four CGUs – re-refining in each of the USA, UK and Australia, and recycling. Re-refining relates to the global exploitation of the Hydrodec re-refining technology (currently operating in respect of the treatment of used transformer oil and the production and sale of SUPERFINETM oils) and recycling relates to the UK collections business (principally focused on the collection and treatment of other waste oils and the sale of recycled oil products). The recoverable amount of each of the US and Australian CGU is determined from value in use calculations. The UK re-refinery and UK recycling CGUs were divested on 4 March 2016 for £1 and as a result the recoverable amounts are determined based on fair value less cost of sale.

Re-refiningAustralia and USAThe royalty payment was recorded at cost in 2008 and represented the right for the Group as a whole to generate income based on the quantity of SUPERFINETM oil produced for a period of 15 years and commenced in 2004. It is being amortised on a straight-line basis and, at 31 December 2015, the remaining unamortised life of the asset was four years.

The Hydrodec technology is being amortised over its anticipated useful life of 15 years. The intangible asset carried forward relates to intellectual property acquired by the Group in 2004. The intellectual property consists of know-how and trade secrets relating to the technology, some of which is covered by a patent. The patent expired in 2013 in respect of certain countries but continues in respect of the US. It is management’s view that the useful life of the intellectual property will extend far beyond the life of the patent and for the purposes of calculating the period over which the costs will be amortised it has been estimated that the minimum useful life of the technology is 15 years. At 31 December 2015, the remaining unamortised life of the asset was four years.

Goodwill of USD 2,904,000 arose on the acquisition of Oil Treatment Services Pty Ltd in 2005, which has been fully provided for. The balance of goodwill relates to the acquisition of Virotec International plc in 2008. The goodwill has been allocated to the Australian and US CGUs and the Group’s projected cash flows do not provide robust support for the carrying value and an impairment of USD 3.4 million has been recognised.

Value in use is the present value of the projected cash flows of this CGU. The key assumptions regarding the value in use calculations were budgeted growth in revenues, budgeted gross profit margins and the discount rate applied. Budgeted revenue growth and budgeted gross profit margins were estimated based on actual performance over the past two financial years and expected market changes.

The remaining technology and prepaid royalty intangible assets have been treated as ‘shared’ assets between the Australian and US CGUs. The key inputs used to determine the recoverable amount of each CGU is: • pre-tax discount rate of 10%• perpetuity growth rate of 0%• five-year forecast period

The Group prepares cash flow forecasts, based on the most recent financial budgets approved by management.


8. Intangible assets continued

Re-refining continued

UK (CEP Licence)The CEP licence was originally recognised as the Group entered into an agreement with Chemical Engineering Partners to licence their technology for use in the proposed UK re-refinery. 50% of the consideration was paid, with the remaining 50% payable upon commissioning of the plant. In 2014 the full 100% was recognised as an intangible. In 2015 the second 50% has been written-off as it is uncertain when this amount will be paid. A contingent liability has been disclosed for a payment dependent on construction of a re-refinery payable to CEP. No amortisation of the licence has been charged in 2015 as construction of the re-refinery is not yet complete.

Given the sale of Hydrodec (UK) Limited, Hydrodec Re-Refining (UK) Limited and the CEP Licence for £1 post 31 December 2015, the Directors considered the impact of the purchase consideration on the carrying value of the assets included in the sale as at 31 December 2015. As a result of this work, the carrying amount of the CEP licence as at 31 December 2015 has been reduced to $nil.

RecyclingCertain customer contracts (2015: USD 2,117,000, 2014: USD 2,354,000) and brand name (2015: USD 1,980,000, 2014: USD 2,201,000) were recognised on acquisition of the principal assets and business of OSS Group Limited (in administration) in 2013 as part of the fair value assessment of the assets acquired and were being amortised over their anticipated useful life. Both items were being amortised on a straight-line basis and, at 31 December 2015, the remaining unamortised life of the asset was one year.

The business and assets of Eco-Oil Limited were acquired on 2 April 2015 with the net assets acquired at fair value. A provisional estimate of fair value was made for intangible assets relating to customer contracts and brand name of the business and these were recorded in the Group’s interim accounts for the six-month period to 30 June 2015. The Directors have now reviewed their provisional estimates of fair value with the result that no value is deemed to attach to either customer contracts or the Eco-Oil brand name at the date of acquisition. As a result, goodwill of US$2.6 million arose at the date of acquisition.

As a result of the disposal of the UK recycling business on 4 March 2016 for £1, the Directors have considered the indications for impairment of the goodwill at 31 December 2015 and concluded that the goodwill balance should be fully written-off.

Amortisation and impairment chargeThe amortisation and impairment charge are both recognised in administrative expenses in the income statement.

9. Trade and other receivables2015

USD’0002014

USD’000

Trade receivables 5,103 4,270Prepayments and accrued income 1,260 3,790Other receivables 436 198Other taxation and social security – 52

6,799 8,310

All trade receivable amounts are short term. The carrying value is considered a fair approximation of their fair value. All of the Group’s trade and other receivables have been reviewed for indicators of impairment.

At 31 December 2015, some of the unimpaired trade receivables are past their due date but all are considered recoverable. The analysis of financial assets is as follows:

2015USD’000

2014USD’000

Less than one month 3,540 3,375Past due but not impaired 1,563 895

5,103 4,270

Credit sales are only made after credit approval procedures are completed, and the carrying value represents the Group’s maximum exposure to credit risk.

