Velocys plc
Annual report and accounts 2015
Velocys plc
Annual report and accounts 2015
Velocys is the company at the forefront of smaller scale gas-to-liquids (GTL) that turns natural gas
or biomass into premium products such as diesel, jet fuel, waxes and base oils. Smaller scale GTL
adds value to shale gas and bio-waste, and makes stranded or flared gas economic – an untapped
market of up to 25 million barrels per day.
Velocys technology, protected by several hundred patents in over 30 countries, is specifically
designed for smaller scales, combining super-active catalysts with intensified reactor systems. The
Company’s standardised modular plants are designed to be easier to ship and faster to install, at
lower risk, even in the most remote or challenging locations. Together with world-class partners,
Velocys works flexibly to unlock gas resources of 15,000 to 150,000 mmbtu per day, allowing more
companies to take advantage of more opportunities.
Velocys plc is listed on the AIM market of the London Stock Exchange (LSE: VLS). The Company is
well capitalised and has a multi-disciplinary staff of around 100 operating from its commercial
centre in Houston, Texas, USA and technical facilities near Oxford, UK and Columbus, Ohio, USA. Its
commercial reference plant, which will be located adjacent to Waste Management’s East Oak
landfill site, is expected to reach mechanical completion in mid-year 2016.
Contents
Page
2
Chairman’s statement..............................................................................................................................
3
Chief Executive’s report ...........................................................................................................................
6
Strategic report.........................................................................................................................................
Directors’ report........................................................................................................................................ 10
Corporate governance report .................................................................................................................. 12
Directors’ remuneration report ............................................................................................................... 16
Statement of directors’ responsibilities................................................................................................. 22
Independent auditors’ report .................................................................................................................. 23
Consolidated income statement ............................................................................................................ 25
Consolidated statement of comprehensive income.............................................................................. 26
Consolidated statement of financial position ....................................................................................... 27
Velocys plc statement of financial position ........................................................................................... 28
Consolidated statement of changes in equity ....................................................................................... 29
Velocys plc statement of changes in equity........................................................................................... 30
Consolidated statement of cash flows................................................................................................... 31
Velocys plc statement of cash flows ...................................................................................................... 32
Notes to the financial statements .......................................................................................................... 33
Directors, secretary and advisors to the Company ............................................................................... IBC
Velocys plc
Annual report and accounts 2015
Highlights
• Strengthened management team with the appointment of David Pummell as new CEO (post period
end)
• Good progress on ENVIA Energy’s GTL project in Oklahoma City:
− Manufacture of reactors and catalyst complete
− Fabrication of all the modular process units complete; these modules, including those
incorporating the Velocys reactors, have been delivered and set in place on site
− Project expected to be fully funded through completion, commissioning and operation
− Enhanced role and equity stake in the project for Velocys
− Mechanical completion is expected in mid-year 2016
• Healthy opportunities pipeline for smaller scale GTL:
− Specialities, remote markets and low feedstock drive attractive plant economics
− Existing opportunities continue to progress with several new projects undergoing paid
engineering studies, although timescales on some projects have been extended
• Velocys pilot plant demonstrated significant technology optimisation
• Revenue of £2.0 million (FY 2014: £1.7 million before exceptional items)
• Cash* at year end of £37.7 million (FY 2014: £59.8 million)
David Pummell, CEO of Velocys, said:
“From my first few months as CEO I am hugely impressed by the quality of the team and the
momentum the Company is making on a number of fronts. Our technology is differentiated and is
being rolled out at ENVIA, and the next challenge is to determine exactly where we must focus
commercially. Even with current commodity prices the economics of smaller scale GTL plants are
attractive in certain markets. Today’s tough market environment still provides attractive
opportunities that our leadership position allows us to pursue. It is clear that Velocys has great
potential to deliver significant future value growth.”
*
Defined as cash, cash equivalents and short term investments (see note 23)
1
Velocys plc
Annual report and accounts 2015
Chairman’s statement
A year of delivery for smaller scale GTL despite a challenging environment.
Commercialising a new process technology is never
easy, so I have been enormously encouraged by the great
strides forward seen across all areas of the business
during 2015; from supply chain delivery to intellectual
property protection, from improvements in pilot plant
results to progress on our commercial reference plant in
Oklahoma City and on new projects. This headway and
our market leading position in smaller scale GTL has
been achieved whilst maintaining the highest health and
safety standards and maintaining good relationships
with stakeholders in a market unsettled by the low oil
price.
There have been a number of recent Board and
management changes to best equip Velocys during this,
its next phase of growth. In January 2016 the Board was
delighted to announce the appointment of David
Pummell as Chief Executive Officer. David brings to the
Company over 30 years of energy and oil industry
experience, including 22 years at BP and previous
experience as CEO at MAPS Technology Ltd, Ceres Power
and ACAL Energy.
In David Pummell, the Board is confident it has found
someone with experience in chemical sector business,
operations and engineering management that is highly
relevant to this stage of the Company’s
commercialisation. Coupled with this, he has the
commercial expertise required to provide strategic
vision, experience in business-to-business deal creation
and execution around the world, and the understanding
of how to finance such initiatives. We have every belief
that David’s inclusive management style will motivate
and lead the team decisively and collaboratively, driving
Velocys through its next opportunities and challenges.
Former CEO Roy Lipski left the Company by mutual
consent in August 2015. Through his entrepreneurial
skills and spirit Roy led Velocys’ transformation from an
interesting idea to a substantial company on the verge
of commercialisation. We are all grateful to him for his
contribution.
I would like to extend my thanks to Susan Robertson,
CFO, who took on the role of Acting CEO during the
transition period. She, ably supported by the Company’s
capable and established senior management team,
ensured that business proceeded uninterrupted during
the second half of 2015. This gave the Board the time it
needed to conduct a thorough search and selection
process for a permanent CEO adhering to the highest
standards of corporate governance. It is our collective
belief that not only will Velocys become a great
company, but a company that will achieve those great
things in the right and proper way.
2
There have been other changes to the Board this year.
Non-executive Director Andrew Jamieson stepped down
from his role in order to devote more time to his many
other interests. I thank him for his five and a half years
of valued service. The considerable banking and finance
sector experience that new Non-executive Directors
Mark Chatterji and Ross Allonby have brought to the
Board has been highly relevant at this stage in the
growth of the Company.
Commodity prices are currently dominating the
headlines, yet natural gas continues to be an abundant,
low cost and, in many situations, under-utilised
resource. During this, the early market adoption phase
for smaller scale GTL, there are ample local
opportunities that show every sign of retaining their
value. In the medium term, we expect the much larger
mainstream market for smaller scale GTL will become
available as gas-oil arbitrage opportunities return.
It is healthy, at such times of very low oil price, for a
company to review and test its current portfolio of
opportunities, ensuring a robust business model that
will allow it to thrive regardless of market cycles. Under
David Pummell’s leadership, Velocys is conducting a
broad review of the strategy of the business, including
its routes to market. The senior management team looks
forward to setting out the Company’s strategic vision
later in the year.
As a strongly positioned, well-run company the
challenging market conditions bring opportunities to
Velocys. The Company not only has a leading technology
advantage, a commercial plant committed and under
construction, one of the largest, most experienced
Fischer-Tropsch teams in the industry, supportive
partners and investors that take a strategic view of the
business and a healthy balance sheet. It is from this
position of strength that the Company is able to exploit
selected attractive opportunities.
Outlook
Under David Pummell’s leadership the reinvigorated
Velocys team has started 2016 on a firm footing and is
focused on delivering the completion and operation of
ENVIA Energy’s GTL plant. Once it is up and running,
Velocys will be a very different business, with a
leadership position in smaller scale GTL in the important
North American market.
Pierre Jungels
Chairman
26 April 2016
Velocys plc
Annual report and accounts 2015
Chief Executive’s report
Velocys is the company at the forefront of smaller scale GTL.
Introduction
Since my appointment in January 2016 I have been
excited to find in Velocys a company that has the
potential and the requisite competencies to deliver
smaller scale GTL on a world stage. Our global
market-leading position combined with our impressive
investor base together make a truly differentiated and
robust platform from which to commercialise our
technology. What has struck me most has been the
unabashed, and to a person, deep desire for success from
a strong and established team, and their will to go the
extra mile to make it happen.
2015 was a challenging year, not least because of the oil
price and changes in leadership within the Company. In
the face of those challenges Velocys’ management and its
technical and commercial teams remained focused on
project delivery, and in particular on the ENVIA Oklahoma
City plant, the successful operation of which will be a
transformational event for the Company.
Market conditions
Even in the current commodity price environment, a
significant number of attractive opportunities continue to
be found and developed for smaller scale GTL. Plant
economics remain favourable for projects that access low
price feedstock, exploit isolated markets where fuel
prices are high, or target high value speciality products
such as waxes.
The Company’s understanding of and access to the wax
market advanced significantly during 2015 through the
development of its Ashtabula project. We have
established the quality of the final cuts of our
Fischer-Tropsch (FT) products for a range of speciality
applications, have qualified the market demand for such
products and verified that their price remains decoupled
from oil price movements. Waxes produced by our FT
process are expected to command prices that are many
multiples of the oil price, and some FT wax cuts carry a
premium on petroleum waxes. There is sufficient market
demand for waxes to support a number of smaller scale
GTL projects, and Velocys technology, which is perfectly
adapted to match the scale of these opportunities,
remains the best placed to take advantage of this
opportunity.
Commodity prices are likely to challenge the oil and gas
industry for months and years to come. The strategy
review I intend to complete later this year will in part
consider how we address such low points in the cycle,
how we increase our robustness, and which markets we
must focus on to commercialise at pace. My approach to
this review of the business’ future strategy will be to
continuously drive simplicity, focus and delivery in all
we do.
Commercialisation
Commercial reference plant
Good progress was made in 2015 on ENVIA Energy’s GTL
plant in Oklahoma City, which will act as the commercial
reference plant for Velocys’ technology. ENVIA Energy is
the new name for the joint venture, in which Velocys holds
a stake, which was formed in March 2014 to produce
renewable fuels and chemicals from biogas and natural
gas using GTL.
Manufacture of the full-scale commercial FT reactors and
the initial catalyst charge for the plant were completed by
Velocys’ supply chain partners in 2015, and all
certifications required at this stage were secured.
Fabrication of all the modular process units has been
completed and these modules, including those
incorporating the Velocys reactors, have been delivered
and set in place on site. Mechanical completion is
expected in mid-year 2016.
Following the further funding of up to US$12 million that
Velocys has made available to ENVIA at the start of 2016
as part of a stakeholder capital contribution, the
Company believes that the plant will be fully funded
through construction, completion and operation. Of the
US$12 million committed, US$3 million was an equity
contribution, and US$9 million was provided as a loan
secured on the project, with a 10% coupon. Velocys has
the opportunity for early repayment of the loan after the
plant is operational. The funding was accommodated
from the Company’s balance sheet.
The terms of the loan provide Velocys the opportunity to
gain a greater equity share of the project and greater
influence in the commissioning, start-up and operations
of the plant, which will provide further assurance of
delivery and generate additional revenue in 2016.
The Company’s technical teams were strengthened
further in 2015 with key appointments, including highly-
skilled process engineers and scientists who have
considerable experience in designing, commissioning and
operating commercial GTL plants. One employee, who
joined us directly from the successful start-up of the
Escravos GTL plant in Nigeria, is currently taking a lead
role in finalising procedures and protocols for commercial
plant operation, after which he and others will mobilise to
the ENVIA Oklahoma City site to lead the commissioning
and start-up activities.
Commercial pipeline
Red Rock Biofuels, which is developing a biomass-to-
liquids plant using forestry waste as feedstock in
3
Velocys plc
Annual report and accounts 2015
Chief Executive’s report (continued)
•
•
Lakeview, Oregon, USA, made a number of
announcements over the course of 2015, including:
An offtake agreement was signed with FedEx.
•
Between Southwest Airlines and FedEx offtake of all
the jet fuel that will be produced by the plant has
been contracted.
It secured partner financing from Flagship Ventures.
It completed in 2016 the merger with Joule Unlimited,
Inc., which is pioneering the production of ultra-low
carbon fuels from recycled CO2. Their demonstration
unit is expected to be co-located at Lakeview.
It signed a Long-term Rural Enterprise Zone
Agreement and a Natural Gas Capacity Sharing
Agreement with Lake County.
•
The merger with Joule, though bringing beneficial
synergies to the project, has temporarily slowed progress
with financing. Unforeseen but surmountable permitting
delays are also being worked through. Velocys and Red
Rock have signed extensions to the contracts for the
supply of Velocys technology to the plant and the project
developer remains confident of reaching final investment
decision (FID) in 2016.
Velocys continued to develop its own pipeline of projects,
the most advanced of which is the plan for a 5,000 barrels
per day (bpd) GTL plant targeting speciality products in
the US, scoped for the Company’s site at Ashtabula in
Ohio. Towards the end of 2015 the timeline of the project
was extended while the Company furthered its work on
the plant engineering and reviewed its strategy on the
funding of the development activities needed to take a
plant to FID. Despite this extended timeline, the high value
of the speciality products that such a plant could produce
means that projected plant economics remain attractive.
Progress on the project in 2015 included:
•
Identification of product offtake partners and
completion of qualification processes with a number
of them. Letters of intent are in place with those
companies.
• Securing letters of support from a major lender and a
potential investor in the project.
• Developing a clear path to achieve the engineering
procurement and construction and performance
guarantee structure that will be needed to achieve
project financing for the project, and securing the
services of a major engineering firm with the influence
to make this happen.
• Delivery in early 2016 of an engineering study for an
integrated plant design, which validated the overall
capital costs of the facility.
• Demonstration of above-expectation performance at
target conditions by the Velocys pilot plant.
4
A large proportion of the work completed on this
specialities plant would be readily transferable to other
sites.
The Company continues to believe that the successful
operation of ENVIA’s plant in Oklahoma City will expedite
third party sales opportunities. Even before this,
significant advances continue to be made on new
projects. For example, at the start of 2016 an engineering
study was commissioned for a project being developed by
a national gas company in Central Asia that is seeking to
develop its stranded gas reserves.
Over the same timeframe Amec Foster Wheeler
commenced an initial engineering study on the
development of a new waste-to-liquids (WTL) project in
the UK, where a combination of gate fees and fuel credits
aid plant economics. Velocys is partnering on this project
with a company affiliated to its largest shareholder,
Ervington Investments. The Company sees significant
commercial interest in WTL projects as FT technology is
one of only a few commercial options for making
sustainable jet fuel. Progress on GreenSky London ceased
in 2015 when its project developer filed for bankruptcy.
Additionally, Velocys remains in active and ongoing
discussions relating to an opportunity with a major fuels
player. The project has an advantageous site with low-
cost feedstock. Equity investors, feedstock suppliers and
product offtakes are in place and the project has the
potential to progress swiftly to FID.
Other projects
In 2014 Velocys announced that it had received an order
from a CIS-based customer for a 175 bpd reactor for
delivery in 2015. This reactor has been completed and
partial payments have been received. Given the political
and market situation the project developer has not been
able to achieve full funding for its plant, which is now on
hold. The original contract with the developer has been
terminated, the reactor is in storage in the USA and
confidential documents have been returned to Velocys.
Pilot plant and operational facilities
The Velocys pilot plant (VPP) has been one of our most
significant resources for the validation of our technology
and the support of project-specific business development
activities.
In the 18 months to November 2015 the VPP
demonstrated a greater than 50% increase in capacity
without changing the commercial catalyst formulation or
the reactor design. This was achieved due to
improvements in the details in the reactor manufacturing
Velocys plc
Annual report and accounts 2015
process and optimisation of operating conditions (while
simultaneously maintaining the superior yields of high-
value products). These improvements have been locked
into build protocols for the Company’s commercial
reactors and incorporated in operating procedures that
will be used at ENVIA and all other proposed plants in the
sales pipeline.
Our commercial plants will be subject to feedstock and
situational variances and a robust technology needs to be
resilient to these changes. Piloting, at the VPP and
elsewhere, has demonstrated our technology’s ability to
perform in various operational modes including upset
conditions; approximately 1,000 hours of VPP testing were
dedicated to such alternative modes and regimes during
2015. The operating protocols developed at the VPP in
2015 for plant start-up, catalyst regeneration, shut-down,
and operation, including potential upset and transient
conditions will maximise the up-time of commercial
plants.
During 2015 extensive tests were performed at the VPP
establishing the operating parameters for optimum
performance over a wide range of gas feed compositions.
This data was directly correlated with the laboratory scale
data. Having completed this programme, we do not
require further pilot scale testing to support client plants
(using natural gas, biomass or waste as feedstock)
operating within that defined range of conditions. This will
allow us to put the VPP into standby mode in Q2 2016, but
to keep it available for specific client-supported studies.
This brings two substantial benefits: reduced operating
costs for Velocys and de-risking the ENVIA plant start-up.
The operators and engineers who have supported the VPP
operations now, as planned, form the core of the start-up
team for this and future commercial plants.
The current Velocys FT four-core reactor, which has a
capacity of 175 bpd, is well suited for deployment in
plants with a total capacity of a few thousand bpd. Adding
further standard reactor cores within a single pressure
vessel will be accomplished through standard
engineering design practices. This approach is consistent
with the modular construction methods adopted by
Velocys and its partners, and is desirable for deployment
in GTL plants of intermediate size. The Company has
successfully scaled up its reactor design to individual
reactors with capacities in the range 350 to 1,000 bpd
and has generated very positive performance data from
the extensive modelling programme. In smaller plants the
175 bpd reactors are typically deployed in trains of two or
four reactors. In larger plants the larger reactor designs
will allow replacement of such trains with a single reactor,
substantially reducing the plant footprint and simplifying
piping.
Manufacturing and supply capability
Our reactor and catalyst supply chains were fully
validated in 2015 through the manufacture of the reactors
and catalyst for ENVIA Energy’s plant. This has enabled
Velocys to ensure that various processes, including
quality assurance and quality control, are operating
effectively, and that we and our supply chain partners are
ready to deliver future orders.
Intellectual property
Two intellectual property (IP) disputes were successfully
resolved in 2015. Velocys continues to focus on the
commercial roll-out of its technology without any
outstanding legal positions.
Velocys settled with Johnson Matthey regarding the
patent infringement case Velocys had filed in the US
against Catacel Corporation in April 2010. Catacel, a
supplier of catalysts to CompactGTL’s demonstration unit
at Petrobras’ facility in Aracaju, Brazil, was purchased by
Johnson Matthey in 2014. Under the terms of the
settlement, Johnson Matthey has paid to Velocys an
undisclosed amount in recognition of the Company’s IP,
and has acknowledged the validity of Velocys’ patent
rights and committed to respect them.
Velocys also came to a settlement in the UK IP
infringement case that it filed with CompactGTL in 2013.
In 2014, the UK High Court upheld the validity of the two
Velocys patents in suit, found certain CompactGTL
activities at its Wilton pilot plant facility to be infringing
both patents and awarded an injunction. With this
settlement, both the pending appeal by CompactGTL on
validity of some of the claims and an enquiry by the UK
High Court into damages have been discontinued. Under
the terms of the settlement, CompactGTL has made an
undisclosed one-off payment to Velocys in recognition of
its IP.
David Pummell
Chief Executive
26 April 2016
5
Velocys plc
Annual report and accounts 2015
Strategic report
The Directors present their review of the Company’s performance during the
year to 31 December 2015 and their assessment of the risks faced by
Velocys
Principal activities
Velocys is a leader in smaller scale gas-to-liquids (GTL),
a technology that produces high value liquid fuels and
speciality chemicals from undervalued natural gas,
waste or biomass.