The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:

2015USD’000

2014USD’000

Sterling 5,552 4,964Australian dollars 453 1,151United States dollars 794 2,195

6,799 8,310





Governance

Strategic Report

10. Inventories2015

USD’0002014

USD’000

Raw materials 713 1365Finished goods at cost 566 333Work-in-progress 3 23

1,282 1,721

All inventory is carried at lower of cost and net realisable value.

11. Trade and other payables2015

USD’0002014

USD’000

CurrentTrade payables 7,420 6,624 Non-trade payables and accrued expenses 3,069 5,207 Deferred income – 1,496

10,489 13,327

The carrying value of trade and other payables are considered to be a reasonable approximation of fair value.

12. Provisions2015

USD’0002014

USD’000

Remediation of contaminated stockCurrent – 319 Non-current 699 –Remediation of contaminated landCurrent – –Non-current 1,077 507

1,776 826

The movement in the provision is represented by:

ProvisionUSD’000

At 31 December 2014 826Change in exchange rates 344Additional provisions 608Released to income statement – Utilised in the period (2)

At 31 December 2015 1,776

The remediation of contaminated stock provision of USD 699,000 relates to stocks of materials at the Young facility dating from the plant’s original function, ownership and business strategy. The Directors have reviewed the timing and cost of the Young remediation provision and these costs will be incurred at least 12 months from the balance sheet date. Consequently this provision has been reclassified to non-current.

The remediation of contaminated land provision of USD 1,077,000 relates to the costs of remediation of land occupied by the Group’s operations on acquisition of the business and assets of OSS Group Ltd (in administration) and the business and assets of Eco-Oil Limited and the land occupied by the Group’s US operations at Canton, Ohio. During the year the Group undertook some remediation, the costs of which were utilised against the provision. Post-balance-sheet date, with the divestment of the UK business the remediation of contaminated land provision transfers to the acquirer and is no longer an obligation to Hydrodec.


13. Other interest-bearing loans and borrowings2015

USD’0002014

USD’000

Current liabilitiesCurrent portion of finance lease liabilities 2,074 309 Unsecured bank facility 4,121 – Finance lease facility – 3,000

6,195 3,309

Non-current liabilitiesFinance lease liabilities 9,125 367 Loan from shareholder 3,966 –

13,091 367

In 2014, the finance lease facility of USD 3,000,000 related to the initial drawdown of the total USD 10,000,000 finance lease facility in the US which converted to a seven-year finance lease arrangement once the Canton plant was commissioned. The remaining USD 7,000,000 finance lease facility was recognised in 2015.

The finance leases are secured over the assets to which they relate. The current portion of the finance lease liabilities relates to property, plant and equipment of USD 1,884,000 at the Canton plant in USA and USD 190,000 at the Bomen site in Australia. The non-current finance lease liabilities of USD 9,125,000 include USD 7,887,000 at the Canton plant and USD 1,238,000 at the Bomen site.

Unsecured bank facility of USD 4,121,000 includes USD 2,802,000 relating to factoring in the UK and USD 1,319,000 for the working capital facility in the US.

Other loans include USD 3,962,000 owed to Andrew Black, a Non-Executive Director and a substantial shareholder.

Minimum lease payments

2015USD’000

Interest2015

USD’000

Principal2015

USD’000

Minimum lease payments

2014USD’000

Interest2014

USD’000

Principal2014

USD’000

Less than one year 2,125 446 1,679 353 44 309 Between one and five years 8,072 1,052 7,020 411 45 366 More than five years 2,578 78 2,500 – – –

12,775 1,576 11,199 764 89 675

14. Deferred taxation2015

USD’000

At 31 December 2013 2,025Transfer to statement of comprehensive income (482)Change in exchange rates (90)


Transfer to statement of comprehensive income (119)Acquisitions 565Change in exchange rates (72)


Reductions in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013. Further reductions to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015. The deferred tax liability at 31 December 2015 has been calculated based on these rates.





Governance

Strategic Report

15. Share capitalIssued and fully paid – Ordinary Shares of 0.5 pence each



At the beginning of the year 803,356,138 803,231,138Issued for cash – 125,000Cancelled (56,673,333) –

746,682,805 803,356,138

2015USD’000

2014RestatedUSD’000

At the beginning of the year 6,620 6,619 Issued for cash – 1 Issued in settlement of loan (420) –

At the end of the year 6,200 6,620

Hydrodec Group plc held 54,500,000 of its own Ordinary Shares (which were previously held by VIN (Australia) Pty Ltd pursuant to the acquisition of Virotec International plc in 2008) and which were transferred to Hydrodec Group plc as part of a dividend in specie to Hydrodec Group plc on the liquidation of VIN (Australia) Pty Ltd in 2014. These shares, together with a further 2,173,333 shares issued as part of the acquisition of Virotec International plc, were cancelled in 2015 upon the liquidation of VIN (Australia) Pty Ltd and Virotec International plc.

WarrantsIn 2011, the Group issued 10,750,000 warrants in connection with the issue of £2,000,000 of fixed rate loan notes – 2014. The warrants have an exercise price of 8p per share with an exercise window from 14 June 2013 to 14 June 2016.

Between 24 December 2012 and 27 June 2013, the Group issued an additional 25,000,000 warrants in connection with the issue of £5,000,000 of fixed rate loan notes – 2015. The warrants have an exercise price of 16p per share with an exercise window from 19 June 2013 to 19 December 2017.