The primary focus of the business is on the emerging
market for modular GTL plants with production in the
range of 1,500 to 15,000 barrels per day.
The Company will announce the results during 2016 of a
review of its strategy and business model following from
the appointment of David Pummell as its CEO.
Total administrative expenses increased to £25.5m
before exceptional items and £26.7m after exceptional
items (2014: £24.4m/£25.8m before/after exceptional
items). The increase reflected full-year costs for an
expanded commercial support and engineering team,
and for development activities undertaken by Velocys
Project Solutions, LLC.
Other income of £2.0m before exceptional items (2014:
£nil m) (see note 9) was mostly made up of proceeds
from legal settlements as referred to under Intellectual
property in the Chief Executive’s report, which offsets
costs previously booked in Administrative expenses.
The current core business model incorporates the sale
of reactors, licences for use of the reactor and catalyst
technology, regular revenue from the catalyst, which is
periodically renewed through the life of the plant, and
fees for engineering and support services.
Velocys also holds a stake in ENVIA Energy, the joint
venture that is building and will operate the plant in
Oklahoma City, which will act as the commercial
reference site for the Company’s technology.
In addition, the Company, through its subsidiary Velocys
Project Solutions, LLC, is working to bring potential GTL
projects to the point of investment.
The principal activity of Velocys plc is a holding
company. In 2015 its three operating subsidiaries were
Velocys Technologies Limited in the UK, and Velocys, Inc.
and Velocys Project Solutions, LLC in the US. In the
financial statements these entities are referred to
collectively as the “Company”, while Velocys plc is
referred to as the “parent company”.
Business review
A review of the Company’s activities during the year and
its future outlook is made in the Chairman’s statement
on page 2 and the Chief Executive’s report on pages 3-5.
Financial review
Revenue in 2015 was £2.0m (2014: £1.7m before
exceptional items, £nil after exceptional items), which
included the first revenue to be recognised by Velocys
for completed reactors, as well as fees for engineering
studies. Gross margin was £0.7m (2014: £1.2m).
All revenue in 2015 was commercial revenue; there was
no income from development partners. There was one
key contract, with ENVIA Energy, relating to the
development of Velocys’ commercial reference plant.
6
Operating loss was £22.7m before exceptional items and
£22.2m after exceptional items (2014: £23.2m/£24.5m
before/after exceptional items), which reflected the
Company’s position of early stage commercialisation,
with small but growing revenues and a cost base that
includes both R&D and commercial support teams. Cash
outflow (excluding share issues) was £22.0m (2014:
£18.1m). Outflow was reduced from £13.6m in the first
half of the year to £8.4m in the second half, reflecting
measures Velocys has taken, and will continue to take,
to preserve cash given the market environment.
The exceptional items in 2015 included the full
impairment of a customer contract representing the
discounted value of expected future income, which the
Company had expected to receive in 2015 upon
obtaining a final investment decision by outside
investors in the Ashtabula project. Since the final
investment decision was not reached in 2015, this
balance was written down to £nil along with a related
deferred tax liability. The exceptional items in 2014 were
a write down of revenue due to the restructuring of a key
contract, and an impairment of intangible assets.
Net assets of the Company were £68.5m, down from
£84.6m in 2014; the main change was due to the cash
outflow. Velocys’ balance sheet remains healthy with
cash, cash equivalents and short-term investments at
year end totalling £37.7m (2014: £59.8m).
Key performance indicators
Aside from the financial results outlined above, key
performance metrics for the business centre on its
commercial readiness – commercial pipeline,
technological robustness, manufacturing capability, and
its expertise and resources to support new sales and
projects. The performance of the Company is expanded
upon in the Chief Executive’s report on pages 3-5.
Velocys plc
Annual report and accounts 2015
Environment
Velocys is careful to monitor the environmental impact of
its operations. Air travel and building operations have
been identified as two of the major factors in the
Company’s CO2 emissions.
In 2015 air travel on the Company’s behalf contributed
497 tonnes of CO2 (2014: 534t). This equates to 4.6 tonnes
per employee (2014: 5.0t). The proportion of air travel that
was between the Company’s offices in Oxfordshire, Ohio
and Texas was 51% (2014: 55%).
Emissions attributable to operation of its three sites
included 1,042 tonnes from consumption of electricity
(2014: 905t) and 1,137 tonnes from consumption of gas
(2014: 746t). This latter increase was a result of running
the pilot plant for most of the year.
Employees
Velocys is committed to being a good employer and
endeavours to train staff well, to pay them fairly and to
maintain a safe environment in which they can work.
Velocys is committed to equal opportunity for all its
employees.
Velocys keeps detailed environmental health and safety
records and takes the safety and well-being of its
employees very seriously. During 2015 there were no Lost-
Time Accidents across the Company’s sites, which took
the total number of operating hours without such an
accident to over 2.3 million.
Of the 103 people employed by Velocys at 31 December
2015, 31% were women, an increase of 6% on 2014 (2014:
25%). The percentage of female employees broken down
by areas of the business was as follows.
Scientific & engineering
Sales, finance, HR & admin
Senior managers
2015
25%
55%
33%
2014
14%
53%
29%
Two of the nine members of the Board are women (2014:
two of eight members).
Operating risks
Since 2012, through a series of scale-up programmes the
Company’s catalyst and microchannel reactor technology
has been proved from laboratory scale up to full
commercial size. During 2016 the technology will be
deployed in the commercial reference plant in Oklahoma.
Management and employees are focussed on managing
the risks inherent in this transition, and thereafter, on
meeting the demands of this new commercial reality.
Pace of commercial adoption
Velocys believes that there is a significant potential
market for its products however the pace of adoption for a
new technology, particularly one with high capital
requirements is difficult to predict and there is a risk that
the pace of adoption may be slow. Velocys addresses this
risk by working with major partners, by developing a
pipeline of potential opportunities and by seeking to
minimise technology performance risk by the measures
outlined below.
Performance
The specification and performance of the catalyst and
reactor have been rigorously tested at every stage of
development. Measures put in place include:
•
Installing a pilot plant at the Company’s facility in Ohio
to test target conditions for ENVIA Energy and other
commercial-scale projects
• Modelling client-specific standard and upset
conditions, and developing mitigation or remediation
strategies where testing identifies areas of risk
• Building a set of robust quality assurance/control
programmes in conjunction with third parties, and
implementing, validating and reviewing them
• Reserving the first commercial reactor purely for
testing.
In the context of the wider GTL plant, Velocys works with
world-class partners and Engineering, Procurement and
Construction (EPC) companies to combine its technology
with other existing, well-proven technologies.
As the operation of customer plants is outside its control
the Company’s agreements with its customers state that
it shall not be liable to licensees for environmental, toxic
waste, hazardous waste or pollution liability.
Manufacturing
Velocys has developed a supply chain of leading
equipment and catalyst manufacturers with proven
track-records in their respective fields, and with the
capability to fabricate the Company’s proprietary
catalysts and reactors to secure petrochemical
industry-standard warranties.
By working with manufacturing partners, rather than
developing in-house capability, manufacturing risk is
considerably reduced.
7
Velocys plc
Annual report and accounts 2015
Strategic report (continued)
Capacity
Velocys has significantly expanded its client-facing team,
including process engineers and other specialists, who
will provide client support and technical assistance
through the design, construction, start up and initial
operation of ENVIA Energy’s plant and subsequent
commercial plants.
During project negotiations care has been taken to agree
commercial terms that do not commit the Company to
performance beyond its current capability or contractual
accountabilities.
The manufacturing partners that Velocys has selected
have the capacity to deliver orders consistent with the
timescales of GTL plant development.
IP protection
Velocys has invested a great deal of time and resources to
develop, protect and enforce its IP portfolio, upon which
its licence, catalyst and reactor revenue streams are
dependent. Between 2010 and 2015 the Company
successfully enforced its patents against infringement
through the US and UK courts.
Velocys’ legal and technical teams are continuing to
protect the Company’s technological innovation and are
constantly monitoring industry activity to detect further
infringement activity against which enforcement may be
necessary.
Personnel
Velocys is a small company in a competitive market, and
works hard to attract and retain high quality personnel. At
the end of 2015 42% of employees had been with the
Company less than two years. Management recognises
the importance of building a strong community among
these recruits.
economics remain attractive. These are projects that
target high value speciality products, such as waxes, that
access low price feedstock, or that exploit isolated
markets where fuel prices are high. These markets are
discussed in the Chairman’s statement and Chief
Executive’s report.
At the same time the oil price situation has helped to sift
the competition in this new and attractive market space.
This positively benefits Velocys, which, with a strong
balance sheet, best-in-class technology, supportive
partners and plants that are already committed, is well
equipped to address the market need and to exploit the
available opportunities.
Velocys closely monitors the economic climate and the
operating environment to ensure it has sufficient
information to develop a thorough understanding of
potential impacts, towards which it can target mitigating
policies and contingencies.
Financial risks
The activities of Velocys expose it to a number of financial
risks, which are dealt with specifically below.
The use of financial derivatives is governed by Company
policies, which are approved by the Board of Directors,
and which provide a set of written principles for the
management of these risks. At present Velocys makes use
of financial derivatives only in the management of the
foreign exchange exposure arising from funding its US
operations.
The financial instruments of the Company, including the
parent company, comprise cash and cash equivalents,
and short-term investments, as well as trade and other
receivables, and trade and other payables. The main
purpose of these financial instruments is to support the
funding of business activities.
Velocys promotes strong communication between its UK
and US sites, harmonises policies where possible and, as
well as its package of benefits, provides a range of
schemes covering incentivisation, share options, training
and performance evaluation.
Credit
The Company’s principal financial assets are cash and
cash equivalents, short-term investments, and trade and
other receivables.
External risks
The performance of Velocys is subject to macroeconomic
conditions and changes in external factors such as oil and
natural gas prices, and interest and foreign exchange
rates.
The Company’s credit risk is primarily attributable to its
trade receivables, which are concentrated in a small
number of high value customer accounts. The Company
manages this risk by carrying out relevant financial
checks on customers, and where necessary, requiring
letters of credit or advance payments.
The low oil price has affected the economics of GTL
projects. However the Company has moved quickly to
focus on those areas of the market for which plant
The credit risk of liquid funds is limited through a
Company treasury policy, maintained to ensure that liquid
8
assets are only placed with highly-rated institutions, and
that the spread of such assets restricts exposure to any
one counterparty.
Interest rates
Variations in interest rates affect only Velocys’ cash
holdings, as its borrowing is payable at a fixed rate. As far
as the cash flow forecast allows for certainty, funds are
placed on fixed rate deposits.
Liquidity
The Company maintains sufficient cash balances to meet
anticipated requirements. Cash flow forecasts are
regularly reviewed, cash balances are held immediately
available as necessary, and surplus funds are placed on
time deposits of varying duration.
Exchange rates
A significant proportion of commercial activity and R&D
costs are US dollar denominated. Where possible, revenue
is receipted in US dollars to act as a natural hedge
against this exposure. Additionally, a proportion of liquid
assets is held in US dollars, and future exchange rate
uncertainty is managed through the use of forward
contracts at fixed rates of exchange.
In the consolidated financial statements there are
significant US-dollar denominated intangible assets
relating to the 2008 acquisition of Velocys, Inc. Exchange
rate fluctuations therefore result in movements in
reserves. The Directors do not consider it necessary to
hedge these movements as they do not have any impact
on the cash position.
Velocys plc
Annual report and accounts 2015
Capital management
The Company believes that equity is currently the most
suitable form of funding for its activities, and this forms
the basis of its capital. The Company’s objectives when
managing this capital are:
•
•
to secure its ability to continue as a going concern
to keep its cost of capital low through an optimised
capital structure
to preserve sufficient funds to protect it against
unforeseen events and risks
to be in a position to take advantage of opportunities
that can deliver a return to shareholders.
•
•
Approved by the Board and signed on its behalf by:
David Pummell
Chief Executive
26 April 2016
9
Velocys plc
Annual report and accounts 2015
Directors’ report
The Directors present their report and the audited consolidated financial
statements for the year ended 31 December 2015
Company
Velocys plc is the ultimate parent of the Company. It is a
public limited company that was incorporated on
16 February 2006, and is registered in England and Wales.
The registered office address is:
115e Olympic Avenue
Milton Park
Abingdon
Oxfordshire
OX14 4SA
Substantial shareholdings
On 12 April 2016, the Company was notified of the
following holdings of 3% or more of the issued share
capital of Velocys plc.
Ervington Investments
Limited
Lansdowne Partners
Invesco Asset
Management
Henderson Global
Investors
Baillie Gifford & Co.
Ruffer LLP
Number of
shares held
30,200,946
26,631,808
Percentage
of issued
share capital
21.08%
18.59%
23,600,000
16.47%
17,480,918
5,230,572
4,901,000
12.20%
3.65%
3.42%
Directors
The Directors of Velocys plc as at 31 December 2015,
who served throughout the year and up to the date of
approval of the financial statements, unless otherwise
stated, were as follows:
•
Pierre Jungels (Non-executive Chairman)
• Roy Lipski (Chief Executive Officer – resigned
10 August 2015)
• Susan Robertson (Chief Financial Officer)
Paul Schubert (Chief Operating Officer)
•
Andrew Jamieson (Non-executive Director – resigned
•
21 November 2015)
Julian West (Senior Independent Director)
•
Jan Verloop (Non-executive Director)
•
• Sandy Shaw (Non-executive Director)
• Mark Chatterji (Non-executive Director – appointed
29 September 2015)
• Ross Allonby (Non-executive Director – appointed
8 December 2015)
David Pummell was appointed as Chief Executive Officer
on 6 January 2016.
On 29 September 2015 Susan Robertson resigned as
Company Secretary and Jeremy Gorman was appointed.
Whilst the Company’s Articles of Association require
that all Directors are subject to election by shareholders
at the first opportunity after their appointment, and to
re-election thereafter at intervals of not more than three
years, the Directors have decided that, in line with best
corporate governance practice, at the 2016 Annual
General Meeting all of the Directors will retire and offer
themselves for re-election.
Directors’ interests
The Directors who held office at 31 December 2015 had
the following interests in the shares of parent company
undertakings (as recorded in the Register of Directors’
Interests and including those of the spouse or civil
partner and children under 18).
Velocys plc
Ordinary shares
31 December
2015
304,874
223,031
150,837
75,000
17,758
–
–
–
31 December
2014
304,874
223,031
150,837
75,000
17,758
–
–
–
Susan Robertson
Pierre Jungels
Jan Verloop
Julian West
Sandy Shaw
Paul Schubert
Mark Chatterji
Ross Allonby
Directors’ share options and service contracts are
detailed in the Directors’ remuneration report.
Donations
The Company made no political donations during 2015.
Dividends
The Directors do not recommend any dividend for the
year ended 31 December 2015 (2014: nil).
Future developments
The Board aims to continue its corporate strategies as
set out in the Chairman’s statement and Chief
Executive’s report.
10
Velocys plc
Annual report and accounts 2015
Company development activities
The Company’s R&D activity includes continued research
and development of its highly active GTL catalyst and of
its efficient microchannel reactor. The Directors regard
investment in research and development as essential for
success in the medium to long term.
Business risks
A full explanation of the Company’s risks and its risk
management policies is made in the Strategic report.
•
Capital structure
The Company’s capital structure is discussed in the
Strategic report on page 9.
Directors’ qualifying third-party indemnity
provision
The Company maintains directors’ qualifying third party
indemnity insurance to provide cover for legal action
against its Directors. This has been in place throughout
the year and remains in place at the date of this report.
Annual General Meeting
The Annual General Meeting of the Company will be held
at Milton Park Innovation Centre, 99 Park Drive, Milton
Park, Oxfordshire OX14 4RY at 10.45am on Tuesday
14 June 2016.
Auditors and disclosure of information to
auditors
Each of the persons who is a Director at the date of
approval of this report confirms that:
•
so far as the Director is aware, there is no relevant
audit information of which the Company’s auditors
are unaware; and
the Director has taken all the steps that he/she ought
to have taken as a Director in order to make
himself/herself aware of any relevant audit
information and to establish that the Company’s
auditors are aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of s418 of the Companies
Act 2006.
PricewaterhouseCoopers LLP have expressed their
willingness to continue in office as auditors and a
resolution to reappoint them will be proposed at the
forthcoming Annual General Meeting.
Approved by the Board and signed on its behalf by:
David Pummell
Chief Executive
26 April 2016
11
Velocys plc
Annual report and accounts 2015
Corporate governance report
Corporate governance
Companies whose securities are traded on the AIM market of The London Stock Exchange are not required to comply
with the principles and provisions of the UK Corporate Governance Code 2014 (Code). The Board, however, has
determined that the Company should maintain high standards of corporate governance and, whilst not complying fully
with the Code, including the full disclosure requirements, has adopted procedures and has taken steps to adopt the
underlying principles in so far as the Board considers these to be appropriate given the size of the Company and the
nature of its operations.
Board of Directors
The Company is controlled by the Board of Directors which currently comprises an independent Non-executive
Chairman (Pierre Jungels), three Executive Directors (David Pummell, Chief Executive Officer; Susan Robertson, Chief
Financial Officer; and Paul Schubert, Chief Operating Officer) and five independent Non-executive Directors (Julian
West, Senior Independent Director; Jan Verloop; Sandy Shaw; Mark Chatterji and Ross Allonby). Although Pierre Jungels
and Jan Verloop have served more than three consecutive 3-year terms of office, the Board considers that they make a
significant contribution to the Company and, in accordance with Code Provision B.7.1, resolutions will be proposed at
the forthcoming Annual General Meeting for their re-appointment. The Board regards each of the other four
Non-executive Directors as being fully independent.
There is a clear division of responsibilities between the running of the Board and the Executive who are responsible for
managing the Company’s business. The roles of the Chairman and the Chief Executive are separated, with clear written
guidance to support the division of responsibilities. On 9 January 2015, Julian West, a Non-executive Director, was
appointed as Senior Independent Director. The detailed biographies of all Directors are provided on the Company’s
web site.
The Board is responsible to shareholders for the proper management of Velocys and meets formally at least six times a
year to set the overall direction and strategy of the Company, to review operating and financial performance and to
consider and advise on senior management appointments. The Board also monitors and approves financial policy and
budgets, including capital expenditure. All key operational decisions are subject to Board approval.
The minutes of the Audit and Risk, Remuneration and Nominations Committees are circulated to the Board. The
Committee Chairmen also report to the Board on the outcome of Committee meetings at the subsequent Board
meeting.
The Company Secretary, through the Chairman, is responsible for advising the Board on governance matters, for
ensuring that Board procedures are followed and that applicable rules and regulations are complied with. All Directors
have access to the advice and services of the Company Secretary. An agreed procedure exists for Directors in the
furtherance of their duties to take independent professional advice.
The Company’s Articles of Association provide that Directors are subject to election by shareholders at the first
opportunity after their appointment. In addition, one third of Directors are subject to retirement by rotation at each
Annual General Meeting. The Board has agreed that, in line with best corporate governance practice, all Directors
should stand for re-appointment at the 2016 Annual General Meeting.
The 2015-16 evaluation of the Board, its committees and individual directors was carried out internally by the Company
Secretary. The evaluation took the form of individual interviews with each director, and comprehensive questionnaires
which provided all directors with an opportunity to comment on Board and Committee procedures. A performance
evaluation of the Chairman was carried out, led by the Senior Independent Director, and taking into account the views
of all Directors. Recommendations arising from the evaluation will be presented to the Board for consideration and,
where appropriate, will be implemented.
In addition, the Board has introduced a process for the evaluation of performance of and provision of feedback to each
individual Board member, including the Chairman.
During the interim period between the resignation of the former CEO and the appointment of David Pummell the Board
took steps to preserve its corporate governance rules and procedures by appointing an independent Company
Secretary, Jeremy Gorman. This appointment took effect on 29 September 2015, from which date the CFO stepped
down from her additional role as Company Secretary.
12
Velocys plc
Annual report and accounts 2015
Committees of the Board
The Board delegates certain powers to designated committees. Information on the work of the Remuneration, Audit
and Risk, and Nomination Committees is set out below.
Remuneration Committee
The following served as members of the committee throughout the year ended 31 December 2015, except where
otherwise shown:
• Sandy Shaw (Chair)
• Julian West
• Ross Allonby (appointed 8 December 2015)
• Pierre Jungels (stepped down 8 December 2015)
• Jan Verloop (stepped down 8 December 2015)
• Mark Chatterji (appointed 29 September 2015, stepped down 8 December 2015)
• Andrew Jamieson (resigned 21 November 2015)
This committee reviews, inter alia, the performance of the Executive Directors and sets the scale and structure of their
remuneration and basis of their service agreements, having due regard to the interests of shareholders. The
Remuneration committee also determines the allocation of share options to Executive Directors. No Director has a
service agreement exceeding one year. Under its terms of reference, no Director is permitted to participate in decisions
concerning his or her own remuneration. The Directors’ remuneration report is set out on pages 16 to 21.
Audit and Risk Committee
The following served as members of the committee throughout the year ended 31 December 2015, except where
otherwise shown:
• Mark Chatterji (appointed as a member and committee chairman 29 September 2015)
• Julian West
• Ross Allonby (appointed 8 December 2015)
• Pierre Jungels (stepped down 8 December 2015)
• Jan Verloop (stepped down as a member and committee chairman 8 December 2015)
• Sandy Shaw (stepped down 8 December 2015)
• Andrew Jamieson (resigned 21 November 2015)
The Audit Committee was renamed the Audit and Risk Committee on 8 December 2015, and adopted revised terms of
reference on that date. Under its revised terms of reference, the committee will meet at least four times a year.
Amongst other duties it reviews the Company’s audit planning, risk and internal controls, accounting policies and
financial reporting, and provides a forum through which the external auditors report. It meets at least once a year with
the external auditors without Executive Directors present.
During the period 1 January 2015 to 29 September 2015 when Mark Chatterji was appointed as a member and
committee chairman, the committee did not have a member with recent and relevant financial experience with
competence in accounting and/or auditing.
The committee keeps under annual review whether an internal audit function should be established. Although this is
not considered necessary at the present time given the size of the Company, this decision will be reviewed as the
operations of the Company develop.
Nominations Committee
The following served as members of the Nominations Committee throughout the year ended 31 December 2015, except
where otherwise shown:
• Pierre Jungels (committee chairman)
• Julian West
• Jan Verloop
• Sandy Shaw
• Mark Chatterji (appointed 29 September 2015)
• Ross Allonby (appointed 8 December 2015)
• Andrew Jamieson (resigned 21 November 2015)
13
Velocys plc
Annual report and accounts 2015
Corporate governance report (continued)
The committee meets at least twice a year and, amongst its other duties, it reviews the composition of the Board and
its succession planning, and keeps under review the leadership needs of the Company with a view to ensuring the
continued ability of the Company to compete effectively in the marketplace.
Senior management team
The day-to-day management of the Company is overseen by the Executive Directors under the leadership of the Chief
Executive.
Board and committee attendance at scheduled Board and committee meetings
Number of meetings held in 2015
Attendance* by:
− Pierre Jungels
− Susan Robertson
− Paul Schubert
− Jan Verloop
− Sandy Shaw
− Julian West
− Mark Chatterji
− Ross Allonby
− Roy Lipski
− Andrew Jamieson
Board
6
Audit and Risk
committee
3
Remuneration
committee
4
Nominations
committee
2
6
6
6
6
6
6
1/1
n/a
3/3
5/5
3
n/a
n/a
3
3
3
1/1
n/a
n/a
2/2
4
n/a
n/a
3/4
4
4
1/1
n/a
n/a
3/3
2
n/a
n/a
2
2
2
1/1
n/a
n/a
1/1
* Directors are eligible to attend all meetings unless marked “n/a” or specified by an alternative denominator. Ross Allonby attended the
December meeting as an observer.
Relations with shareholders
The Board considers effective communication with shareholders to be very important, and encourages regular dialogue
with investors. The Board responds promptly to questions received verbally or in writing. Directors regularly attend
meetings with shareholders and analysts throughout the year. Shareholders will be given at least 21 days’ notice of the
Annual General Meeting, at which they will have the opportunity to discuss the Company’s development and
performance.
The Company’s web site www.velocys.com contains full details of the Company’s activities, press releases and other
details, as well as a link to the relevant web page of the London Stock Exchange web site for share price details, share
trading activities and graphs, and Regulatory News Service (RNS) announcements.
Maintenance of a sound system of internal control
The Directors have overall responsibility for ensuring that the Company maintains a system of internal control to
provide them with reasonable assurance that the assets of the Company are safeguarded and that shareholders’
investments are protected. The system includes internal controls appropriate for a Company of the size of Velocys, and
covers financial, operational, compliance (including health and safety) controls and risk management. Such systems
are designed to manage, rather than eliminate, the risk of failure to achieve business objectives; any system can
provide only reasonable, and not absolute, assurance against material misstatement or loss. The process in place for
reviewing Velocys’ system of internal control includes procedures designed to identify and evaluate failings and
weaknesses, and to ensure that necessary action is taken to remedy the failings.
The Board has considered its policies with regard to internal controls as set out in the Code and undertakes
assessments of the major areas of the business and methods used to monitor and control them. In addition to financial
risk, the review covers operational, commercial, regulatory and health and safety risks. The risk review is an ongoing
process with reviews being undertaken on a regular basis.
The key procedures designed to provide an effective system of internal controls that are operating up to the date of
sign-off of this report are set out below.
Control environment
There is an organisational structure with clearly defined lines of responsibility and delegation of accountability and
authority.
14
Velocys plc
Annual report and accounts 2015
Risk management
The Company employs Directors and senior personnel with the appropriate knowledge and experience for a business
engaged in activities in its field of operations, and undertakes regular risk assessments and reviews of its activities.
Details of risks to the business which the Board considers to be potentially material are set out in the Strategic report
on pages 7 to 9.
Financial information
The Company prepares detailed budget and working capital projections which are approved annually by the Board and
are maintained and updated regularly throughout the year. Detailed management accounts and working capital cash
flows are prepared on a monthly basis and compared to budgets and projections to identify any significant variances.
Management of liquid resources
The Board is risk averse when investing the Company’s surplus cash. The Company’s treasury management policy is
reviewed periodically, and sets out strict procedures and limits on how surplus funds are invested.
Review of corporate governance disclosures
The Board has voluntarily complied with those key principles of the Code in so far as they are considered appropriate
given the size of the Company and the nature of its operations. These have not been formally reviewed by the
Company’s auditors. The auditors’ responsibility extends only to reading this report as a part of the Annual report and
accounts and considering whether it is consistent with the audited financial statements.
15
Velocys plc
Annual report and accounts 2015
Directors’ remuneration report
Introduction
The Remuneration committee is committed to maintaining high standards of corporate governance and has taken
steps to comply with the principles of best practice in so far as it can be applied practically given the size of the
Company and the nature of its operations. Since it is not a requirement for companies which have securities listed on
the AIM market of the London Stock Exchange to comply with the disclosure requirements of the Directors’
Remuneration Report Regulations 2013 or to comply with the UKLA Listing Rules and the disclosure provisions under
schedule 8 to SI 2008/410 of the large and medium-sized companies and groups (accounts and reports) regulations
2008, certain disclosures are not included below.
Unaudited information
Remuneration report
The Board has applied the principles of good governance relating to Directors’ remuneration as described below.
Remuneration committee
The following served as members of the committee throughout the year ended 31 December 2015, except where
otherwise shown:
• Sandy Shaw (Chair)
• Julian West
• Ross Allonby (appointed 8 December 2015)
• Pierre Jungels (stepped down 8 December 2015)
• Jan Verloop (stepped down 8 December 2015)
• Mark Chatterji (appointed 29 September 2015, stepped down 8 December 2015)
• Andrew Jamieson (resigned 21 November 2015)
The committee’s constitution and operation is compliant with the provisions of the Code on Corporate Governance.
When setting its remuneration policy for Executive Directors, the committee gives consideration to the provisions and
principles of the Code and the guidelines published by the Investment Association (formerly the Association of British
Insurers).
Remuneration policy for Executive Directors
The remuneration policy has been designed to ensure that Executive Directors receive appropriate incentive and
reward given their performance, responsibility and experience. When assessing this, the Remuneration committee
seeks to ensure that the policy aligns the interests of the Executive Directors with those of shareholders.
The Company’s remuneration policy for Executive Directors is to:
• consider the individual’s experience and the nature, complexity and responsibilities of their work in order to set a
competitive salary that attracts and retains management of the highest quality
• link individual remuneration packages to the Company’s long-term performance through bonus schemes and long-
term share-based plans
• provide post-retirement benefits through payment into defined contribution pension schemes
• provide employment-related benefits including life assurance and medical insurance.
Remuneration of Executive Directors
Executive Directors’ remuneration is considered annually. In addition, the Remuneration committee undertakes a
comprehensive review using external advisors every three years. The current remuneration package is based on such a
review commissioned by the Remuneration committee at the end of 2013. This review looked at the overall
remuneration package for Executive Directors and made recommendations based on benchmarking with other
companies similar in size, industry and stage of development, and taking into account the location of the Director
concerned. The basic components of this package are set out below.
Base salary
The base salary is reviewed annually at the beginning of each year. The review process undertaken by the
Remuneration committee has regard to the development of the Company and the contribution that individuals will
continue to make. Consideration is also given to the need to retain and motivate individuals, and available information
on the package levels in comparable organisations.
16
Velocys plc
Annual report and accounts 2015
Annual performance incentive
All Executive Directors are eligible, at the discretion of the Remuneration committee, for an annual bonus. The target
bonus award for each individual is based on a percentage of base salary for each individual, which for the year
commencing 1 January 2016 is 75%. In the year ended 31 December 2015 the target percentage relating to the former
Chief Executive was 100% (see note on Former Directors), and for the other Executive Directors was 75%. The
maximum award for stretch target performance is twice the target amount. The Remuneration committee sets
performance targets for bonus awards at the beginning of each year. Awards are determined by both the performance
of the individual and the Company as a whole at the end of each year. The performance targets for the Company
comprise measures of certain financial, as well as technical and business development goals.
Following the resignation of the former Chief Executive Officer, Susan Robertson was appointed as Acting Chief
Executive Officer in addition to her role as Chief Financial Officer for the period 12 August 2015 to 5 January 2016. The
committee agreed that, in these circumstances, it was appropriate to pay Susan Robertson an additional, non-
recurring, interim bonus amounting to 25% of salary during this period, based on her achieving corporate and personal
targets beneficial to the Company. The interim bonus paid is included in the total bonus paid for the year ended
31 December 2015 set out in the table of Directors’ remuneration below.
Pensions and other benefits
The Company contributes to individuals’ defined contribution pension plans.
Other benefits provided are life assurance, private medical insurance and relocation allowances where applicable, in
line with the Company’s standard policies.
The Velocys Group 2012 Share Option Scheme (2012 Option Scheme)
Following approval of revised headroom limits by shareholders at a general meeting held on 23 February 2015, the
Company made awards to its Executive Directors under the Executive Long Term Incentive Plan (ELTIP) for both 2014
and 2015. The 2014 ELTIP awards include both time vesting and performance vesting elements.
The 2015 ELTIP awards have the following features:
• awards include both time vesting and performance vesting elements
• the performance criteria are designed to align with shareholder interests and are based on compound annual
growth of the Company’s market capitalisation excluding fund raising subsequent to 1 January 2015
• targets set for achievement of the maximum award are designed to be stretching
• a minimum performance threshold below which none of the performance awards vest
• pro rata vesting of award between minimum and stretch targets, up to maximum award amount
• all awards are subject to the detailed rules within the Velocys employee option plan and include malus and
clawback provisions.
In the case of Executive Directors, the awards are made annually based on a multiple of base salary, and have a three
year performance period, with re-testing of performance at the end of the fourth and fifth years in specific
circumstances. Of these awards, 23% vest on a time basis. For the remaining performance based awards, 30% vest at a
threshold level of performance with additional awards vesting pro rata for performance between the minimum and the
maximum stretch target.
Remuneration policy for Non-executive Directors
The remuneration of the Non-executive Directors is determined by the Executive members of the Board in consultation
with the Chairman, based on a review of current practices in other equivalent companies. The Non-executive Directors
do not receive any pension payments, nor do they participate in any of the bonus schemes. Remuneration is based on a
fixed fee, plus a separate fee for any additional consulting services.
The Non-executive Directors do not have service contracts with the Company but are appointed for an initial three-year
term. Non-executive Directors are typically expected to serve for two three-year terms, although their appointment can
be terminated either by them or by the Company on three month’s written notice. The Chairman’s notice period is also
three months. The Company may invite a Non-executive Director to serve for further periods after the expiry of two
three-year terms subject to a particularly rigorous review of performance and taking into account the need for
progressive refreshing of the Board. Under the Company’s Articles of Association, all Directors are required to stand for
re-election by shareholders on appointment and thereafter at least once every three years.
17
Velocys plc
Annual report and accounts 2015
Directors’ remuneration report (continued)
Proposed amendment to the Company’s Articles of Association (Articles) and ratification of breach of Article 92
During the two financial years ended 31 December 2015, fees have been paid to the Chairman and other Non-executive
Directors in excess of the aggregate limit of £250,000 specified in Article 92 of the Articles adopted on 22 June 2011.
The aggregate amount of the fees paid to the chairman and other Non-executive Directors, as set out in the Company’s
annual reports for the years ended 31 December 2014 and 2015, is as follows.
Aggregate fees paid to Chairman and Non-executive Directors
2015
£
2014
£
271,853
258,705
Resolutions will therefore be proposed at the 2016 Annual General Meeting (i) to amend Article 92 so as to increase the
aggregate limit set out therein from £250,000 to £350,000 and (ii) to approve and ratify any payments to the Chairman
and other Non-executive Directors out of the funds of the Company by way of fees for their services in excess of the
amount specified in Article 92 of the Articles as though the Directors had been authorised pursuant to Article 92 of the
Articles to make payments of such amounts.
Further information is set out in the Notice of Annual General Meeting, which is being published together with this
Report and Accounts.
Audited information
Directors’ remuneration
Aggregate emoluments for current and former Directors in 2015 totalled £1,645,154 (2014: £2,099,087), and pension
contributions were £31,734 (2014: £34,010).
The Directors who held office at 31 December 2015 received the following remuneration in relation to the year ended 31
December 2015.
Name of Director*
Executive
Susan Robertson
Paul Schubert
Non-executive
Pierre Jungels
Jan Verloop
Julian West
Mark Chatterji
Ross Allonby
Sandy Shaw
Aggregate emoluments
and pension
contributions
Salary
and fees
£
Bonus**
£
Other
benefits
£
EBT
payment
£
2015
Total
£
2015
Pension
£
2014
Total
£
2014
Pension
£
215,469
185,104
161,602
132,031
807
13,622
80,000
44,666
45,000
12,188
3,750
45,000
–
–
–
–
–
–
–
–
–
–
–
–
631,177
293,633
14,429
–
–
–
–
–
–
–
–
–
377,878
330,757
15,071
5,201
383,546
513,573
13,181
4,734
80,000
44,666
45,000
12,188
3,750
45,000
–
–
–
–
–
–
80,000
43,705
45,000
–
–
45,000
–
–
–
–
–
–
939,239
20,272
1,110,824
17,915
*
**
Remuneration for former Directors Roy Lipski (Executive) and Andrew Jamieson (Non-executive) is outlined separately below
This is bonus accrued for 2015 to be paid in 2016
Directors’ share options
Aggregate emoluments disclosed above include amounts paid through the Employee Benefit Trust (EBT) in relation to
share options exercised, of which there were none during 2015.
In December 2014, Paul Schubert exercised options over 277,100 shares. This resulted in a net gain of £368,000
inclusive of a bonus award through the EBT, which is included in the 2014 total in the remuneration table above.
ELTIP awards made in 2015
Due to the need to obtain shareholder approval for the revised share plan, awards under the revised ELTIP plan for 2014
were not made until 26 February 2015. However, these were included in the calculation of the share-based payment
charge for 2014. The awards were as follows.
18
Velocys plc
Annual report and accounts 2015
Name of Director
Susan Robertson
Paul Schubert
*
Restricted stock units
% with
Shares under performance
conditions
award
245,881
187.826
77%
77%
Award type
Option
RSU *
Exercise
price (£)
Nil
Nil
Earliest
date of
exercise Date of expiry
02/01/17
02/01/17
26/02/25
02/01/18
On 26 February 2015, further awards were made to two Executives Directors, representing the ELTIP annual awards for
the year commencing 1 January 2015, as follows.
Name of Director
Susan Robertson
Paul Schubert
% with
Shares under performance
conditions
award
205,508
156,985
77%
77%
Award type
Option
RSU
Exercise
price (£)
Nil
Nil
Earliest
date of
exercise Date of expiry
02/01/18
02/01/18
26/02/25
02/01/19
Details of all Directors’ shareholdings are disclosed on page 10 in the Directors’ report.
Details of all options held by the Directors at 31 December 2015 are as follows.
At 31
December
2014
Granted Exercised
Lapsed
2015
At 31
December Exercise
Earliest
date of
price (£) exercise
Exercisable
at 31
Date of December
2015
expiry
Name of Director
Susan Robertson
EMI
Bonus 2008
Bonus 2010
ELTIP 2009
ELTIP 2011
ELTIP 2012
ELTIP 2012
ELTIP 2013
ELTIP 2013
ELTIP 2014
ELTIP 2014
ELTIP 2015
ELTIP 2015
ELTIP 2015
ELTIP 2015
62,893
42,105
37,655
105,000
390,625
365,000
273,803
502,930
125,732
440,316
110,079
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
56,742
189,139
47,425
158,083
Total
2,456,138
451,389
Paul Schubert
EMI
ELTIP 2012
ELTIP 2013
ELTIP 2013
ELTIP 2014
ELTIP 2014
ELTIP 2015
ELTIP 2015
ELTIP 2015
ELTIP 2015
207,894
119,000
502,930
41,911
336,711
56,119
–
–
–
–
–
–
–
–
–
–
43,344
144,482
36,227
120,758
Total
1,264,565
344,811
No options were exercised by Directors during 2015.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
62,893
42,105
37,655
105,000
390,625
365,000
273,803
502,930
125,732
440,316
110,079
56,742
189,139
47,425
158,083
– 2,907,527
–
–
–
–
–
–
–
–
–
–
207,894
119,000
502,930
41,911
336,711
56,119
43,344
144,482
36,227
120,758
– 1,609,376
01/04/18
1.59 29/10/10
0.01 31/03/09
31/03/19
0.01 20/03/11 20/03/21
0.01 31/01/12
21/11/19
0.01 20/09/11 20/09/21
01/02/22
0.49 01/01/15
0.49 01/01/12
01/02/22
1.59 01/01/16 12/04/23
1.59 12/04/13 12/04/23
01/04/24
1.64 01/01/17
01/04/24
1.64 01/04/14
01/01/17
Nil 01/01/17
01/01/19
Nil 01/01/17
Nil 01/01/18
01/01/18
01/01/20
Nil 01/01/18
04/10/21
0.92 04/10/14
0.49 01/01/15
01/02/22
1.59 01/01/16 12/04/23
1.59 01/01/15 12/04/23
01/04/24
1.64 01/01/17
01/04/24
1.64 01/01/15
01/01/17
Nil 01/01/17
01/01/19
Nil 01/01/17
01/01/18
Nil 01/01/18
01/01/20
Nil 01/01/18
62,893
42,105
37,655
105,000
390,625
365,000
273,803
–
125,732
–
73,386
–
–
–
–
1,476,199
207,894
119,000
–
41,911
–
28,059
–
–
–
–
396,864
19
Velocys plc
Annual report and accounts 2015
Directors’ remuneration report (continued)
Former Directors
The Directors listed below, who were members of the Board at 1 January 2015 and resigned during the year, received
the following remuneration.