No value has been ascribed to the warrants in these accounts due to the value being negligible and thus immaterial.

16. ReservesThe share premium account represents the excess over the nominal value of shares allotted.

The merger reserve arises under s612 of the Companies Act 2006 as a result of the acquisition of Virotec International plc using the issue of 62,515,894 Ordinary Shares at 48 pence in part consideration. The excess of fair value over nominal value of shares is transferred to a merger reserve rather than share premium. This reserve is not distributable.

The treasury reserves relates to 54.5 million Ordinary Shares at 48p per share totalling £26 million held in the parent company that were acquired as part of the acquisition of Virotec International plc in 2008. In 2015, with the liquidation of Virotec International plc the total 54.5 million treasury shares have been cancelled at 48 pence per share totalling £26 million or USD 42 million at the date of cancellation.

The Employee Benefit Trust represents the value of shares held on trust for the benefit of employees.

The foreign exchange reserve records differences arising from the translation of the net investment in subsidiaries.

The capital redemption reserve represents the Ordinary Share capital that was cancelled in 2015 upon the liquidation of Virotec International plc.

The share option reserve represents accumulated charges made under IFRS 2 in respect of share-based payments.

The profit and loss reserve includes all current and prior period retained losses.


17. Share-based paymentsLong-Term Incentive PlanIn June 2015 shareholders approved the Hydrodec Group plc 2015 Long-Term Incentive Plan (the ‘LTIP') for the purposes of attracting, retaining and motivating key executives of the Group and securing greater alignment of the interests of shareholders and management.

Awards were granted to selected members of the senior executive team effective 10 June 2015 (or on later appointment) and were conditional on the achievement of the following share price targets for 20 consecutive trading days prior to 9 June 2018: 14 pence, 16 pence, 18 pence, 20 pence, 22 pence, 24 pence and 25 pence per Ordinary Share (each a Share Price Threshold).

Equity-settled share option schemeThe Group has a share option scheme for selected employees and Directors of the Group. Options are generally exercisable at a price equal to the quoted market price of the Group’s shares on the date of grant. The vesting period for each grant is variable and typically between two and five years. No options were granted during the year and a total of 9,750,000 options granted to previous Directors and employees of the Group lapsed or were forfeited during the year. No options were exercised in the year. The total number of options in issue is shown below:

Number

2015Weighted average

exercise price Number

2014Weighted average

exercise price

At the beginning of the year 14,250,000 17.6p 19,950,000 16.9pIssued in the year – –Lapsed during the year (9,750,000) 0.55p (5,700,000) 6.7p

At the end of the year 4,500,000 18.15p 14,250,000 17.6p

Fair value is determined by reference to the fair value of the instrument granted to the employee. The expected life used in the Black-Scholes option pricing model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

These fair values were calculated using a Black-Scholes option pricing model as follows:

2015

Weighted average share price 18.18pWeighted average exercise price 18.15pExpected volatility 24%Expected life 9.17yrsRisk-free rate 1%

Expected dividend yield 0.0%

Expected volatility was assessed based on the volatility of the Group’s shares since incorporation. The share options outstanding at the end of the year have exercise prices of between 6.90 pence and 33.25 pence per share. In the Directors’ experience, the expected life of an employee share option is 10 years from the date of grant.

18. Financial instrumentsCapital management riskThe Group manages its capital structure to ensure it will be able to continue as a going concern. The Group’s financial instruments comprise cash, and various items, such as trade and other receivables (see note 9) and trade and other payables (note 11) and other interest-bearing loans and borrowings (see note 13) that arise directly from or in support of its operations which is monitored by the Board. No trading in derivative financial instruments is undertaken.

The main risks arising from the Group’s financial instruments are interest rate, credit, currency and liquidity. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged during the year.

Liquidity riskThe Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. The Group manages liquidity risk by the pooling of cash resources and depositing funds available for investment in approved financial instruments with financial institutions. Counterparty risk with respect to cash and cash equivalents is managed by only investing in banks and financial instruments with good credit ratings. Management does not expect any losses from the non-performance of these counterparties.





Governance

Strategic Report

Interest rate riskThe Group finances its operations through equity Group funds which are invested in deposit accounts with the objective of maintaining a balance between accessibility of funds and competitive rates of return. The weighted average interest rate received on deposited funds was 0.48% (2014: 0.54%) during the year.

Interest costs of items acquired under lease arrangements are fixed at the time the lease is entered into for the term of the lease, which carry a weighted average interest cost of 4.0% (2014: 9.4%) per annum.

The Directors consider the only element of risk from changes in interest rates arises on bank deposits which are not expected to give rise to a material adjustment to the reported results for either 2015 or 2014.

The table below analyses the Group’s financial liabilities into relevant groupings based on the remaining period at the balance sheet date to the contractual maturity date.

Balance sheetContractual cash

flowsLess than

1 yearBetween 1 year

and 5 years

Trade and other payables including finance leases31 December 2015 29,775 29,775 16,684 13,091

31 December 2014 18,003 18,003 16,636 1,367

Credit riskThe Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic environment. The maximum exposure to credit risk for the Group is USD 5,103,000 (2014: USD 4,270,000), and there are no material concentrations of credit risk.