Name of Director
Executive
Roy Lipski
Non-executive
Andrew Jamieson
Salary and Pay in lieu
of notice
£
fees
£
Other
benefits
£
EBT
payment
£
2015
Total
£
2015
pension
£
2014
Total
£
2014
pension
£
258,196
382,061
24,408
41,250
–
–
299,446
382,061
24,408
–
–
–
664,665
11,462
943,262
16,095
41,250
–
45,000
–
705,915
11,462
988,262
16,095
Roy Lipski resigned on 10 August 2015 and Andrew Jamieson resigned on 21 November 2015.
Mr Lipski, who was Chief Executive Officer, was eligible, at the discretion of the Remuneration Committee, for an annual
bonus in line with the terms for other Executive Directors, details of which are set out above, save that the target bonus
award for Mr Lipski was based on 100% of his base salary. No bonus was paid to Mr Lipski in respect of the period
1 January 2015 to 11 August 2015.
Mr Lipski, who was located in the USA, was entitled to the standard medical benefits provided to all of the Company’s
US full-time employees.
During 2013, Mr Lipski relocated from Plain City to Houston and the Company paid for the costs of relocation for
himself and his family including housing rental costs for a defined period of time to facilitate this move. Rental costs
continued part way through 2014 and then ceased. Where these costs were taxable, the Company paid grossed up
costs, which are included in the 2014 total in the table above.
The ELTIP awards made to Mr Lipski in February 2015 relating to 2014 comprised a single 5-year award, intended to
ensure focus on growth targets over a longer horizon. This award included an element that vested on a time basis
(30% of the award) with the remainder related to performance. Of the performance component, no awards would vest
unless a minimum threshold performance was met with pro rata vesting between 0 -100% for performance between
the minimum threshold and the maximum stretch target.
Name of Director
Roy Lipski
Award type
Shares
% with
under performance
conditions
award
Exercise
price (£)
Earliest
date of
exercise
Date
of expiry
RSU
7,000,000
70%
n/a
02/01/19
02/01/20
Under the terms of a Settlement Agreement entered into by the Company and Mr Lipski, it was agreed that a total of
2,216,666 shares held under the RSU would vest and that the balance of 4,783,334 shares would lapse. 1,330,000
shares held under the RSU were allotted to Mr Lipski on 10 March 2016 in full settlement of this award, net of
estimated taxation liabilities. Based on the opening share price on that date of 37.5p, this allotment was valued at
£498,750.
20
Velocys plc
Annual report and accounts 2015
At the date that Mr Lipski left the Company, he held options over the Company’s shares as follows:
Roy Lipski
Bonus 2009
ELTIP 2008
ELTIP 2009
ELTIP 2011
ELTIP 2012
ELTIP 2012
ELTIP 2013
ELTIP 2013
ELTIP 2014
ELTIP 2014
ELTIP 2014
Total
Number
of options
Exercise
price (£)
342,000
100,000
140,000
625,000
818,000
613,000
1,126,563
281,640
986,306
164,384
82,192
5,279,085
0.01
0.01
0.01
0.58
0.49
0.49
1.59
1.59
1.64
1.64
1.64
Earliest
date of
exercise
31/03/10
24/01/11
31/01/12
20/09/11
01/01/15
01/01/12
01/01/16
12/04/13
01/01/17
01/04/14
01/04/14
Date of
expiry
31/03/20
19/11/18
04/11/19
20/09/21
01/02/22
01/01/22
12/04/23
12/04/23
01/04/24
01/04/14
01/04/24
Vested
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
No
Yes
No
Under the Settlement Agreement referred to above, the committee has exercised its discretion to permit Mr Lipski to
exercise vested options over 3,084,024 shares. The remaining unvested options over 2,195,061 shares have lapsed.
Andrew Jamieson, who was a Director at 1 January 2015, held options over 20,094 ordinary shares exercisable at a
price of 1p per share on 21 November 2015, the date of his resignation. The committee has exercised its discretion to
permit Mr Jamieson to exercise these options during the 12 month period ending 9 December 2016.
Share price
The market price of the parent company’s shares as at 31 December 2015 was 42p (2014: 144p) and the range during
the year was 34p to 169p (2014: 140p to 237p). Details of options and the cost of share-based payments are given in
note 15.
21
Velocys plc
Annual report and accounts 2015
Statement of Directors’ responsibilities
The Directors are responsible for preparing the annual report, the Strategic report, the Director’s report, the Directors’
remuneration report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the
Directors have prepared the financial statements for the parent company (Velocys plc) and the Company (Velocys plc
and its subsidiaries) in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union. 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 Company and of the parent company, and of the profit or
loss of the Company for that period. In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material
departures disclosed and explained in the financial statements;
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the
Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the
Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and
of Velocys plc and enable them to ensure that the financial statements and the Directors’ remuneration report comply
with the Companies Act 2006 and, as regards the Company financial statements, Article 4 of the IAS Regulation. They
are also responsible for safeguarding the assets of the Company and of Velocys plc and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company’s web site. Legislation in the United
Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other
jurisdictions.
The Directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Company’s performance, business model and
strategy.
On behalf of the Board
David Pummell
Chief Executive
26 April 2016
22
Velocys plc
Annual report and accounts 2015
Independent auditors’ report
to the members of Velocys plc
Report on the financial statements
Our opinion
In our opinion:
• Velocys plc’s group financial statements and parent company financial statements (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 and the group’s and the parent company’s cash flows for the year then ended;
• the group financial statements have been properly prepared in accordance with International Financial Reporting
Standards (“IFRSs”) as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the
European Union and as applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
What we have audited
The financial statements, included within the Annual report and accounts 2015 (the “Annual Report”), comprise:
• the consolidated statement of financial position and Velocys plc statement of financial position as at 31 December
2015;
• the consolidated income statement and consolidated statement of comprehensive income for the year then ended;
• the consolidated statement of cash flows and Velocys plc statement of cash flows for the year then ended;
• the consolidated statement of changes in equity and Velocys plc statement of changes in equity for the year then
ended; and
• the notes to the financial statements, which include a summary of significant accounting policies and other
explanatory information.
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the
financial statements. These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as
adopted by the European Union, and applicable law and, as regards the parent company financial statements, as
applied in accordance with the provisions of the Companies Act 2006.
In applying the financial reporting framework, the directors have made a number of subjective judgements, for example
in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered
future events.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion, the information given in the Strategic report and the Directors’ report for the financial year for which the
financial statements are prepared is consistent with the financial statements.
Opinion on additional disclosures
Directors’ remuneration report
The parent company voluntarily prepares a Directors’ remuneration report in accordance with the provisions of the
Companies Act 2006. The directors have requested that we audit the part of the Directors’ remuneration report
specified by the Companies Act 2006 to be audited as if the parent company were a quoted company.
In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance
with the Companies Act 2006.
Other matters on which we are required to report by exception
Adequacy of accounting records and information and explanations received
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• 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.
•
We have no exceptions to report arising from this responsibility.
23
Velocys plc
Annual report and accounts 2015
Independent auditors’ report
to the members of Velocys plc (continued)
Directors’ remuneration
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’
remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
Responsibilities for the financial statements and the audit
Our responsibilities and those of the directors
As explained more fully in the Statement of Directors’ responsibilities set out on page 22, 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) (“ISAs (UK & Ireland)”). Those standards require us to comply with
the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the parent company’s members as a body in
accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these
opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or
into whose hands it may come save where expressly agreed by our prior consent in writing.
What an audit of financial statements involves
We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the
amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial
statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
• whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have
been consistently applied and adequately disclosed;
• the reasonableness of significant accounting estimates made by the directors; and
•
the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming
our own judgements, and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary
to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of
controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material
inconsistencies with the audited financial statements and to identify any information that is apparently materially
incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit.
If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our
report.
Sam Taylor (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Reading
26 April 2016
24
Velocys plc
Annual report and accounts 2015
Consolidated income statement
for the year ended 31 December 2015
2015 2015 2015 2014 2014 2014
Note £’000 £’000 £’000 £’000 £’000 £’000
Before Exceptional Before Exceptional
exceptional items exceptional items
items (note 4) Total items (note 4) Total
Revenue 6 2,002 – 2,002 1,736 (1,742) (6)
Cost of sales (1,275) – (1,275) (536) 1,742 1,206
Gross profit 727 – 727 1,200 – 1,200
Research and development costs (13,199) – (13,199) (11,163) – (11,163)
Share-based payments 15 (2,142) – (2,142) (3,407) – (3,407)
Administrative expenses (10,142) (1,204) (11,346) (9,853) (1,328) (11,181)
Total administrative expenses (25,483) (1,204) (26,687) (24,423) (1,328) (25,751)
Other income 9 2,009 1,763 3,772 56 – 56
Operating income (loss) 10 (22,747) 559 (22,188) (23,167) (1,328) (24,495)
Finance income 7 1,155 – 1,155 1,225 – 1,225
Finance costs 8 (53) – (53) (29) – (29)
Finance income, net 1,102 – 1,102 1,196 – 1,196
Income (loss) before income tax (21,645) 559 (21,086) (21,971) (1,328) (23,299)
Income tax credit 13 1,035 – 1,035 929 – 929
Income (loss) for the financial year
attributable to the owners of
Velocys plc (20,610) 559 (20,051) (21,042) (1,328) (22,370)
Loss per share attributable to the
owners of Velocys plc
Basic and diluted loss
per share (pence) 16 (14.52) (14.13) (17.24) (18.33)
The notes on pages 33 to 63 are part of these consolidated financial statements.
The Company has elected to take the exemption under Section 408 of the Companies Act 2006 to not present the
parent company income statement and statement of comprehensive income. The loss for the parent company for the
year was £5,433,000 (2014: loss £5,649,000).
25
Velocys plc
Annual report and accounts 2015
Consolidated statement of comprehensive income
for the year ended 31 December 2015
2015 2015 2015 2014 2014 2014
£’000 £’000 £’000 £’000 £’000 £’000
Before Exceptional Before Exceptional
exceptional items exceptional items
items (note 4) Total items (note 4) Total
Income (loss) for the year (20,610) 559 (20,051) (21,042) (1,328) (22,370)
Other comprehensive income
Items that may be reclassified
subsequently to profit or loss
if certain conditions are met
Foreign currency translation differences 1,869 1,869 1,108 – 1,108
Total comprehensive income (expense)
for the year (18,741) 559 (18,182) (19,934) (1,328) (21,262)
The notes on pages 33 to 63 are part of these consolidated financial statements.
26
Velocys plc
Annual report and accounts 2015
Consolidated statement of financial position
as at 31 December 2015
2015 2014
Note £’000 £’000
Assets
Non-current assets
Intangible assets 17 28,378 28,347
Property, plant and equipment 18 5,507 4,065
Investments 20 3,375 1,711
37,260 34,123
Current assets
Trade and other receivables 21 911 653
Current income tax asset 780 1,778
Inventories 22 1,393 291
Derivative financial instruments 27 156 435
Short term investments – funds held on deposit 23 3,000 28,083
Cash and cash equivalents 23 34,736 31,693
40,976 62,933
Total assets 78,236 97,056
Liabilities
Current liabilities
Trade and other payables 24 (7,380) (10,902)
Borrowings 26 (288) (267)
(7,668) (11,169)
Non-current liabilities
Trade and other payables 25 (1,327) (69)
Borrowings 26 (759) (999)
Deferred tax 14 – (269)
(2,086) (1,337)
Total liabilities (9,754) (12,506)
Net assets 68,482 84,550
Capital and reserves attributable to owners of Velocys plc
Called up share capital 29 1,419 1,419
Share premium account 29 149,197 149,225
Merger reserve 369 369
Share-based payment reserve 15,362 13,220
Foreign exchange reserve (282) (2,151)
Accumulated losses (97,583) (77,532)
Total equity 68,482 84,550
The notes on pages 33 to 63 are part of these consolidated financial statements.
The financial statements on pages 25 to 63 were approved by the Board of Directors and authorised for issue on
26 April 2016. They were signed on its behalf by:
Susan Robertson
Chief Financial Officer
Company number 5712187
27
Velocys plc
Annual report and accounts 2015
Velocys plc statement of financial position
as at 31 December 2015
2015 2014
Note £’000 £’000
Assets
Non-current assets
Investments in subsidiaries 19 126,289 128,752
Current assets
Trade and other receivables 21 32 76
Current income tax asset 600 1,357
Total assets 126,921 130,185
Current liabilities
Trade and other payables 24 (140) (85)
Total liabilities (140) (85)
Net assets 126,781 130,100
Capital and reserves attributable to owners
of Velocys plc
Called up share capital 29 1,419 1,419
Share premium account 29 149,197 149,225
Share-based payment reserve 15,362 13,220
Accumulated losses (39,197) (33,764)
Total equity 126,781 130,100
The notes on pages 33 to 63 are part of these consolidated financial statements.
The financial statements on pages 25 to 63 were approved by the Board of Directors and authorised for issue on 26
April 2016. They were signed on its behalf by:
Susan Robertson
Chief Financial Officer
Company number 5712187
28
Velocys plc
Annual report and accounts 2015
Consolidated statement of changes in equity
as at 31 December 2015
Called up Share Share-based Foreign
share premium payments Merger exchange Accumulated Total
capital account reserve reserve reserve losses equity
£’000 £’000 £’000 £’000 £’000 £’000 £’000
Balance at 1 January 2014 1,164 95,793 9,813 369 (3,259) (55,162) 48,718
Comprehensive income
Loss for the year – – – – – (22,370) (22,370)
Other comprehensive
income
Foreign currency
translation differences – – – – 1,108 – 1,108
Total comprehensive expense – – – – 1,108 (22,370) (21,262)
Transactions with owners
Share-based payments – value
of employee services – – 3,407 – – – 3,407
Proceeds from share issues 247 51,785 – – – – 52,032
Issue of ordinary shares in
relation to business
combination 8 1,647 – – – – 1,655
Total transactions with owners 255 53,432 3,407 – – – 57,094
Balance at 1 January 2015 1,419 149,225 13,220 369 (2,151) (77,532) 84,550
Comprehensive income
Loss for the year – – – – – (20,051) (20,051)
Other comprehensive income
Foreign currency translation
differences – – – – 1,869 – 1,869
Total comprehensive expense – – – – 1,869 (20,051) (18,182)
Transactions with owners
Share-based payments – value
of employee services – – 2,142 – – – 2,142
Employee benefit trust
reimbursement – (28) – – – – (28)
Total transactions with owners – (28) 2,142 – – – 2,114
Balance at 31 December 2015 1,419 149,197 15,362 369 (282) (97,583) 68,482
The notes on pages 33 to 63 are part of these consolidated financial statements.
29
Velocys plc
Annual report and accounts 2015
Velocys plc statement of changes in equity
as at 31 December 2015
Share Share-based
Called up premium payments Accumulated Total
share capital account reserve losses equity
£’000 £’000 £’000 £’000 £’000
Balance at 1 January 2014 1,164 95,793 9,813 (28,115) 78,655
Comprehensive income
Loss for the year – – – (5,649) (5,649)
Total comprehensive expense – – – (5,649) (5,649)
Transactions with owners
Share-based payments – value of
employee services – – 3,407 – 3,407
Proceeds from share issues 247 51,785 – – 52,032
Issue of ordinary shares in relation
to business combination 8 1,647 – – 1,655
Total transactions with owners 255 53,432 3,407 – 57,094
Balance at 1 January 2015 1,419 149,225 13,220 (33,764) 130,100
Comprehensive income
Loss for the year – – – (5,433) (5,433)
Total comprehensive expense – – – (5,433) (5,433)
Transactions with owners
Share-based payments – value of
employee services – – 2,142 – 2,142
Employee benefit trust reimbursement – (28) – – (28)
Total transactions with owners – (28) 2,142 – 2,114
Balance at 31 December 2015 1,419 149,197 15,362 (39,197) 126,781
The notes on pages 33 to 63 are part of these consolidated financial statements.
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Velocys plc
Annual report and accounts 2015
Consolidated statement of cash flows
for the year ended 31 December 2015
2015 2014
Note £’000 £’000
Cash flows from operating activities
Operating loss before taxation (22,188) (24,495)
Depreciation and amortisation 1,277 909
Loss on disposal of property, plant and equipment 5 11
Loss on disposal of intangible assets 383 154
Impairment of intangible assets 1,473 1,328
Write-down of deferred consideration and deferred tax liability (2,032) –
Share-based payments 2,142 3,407
Loss (gain) on derivative financial instruments 279 (698)
Changes in working capital (excluding the effects of
exchange differences on consolidation)
– Trade and other receivables (301) 282
– Trade and other payables (975) 2,507
– Inventory (1,066) (8)
Tax credits received 2,031 901
Net cash used in operating activities (18,972) (15,702)
Cash flows from investing activities
Purchase of property, plant and equipment (2,262) (1,544)
Purchase of intangible assets (395) (429)
Investment in ENVIA (formerly GTL JV) (1,535) (1,613)
Interest received 401 358
Interest paid (33) (37)
Decrease (increase) in funds placed on deposit 23 25,083 (16,208)
Net cash generated from (used in) investing activities 21,259 (19,473)
Cash flows from financing activities
(Employee benefit trust reimbursement) net proceeds of
issuance of ordinary shares (28) 51,570
Decrease in borrowings 26 (271) (104)
Net cash (used in) generated from financing activities (299) 51,466
Net increase in cash and cash equivalents 1,988 16,291
Cash and cash equivalents at beginning of year 23 31,693 14,475
Exchange gains on cash and cash equivalents 1,055 927
Cash and cash equivalents at end of year 23 34,736 31,693
The notes on pages 33 to 63 are part of these consolidated financial statements.
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Velocys plc
Annual report and accounts 2015
Velocys plc statement of cash flows
for the year ended 31 December 2015
2015 2014
£’000 £’000
Cash flows from operating activities
Operating loss before taxation (8,956) (7,999)
Movement in intercompany balances 7,310 (44,219)
Changes in working capital (excluding the effects of
exchange differences on consolidation)
– Trade and other receivables 55 (78)
– Trade and other payables 46 85
Cash consumed by operations (1,545) (52,211)
Tax credit received 1,573 641
Net cash from (used in) operating activities 28 (51,570)
Cash flows from financing activities
(Employee benefit trust reimbursement) net proceeds of issuance
of ordinary shares (28) 51,570
Net cash (used in) generated from financing activities (28) 51,570
Net movement in cash and cash equivalents – –
Cash and cash equivalents at beginning of year – –
Cash and cash equivalents at end of year – –
The notes on pages 33 to 63 are part of these consolidated financial statements.
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Velocys plc
Annual report and accounts 2015
Notes to the financial statements
1. General information
Velocys plc is a company incorporated in England and Wales and domiciled in England. It operates through its
subsidiaries Velocys Technologies Limited and Velocys (USA Holdings) LLC, which primarily holds Velocys, Inc. and
Velocys Project Solutions, LLC, and collectively they are referred to in the Notes to the Financial Statements as the
“Company”, with Velocys plc as the “parent company”. The nature of the Company’s operations and its principal
activities are set out in the summary on the inside front cover, on the highlights page, and in the Chairman’s statement
and Chief Executive’s, Strategic and Directors’ reports on pages 2 to 11.
The parent company is a public limited company that is listed on AIM.
2. Accounting policies
The principal accounting policies applied in the preparation of these consolidated and parent company financial
statements are summarised below. The policies have been consistently applied to all the years presented unless
otherwise stated.
Basis of preparation
The consolidated and parent company financial statements have been prepared in accordance with International
Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRS IC Interpretations
and the Companies Act 2006 applicable to companies reporting under IFRS and Article 4 of the IAS Regulation. They
have been prepared under the historical cost convention, as modified for fair value required under IFRS and measured
in accordance with IFRS 13 ‘Fair value measurement’.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting
estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting
policies. Areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are
significant to the consolidated financial statements, are disclosed in note 3.
Going concern
The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and
the parent company have adequate resources to continue in operational existence for the foreseeable future. Thus they
continue to adopt the going concern basis of accounting in preparing the financial statements.
Accounting developments
The following new standards, amendments to standards and interpretations are mandatory for the first time for the
financial year beginning 1 January 2015:
•
FRS 101, ‘Reduced disclosure framework’. These standards summarise the requirements of the new standards with
respect to the reduced disclosure framework. The standard is not applicable to the Company, but is to one of its
subsidiaries, Velocys Technologies Limited.
The following new standards, amendments to standards and interpretations are mandatory for the first time for the
financial year beginning 1 January 2016, but were not currently relevant for the Company:
•
IAS 1, ‘Presentation of financial statements’ on the disclosure initiative. These amendments are part of the IASB
initiative to improve presentation and disclosure in financial reports. These amendments are not currently relevant
to the Company.
IAS 16, ‘Property, plant and equipment’ and IAS 38,’Intangible assets’, on depreciation and amortisation. In this
amendment the IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset
is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects
factors other than the consumption of the economic benefits embodied in the asset. The IASB has also clarified
that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic
benefits embodied in an intangible asset. These amendments are not currently relevant to the Company.
IAS 27, ‘Separate financial statements’ on the equity method. These amendments in separate financial statements,
allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in
their separate financial statements. These amendments are not currently relevant to the Company.
IFRS 11, ‘Joint arrangements’ on acquisition of an interest in a joint operation. This amendment adds new guidance
on how to account for the acquisition of an interest in a joint operation that constitutes a business. The
amendments specify the appropriate accounting treatment for such acquisitions. These amendments are not
currently relevant to the Company.
•
•
•
• Annual improvements to IFRSs 2012-2014 cycle. These amendments are not currently relevant to the Company.
− IFRS 5, ‘Non-current assets held for sale and discontinued operations’ regarding methods of disposal.
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Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
− IFRS 7, ‘Financial instruments: Disclosures’, (with consequential amendments to IFRS 1) regarding servicing
contracts and applicability of the amendments to IFRS 7 to condensed interim financial statements.
− IAS 19,’Employee benefits’ regarding discount rates.
− IAS 34, ‘Interim financial reporting’ regarding disclosure of information.
Amendment to IFRS 10 and IAS 28 on investment entities applying the consolidation exemption. These
amendments clarify the application of the consolidation exception for investment entities and their subsidiaries.
Not yet endorsed by the EU and hence required to be noted as not yet effective in the consolidated financial
statements. This is not applicable to the Company.
IFRS 14, ‘Regulatory deferral accounts’. Permits first-time adopters to continue to recognise amounts related to rate
regulation in accordance with their previous GAAP requirements when they adopt IFRS. However, to enhance
comparability with entities that already apply IFRS and do not recognise such amounts, the standard requires that
the effect of rate regulation must be presented separately from other items. This is not applicable to the Company.
•
•
The following new standards, amendments to standards and interpretations are mandatory for the first time for the
financial year beginning 1 January 2017, but are not currently relevant for the Company:
•
Amendment to IAS 7, ‘Statement of cash flows’ on disclosure initiative. These amendments to IAS 7 introduce an
additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from
financing activities. The amendment is part of the IASB’s Disclosure Initiative, which continues to explore how
financial statement disclosure can be improved. The Company has not chosen to early adopt this standard, but it is
considered relevant for future accounting periods.
Amendment to IAS 12, ‘Income taxes’ on recognition of deferred tax assets for unrealised losses. These
amendments on the recognition of deferred tax assets for unrealised losses clarify how to account for deferred tax
assets related to debt instruments measured at fair value. The Company has not chosen to early adopt this
standard, but it is considered relevant for future accounting periods.
•
The following new standard is mandatory for the first time for the financial year beginning 1 January 2018, but is not
currently relevant for the Company:
•
IFRS 15, ‘Revenue from contracts with customers’. This converged standard will improve the financial reporting of
revenue and improve comparability of the top line in financial statements globally. Companies using IFRS will be
required to apply the revenue standard for reporting periods beginning on or after 1 January 2018, subject to EU
endorsement and public companies using US GAAP will be required to apply it for annual reporting periods
beginning after 15 December 2016 (including interim reporting periods therein). The Company has not chosen to
early adopt this standard, but it is considered relevant for future accounting periods.
The following new standard is mandatory for the first time for the financial year beginning 1 January 2019, but is not
currently relevant for the Company:
•
IFRS 16 ‘Leases’. This standard will replace IAS 17 ‘Leases’ and sets out the principles for the recognition,
measurement, presentation and disclosure of leases. Lessees will be required to recognise a lease liability
reflecting future lease payments and a ‘right-of-use asset’ for lease contracts. The IASB has included an optional
exemption which can be applied by lessees for certain short-term leases and leases of low-value assets. The
Company has not chosen to early adopt this standard, but it is considered relevant for future accounting periods.
An assessment has not yet been done as to the impact of the developments in the future.
Financial risk management policies
Financial risk management policies are set out in the Strategic report on pages 8-9.
Capital management policies
Capital management policies are set out in the Strategic report on page 9.
Significant accounting policies
Consolidation – subsidiaries
The purchase method of accounting is used for the acquisition of subsidiaries by the Company. The cost of an
acquisition is measured as the fair value of the assets acquired, equity instruments issued and liabilities incurred or
assumed at the date of exchange plus, for acquisitions completed prior to 1 January 2010, costs directly attributable to
the acquisition. For acquisitions completed on or after 1 January 2010, directly attributable costs are expensed.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the
cost of acquisition over the fair value of the acquiring company’s share of the identifiable net assets acquired is
recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired,
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Velocys plc
Annual report and accounts 2015
the difference is recognised directly in the income statement. Acquired subsidiaries are consolidated from the date on
which control of the subsidiary is transferred to the Company.
Intercompany transactions, balances and unrealised gains and losses on transactions between Company entities are
eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the
policies adopted by the Company.
Contingent consideration is initially measured at fair value on the acquisition date and classified as a liability. It is
remeasured at fair value at the balance sheet date and any change in value is recognised directly in the consolidated
income statement.
Exceptional items
Items that are material because of their size or nature, and/or that are non-recurring are considered as exceptional
items. Exceptional items are presented with the line items to which they best relate. During 2015 and 2014, exceptional
items were included in the consolidated income statement.
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating
decision-maker. The person or persons responsible for allocating resources and assessing performance of the
operating segments has been identified as the Senior Management Team, who take operational decisions.
Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of the Company’s entities are measured using the currency of the
primary economic environment in which the entity operates (the functional currency). The consolidated financial
statements are presented in sterling (£), which is Velocys plc’s functional and the Company’s presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the
dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and
from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies
are recognised in the consolidated income statement. Foreign exchange gains and losses that relate to borrowings and
cash and cash equivalents are presented in the Income statement within ‘Finance income’ or ‘Finance costs’.
Entities within the Company
The results and financial position of all the Company entities that have a functional currency different from the
presentation currency (none of which has the currency of a hyper-inflationary economy) are translated into the
presentation currency as follows:
1. assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance
2.
sheet;
income and expenses for each income statement are translated at average exchange rates (unless this average is
not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which
case income and expenses are translated at the rate on the dates of the transactions); and
3. all resulting exchange differences are recognised as a movement within equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign operations are
taken to shareholders’ equity.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of
the foreign entity and translated at the closing rate.
Cash and cash equivalents including short term deposits
Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term, highly liquid
investments with original maturities of three months or less.
Bank accounts held which have an original maturity of more than three months, or which are subject to significant
restrictions over access, are not presented as cash and cash equivalents. Such amounts are shown separately as short
term investments or other financial assets with appropriate disclosure of the related terms.
35
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
Inventories
Inventories are stated at the lower of cost or net realisable value. Cost is determined on a first-in, first-out basis and
includes transport and handling costs. In the case of manufactured products, cost includes all direct expenditure
including production overheads. Where necessary, provision is made for obsolete, slow-moving and defective
inventories. Items purchased for use in externally funded research and development contracts are expensed to that
contract immediately. Items held for the Company’s own development are also expensed when acquired. Items
purchased for ongoing commercial sale are held in inventory and expensed when used or sold.
Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as
operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged
to the income statement on a straight-line basis over the period of the lease.
The Company leases certain property, plant and equipment. Leases under which the Company incurs substantially all
the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised on commencement
of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments.
Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the
finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other long-
term payables. The interest element of the finance cost is also charged to the income statement over the lease period
so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The
property, plant and equipment acquired under finance leases is depreciated over the shorter of the useful life of the
asset and the lease term.
Revenue recognition
Revenue is measured at the fair value of consideration received or receivable, and represents goods and services
provided in the normal course of business, net of trade discounts, VAT and other sales-related taxes after eliminating
sales within the Company.
Revenue is recognised only when the collection of related receivables is probable. When uncertainty arises about the
collectability of an amount that has already been recorded in revenue, any provision required as a result of that
uncertainty is recognised as an expense and not a reduction in revenue.
Revenue related to FT reactors and catalyst
FT reactor revenue and costs are recognised when substantially all risk and reward associated with the reactor has
passed to the customer under IAS 18 (see note 4); this will be upon delivery of reactors as defined by the contract.
Under the Company’s standard contract terms, “delivery” means available for shipping to the customer’s site, although
this term varies as contracts are negotiated.
Prior to 2014 the Company recognised revenue and costs from its FT reactors over the manufacturing period, where the
right to consideration was accrued on a percentage of completion basis under IAS 11. In 2014, after the restructuring of
a major supply agreement, which provided a more consistent measure of the cost of each reactor, the Company
changed its method to the one described above. As this process developed and evolved, the partners agreed that it
would be appropriate for the contract to be amended to reflect this evolution.
Catalyst sales income will be recognised over the term of the arrangement, whilst the service element will be
recognised when services are provided. Licence fee revenue will be recognised on commencement of the contract
provided that the fair value of the licence fee can be determined. However, if no reliable fair value can be determined,
any revenue associated with the licence fee will be deferred and recognised in line with the reactor sales.
Other revenue
Revenue from development contracts is measured in accordance with the Company’s policy: revenue from most
development contracts is earned on a time and materials basis, supplemented by milestones, and is recognised as the
work is performed. In a situation where a contract is for fixed services and value, and where the outcome of a
development contract can be estimated reliably, revenue and costs are recognised by reference to the stage of
completion of the contract activity at the balance sheet date. This is normally measured as the proportion of costs
incurred for work performed to date relative to the estimated total costs, except where this would not be representative
of the stage of completion.
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Velocys plc
Annual report and accounts 2015
Where the outcome of a development contract cannot be estimated reliably, contract revenue is recognised to the
extent that contract costs incurred are expected to be recoverable. Contract expenses are recognised as costs in the
year in which they are incurred. When it is probable that total contract costs will exceed revenue, the total expected
loss is recognised as an expense immediately.
Contracts for development work may include either upfront payments or milestone payments, payable on successful
attainment of defined milestones. Where upfront non-refundable payments are received on signature of an agreement,
such payments are deferred and amortised over the life of the agreement to which it relates. For milestone payments,
revenue is only recognised when the milestone has been successfully achieved and no further obligations remain.
Grants are recognised as income over the periods necessary to match them, on a systematic basis, with the costs that
they are intended to compensate. Grant income is not recognised until the conditions for its receipt have been
complied with and there is assurance that the grant will be received. Where a grant is received to fund the acquisition
of property, plant and equipment, the income is deferred and recognised over the useful economic life of the related
asset.
Interest income is accrued on a time basis by reference to the principal outstanding and at the effective interest rate
applicable.
Other income consists of items such as sales of fixed assets, legal settlements and any other operating income
recognised outside of the Company’s commercial activities. Other income derived from sales of fixed assets and non-
commercial activities is recognised on an accrual basis. In 2015 other income consisted primarily of legal settlements.
Legal settlements are recognised as income when a final judgement is received not subject to further appeals.
Provisions
Provisions for claims are recognised when the Company has a present constructive or legal obligation as a result of
past events, and it is probable that an outflow of resources will be required to settle the obligation and the amount can
be reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to
settle the obligation.
Intangible assets
Licences
Purchased licences are capitalised at the present value of the minimum licence payments. Amortisation will
commence when related revenue starts to be earned and it will be charged on a straight line basis over the life of the
patents to which the licences relate. Provision is made for any impairment.
Patents and trademarks
Patents and trademarks are included at cost less accumulated amortisation, and are amortised in equal annual
instalments over a period of 20 years, which is their estimated useful economic life. Provision is made for any
impairment. Where patent expenditure is funded by arrangements with development partners, the costs of such
patents are not capitalised, but are expensed as cost of sales.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the
identifiable net assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisition of subsidiaries is
included in ‘Intangible assets’. Goodwill is tested annually for impairment and carried at cost less accumulated
impairment losses. Impairment reviews are performed more frequently if events or changes in circumstances indicate
a potential impairment. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity
include the carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those
cash-generating units or groups of cash-generating units that are expected to benefit from the business combination
in which the goodwill arose, identified according to operating segment.
Software
Purchased software is measured initially at cost and is amortised on a straight-line basis over its estimated useful life
of 3 years. Provision is made for any impairment.
37
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
In process technology
In process technology consists of purchased intangibles and capitalised development costs and is carried at cost less
accumulated amortisation and impairment losses. The development phase has been completed and delivery of
commercial reactors commenced in 2015; consequently amortisation of the intangibles has begun. The Company uses
the units-of-production method of amortisation with the measured unit being reactors sold. The number of units used
for amortisation purposes is approximately 1,400 reactors based on projections of future sales. Amortisation for the
capitalised development costs began in 2015 based on delivery of commercial reactors.
Purchased intangibles
Purchased intangibles arose from the acquisition of Velocys, Inc. and Velocys Project Solutions, LLC (VPS). These are
valued using discounted cash flows of projected future benefits arising from the technology acquired. See “Impairment
of non-financial assets” below.
Capitalised development costs
Development costs are normally charged to the income statement in the year they are incurred except in those
circumstances where, during the development phase of a project, the Company is able to identify an intangible asset
and demonstrate that the asset will generate probable future economic benefits. In such cases, provided the criteria
defined under IAS 38 are met, the costs are capitalised as In process technology. The costs in respect of funded
projects are recognised to the extent that they meet the relevant criteria, net of any amounts reimbursed by research
partners.
Development costs are amortised from the point the asset is available for use in the manner intended by management,
on a straight-line time basis or other appropriate basis, over the period of its expected benefit. See “Impairment of non-
financial assets” below.
Customer contracts
Customer contracts in 2014 consisted of the discounted value of the project development fee negotiated in the
acquisition of VPS. It is carried at cost less impairment losses. Per the terms of the acquisition agreement, if the
development phase had been completed and delivery of commercial reactors had commenced in 2015, the project
development fee would have been recognised in 2015. Since the final investment decision was not reached in 2015, the
balance of customer contracts was written down to £nil in 2015.
Impairment of non-financial assets
Assets that have an indefinite useful life, for example goodwill and investments, are not subject to amortisation and are
tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is
recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-
generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible
reversal of the impairment at each reporting date. Assets that are not yet being amortised are reviewed for impairment
on an annual basis.
Property, plant and equipment
Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. Cost includes the
original purchase price of the asset and the costs attributable to bringing the asset to a working condition for its
intended use. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost or
valuation of each asset, less estimated residual value, on a straight-line basis over its expected useful life, as follows:
plant and machinery, 3-10 years. No depreciation is provided on land or assets under construction. Residual value is
calculated on prices prevailing at the balance sheet date. Residual values and useful lives are reviewed annually and
adjusted if appropriate at each balance sheet date.
Expenditure funded by research partners is only capitalised where there are no significant rights acquired by that third
party over the asset, and the asset has a clear enduring use beyond the specific funding project; these are regularly
reviewed.
Investments
Investments are shown at cost less provision for impairment. See “Impairment of non-financial assets” above.
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Velocys plc
Annual report and accounts 2015
Share-based payments
Velocys plc issues share options to certain Company employees, which are accounted for as equity settled. These are
measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant, and are
expensed on a straight-line basis over the vesting period, based on the Company’s estimate of shares that will
eventually vest and adjusted for the effect of non market-based vesting conditions.
Fair value of executive share options with market performance conditions attached is measured using a Monte Carlo
pricing model. The expected life used in the model is assumed to be the earliest point at which the shares may vest.
Fair value of all other share options is measured using the Black-Scholes pricing model. The expected life used in the
model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise
restrictions, and behavioural considerations. Under both models, when options are exercised the proceeds received, net
of attributable transaction costs, are credited to share capital and premium.
For executive options with market performance conditions attached the recognition period covers the period of service
and the vesting period; for all other options the recognition period is the vesting period.
At each balance sheet date, the Company revises its estimates of the number of options that are expected to vest. It
recognises any impact of the revision in the income statement with a corresponding adjustment to reserves.
The grant by the parent company of options of its equity instruments to employees of subsidiary undertakings is
treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date
fair value, is recognised as an increase to investments in subsidiary undertakings with a corresponding credit to equity.
Short term employee benefits
Accruals are included to reflect the cost of short term compensation to employees for absences such as paid leave.
Pension costs
The Company operates various defined contribution pension schemes for its employees. The amount charged to the
income statement in respect of pension costs and other post-retirement benefits is the contributions payable in the
year. Differences between contributions payable and contributions actually paid are shown as either accruals or
prepayments in the balance sheet. The Company has no further payment obligations once the contributions have been
paid.
Taxation
Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered)
using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised using the liability method, on temporary differences arising between the tax basis of assets
and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not
accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business
combination that at the time of the transaction affected neither accounting nor taxable profit or loss. Deferred income
tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date
and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is
settled.
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be
available against which the temporary differences can be utilised. Deferred income tax is provided on temporary
differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference
is controlled by the parent company and it is probable that the temporary difference will not reverse in the foreseeable
future.
Financial instruments
Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective
interest method, less provision for impairment. A provision for impairment of trade receivables is established when
there is objective evidence that the Company will not be able to collect all amounts due according to their original
terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial
reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the
trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the
present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of
39
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income
statement within ‘cost of sales’. When a trade receivable is uncollectible, it is written off against the allowance account
for trade receivables. Subsequent recoveries of amounts previously written off are credited against ‘cost of sales’ in the
income statement.