The credit risk on liquid funds is limited because the counterparties are reputable banks. Currency riskThe Group is exposed to translation and transaction foreign exchange risk. The currencies where the Group is most exposed to volatility are UK sterling and Australian dollars. The Group’s policy is to match, as far as possible, its principal projected cash flows by currency.

Currently, no hedging instruments are used. The Group keeps under review the extent of its exposure to currency fluctuations.

The following table illustrates the sensitivity of the net result for the year and equity in regards to the Group’s financial assets and financial liabilities and the US dollar to British pound and Australian dollar exchange rates. There is insignificant currency risk arising within the Group, but the presentation of the Group results can be affected by presentation in US dollars. It assumes a percentage change in the exchange rate based on the foreign currency financial instruments held at each balance sheet date. Both of these percentages have been determined based on the average market volatility in exchange rates in the previous 12 months.

UK sterling Australian dollars

2015 2014 2015 2014

Currency fluctuation 1% 5% 10% 7%

If the US dollar had strengthened against each currency by the percentage above retrospectively, then this would have had the following impact:

2015 USD’000

2014 USD’000

GBP AUD GBP AUD

Net result for the year 264 165 517 59Equity 32 162 (323) (7)

If the US dollar had weakened against each currency by the percentage above retrospectively, then this would have had the following impact:

2015 USD’000

2014 USD’000

GBP AUD GBP AUD

Net result for the year (264) (165) (517) (59)Equity (32) (162) 323 7

Exposure to foreign exchange rates varies during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Group’s exposure to currency risk.

Fair valuesThe Directors consider there to be no material difference between the book value and fair value of the Group’s financial instruments in either financial year.



19. Capital commitmentsAt 31 December 2015, the Group had no contractual capital commitments. In 2014 the Group had contractual capital commitments of USD 6,611,472 in relation to the US rebuild and expansion programme and UK re-refining licence. There were no other material contractual commitments.

20. ContingenciesThere were no contingent liabilities at 31 December 2015 or 31 December 2014. As at 31 December 2015, there was a contingent asset related to a receivable claim of US$0.4 million from Zeton. US$0.2 million was received in February 2016 with a further US$0.1 million to be paid in April 2016 and in May 2016. As described in note 7, a payment dependant on construction of a re-refinery is payable to CEP.

21. Financial commitmentsThe Group has entered into commercial leases on certain properties and property, plant and equipment. There are no restrictions placed upon the lessee by entering into these leases.

The future minimum rentals payable under non-cancellable operating leases is as follows:

2015USD’000

2014USD’000

Within one year 2,091 778Between one and five years 4,389 1,528

6,480 2,306

Post-balance-sheet date, with the divestment of the UK business the future minimum rentals payable under non-cancellable operating leases is as follows:

2015USD’000

2014USD’000

Within one year 258 778Between one and five years 21 1,528

279 2,306

22. Interests in subsidiaries22.1. Composition of the GroupThe subsidiary undertakings at 31 December 2015 are listed below:

Country of incorporation andprincipal operations Ordinary Share capital held Activity

Hydrodec Holdco Limited UK 100% Holding companyHydrodec Development Corporation (UK) Limited* UK 100% Technology companyHydrodec Development Corporation Pty Limited* Australia 100% Technology and holding companyHydrodec (UK) Limited*(1) UK 100% Oil treatment servicesHydrodec Re-Refining (UK) Limited*(1) UK 100% Oil treatment servicesHydrodec Inc USA 100% Holding companyHydrodec of North America LLC** USA 75% Oil treatment servicesHydrodec Australia Pty Limited*** Australia 100% Oil treatment servicesHydrodec Japan Co Limited Japan 100% Holding companyHydrotek Eco Japan Co Limited**** Japan 100% Patent holding company

* Held through Hydrodec Holdco Limited** Held through Hydrodec Inc*** Held through Hydrodec Development Corporation Pty Limited**** Held through Hydrodec Japan Co Limited(1) Disposed out of the Group on 4 March 2016

22.2. Subsidiary with material non-controlling interestsThe Group includes one subsidiary, Hydrodec of North America LLC, which has material non-controlling interests (‘NCI'):

Proportion of ownership interests and voting rights held by NCI

Total comprehensive income allocated to NCI Accumulated NCI

Year ended 31 December 2015 2015 20142015

USD’0002014

USD’0002015

USD’0002014

USD’000

Hydrodec of North America LLC 25% 25% (1,004) 986 241 1,245

No dividends were paid to the NCI during the years 2015 and 2014.




Governance

Strategic Report

Summarised financial information for Hydrodec of North America LLC, before intra-group eliminations, is set out below:

2015USD’000

2014USD’000

Non-current assets 34,616 23,733 Current assets 1,485 7,499

Total assets 36,101 31,232

Non-current liabilities (7,860) – Current liabilities (5,835) (6,866)

Total liabilities (13,695) (6,866)

Equity attributable to owners of the Parent 16,787 18,266 Non-controlling interests 5,619 6,100

2015USD’000

2014USD’000

Revenue 4,049 4,599 Other income 1,514 8,552 Profit for the year attributable to the owners of the Parent (3,056) 2,958 Profit for the year attributable to NCI (1,004) 986 Profit for the year (4,060) 3,944 Total comprehensive income for the year attributable to the owners of the Parent (3,056) 2,958 Total comprehensive income for the year attributable to NCI (1,004) 986

2015USD’000

2014USD’000

Net cash from operating activities (2,289) 13,822 Net cash used in investing activities (11,652) (17,875)Net cash from financing activities 9,744 7,670

Net cash flow (4,197) 3,617

During the year, as part of the agreement signed in 2013, total capital contributions in 2015 of USD 1.3 million (2014: USD 4.9 million) were made by the Group and G&S in relation to the expansion of the Canton plant. 25% of this ownership held by G&S, with the remainder recognised in the Group reserves.