Trade payables
Trade payables are stated at fair value and subsequently held at amortised cost.
Financial liabilities and equity instruments
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after
deducting all of its liabilities.
Borrowings
Interest bearing loans and overdrafts are initially recorded at fair value, taken as proceeds received net of direct issue
costs, and thereafter at amortised cost. Finance charges, including premiums payable on settlement or redemption
and direct issue costs, are recognised in the income statement using the effective interest method and are added to
the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
Provisions
Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it
is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably
estimated.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using
a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the
obligation. The increase in the provision due to passage of time is recognised as an interest expense.
Derivative financial instruments
The Company enters into forward contracts and options to fund its US operations. Derivative financial instruments are
classified as current assets or current liabilities where they have a maturity period within 12 months. Where derivative
financial instruments have a maturity period greater than 12 months, they are classified within either non-current
assets or non-current liabilities. Financial assets and liabilities are initially recognised and subsequently measured at
fair value. The gain or loss on re-measurement to fair value is recognised immediately in the income statement, in net
finance income.
Financial assets
The Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and
receivables and available-for sale. The classification depends on the nature of the asset and the purpose for which the
assets were acquired. Management determines the classification of its financial assets at initial recognition.
Classification
1. Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is
classified in this category if it is acquired principally for the purpose of selling in the short term. Derivatives are also
categorised as held for trading. Assets in this category are presented as current assets if they are expected to be
realised within 12 months after the balance sheet date, otherwise they are classified as non-current.
2. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted
in an active market. They are included as current assets, except for maturities greater than 12 months after the
balance sheet date which are presented as non-current assets. Loans and receivables are presented as “trade and
other receivables” (note 21) and “cash and cash equivalents” (note 23) on the balance sheet.
3. Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified
in any of the other categories. They are included in non-current assets unless the investment matures or
management intends to dispose of the assets within 12 months after the balance sheet date.
Recognition and measurement
Regular purchases and sales of financial assets are recognised on the trade date – the date on which the Company
commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all
financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or
loss are initially recognised at fair value, and transaction costs are expensed in the consolidated income statement.
40
Velocys plc
Annual report and accounts 2015
Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have
been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale
financial assets and assets held at fair value through profit and loss are subsequently carried at fair value. Loans and
receivables are subsequently carried at amortised cost using the effective interest method.
Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category
are presented in the income statement in the period in which they arise. Dividend income from ‘financial assets at fair
value through profit or loss’ is recognised in the income statement as part of other income when the Company’s right to
receive payments is established.
Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognised in
other comprehensive income.
When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments
recognised in equity are included in the income statement as “Gains and losses from investment securities”.
Interest on available-for-sale securities calculated using the effective interest method is recognised in the
consolidated income statement as part of finance income. Dividends on available-for-sale equity instruments are
recognised in the income statement as part of other income when the Company’s right to receive is established.
3. Critical accounting estimates and judgements
The preparation of financial information in conformity with IFRS requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities at the reporting date and the reported amounts of revenues and
expenses during the reporting period. Although these estimates are based on management’s best knowledge of the
amount, event or actions, actual results ultimately may differ from those estimates. Estimates and assumptions that
have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next
financial period are discussed below.
Valuation of acquired intangible assets
Estimation of the fair values of acquired intangible assets requires assumptions as to value, future life and future cash
flows for impairment tests. There is a high degree of judgement required in making these assumptions, which impact
both the initial fair value acquired and the carrying value as at the balance sheet date (see note 17).
When intangible assets are brought into use, they are amortised over their expected useful lives and are reviewed when
there is an indication that impairment may have occurred. Intangible assets that are not yet ready for use are subject
to an annual impairment review.
At 31 December 2015, the carrying value of the Company’s intangible assets was £28,378,000 (2014: £28,347,000). The
impairment charge for the year includes £1,473,000 in 2015 (2014: £1,328,000). The Company acquired intangible
assets valued at £3,209,000 through the acquisition of Velocys Project Solutions, LLC in 2014. These are valued at
£2,214,000 at 31 December 2015 after the impairment charge (see note 30).
Revenue recognition and cost of sales
In order to recognise revenue, the fair value of each component of the Fischer-Tropsch process is identified, which
includes the sale of the reactor, an initial licence fee, the sale of catalyst and ongoing engineering services. This fair
value is based on the sales contract and historical actual data.
Once the fair value of the components has been determined, revenue is recognised in line with the underlying nature of
the contract. Revenue for the reactor is recognised upon delivery as defined by the contract. Where the fair value of the
licence fee can be determined this is recognised on commencement of the contract. However, if no reliable fair value
can be determined any revenue associated with the licence fee is deferred and recognised in line with the reactor
sales. Catalyst sales income is recognised monthly, whilst the service element is recognised when services are
provided.
Where the underlying costs associated with any component cannot be estimated, any profit element identified is
deferred until such time as the costs can be reliably estimated.
Investments
The carrying value of investments is considered in the context of market capitalisation and future forecast earnings.
41
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
Share-based payments
The fair value calculation of share-based payments requires several assumptions and estimates, details of which are
disclosed in note 15. Such assumptions and estimates could change and could affect the amount recorded.
4. Exceptional items
Items that are material because of their size or nature, and/or that are non-recurring are considered as exceptional
items and are presented with the line items to which they best relate. Exceptional items, as detailed below, have been
included in the consolidated income statement.
Exceptional items were as follows:
2015 2014
£’000 £’000
Impairment of intangible assets (1,473) (1,328)
Deferred tax liability write down 269 –
Deferred consideration write down 1,763 –
Reversal of revenue – (1,742)
Reversal of cost of sales – 1,742
559 (1,328)
In 2015, the impairment of intangible assets relates to the full impairment of customer contracts. Customer contracts
represented the discounted value of expected future income which the Company had expected to receive in 2015 upon
obtaining a final investment decision by outside investors in the Ashtabula project (see note 30). Since the final
investment decision was not reached in 2015, this balance was written down to £nil. In addition, the related deferred
tax liability was written down to £nil.
The deferred consideration arrangement required the Company to issue shares in Velocys plc to the former owners of
VPS contingent upon the achievement of final investment decision on the plant in Ashtabula in a specified time frame.
The deferred consideration was written down to £nil in 2015 as the final investment decision was not achieved.
The exceptional items in 2014 resulted from the restructuring of a key contract and an impairment of intangible assets.
The impairment of intangible assets relates to the full impairment of one of the Company’s six cash-generating units
(see note 17).
The 2014 reversals of revenue and costs of sales are related to the restructuring of a major multi-year supply contract
for FT reactor cores which was formally agreed in early 2015. The terms of the revised agreement, which provides a
more consistent measure of cost of each reactor, resulted in a change in the method of recognising the revenue and
costs related to the build of the commercial reactors. The Company will now recognise revenue and costs upon delivery
of the commercial reactors under IAS 18 and no longer use the percentage of completion method under IAS 11. The
reversals of revenue and costs of sales represent the unwinding of the percentage of completion method for 2013.
The revenue reversed was generated in the Americas.
None of the exceptional items described above had any cash flow impact.
5. Segmental information
The chief operating decision-maker has been identified as the Senior Management Team (“SMT”). This committee
reviews the Company’s internal reporting in order to assess performance and allocate resources. The SMT has
determined the operating segments based on these reports.
The SMT considers that the business comprises a single activity which is the design and development of technology for
synthetic fuels production. The SMT reviews the Company’s profit or loss and its cash flows, assets and liabilities on a
Company-wide basis. In carrying out these reviews, the SMT considers all material items of income and expenditure
that are directly attributable to individual commercial projects and development programmes. The internal
management reports do not allocate assets and liabilities or shared overheads to individual products or projects.
Based on the above considerations, there is considered to be one reportable segment, synthetic fuels. The business is
segmented on the basis that the key end use market is that of synthetic fuels production. At this stage, the synthetic
fuels segment represents over 90% of the business and therefore represents the only material segment. The remaining
42
Velocys plc
Annual report and accounts 2015
10% does not constitute a segment and is related to other end markets such as selective oxidations which uses
technology developed for FT.
Internal and external reporting is on a consolidated basis, with purchases and sales between subsidiaries eliminated
on consolidation. Therefore, the segmental and financial information is the same as that set out in the consolidated
income statement, consolidated statement of comprehensive income, the consolidated statement of financial position,
the consolidated statement of cash flows and the consolidated statement of changes in equity.
The SMT assesses the performance of the operating segment based on a measure of operating loss.
The Company’s operating segment operates in three main geographical areas. Revenue before exceptional items is
allocated based on the country in which the customer is located.
2015 2014
Total revenue before exceptional
items
400
1,589
13
207
1,090
439
Europe
£’000
Americas
£’000
Asia Pacific
£’000
Europe
£’000
Americas
£’000
Asia Pacific
£’000
Revenues during the year were generated in the United Kingdom and United States.
Non-current assets, consisting primarily of goodwill, other intangible assets, investment in ENVIA and property, plant
and equipment, totalling £36,406,000 (2014: £33,157,000) were located in the United States. All other non-current
assets were held in the United Kingdom.
6. Revenue
The majority of revenue before exceptional items of the Company is derived from a small number of significant
commercial customers and development partners, who are not related parties. The total amounts recognised from
partners where revenue comprises 10% or more of Company revenue before exceptional items is as follows.
2015 2014
£’000 £’000
Partner 1 – 532
Partner 2 – 312
Partner 3 – 250
Partner 4 – 183
Partners less than 10% – 459
Reactors, licences and other revenue 2,002 –
Total before exceptional items 2,002 1,736
7. Finance income
2015 2014
£’000 £’000
Interest income on bank deposits 329 164
Net fair value gains on forward foreign exchange contracts 381 394
Foreign exchange gains 445 667
1,155 1,225
43
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
8. Finance costs
2015 2014
£’000 £’000
Unwinding of discount on deferred licence payments payable 20 (8)
Interest on finance leases 9 12
Interest on borrowings 24 25
53 29
Notice was given at the end of 2014 to terminate the licence, although final interest payments have been accrued.
9. Other income
2015 2014
£’000 £’000
Legal settlements 1,996 –
Sale of fixed assets 13 56
Total before exceptional items 2,009 56
Other income included receipt of settlements arising from two legal disputes, with CompactGTL and Johnson Matthey,
which offset costs previously booked through Administrative expenses.
10. Expenses by nature
2015 2014
£’000 £’000
Employee benefit expense (see note 12) 13,480 14,014
Sub-contractor and consultant costs 2,385 2,714
Depreciation of property, plant and equipment: owned (note 18) 975 680
Depreciation of property, plant and equipment: leased (note 18) 50 48
Amortisation of intangible assets (note 17) 252 181
Operating lease payments – plant and machinery 31 13
Operating lease payments – other 475 418
Patent and other IP costs 579 914
Materials expense 3,924 2,018
Services 738 811
Other expenses 3,869 3,148
Total costs of sales, research and development costs, share-based
payments and administrative expenses before exceptional items 26,758 24,959
11. Auditors remuneration
2015 2014
£’000 £’000
Fees payable to Company’s auditors for the audit of parent company and
consolidated financial statements 31 26
Fees payable for the audit of Company’s subsidiaries pursuant to legislation 62 55
Fees payable to the Company’s auditors for other services
– Taxation compliance services 13 23
106 104
12. Employee benefit expense
The average monthly number of Company employees (including Executive Directors) was as follows.
2015 2014
number number
Research, design and development 79 79
Administration 29 26
Total average headcount 108 105
44
Velocys plc
Annual report and accounts 2015
Their aggregate remuneration comprised the following items.
2015 2014
£’000 £’000
Wages and salaries 9,822 9,684
Social security costs 679 649
Other pension costs 326 252
Severance expense 511 22
Share-based payments granted to Directors and employees 2,142 3,407
13,480 14,014
Details of Directors’ remuneration are given in the audited information in the Directors’ remuneration report on pages
18-21, which forms part of these financial statements.
13. Income tax
2015 2014
Company £’000 £’000
Current tax:
R&D tax credit relating to prior years (255) (129)
R&D tax credit relating to current year (780) (800)
Current tax total (1,035) (929)
Deferred tax:
Write off (Purchase) of intangible assets 269 (269)
Income tax total (766) (1,198)
Due to the availability of losses incurred in the year, there is no charge to corporation tax. The Company recovered
£1,035,000 through R&D tax credits (2014: £929,000).
The actual tax charge for the current and previous year is higher (2014: higher) than the theoretical amount that would
arise using the weighted average tax rate applicable to the results of the consolidated entities, for the reasons set out
in the following reconciliation.
2015 2014
Company £’000 £’000
Loss before income tax (21,086) (23,299)
Tax calculated at domestic tax rates applicable to losses in the respective countries (5,594) (6,184)
Tax effects of:
− Expenses not deductible for tax purposes 468 401
− Unutilised tax losses 5,126 5,783
− R&D tax credit (1,035) (929)
Current tax total (1,035) (929)
The weighted average applicable tax rate was 26.5% (2014: 27.3%).
The standard rate of corporation tax in the United Kingdom changed from 21% to 20% with effect from 1 April 2015.
Accordingly, profits in the United Kingdom were taxed at an effective rate of 20.25%. Legislation to reduce the main rate
of corporation tax to 19% from 1 April 2017 and to 18% from 1 April 2020 was enacted on 18 November 2015.
Legislation to further reduce the rate to 17% from 1 April 2020 was announced but has not been substantively enacted
at the end of the year. Deferred tax balances have been measured at 18%.
45
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
14. Deferred tax
The movement in deferred tax in the year was as follows.
2015 2014
Company £’000 £’000
Recognised
Deferred tax liability 269 –
Purchase of intangible assets through acquisition of subsidiary (see note 30) – 269
Write off of intangible assets (see note 30) (269) –
Deferred tax carried forward – 269
2015 2014
Company £’000 £’000
Unrecognised
Deferred tax assets
− Trading losses (22,918) (16,298)
− Equity settled options (605) (1,081)
(23,523) (17,379)
At 31 December 2015 the Company had a net unrecognised deferred tax asset of £22,918,000 (2014: £16,298,000)
arising from trading losses from incorporation. No recognition (2014: £nil) of the net deferred tax asset has been made
at 31 December 2015 on the grounds of uncertainty over its recoverability in light of the Company’s nascent revenue
streams and commitment to continued investment in research and development and therefore there is no impact on
the current or prior year income statement.
Of this unrecognised deferred tax asset, £16,580,000 (2014: £10,929,000) is anticipated to remain available indefinitely
to offset against future taxable trading profits of the companies in which the losses arose. The remainder has expiry
dates between 2023 and 2035 (2014: 2023 and 2033).
15. Share-based payments
Equity settled share option scheme
The Company has four share option schemes that cover all employees. The number of options outstanding at
31 December 2015 and the expense recognised in the profit and loss for these schemes, along with bonus shares and
other schemes, are as follows.
2015
2014
Income Income
Options statement Options statement
Scheme outstanding £’000 outstanding £’000
All employees UK/US 4,188,283 281 4,179,111 308
ELTIP 1,520,000 – 1,520,000 –
NELTIP 9,392,628 1,843 8,006,636 3,068
Velocys, Inc. 95,978 – 130,062 3
Bonus shares 421,760 – 421,760 –
Other 253,879 18 92,129 28
Total 15,872,528 2,142 14,349,698 3,407
All employees scheme
This scheme covers all employees of the Company, and was previously referred to as the EMI scheme; however, the
Company no longer qualifies for EMI status due to the value of its gross assets. Options granted under this scheme are
exercisable at a price equal to the mid-market value of the parent company’s ordinary shares on the day prior to grant,
and vest after three, four or five years from the earlier of grant date or date of joining the Company. Options expire after
10 years and are forfeited if the employee leaves the Company before the options vest. In addition, during 2015 options
were granted to certain employees that will vest in January 2017 subject to meeting certain non-market performance
conditions; other conditions are per the main scheme.
46
Velocys plc
Annual report and accounts 2015
Movements in the number of EMI scheme share options outstanding and their related weighted average exercise prices
are as follows.
2015
2014
Weighted Weighted
average Number of average Number of
exercise price options exercise price options
At 1 January 119.33p 4,179,111 80.17p 3,811,236
Granted 107.09p 1,159,173 180.64p 1,264,000
Forfeited 161.30p (1,138,335) 78.12p (350,934)
Exercised 59.16p (11,666) 86.89p (545,191)
At 31 December 109.60p 4,188,283 119.33p 4,179,111
Of the 4,188,283 options outstanding at 31 December 2015, 1,371,533 were exercisable (2014: 740,705). The weighted
average exercise price of the exercisable shares was 71.38p (2014: 67.84p).
Share options outstanding at the end of the year have the following expiry dates and exercise prices.
Year of expiry
2017
2018
2019
2020
2021
2022
2023
2024
2025
Total
2015
2014
Weighted Weighted
Range of Number of average Number of average
exercise price options exercise price options exercise price
124.00p 16,129 124.00p 16,129 124.00p
159.00p 62,893 159.00p 62,893 159.00p
54.50p – – 10,000 54.50p
56.01 – 57.50p 51,748 58.55p 51,748 56.19p
50.22 – 59.50p 1,316,140 59.72p 1,506,141 57.73p
46.36 – 156.00p 468,200 79.19p 468,200 76.21p
126.19 – 179.79p 514,000 168.18p 984,000 152.82p
146.00 – 257.40p 603,334 196.17p 1,080,000 194.65p
51.94 – 180.00p 1,155,839 106.88p – –
46.36 – 257.40p 4,188,283 109.60p 4,179,111 119.33p
The weighted average fair value of options granted during the year determined using the Black-Scholes valuation
model was 29.32p (2014: 52.46p) per option. The significant inputs into the model were as follows.
2015 2014
Weighted average share price at grant date 107.09 180.64
Weighted average exercise price 107.09 180.64
Expected volatility (i) 44% 30%
Weighted average annual risk free rate 0.8% 3%
Dividend yield 0% 0%
Weighted average expected life 2.9 years 4.0 years
(i) The expected volatility was determined by a review of historic actual volatility based on statistical analysis of daily share prices since the
date of Velocys plc’s listing on AIM.
Total expense recognised in the income statement for share options granted to Directors and employees was £281,000
in 2015 (2014: £308,000).
Executive options
Executive options, documented as ‘ELTIP’ in the Directors’ Remuneration Report, have been awarded under two
schemes, ELTIP and NELTIP, as set out below.
Executive Long Term Incentive Plan (ELTIP)
The ELTIP scheme covers executives of the Company. Options are exercisable at a price of 1p or at a price equal to the
mid-market value of the parent company’s ordinary shares on the day prior to the grant. Options vest after a period of
one, two or three years from grant, expire after 10 years and are forfeited if the employee leaves the Company before
the options vest.
47
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
Movements in the number of ELTIP share options outstanding and their related weighted average exercise prices are as
follows:
Weighted Weighted
average Number of average Number of
exercise price options exercise price options
At 1 January 30.41p 1,520,000 31.71p 1,595,000
Exercised – – 58.00p (75,000)
At 31 December 30.41p 1,520,000 30.41p 1,520,000
2015
2014
Of the 1,520,000 options outstanding at 31 December 2015, 1,520,000 were exercisable (2014: 1,520,000). The
weighted average exercise price of the exercisable shares was 30.41p (2014: 30.41p).
Share options outstanding at the end of the year have the following expiry dates and exercise prices.
Year of expiry
2018
2019
2021
Total
2015
2014
Weighted Weighted
Range of Number of average Number of average
exercise price options exercise price options exercise price
1.00p 100,000 1.00p 100,000 1.00p
1.00p 245,000 1.00p 245,000 1.00p
1.00 – 58.00p 1,175,000 39.05p 1,175,000 39.05p
1.00 – 58.00p 1,520,000 30.41p 1,520,000 30.41p
No share options were issued in 2015 (2014: nil). Total expense recognised in the income statement for share options
granted to Directors and employees was £nil in 2015 (2014: £nil).
At the time of exercising their share options, executives of the Company may apply to an employee benefit trust
managed by Oxford Catalysts Trustees Limited for a distribution in respect of the exercise value of their options. The
trustees then request a contribution from the Company in respect of the grant made. The total value of funds
distributed to executives by Oxford Catalysts Trustees Limited during the year in respect of ELTIP options was £nil. The
reported 2014 was £nil; however this has been restated to £28,000, which is represented by the “Employee benefit trust
reimbursement” in the financial statements.
New Executive Long Term Incentive Plan (NELTIP)
The NELTIP scheme also covers executives of the Company. On 27 February 2015 grants were made of 7,588,613
options in respect of financial year 2014 and 535,773 options in respect of 2015; a further 240,000 were granted in
respect of 2015 in October. The fair value of the share options was recognised over a period combining the year during
which performance was measured, the time from the end of that year to the options’ grant date, and the vesting period.
Under the NELTIP scheme, options awarded up to and including 2014 are, subject to the Board’s decision, exercisable
at a price either equal to the mid-market value of the parent company’s ordinary shares on the day prior to the grant, or
to the nominal value of the shares. Options vest immediately, or after a period of one, two or three years from grant,
they expire after 10 years and are forfeited if the employee leaves the Company before the options vest.
Options awarded in 2015 are divided into time lapse options and market performance options. Time lapse options
represent 23% of the total award; they vest two years after the conclusion of the period over which performance is
measured. The market performance conditions on which the rest of the award is based pertain to the Compound
Annual Growth Rate of the Company’s market capitalisation excluding fund raising subsequent to 1 January 2015.
Market performance options are measured after 3 years from the start of the service period, with possible
re-measurements one, and two years later. Options are subject to the discretion of the Board if the employee leaves the
Company before the options vest.
For the former CEO, time lapse options represented 30% of the potential total award. Market performance options were
measured after 5 years from the start of the service period, with a possible re-measurement one year later. Under the
terms of the Settlement Agreement between the Company and the former CEO, 2,216,666 options from this award were
deemed to have vested.
48
Velocys plc
Annual report and accounts 2015
Movements in the number of NELTIP share options outstanding and their related weighted average exercise prices are
as follows.
2015
2014
Weighted Weighted
average Number of average Number of
exercise price options exercise price options
At 1 January 125.96p 8,006,635 108.92p 5,603,325
Granted 98.10p 8,364,386 97.54p 2,567,791
Forfeited 50.70p (6,978,394) – –
Exercised – – 124.59p (164,481)
At 31 December 69.70p 9,392,627 125.96p 8,006,635
Of the 9,392,627 options outstanding at 31 December 2015, 5,555,571 were exercisable (2014: 1,485,503). The
weighted average exercise price of the exercisable shares was 46.32p (2014: 83.89p).
Share options and RSU’s outstanding at the end of the year have the following expiry dates (RSU latest exercise dates)
and exercise prices.
Year of expiry
2016
2017
2018
2019
2020
2022
2023
2024
Total
2015
2014
Weighted Weighted
Range of Number of average Number of average
exercise price options exercise price options exercise price
Nil 2,216,667 Nil
Nil 135,834 Nil – –
Nil 243,639 Nil – –
Nil 452,779 Nil – –
Nil 532,134 Nil – –
49.00p 2,498,503 49.00p 2,498,503 49.00p
159.00p 1,841,837 159.00p 2,968,400 159.00p
153.00p – 163.50p 1,471,235 162.72p 2,539,732 163.05p
Nil – 163.50p 9,392,628 68.51p 8,006,635 125.96p
The weighted average fair value of the market performance options and the time lapse options to be granted in respect
of year ended 31 December 2015 using respectively the Monte Carlo and Black-Scholes valuation models is 108.13p
(2014: 155.00p) per option. The significant inputs into the model were as follows.
2015 2014
Weighted average share price at grant date 155.00p 155.00p
Weighted average exercise price Nil 0.01p
Weighted average expected volatility (i) 51% 46%
Weighted average annual risk free rate 0.79% 1.03%
Dividend yield 0% 0%
Weighted average expected life 2.68 years 3.77 years
(i)
The expected volatility under Black-Scholes was determined by a review of historic actual volatility based on statistical analysis of daily
share prices since the date of Velocys plc’s listing on AIM. The expected volatility under Monte Carlo was calculated using statistical
analysis of historic share prices over an equivalent period to the vesting period.
Total expense recognised in the income statement for share options granted to Directors and employees was
£1,843,000 in 2015 (2014: £1,390,000). No further expense was accrued within the share-based payments charge
(2014: £1,678,000) as all options pertaining to the financial year were granted during 2015.
At the time of exercising their share options, executives of the Company may apply to an employee benefit trust
managed by Oxford Catalysts Trustees Limited for a distribution in respect of the exercise value of their options. The
trustees then request a contribution from the Company in respect of the grant made. The total value of funds
distributed to executives by Oxford Catalysts Trustees Limited during the year in respect of NELTIP options was £nil
(2014: £205,000).
49
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
Velocys, Inc. scheme
The Velocys, Inc. Stock Compensation Plan (“Pre-Acquisition Scheme”) was acquired as part of the acquisition of
Velocys, Inc. by Velocys plc, formerly Oxford Catalysts Group PLC, on 20 November 2008. The scheme was started in
2001 and covers all US based employees. Prior to the acquisition, Velocys, Inc.’s Board of Directors granted
non-qualified share options to employees with expiry 10 years from grant date. The options’ exercise price was equal to
the stock’s fair market value at the date of grant. Options are forfeited if an employee leaves the Company. Generally,
options vest as follows.
After 1 year of service from vest start date:
Each month subsequent to 1 year of service:
25% of grant
1/48th of grant
Pursuant to the terms and conditions of the acquisition of Velocys, Inc., each vested and unvested Pre-Acquisition
Scheme option existing on the acquisition date was converted into 0.3659 of a Velocys plc, formerly Oxford Catalyst
Group PLC, option (the ratio of the value of one share of Velocys, Inc. stock to one share of Velocys plc, formerly Oxford
Catalyst Group PLC stock) with a corresponding increase to the exercise price. Share options are exercisable in US
dollars.
During 2011, the Company reviewed employee incentives and concluded that the Pre-Acquisition Scheme options did
not provide the intended incentive or retention value for its employees due to significant shifts in the market price
since the original grants. Consequently, holders of these options were offered the opportunity to forfeit their options
and have new options issued. All such new issues vest in three years and expire 10 years from date of grant.
Details of the share options outstanding under the Pre-Acquisition Scheme are as follows.
2015
2014
Weighted Weighted
average Number of average Number of
exercise price options exercise price options
At 1 January $1.00 130,062 $0.94 202,415
Forfeited $0.82 (21,503) $0.77 (951)
Exercised $0.77 (12,581) $0.86 (71,402)
At 31 December $1.08 95,978 $1.00 130,062
Of the options outstanding presented above, 95,978 (2014: 130,062) were exercisable as of 31 December 2015. The
weighted average share price of the exercisable shares was $1.08 (2014: $0.91).
Share options outstanding at the end of the year have the following expiry dates and exercise prices.
Year of expiry
2015
2017
2021
Total
2015
2014
Range of Weighted Weighted
exercise price Number of average Number of average
per share options exercise price options exercise price
$0.77 – – 27,410 $0.77
$2.21 – $2.54 9,218 $2.45 9,218 $2.45
$0.93 86,760 $0.93 93,434 $0.93
$0.77 – $2.54 95,978 $1.08 130,062 $1.00
Total expense recognised in the income statement for share options granted under the Velocys, Inc. plan was £nil
(2014: £3,000).
Bonus shares
The Company previously maintained two bonus share schemes for certain executives: one in respect of employees of
Velocys Technologies Limited and one in respect of employees of Velocys, Inc. Under both schemes, the value of the
bonus was based upon the executive’s salary as well as the Company and the executive achieving certain targets
throughout the year. No awards were, or will be, made under these schemes during, or in respect of, 2015.
50
Velocys plc
Annual report and accounts 2015
The Velocys Technologies Limited bonus share scheme awarded nominal value share options (1p) that were issued
subsequent to the end of previous financial years. The awards vested on the date of grant and expire 10 years
thereafter. Details of the bonus shares outstanding under the Velocys Technologies Limited bonus share scheme are as
follows.
Exercise Number of Exercise Number of
price options price options
At 1 January 1.00p 421,760 1.00p 421,760
At 31 December 1.00p 421,760 1.00p 421,760
2015
2014
Velocys Technologies Limited bonus share options outstanding at the end of the year have the following expiry dates.
Year of expiry
2019
2020
2021
Total
Exercise
price
1.00p
1.00p
1.00p
1.00p
2015
Number of
options
42,105
342,000
37,655
421,760
2014
Number of
options
42,105
342,000
37,655
421,760
The Velocys, Inc. bonus share scheme consists of deferred shares awarded subsequent to year end at a nominal price
of 1p. 20% of the award is granted on each anniversary of the date of award. Shares remaining to be granted in future
years totalled 16,418. No bonus share awards were made in respect of 2015 (2014: nil).
The share-based payment expense for the year includes a cost of £nil (2014: £nil) relating to shares granted under
either the Velocys Technologies Limited or the Velocys, Inc. bonus share schemes.
Other share options
The Board has approved the granting of share options to a small number of consultants who provide a strategic service
to the business.
Movements in the number of consultants’ share options outstanding and their related weighted average exercise prices
are as follows.
2015 2014
Weighted Weighted
average Number of average Number of
exercise price options exercise price options
At 1 January 51.15p 92,129 58.38p 232,264
Granted 108.03p 161,750 145.25p 21,375
Forfeited – – – –
Exercised – – 73.99p (161,510)
At 31 December 87.39p 253,879 51.15p 92,129
Of the 253,879 options outstanding at 31 December 2015, 103,879 were exercisable (2014: 70,969). The weighted
average exercise price of the exercisable shares was 51.88p (2014: 66.10p).
51
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
Share options outstanding at the end of the year have the following expiry dates and exercise prices.
2015 2014
Year of expiry
2021
2022
2023
2024
2024
Total
Weighted Weighted
Range of Number of average Number of average
exercise price options exercise price options exercise price
1.00p 6,500 1.00p 6,500 1.00p
1.00p 10,204 1.00p 10,204 1.00p
1.00 – 53.10p 54,050 29.44p 54,050 29.44p
145.25p 21,375 145.25p 21,375 145.25p
105.25 – 143.5p 161,750 108.03p – –
1.00 – 145.25p 253,879 84.67p 92,129 51.15p
As in 2014 options were granted at market price. Vesting periods varied from immediate to 3 years; in 2014 all options
vested immediately. The weighted average fair value of options granted during the year determined using the
Black-Scholes valuation model was 22.51p (2014: 0.92p) per option. The significant inputs into the model were as
follows.
2015 2014
Weighted average share price at grant date 108.03p 145.25p
Weighted average exercise price 108.03p 145.25p
Weighted average expected volatility (i) 43% 30%
Weighted average annual risk free rate 0.8% 3%
Dividend yield 0% 0%
Weighted average expected life 1.66 years 0.01 years
(i)
The expected volatility was determined by a review of historic actual volatility based on statistical analysis of daily share prices since the
date of Velocys plc’s listing on AIM.
The share-based payment expense for the year includes a cost of £18,000 (2014: £28,000) related to options granted to
consultants.
Share-based payments charge
The total charge for share-based payments during the year was £2,142,000 (2014: £3,407,000) of which £1,544,000
(2014: £2,864,000) relates to options granted to Directors and the remainder to other employees.
16. Loss per share
The basic loss per share is calculated by dividing the loss attributable to owners of the parent company by the
weighted average number of ordinary shares in issue during the year.
2015 2014
Loss attributable to owners of Velocys plc (£’000s) (20,051) (22,370)
Weighted average number of ordinary shares in issue 141,915,307 122,062,050
Basic and diluted loss per share (pence) (14.13) (18.33)
Diluted loss per share is calculated by adjusting the weighted average number of shares in issue to assume conversion
of all potential dilutive shares. Share options have not been included in the number of shares used for the purpose of
calculating diluted loss per share since these would be anti-dilutive for the period presented. There are no other
potentially dilutive instruments. Details of share options are given in note 15.
52
Velocys plc
Annual report and accounts 2015
17. Intangible assets
Patents,
In process licence and Customer
Company Goodwill technology trademarks contracts Software Total
2015 £’000 £’000 £’000 £’000 £’000 £’000
Cost
At 1 January 2015 5,958 20,610 1,995 1,473 328 30,364
Additions – – 393 – 2 395
Disposals – – (523) – (208) (731)
Foreign exchange movement 775 919 62 – 6 1,762
At 31 December 2015 6,733 21,529 1,927 1,473 128 31,790
Accumulated amortisation
At 1 January 2015 – 1,328 528 – 161 2,017
Charge for the year – 28 152 – 72 252
Disposals – – (148) – (200) (348)
Impairment – – – 1,473 – 1,473
Foreign exchange movement – – 15 – 3 18
At 31 December 2015 – 1,356 547 1,473 36 3,412
Net book amount
At 31 December 2015 6,733 20,173 1,380 – 92 28,378
Patents,
In process licence and Customer
Goodwill technology trademarks contracts Software Total
2014 £’000 £’000 £’000 £’000 £’000 £’000
Cost
At 1 January 2014 4,062 19,440 1,752 – 211 25,465
Additions – – 329 – 100 429
Disposals – – (167) – – (167)
Acquisition of subsidiary 1,865 – – 1,344 – 3,209
Foreign exchange movement 31 1,170 81 129 17 1,428
At 31 December 2014 5,958 20,610 1,995 1,473 328 30,364
Accumulated amortisation
At 1 January 2014 – – 382 – 112 494
Charge for the year – – 138 – 43 181
Disposals – – (13) – – (13)
Impairment – 1,328 – – – 1,328
Foreign exchange movement – – 21 – 6 27
At 31 December 2014 – 1,328 528 – 161 2,017
Net book amount
At 31 December 2014 5,958 19,282 1,467 1,473 167 28,347
The majority of the intangibles balance, including the Goodwill, In process technology and Customer contracts has
arisen from the acquisitions of Velocys Inc. in 2008 and Velocys Project Solutions (VPS) in 2014. Further details of the
VPS acquisition are included in note 30, including an explanation of the impairment of Customer contracts. The
remainder of Intangibles, (Patents, licence and trademarks, and Software) are internally generated.
Goodwill of £4,519,000 (2014: £4,062,000) originates from the acquisition of Velocys, Inc. in 2008. Goodwill of
£2,214,000 (2014: £1,865,000) originates from the acquisition of Velocys Project Solutions in 2014.
As part of its IP strategy, the Company decided to abandon certain patents in 2015. This resulted in a loss on disposal
of patents of £375,000.
Assets in use and amortisation
In 2015, as a result of the first sale of reactors to a commercial plant, all the In Process technology was brought into
use for the first time. When intangible assets are brought into use, they are amortised over their expected useful lives.
Amortisation of intangible assets is charged to administrative expenses in the consolidated income statement.
53
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
Impairment of Goodwill and In-process technology
Goodwill and ‘In process technology’ intangible assets were subject to an impairment review. The impairment review for
In process technology and Goodwill is performed for each ‘Cash Generating Unit’ (CGU) identified in accordance with
the Company’s accounting policy. The In process technology, all arises from the acquisition of Velocys Inc. At the time of
the acquisition in 2008, it was determined that there were six CGU’s, each representing a separate technology stream
for which distinct revenue streams could be identified. In 2014 one CGU, which represented one of the Company’s
non-core technologies and which the Company determined that it did not currently have the intention to pursue, was
impaired. In 2015 the Company determined that the remaining CGU’s should be combined into one CGU, being the
business segment, synthetic fuels. All of the Goodwill is considered to relate to this same segment.
The Company carried out an impairment test on its In process technology and Goodwill as at 31 December 2015 based
on a value in use (‘VIU’) calculation. The VIU calculation is based on the estimated discounted future cash flows to be
generated by the respective technology stream.
Key assumptions
The key assumptions in the VIU calculations are the discount rate applied, and the sales and gross margin forecasts for
the period of the expected useful life of the technology.
Sales and gross margin forecasts
Future sales forecasts are based upon the commercialisation of the Company’s technology in what is an emerging and
nascent market. Forecast sales and gross margin levels are therefore dependent upon speed of uptake of the
Company’s technology, the size of the markets and the penetration achieved in those markets.
In all cases the approved budget for the following financial year forms the initial basis for the forecasts. Growth rate
assumptions have then been applied to revenue for periods of between 6 and 7 years with steady state sales for
periods beyond this since it is considered difficult at this stage to assess a long term growth rate. This period of growth
is considered reasonable given the long development cycle for projects using the Company’s technology. The expected
units of production for synthetic fuels CGU has been estimated to be approximately 1,400 reactors.
Discount rate
The discount rate applied represents a pre-tax rate that reflects market assessment of the time value of money at the
balance sheet date and the specific risks. The pre-tax discount rates applied was 25% in 2015 (2014: 25%).
Sensitivities
The key sensitivity in the forecasts is the rate of sales of units (a unit being a reactor). The technology is new and so
there are no comparable industry growth rates. In addition, since the Company’s commercial sales growth is projected
off a very early stage and consequently a low starting point, the rate of growth projected is relatively high. Different
forecast rates have been applied to test the sensitivity of the model to lower rates and it is considered that even at the
lower end of possible growth rates, there is still sufficient head room to suggest no impairment is required.
Summary of results
Based on the impairment testing carried out, it was determined that there was no impairment of Goodwill and In
process technology intangible assets. In 2014, impairment testing of In process technology resulted in an impairment
charge of £1,328,000.
The forecast used in the impairment review of In process technology as at 31 December 2015 indicates significant
headroom when comparing the recoverable amount against carrying value. However, given the early stage of adoption
there remains a significant level of judgement involved in making the assumptions for revenues and margins. Other
significant areas of judgement include the assumptions of just one CGU and of longevity of the technology.
Parent company
The parent company has no intangible assets (2014: £nil).
54
Velocys plc
Annual report and accounts 2015
18. Property, plant and equipment
Assets under Plant and
Company construction Land machinery Total
2015 £’000 £’000 £’000 £’000
Cost
At 1 January 2015 778 1,053 7,827 9,658
Additions 224 – 2,038 2,262
Disposals – – (1,082) (1,082)
Transfers to plant and machinery (954) – 954 –
Foreign exchange 15 51 381 447
At 31 December 2015 63 1,104 10,118 11,285
Accumulated depreciation
At 1 January 2015 – – 5,593 5,593
Charge for the year – – 1,025 1,025
Disposals – – (1,077) (1,077)
Foreign exchange – – 237 237
At 31 December 2015 – – 5,778 5,778
Net book amount
At 31 December 2015 63 1,104 4,340 5,507
Assets under Plant and
construction Land machinery Total
2014 £’000 £’000 £’000 £’000
Cost
At 1 January 2014 160 – 6,953 7,113
Additions 1,203 23 318 1,544
Disposals – – (450) (450)
Assets acquired on acquisition of subsidiary – 940 – 940
Transfers to plant and machinery (630) – 630 –
Foreign exchange 45 90 376 511
At 31 December 2014 778 1,053 7,827 9,658
Accumulated depreciation
At 1 January 2014 – – 5,029 5,029
Charge for the year – – 728 728
Disposals – – (439) (439)
Foreign exchange – – 275 275
At 31 December 2014 – – 5,593 5,593
Net book amount
At 31 December 2014 778 1,053 2,234 4,065
The costs of leased assets included above is £207,000 (2014: £214,000). The net book amount of leased assets
included above is £73,000 (2014: £121,000). Depreciation is charged to administrative expenses in the consolidated
income statement.