23. Related-party transactionsG&S Technologies, a Company in which G&S Oil Recycling Group LLC (G&S) the holder of a 25% interest in Hydrodec of North America LLC (HoNA) has an interest, supplied feedstock to the value of USD 1,617,000 in 2015 (2014: USD 2,617,000 subsequent to taking an interest in HoNA). HoNA also sold traded oil to G&S with a value of USD 675,000 (2014: USD 684,014), balance outstanding of USD nil (2014: USD 134,000).

There is a non-current loan of USD 3,962,000 owed to Andrew Black, a Non-Executive Director and a substantial shareholder. This is repayable by 31 December 2017 with interest calculated at 7% per annum. The initial facility of £2,150,000 is secured over the Company’s licence of and rights to develop the CEP lubricant oil re-refining technology in the UK. The second facility of £2,000,000 is secured over the rights for Hydrodec Development Corporation Pty Ltd to receive income based on the quantity of SUPERFINETM oil produced by Hydrodec of North America LLC and Hydrodec of Australia Pty Ltd respectively, which royalty is based on average annual production. In order to reinforce the Company’s working capital headroom, the second facility was extended on 11 April 2016 by a further £2,250,000 to £4,250,000.

The Company entered into a settlement agreement with Ian Smale on 4 December 2015, the quantum of which is set out on page 25 of the Remuneration Committee Report.

24. Acquisitions of subsidiariesAcquisitions in the current periodOn 2 April 2015, the Group acquired the principal business and assets of Eco-Oil from Eco-Oil International Limited and its subsidiaries for £2,295,138 (USD 3,575,368), satisfied in cash. The acquisition was made as part of the Group’s strategy to secure the supply chain for used oil collection in the UK following the acquisition of OSS in August 2013 and underpinned Hydrodec’s plan to invest in a base oil re-refinery in the UK.

Finalisation of fair valueIn preparing the interim accounts of Hydrodec for the six months to 30 June 2015, the Directors made provisional assessments of the fair value of net assets acquired, with input from a valuer in respect of land, buildings, plant and equipment.

The Directors have reviewed the estimates of fair value made initially and recorded on a provisional basis in the Group’s interim accounts for the six months to 30 June 2015. As a result of that review, the Directors recognised that their initial forecasts for the business upon which the estimates of value for customer contracts and brand name had been based were optimistic as evidenced by its trading performance and cash flows of the business. Consequently, they have reassessed these valuations and determined that no material value can be assigned to these intangible assets at date of acquisition. This is further supported by the subsequent sales. The provisional values attached to land, buildings, plant and equipment have been finalised at their provisional assessment.


24. Acquisitions of subsidiaries continued

Effect of acquisitionThe acquisition had the following effect on the Group’s assets and liabilities.

Recognised fair values on

acquisition£’000

Recognised fair values on

acquisitionUSD’000

Acquiree’s net assets at the acquisition date: Property, plant and equipment 2,513 3,846

Total non-current assets 2,513 3,846

Trade and other receivables 1,625 2,530Inventories 254 396

Total current assets 1,879 2,926

Trade and other payables (2,356) (3,669)

Total current liabilities (2,356) (3,669)

Borrowings (20) (32)Provisions (300) (467)Deferred tax liability (364) (565)

Total non-current liabilities (684) (1,064)

Identifiable net assets 1,352 2,039

Goodwill 943 1,536

Consideration settled in cash 2,295 3,575Acquisition costs charged to expenses 274 422

Net cash paid relating to the acquisition 2,569 3,997

Acquisition-related costsThe Group incurred acquisition-related costs of £274,000 (USD 422,000) related to legal and financial adviser costs. These costs have been included in administrative costs in the Group’s consolidated statement of comprehensive income.

Operating performance of Eco-Oil post acquisitionOn acquisition of the business and assets of Eco-Oil, these immediately combined with the Group’s existing UK recycling business. It is therefore not possible to segregate the revenue and profit performance of the acquired Eco-Oil business from the remainder of the UK business in 2015.

25. Post-balance-sheet events On 4 March 2016, following a strategic auction process conducted by an independent third-party financial adviser, Hydrodec Holdco Limited, a wholly-owned subsidiary of the Company, disposed of Hydrodec (UK) Limited and Hydrodec Re-Refining (UK) Limited (together, the ‘UK Operations’), and the Company agreed to transfer certain other rights and assets relating to its UK Operations, to Andrew Black, a Non-Executive Director and a substantial shareholder of the Company (the ‘Buyer’). The disposal of the UK Operations constituted both a related-party transaction and a substantial transaction for the purposes of the AIM Rules. The consideration for the sale of the UK Operations was £1 in cash, and included the transfer to the Buyer of circa. £1.2 million of existing third-party indebtedness in HUK. In addition to this, the Buyer has agreed to grant Hydrodec a contractual right to receive 10% of the Buyer’s entitlement to any future net profits of the UK lubricant oil re-refining project on distribution or exit. The Buyer will bear all risk and responsibility for developing the UK lubricant oil re-refining project going forward, with Hydrodec retaining only a passive economic interest under these profit share arrangements. The transfer of the UK licence and basic engineering package from CEP is subject to the consent of CEP, which the Company has agreed to use its reasonable efforts to achieve.

On 11 April 2016, the Company entered into an agreement to extend its £2 million secured second working capital facility with Andrew Black, a Non-Executive Director, dated 30 November 2015 by a further £2.25 million to £4.25 million. This extension to the facility is also secured over the rights for Hydrodec Development Corporation Pty Ltd to receive income based on the quantity of SUPERFINETM oil produced by Hydrodec of North America LLC and Hydrodec of Australia Pty Ltd respectively, which royalty is based on average annual production.





Governance

Strategic Report

The consolidated statement of financial position adjusted to remove the balances as at 31 December 2015 related to the recycling business is shown below for illustrative purposes.

Group balance sheet

As at 31/12/2015USD’000

Divested UK businessUSD’000

Group balance sheet

post-divestmentUSD’000

Non-current assetsProperty, plant and equipment 45,645 4,427 41,218 Intangible assets 9,616 – 9,616

55,261 4,427 50,834

Current assetsTrade and other receivables 6,799 5,477 1,322 Inventories 1,282 539 743 Cash and cash equivalents 2,064 2 2,062

10,145 6,018 4,127 Current liabilitiesBank overdraft (2,367) (1,437) (930)Trade and other payables (10,489) (5,184) (5,305)Other interest-bearing loans and borrowings (6,195) (2,802) (3,393)

(19,051) (9,423) (9,628)

Net current liabilities (8,906) (3,405) (5,501)Non-current liabilitiesEmployee obligations (46) – (46)Provisions (1,776) (1,022) (754)Other interest-bearing loans and borrowings (13,091) – (13,091)Deferred taxation (1,827) – (1,827)Other non-current liabilities – – –

(16,740) (1,022) (15,718)

Net assets 29,615 (0) 29,615

Equity attributable to equity holders of the ParentCalled-up share capital 6,200 0 6,200 Share premium account 130,539 – 130,539 Merger reserve 48,940 – 48,940 Employee benefit trust (1,150) – (1,150)Foreign exchange reserve (9,174) – (9,174)Share option reserve 883 – 883 Capital redemption reserve 420 – 420 Profit and loss account (152,662) (0) (152,662)

23,996 – 23,996

Non-controlling interests 5,619 – 5,619

Total equity 29,615 – 29,615


Note2015

£’0002014

£’000

Non-current assetsTangible fixed assets 29 29 30 Investments 30 22,572 40,926

22,601 40,956

Current assetsDebtors 31 825 940 Amounts due from subsidiary undertakings 31 867 12,164 Cash and cash equivalents 1,257 5,918

2,949 19,022 Current liabilitiesAmounts due to subsidiary undertakings – (2,079)Trade and other creditors 32 (997) (1,979)

(997) (4,058)

Net current assets 1,952 14,964

Non-current liabilities

Shareholder loans (2,673) –

(2,673) –

Net assets 21,880 55,920

Equity attributable to equity holders of the ParentCalled-up share capital 33 3,733 4,016 Share premium account 108,895 108,895 Treasury reserve – (649)Share option reserve 596 1,425 Capital redemption reserve 283 –Profit and loss account (91,627) (57,767)

Total equity 21,880 55,920

The financial statements of the Company (Hydrodec Group plc – 5188355) were approved by the Board of Directors on 12 April 2016 and were signed on its behalf by:



Company Balance SheetAs at 31 December 2015




Governance

Strategic Report

Company Statement of Cash FlowsFor the year ended 31 December 2015

2015£’000

2014£’000

Cash flows from operating activitiesLoss before tax (34,061) (2,882)Net finance costs 23 –Depreciation 7 44 Impairment losses on intangible assets 609 –Loss on investment in subsidiaries 17,745 –Debt forgiveness 12,613 –Share-based payment expense – 190 Share transfer (non-cash) – (4,226)Other non-cash movements – 642 Foreign exchange movement 14 227 Decrease in trade and other receivables 166 19 (Decrease)/increase in trade and other payables (1,032) 1,428 Increase in provisions – 1,434

Net cash outflow from operating activities (3,916) (3,124)

Cash flows from investing activitiesLoans granted to subsidiaries (3,395) (1,972)

Net cash outflow from investing activities (3,395) (1,972)

Cash flows from financing activitiesProceeds from loans 2,673 – Interest paid (23) –

Net cash inflow from financing 2,650 –

Decrease in cash and cash equivalents (4,661) (5,096)

Movement in net cashCash 5,918 11,014

Opening cash and cash equivalents 5,918 11,014 Decrease in cash and cash equivalents (4,661) (5,096)

Closing cash and cash equivalents 1,257 5,918

Reported in the consolidated statement of financial position as:Cash and cash equivalents 1,257 5,918

1,257 5,918



Company Statement of Changes in EquityFor the year ended 31 December 2015

Share capital

£’000

Sharepremium

£’000

Equity reserve

£’000

Treasury reserve

£’000

Capitalredemption

reserve£’000

Share option

reserve£’000

Profit and loss account

£’000Total

£’000

At 1 January 2014 4,016 108,885 – (649) – 1,017 (55,527) 57,742Share issues 1 10 – – – – – 11Issue costs – – – – – – – –Share-based payment – – – – – 190 – 190Transfers (1) – – – – 218 642 859 Loss for the period – – – – – – (2,882) (2,882)

At 1 January 2015 4,016 108,895 – (649) – 1,425 (57,767) 55,920

Share issues – – – – – – – –Issue costs – – – – – – – –Cancelled shares (283) – – 649 283 – (649) –Share-based payment – – – – – 21 – 21 Transfers – – – – – (850) 850 –Loss for the period – – – – – – (34,061) (34,061)

At 31 December 2015 3,733 108,895 – – 283 596 (91,627) 21,880





Governance

Strategic Report

Notes to the Company Financial StatementsFor the year ended 31 December 2015

26. Significant accounting policiesThe following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements, except as noted below.