Parent company
The parent company has no property, plant or equipment (2014: £nil).
As at 31 December 2015, the Company had entered into contractual commitments for the acquisition of property, plant
and equipment amounting to £23,000 (2014: £60,000).
55
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
19. Investments in subsidiaries
2015
2014
Capital Total Capital Total
Loan to contributions to investment in Loan to contributions investment
subsidiaries subsidiaries subsidiaries subsidiaries to subsidiaries in subsidiaries
Velocys plc £’000 £’000 £’000 £’000 £’000 £’000
Investments in
subsidiaries
At 1 January 93,820 34,932 128,752 47,948 29,407 77,355
Movement in loans (3,655) – (3,655) 47,080 – 47,080
Capital contributions – 1,988 1,988 – 5,525 5,525
Foreign exchange (796) – (796) (1,208) – (1,208)
At 31 December 89,369 36,920 126,289 93,820 34,932 128,752
The Directors believe the carrying value of the investments is supported by their expected future cash flows.
Investments include long term loans to Velocys, Inc., Velocys Technologies Limited and Velocys (USA Holdings) LLC.
Investments are stated at cost.
The parent company has direct investments in the following subsidiary undertakings.
Country of % Holding
incorporation or principal (all ordinary
Subsidiary undertakings business address Principal activity share capital)
Velocys Technologies Limited England and Wales Design and development
of catalysts, and exploitation of
platform catalyst technologies 100
Velocys (USA Holdings) LLC Ohio, USA Holding company for US subsidiaries 100
Oxford Catalysts Trustees Limited England and Wales Holds assets and makes distributions
in respect of employee remuneration 100
The following companies are subsidiaries of the Company whose immediate parent is not Velocys plc.
Country of % Holding
incorporation or principal (all ordinary
Subsidiary undertakings business address Principal activity share capital)
Velocys, Inc. Delaware, USA Design, development and exploitation
of its microchannel technologies 100
Velocys Project Solutions, LLC Delaware, USA Project development of smaller scale
GTL plants 100
Ashtabula Energy, LLC Delaware, USA Project development of smaller scale
GTL plant in Ashtabula, Ohio 100
VMH Assets LLC Ohio, USA Hold manufacturing assets in Ohio 100
JAB Land-Ashtabula Ohio USA Hold land for small scale GTL plant in
Ashtabula Ohio 100
Velocys plc has an investment in the following dormant subsidiary.
Dormant subsidiary Incorporated Principal activity % Holding
Oxford Catalysts UK Limited England and Wales (07671880) Dormant company 100
56
Velocys plc
Annual report and accounts 2015
20. Investments
2015 2014
£’000 £’000
Investment in ENVIA (formerly GTL JV) 3,246 1,613
Foreign exchange 129 98
3,375 1,711
Available for sale financial assets purchased for cash in 2014 represent the acquisition of a minority interest in a GTL
joint venture. In 2014 the Company entered into a joint venture (ENVIA) with established players in the gas and energy
markets to develop GTL plants using a combination of renewable biogas (including landfill gas) and natural gas. The
investment is measured at fair value on the statement of financial position date and any changes in value are included
in the other comprehensive income statement. The investment was remeasured at 31 December 2015 and there was
no change in value. This is a level 3 fair value measurement. The investment is denominated in US dollars. The Company
is committed to a further investment of £1,636,000. The parent company had no investments (2014: £nil). The Company
invested additional funds into ENVIA of £1,535,000 in 2015.
21. Trade and other receivables
Company
2015 2014
£’000 £’000
Current
Trade receivables 4 43
Prepayments and accrued income 324 420
Other receivables 583 190
911 653
Parent company
2015 2014
£’000 £’000
Current
Prepayments and accrued income 15 15
Other receivables 17 61
32 76
The fair value of trade and other receivables is not materially different to the book value above (2014: not materially
different). The trade receivables hold a low credit risk. The maximum exposure to credit risk at the reporting date is the
carrying value of each class of receivable plus cash balances held. The Company does not hold any collateral as
security (2014: £nil).
As at 31 December 2015 Company trade receivables of £4,000 (2014: £ nil) were past due but not impaired. The aging
analysis for the 2015 amounts past the due date, which were received in full in 2016, is as follows.
2015 2014
£’000 £’000
Up to 3 months 4 –
4 –
Company
The parent company had no trade and other receivables past due but not impaired (2014: £nil).
Trade receivables outstanding at year end represent approximately 1 days’ sales (2014: 9 days).
The Company believes that the full amount of trade receivables recognised is recoverable after allowance has been
made for doubtful debts. At 31 December 2015, the parent company had no overdue trade receivables (2014: £nil). The
other classes within trade and other receivables do not contain impaired assets (2014: £ nil).
57
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
Trade and other receivables are denominated in the following currencies:
2015 2014
£’000 £’000
UK sterling 233 331
US dollars 678 322
911 653
22. Inventories
2015 2014
£’000 £’000
Raw materials and consumables 77 8
Finished goods 1,316 283
Total 1,393 291
£218,000 has been written off the value of an inventoried reactor as a reflection of slight differences between it and the
current model.
Company
The parent company has no inventory.
23. Short term investments, cash and cash equivalents
2015 2014
£’000 £’000
Short term bank deposits 3,000 28,083
Cash at bank and in hand 34,736 31,693
Total cash and cash equivalents 37,736 59,776
Under IAS 7, cash held on term deposits of greater than 3 months has been classified as a short term investment.
Company
Both short term investments, and cash and cash equivalents, are denominated in UK sterling and in US dollars, as
follows:
UK sterling denominated:
2015 2014
£’000 £’000
Short term bank deposits 3,000 21,000
Cash at bank and in hand 23,570 24,039
26,570 45,039
Company
US dollar denominated:
2015 2014
£’000 £’000
Short term bank deposits – 7,083
Cash at bank and in hand 11,166 7,654
11,166 14,737
Company
The parent company has no cash or cash equivalents (2014: £ nil).
58
Velocys plc
Annual report and accounts 2015
24. Trade and other payables: current
Company
2015 2014
£’000 £’000
Trade payables 1,372 728
Other payables – 875
Other taxation and social security 14 62
Accruals 3,265 3,260
Deferred income 2,638 4,214
Deferred consideration 91 1,763
7,380 10,902
The parent company has trade and other payables of £140,000 (2014: £85,000), all of which are accruals.
The fair value of trade and other payables are not considered to be materially different to their carrying values based
on discounted cash flows.
In circumstances in which an award for costs from an external entity is subject to a final settlement, such as awarded
costs from a court judgement, the Company does not recognise awarded amounts until the settlement is finalised and
are therefore included in other payables.
All trade payables are due in 60 days or less (2014: 60 days or less).
The Deferred consideration relates to the acquisition of VPS, as explained in note 30.
25. Trade and other payables: non-current
Company
2015 2014
£’000 £’000
Accruals 65 53
Deferred income 1,262 16
1,327 69
The parent company has no non-current trade and other payables (2014: £nil).
The fair value of trade and other payables are not considered to be materially different to their carrying values based
on discounted cash flows.
Deferred income for 2015 includes funds received for catalyst to be earned over a 2-year lease period.
26. Borrowings
The parent company had no borrowings in 2015 (2014: £nil). Maturity of borrowings for the Company is as follows.
Company
2015 2014
£’000 £’000
Within 1 year 288 267
Within 2 to 5 years 759 999
1,047 1,266
The majority of the Borrowings relates to a loan entered into on 1 December 2009 by Velocys plc’s wholly owned
subsidiary, Velocys, Inc. (Velocys) with the State of Ohio (the State) allowing Velocys to borrow up to $2.25 million to fund
qualified capital projects for research and development projects. All such projects were required to be completed by
31 August 2012 and have 25% of costs funded by Velocys. The interest rate for the loan is 2.00% per annum with a
service fee of 0.25% of the principal balance. The loan is repaid to the State using a blended payment schedule as
follows.
59
Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
•
•
For the first five years of the loan, the principal is paid in consecutive monthly instalments based upon an original
amortisation over 20 years with any interest accrued during that particular month.
For the remaining term of the loan, the principal is paid in consecutive monthly instalments based upon the
remaining term of the loan (5 years) with any interest accrued during that particular month.
The loan is secured by all plant and machinery acquired using the loan proceeds as well as a guarantee of payment
provided by the parent company. The gross book value of the capital projects secured is £2,217,000 (2014: £2,116,000).
The loan was fully drawn down in 2012. After repayments of principal, the amount outstanding on the loan as at 31
December 2015 is £964,000 (2014: £1,138,000).
All remaining borrowings of £83,000 (2014: £128,000) arise from finance lease obligations. The fair values of
borrowings are not considered to be materially different to their carrying values based on discounted cash flows.
27. Derivative financial instruments
The Company sells sterling and buys US dollars to fund its operations in the United States, which exposes it to foreign
exchange risk. This is mitigated through the use of forward contracts at fixed rates of exchange with fixed maturity
dates. The contracts are initially measured at fair value on the date the contract is entered into. This is a level 2 fair
value measurement. Gains and losses against the US dollar exchange rate as at 31 December 2015 are recognised in
Finance income in the Consolidated income statement and in Current assets in the Consolidated statement of financial
position. At 31 December 2015 the notional principal amounts of the outstanding forward foreign exchange contracts
were £3,217,000 (2014: £14,000,000), and the revalued amounts were £3,373,000 (2014: £14,435,000). The foreign
exchange gain on these contracts as at 31 December 2015 was £156,000. All the outstanding contracts will mature
during 2016.
28. Financial instruments
31 December 2015
Assets at fair
Loans and value through Available
receivables profit and loss for sale Total
Company £’000 £’000 £’000 £’000
Assets as per balance sheet
Available-for-sale financial assets – – 3,375 3,375
Derivative financial instruments – 156 – 156
Trade and other receivables excluding
non-financial assets 587 – – 587
Short term investments – funds held on deposit 3,000 – – 3,000
Cash and cash equivalents 34,736 – – 34,736
38,323 156 3,375 41,854
31 December 2014
Assets at fair
Loans and value through Available
receivables profit and loss for sale Total
Company £’000 £’000 £’000 £’000
Assets as per balance sheet
Available-for-sale financial assets – – 1,711 1,711
Derivative financial instruments – 435 – 435
Trade and other receivables excluding
non-financial assets 233 – – 233
Short term investments – funds held on deposit 28,083 – – 28,083
Cash and cash equivalents 31,693 – – 31,693
60,009 435 1,711 62,155
60
Velocys plc
Annual report and accounts 2015
The credit risk of short term investments and cash and cash equivalents, summarised in the following table, is
assessed using an external credit rating agency’s long-term ratings.
2015
2014
Short-term bank deposits, cash at bank
and in hand £’000 % £’000 %
Aa2 3,447 9% – –
Aa3 5,698 15% 11,504 19%
A1 15,044 40% 8,951 15%
A2 12,034 32% 27,496 46%
A3 1,513 4% 11,825 20%
37,736 59,776
31 December 2015
Liabilities at fair Other financial
value through the liabilities at
profit and loss amortised cost Total
Company £’000 £’000 £’000
Liabilities as per balance sheet
Borrowings – 964 964
Trade and other payables excluding
non-financial liabilities – 4,637 4,637
Finance lease liabilities – 83 83
– 5,684 5,684
31 December 2014
Liabilities at fair Other financial
value through the liabilities at
profit and loss amortised cost Total
Company £’000 £’000 £’000
Liabilities as per balance sheet
Borrowings – 1,139 1,139
Trade and other payables excluding
non-financial liabilities – 6,626 6,626
Finance lease liabilities – 127 127
– 7,892 7,892
Derivative financial instruments are forward foreign exchange contracts. Risks associated with these contracts include
foreign exchange risk from adverse movements during the maturity period of the contract, or from a default by the
contracting party, which could leave the Company with un-hedged dollar liabilities.
29. Called up share capital
Number of Ordinary Share
shares shares premium
Company and parent company (thousands) £’000 £’000
At 1 January 2014 116,411 1,164 95,793
Employee share options scheme: Shares issued 1,018 10 506
Investment by Shiloh Industries, Inc. 601 6 1,197
Consideration for purchase of Pinto Energy, LLC 755 8 1,647
Fund raising October 2014 23,111 231 50,082
At 31 December 2014 141,896 1,419 149,225
Employee share options scheme: Shares issued
including 1p exercise price options 27 – (28)
At 31 December 2015 141,923 1,419 149,197
A total of 15,613,701 (2014: 13,927,937) options to subscribe for ordinary shares of Velocys plc have been granted and
are outstanding at 31 December 2015 under the employee options schemes operated within the Company and
contracts for options granted to a limited number of consultants. Details are given in note 15.
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Velocys plc
Annual report and accounts 2015
Notes to the financial statements (continued)
On 25 June 2014 the Company acquired Pinto Energy, LLC, now known as Velocys Project Solutions, LLC. A number of
holdback shares was designated to cover adjustments in the period after acquisition. The remaining balance of these
shares, which will be issued during 2016, is 41,644. Details of the acquisition are contained in note 30.
30. Acquisition of a subsidiary
On 25 June 2014, the Company acquired 100% of a project development company that was subsequently rebranded
Velocys Project Solutions, LLC (VPS), along with its Ashtabula GTL project and a pipeline of other opportunities.
Ashtabula GTL is a GTL plant designed to produce approximately 5,000 barrels per day (bpd), and scoped for an 80-acre
industrial site that VPS owns near the Port of Ashtabula in Ohio, USA. The following table summarises the
consideration for VPS, the fair values of the assets acquired and liabilities assumed at the acquisition date.
Fair value
Consideration at 25 June 2014 £’000
Equity 1,655
Cash 462
Deferred consideration – contingent 1,763
Total consideration 3,880
Assets acquired and liabilities assumed at acquisition
Land 940
Customer contracts 1,344
Total identifiable net assets 2,284
Deferred tax liability (269)
Goodwill arising on acquisition 1,865
Total 3,880
Purchase consideration of £3,880,000 comprised an initial amount of £1,655,000 from the issue of 754,887 shares in
Velocys plc, £462,000 paid in cash for outstanding obligations, and deferred consideration of £1,763,000 to have been
settled by a further issue of shares in Velocys plc. During 2015 the cash consideration was adjusted to reflect accrued
expenses at acquisition, and replaced with a deferred consideration of 41,644 ‘holdback’ shares, which are to be issued
in 2016.
The fair value of the initial 754,887 shares issued was based on an average of the published share price from 17 June
to 24 June 2014. Acquisition costs were charged to Administrative expenses in the consolidated income statement for
2014.
The initial Goodwill of £1,865,000 arising from the acquisition is attributable to the acquired project development
capability and pipeline of potential projects. Due to exchange rate differences, this Goodwill figure is £2,214,000 (2014:
£1,646,000). This has been reviewed for impairment in 2015, with no impairment resulting.
The customer contract of £1,344,000 and deferred consideration of £1,763,000 were elements of the acquisition
agreement relating to the Ashtabula project reaching Final Investment Decision (FID). The customer contract
represented a development fee due to the Company from investors in the project, who were then being sought. The fair
value estimate was based on a discount of 63% reflecting the probable level of the eventual fee as well as the
likelihood of the project proceeding; this is a level 3 fair value measurement. The deferred consideration was contingent
on the achievement of FID within a specified time frame. The fair value estimate was based on a discount of 25%; this
is also a level 3 fair value measurement.
FID was not achieved during the specified time frame, which fell during 2015. As a result, the value of both the
customer contract and the deferred consideration have been fully impaired, with a remaining value of £nil in each case.
31. Commitments
Capital commitments are disclosed in note 18.
The Company is committed to a further investment in ENVIA of £1,636,000 and a loan of £6.3m repayable by
31 December 2020.
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Velocys plc
Annual report and accounts 2015
Operating lease commitments
The Company leases various offices under non-cancellable operating lease agreements. The lease terms are between
2 and 5 years and the majority of lease agreements are renewable at the end of the lease period at market rate.
2015 2014
£’000 £’000
Future aggregate minimum lease payments under non-cancellable property leases:
– Within one year 408 412
– Between one and five years 1,217 1,419
– After more than five years 415 575
2,040 2,406
2015 2014
£’000 £’000
Future commitments under non-cancellable operating plant and equipment leases:
– Within one year 2 1
– Between one and five years 3 3
5 4
32. Pension arrangements
The Company operates a number of defined contribution schemes for which the pension cost charge for the year
amounted to £326,000 (2014: £252,000).
33. Related party transactions
The parent company has the following amounts due from its subsidiaries:
2015 2014
Balances with subsidiary companies £’000 £’000
Velocys Technologies Limited 58,637 78,565
Velocys (USA Holdings) LLC 6,191 1,711
Velocys, Inc. 24,541 13,544
Total due from subsidiaries 89,369 93,820
All amounts are unsecured and have no fixed date of repayment.
Oxford Catalysts Trustees Limited
At the time of exercising their share options, executives of the Company may apply to the employee benefit trust
managed by Oxford Catalysts Trustees Limited for a distribution in respect of the exercise value of their options. The
trustees then request a contribution from the Company in respect of the grant made. The total value of funds
contributed by the Company to Oxford Catalysts Trustees Limited during the year was £nil (2014: £205,000).
34. Post-financial position events
On 5 February 2016 the Company announced that it had made available to ENVIA Energy up to US$12 million of further
funding as part of a stakeholder capital contribution. As a result of this contribution the Company expects that the
commercial reference plant will be fully funded through construction, completion and operation. Of the US$12 million
committed, US$3 million is Velocys’ equity contribution and US$9 million will be provided as a loan secured on the
project. The terms of the loan provide the Company with the opportunity to gain a greater equity share of the project
and greater influence in the commissioning, start-up and operations of the plant. The funding will be accommodated
from the Company’s balance sheet. This loan will have a 10% coupon, and the Company has the opportunity for early
repayment of the loan after the plant is operational.
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Annual report and accounts 2015
Directors, secretary and advisors to the Company
Velocys plc registration no.
5712187
Registered office
Directors
115e Olympic Avenue
Milton Park
Abingdon
Oxfordshire
OX14 4SA
Pierre Jungels (Non-executive Chairman)
David Pummell (Chief Executive Officer since 6 January 2016)
Susan Robertson (Chief Financial Officer)
Paul Schubert (Chief Operating Officer)
Julian West (Senior Independent Director)
Jan Verloop (Non-executive Director)
Mark Chatterji (Non-executive Director)
Ross Allonby (Non-executive Director)
Sandy Shaw (Non-executive Director)
Company secretary
Jeremy Gorman
Brokers & nominated
advisors
Numis Securities Limited
The London Stock Exchange Building
10 Paternoster Square
St Pauls
London EC4M 7LT
Registrars
Bankers
Public relations
Independent auditors
Capita Registrars Ltd
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Barclays Bank Plc
Wytham Court
11 West Way
Oxford OX2 0JB
Camarco
107 Cheapside
London EC2V 6DN
PricewaterhouseCoopers LLP
3 Forbury Place
23 Forbury Road
Reading
Berkshire RG1 3JH
Velocys plc
115e Olympic Avenue
Milton Park
Abingdon
Oxfordshire
OX14 4SA
Company Number: 5712187
www.velocys.com