Basis of preparationIn the transition to FRS 101, the Company has applied IFRS 1 whilst ensuring that its assets and liabilities are measured in compliance with FRS 101. An explanation of how the transition to FRS 101 has affected the reported financial position, financial performance and cash flows of the Company is provided in note 36.

As the consolidated financial statements include the equivalent disclosures, the Company has also taken the exemptions under FRS 101 available in respect of the following disclosures:• IFRS 2 Share Based Payments in respect of Group settled share-based payments;• certain disclosures required by IAS 36 Impairment of assets in respect of the impairment of goodwill and indefinite life intangible assets; and• certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instrument Disclosures.

InvestmentsInvestments in subsidiaries are recorded at cost, less amount written-off.

Financial liabilities and equityFinancial liabilities and equity instruments issued by the Company are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.

Intra-group financial instrumentsWhere the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its Group, the Company considers these to be insurance arrangements and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.

Tangible fixed assets and depreciationDepreciation is calculated to write down the cost less estimated residual value of all tangible fixed assets other than freehold land by equal annual instalments over their expected useful lives. The rates generally applicable are:

Fixtures, fittings and equipment 30% diminishing value

Employee Benefit TrustThe assets and liabilities of the Employee Benefit Trust (‘EBT') have been included in the Company accounts. Any assets held by the EBT cease to be recognised on the Group balance sheet when the assets vest unconditionally in identified beneficiaries.

Share-based paymentsThe Company issues equity-settled share-based payments to certain employees and Directors. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the shares that will eventually vest and adjustment for the effect of non-market-based vesting conditions. WarrantsThe Group issued equity-settled warrants in connection with fixed rate loan notes. Equity-settled warrants are measured at fair value of the instruments granted (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period (or until fixed rate loan notes are repaid), based on the Group’s estimate of the shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions.

Interest-bearing loans and borrowingsAll loans and borrowings are initially recognised at cost of the consideration received net of issue costs associated with the borrowing. All interest costs are charged to the income statement.

Intra-group financial instrumentsWhere the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its Group, the Company considers these to be insurance arrangements and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.

Going concernAs set out in note 1 of the consolidation financial statements on page 33, taking into account the Group’s current forecasts and projections and recent progress in re-establishing market share in the US, and considering the uncertainties described in note 1 of the consolidated financial statements, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and is viable on a robust assessment of the Company’s principle risks and the Company’s current position. Accordingly, the Directors continue to adopt the going concern basis in preparing the Annual Report and accounts.


27. Directors Directors’ emoluments paid during the year were:

2015£’000

2014£’000

Emoluments 1,268 1,135

The highest paid Director received emoluments totalling £673,000 (2014: £373,000). Pension contributions for Directors were 2015: NIL (2014: NIL).

28. Loss attributable to the shareholders of the CompanyThe Company is an investment holding company. As permitted by section 408 of the Companies Act 2006, the Company’s profit and loss account has not been included in these accounts. The loss on ordinary activities attributable to shareholders of the Company dealt with in these accounts was £34,061,000 (2014: £2,882,000).

29. Tangible fixed assetsFixtures and equipment

£’000

CostAt 1 January 2015 140 Additions in the year 6

At 31 December 2015 146

DepreciationAt 1 January 2015 110 Provided in the year 7

At 31 December 2015 117

Carrying amountNet book amount at 31 December 2015 29 Net book amount at 31 December 2014 30

30. InvestmentsShares in

subsidiary undertakings

£’000

Loans in subsidiary

undertakings£’000

Total£’000

CostAt 31 December 2014 61,978 611 62,589 Additions – – –Disposals (39,206) (611) (39,817)

At 31 December 2015 22,772 – 22,772

Accumulated impairment At 31 December 2014 21,663 – 21,663 Released in year (21,663) – (21,663)Impairment (200) – (200)

At 31 December 2015 (200) – (200)

Net book valueAt 31 December 2015 22,572 – 22,572

At 31 December 2014 40,315 611 40,926

Disposals in 2015 relate to the elimination of investment in Virotec International plc on liquidation.

31. Debtors and amounts due from subsidiaries2015

£’0002014

£’000

Other debtors 825 940Amounts due from subsidiary undertakings 867 12,164

1,692 13,104

The amount due from subsidiaries relates to the ongoing funding provided to the principal trading subsidiaries during their development phase. All intercompany amounts are repayable on demand. The timing of the repayment of this debt is uncertain and unlikely to be within one year.

Notes to the Company Financial Statements continuedFor the year ended 31 December 2015




Governance

Strategic Report

32. Trade and other creditors2015

£’0002014

£’000

Trade creditors 84 1,492Other creditors 190 59Accruals 723 428

997 1,979

33. Share capital2015

Number of shares

2014Number of

shares

At the beginning of the year 803,356,138 803,231,138Issued for cash – 125,000Cancelled (56,673,333) –

746,682,805 803,356,138

2015£’000

2014£’000

Issued and fully paid – Ordinary Shares of 0.5 pence each 3,733 4,016

On 16 April 2015 the Company cancelled 56,673,333 Ordinary Shares. These shares arose from the Company’s acquisition of Virotec International plc in 2008, which was liquidated during 2015. These shares were excluded from the total number of issued voting shares reported by the Company since 2008.


34. Contingent liabilitiesThe Company has guaranteed the overdrafts of its subsidiaries, Hydrodec (UK) Limited, Hydrodec Development Corporation (UK) Limited and Hydrodec Re-Refining (UK) Limited; the amount outstanding at the year end was £969,000 (2014: £424,000). The Company ceased to guarantee the overdrafts of Hydrodec (UK) Limited and Hydrodec Re-Refining (UK) Limited on 4 March 2016.

35. Related-party transactionsNo transactions were undertaken between the Company and any entities where the Group interest is less than 90%.

Intercompany loans of £12,614,000 were forgiven as part of the divestment of Hydrodec UK and Hydrodec re-refinery. A further £2,800,000 of intercompany loans were impaired.

There is a non-current loan of £2,673,000 owed to Andrew Black, a Non-Executive Director and a substantial shareholder. This is repayable by 31 December 2017 with interest calculated at 7% per annum. The initial facility of £2,150,000 is secured over the Company’s licence of and rights to develop the CEP lubricant oil re-refining technology in the UK. The second facility of £2,000,000 is secured over the rights for Hydrodec Development Corporation Pty Ltd to receive income based on the quantity of SUPERFINETM oil produced by Hydrodec of North America LLC and Hydrodec of Australia Pty Ltd respectively, which royalty is based on average annual production. In order to reinforce the Company’s working capital headroom, the second facility was extended on 11 April 2016 by a further £2,250,000 to £4,250,000.

The Company earned £653,000 of intercompany revenue for services provided to subsidiaries.

The Company entered into a settlement agreement with Ian Smale on 4 December 2015, the quantum of which is set out on page 25 of the Remuneration Committee Report.

36. Post-balance-sheet events On 4 March 2016, following a strategic auction process conducted by an independent third-party financial adviser, Hydrodec Holdco Limited, a wholly-owned subsidiary of the Company, disposed of Hydrodec (UK) Limited and Hydrodec Re-Refining (UK) Limited (together, the ‘UK Operations’), and the Company agreed to transfer certain other rights and assets relating to its UK Operations, to Andrew Black, a Non-Executive Director and a substantial shareholder of the Company (the ‘Buyer’).

37. Explanation of transition to FRS 101 from old UK GAAP As stated in note 26, these are the Company’s first financial statements prepared in accordance with FRS 101.

The accounting policies set out in notes 26 to 35 have been applied in preparing the financial statements for the year ended 31 December 2015, the comparative information presented in these financial statements for the year ended 31 December 2014 and in the preparation of an opening FRS 101 balance sheet at 1 January 2015 (the Company’s date of transition).

In preparing its FRS 101 balance sheet, the Company has adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (UK GAAP). There were no transitional adjustments applicable in preparing the Company’s balance sheet under FRS 101.

Adoption of Financial Reporting Standard 101 – Reduced Disclosure Framework (FRS 101)Following the publication of FRS 100 Application of Financial Reporting Requirements by the Financial Reporting Council, Hydrodec Group plc adopted FRS 101 Reduced Disclosure Framework for its Parent Company financial statements for the year ended 31 December 2015. The Company intends to adopt FRS 101 for its Parent Company financial statements for the year ended 31 December 2016.

The Company’s decision to adopt FRS 101 for its Parent entity financial statements and those of its UK subsidiaries does not require shareholder approval. The Company is, however, required to notify all shareholders of this election and any shareholder or shareholders holding in aggregate 5% or more of the total allotted shares in Hydrodec Group plc may serve objections to the use of the disclosure exemptions on Hydrodec Group plc, in writing, to its registered office (6 Hay’s Lane, London SE1 2HB) no later than 7 June 2016.

Notes to the Company Financial Statements continuedFor the year ended 31 December 2015




Governance

Strategic Report

Directors and Advisers

Company registration number: 5188355

Registered office: 6 Hay’s Lane, London SE1 2HB

Directors: Lord Moynihan (Non-Executive Chairman)Dame Mary Archer (Non-Executive Director)Andrew Black (Non-Executive Director)Dr. Caroline Brown (Non-Executive Director)Chris Ellis (Chief Executive Officer)

Company secretary: James Hodges

Nominated adviser and broker: Canaccord Genuity Limited88 Wood StreetLondon EC2V 7QR

Solicitors: Norton Rose Fulbright LLP3 More London RiversideLondon SE1 2AQ

Registrars: Capita RegistrarsThe Registry34 Beckenham RoadBeckenhamKent BR3 4TU

Auditor: KPMG LLPRegistered Auditor15 Canada SquareLondon E14 5GL


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ual Report and Fin

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Hydrodec Group plc 6 Hay’s Lane London, SE1 2HB United Kingdom

www.hydrodec.com

Annual Report and - Hydrodec

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