Graphene NanoChem PLC Further information on 2015 report and accounts (9956S)

TIDMGRPH

RNS Number : 9956S

Graphene NanoChem PLC

29 December 2016

Graphene NanoChem plc

(the "Company" or the "Group")

Further information on report and accounts

for the 12 months ended 31 December 2015

Graphene NanoChem (AIM: GRPH), the international provider of nanotechnology performance enhancing solutions for global industries, announced its results for the 12 months ended 31 December 2015 on 14 November 2016.

The Company's annual report and accounts were sent to shareholders at the same time and are available on the Company's website at http://www.graphenenanochem.com/investor-relations/financials/annual-interim-reports. The accounts for the 12 months ended 31 December 2015 contained a disclaimer opinion from the Company's auditors, which was not contained in the preliminary unaudited results and is now replicated below.

The Company would like to highlight that since its auditor issued its opinion disclaimer, the Company has entered into a subscription agreement for the issuance of up to GBP2.5m of Unsecured Convertible Loan Notes, announced on 23 December 2016. The proceeds from the Loan Notes will support the working capital requirements of the Company as it looks to complete its debt rationalisation plan and continues to advance the progress of its business turnaround plan as previously announced, particularly in crystallizing opportunities in its water and enhanced polymer divisions. On 28 December 2016, the Company also announced a significant contract win with the receipt of its first commercial order and deployment of PlatDrill in China, tapping into the new burgeoning market for shale gas development in the southwest region of the country.

Auditor's opinion disclaimer:

"We have audited the financial statements of Graphene Nanochem plc for the year ended 31 December 2015 which comprise the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Statement of Changes in Equity, Consolidated Statement of Cash Flows and the Parent Company Balance Sheet, Parent Company Statement of Changes in Equity, Parent Company Statement of Cash Flows and the related notes 1 to 30 and 1 to 15 for the Group and Company, respectively.

The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

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

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

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

SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS

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 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.

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.

BASIS FOR DISCLAIMER OF OPINION ON FINANCIAL STATEMENTS

The Group had become unable to meet its current loan obligations which stood at GBP24,927,000 as at 31 December 2015 and which are secured on the property, plant and equipment of the Company's subsidiaries. Subsequent to the balance sheet date, one of the Group's lenders agreed to restructure the terms of secured borrowings amounting to GBP14,463,000 and the Group is in discussion with its other lenders to dispose of property, plant and equipment to settle the borrowings due to them.

The restructured borrowings of GBP14,463,000 are secured by a second charge on the property, plant and equipment subject to disposal and a guarantee given by the parent company and are repayable in instalments or otherwise on demand. The directors have provided us with evidence to support the current position with regard to the debt restructure plans but discussions with the lenders are not sufficiently advanced for us to form an opinion on the possible outcome which is outside the control of the Group. Consequently, the carrying amount of property, plant and equipment of GBP20,631,000 disclosed in the financial statements at a forced sale value estimated by the directors may require a material adjustment and/or the lenders may take a different course of action than proposed by the Group to recover their outstanding borrowings.

In addition, there is an uncertainty with respect to the Group's future operations which are expected to be funded via joint ventures, specialist water treatment funds, private equity and an anticipated equity fundraise. The directors have provided us with evidence to support their fund raising plans, however we are unable to determine if these will be successful or if the Group's planned new business will be profitable or provide sufficient funds to enable the Group and the Company to continue in operation for the foreseeable future.

The continuation of the Group's and the Company's operations is therefore dependent on the support from the lenders and the discussions which are being held regarding an appropriate solution to a restructuring of the Group. The continuity of the Group is also dependent on its ability to secure profitable future contracts and to successfully dispose of assets.

These events indicate material uncertainties as to the potential value of assets and liabilities presented in the Statement of Financial Position and cast significant doubt on the Group's and the Company's ability to continue as a going concern. Notwithstanding the fact that management have provided all information presently available, the existence and scope of multiple uncertainties are such that we have been unable to obtain sufficient appropriate audit evidence regarding the effect of these uncertainties.

DISCLAIMER OF OPINION ON FINANCIAL STATEMENTS

Because of the significance of the matters set out above, it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements. Accordingly we do not express an opinion on the group or parent company financial statements.

OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006

Notwithstanding our disclaimer of an opinion on the view given by the financial statements, in our opinion the information given in the Strategic Report and Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION

Arising from the limitation of our work referred to above:

- We have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and

   -           We were unable to determine whether adequate accounting records have been kept. 

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

- Returns adequate for our audit have not been received from branches not visited by us; or

- The financial statements are not in agreement with the accounting records and returns; or

   -           Certain disclosures of directors' remuneration specified by law are not made. 

Crowe Clark Whitehill LLP"

2015 Annual Report details on 'Going Concern'

In response to the disclaimer, the Company would like to highlight section 2.2 of the financial notes in the 2015 annual report, which provides detail on "Going Concern", as previously announced:

"Faced with the challenges of a global downturn in the oil and gas markets, the Group has taken decisive action to improve operating efficiencies, reduce its cost base and recalibrate and streamline its portfolio of businesses to maximize growth opportunities.

As part of the execution of its rationalization plan, the Group is in the process of exiting the low margin fuel additive and palm oil refining businesses, which are not expected to have any significant growth in margins. In view of the proposed structured exit, the directors deemed it prudent to impair the assets of those businesses that resulted in the Group incurring a loss for the year ended 31 December 2015 of GBP33,283,000 after impairment charges of GBP25,694,000 and as at that date the Group and Company had net current liabilities of GBP26,572,000 and GBP117,000, respectively, and the Group and Company had a shareholders' deficiency of GBP5,893,000 and GBP76,000, respectively.

During the year ended 31 December 2015, the Group has been in discussions with its financiers on outstanding loan repayment obligations and as at that date the Group had total secured borrowings of GBP24,927,000 which have been reported in the consolidated statement of financial position as being repayable on demand (Note 19).

Subsequent to the balance sheet date, the Group successfully negotiated the restructure of borrowings amounting to GBP14,463,000 repayable in instalments to 2021 with a 2 year repayment moratorium and a pay down in the aggregate amount of GBP315,000 for 2016 and 2017 respectively. The pay down of GBP315,000 has been made for 2016. The Group remains in discussion with its other major lenders to dispose of property plant and equipment ("PPE") used in the Group's palm oil refining and biodiesel businesses, in order to settle the remaining borrowings of GBP10,464,000. The PPE has been recorded at an estimated forced sale value as disclosed in Note 13 to the financial statements the value of which is in excess of the borrowings due. The carrying amount of PPE of GBP20,631,000 disclosed in the financial statements are at a forced sale value estimated by the directors that are based on independent valuation of the assets undertaken by independent valuer's approved by the lenders.

The status of the Group's current borrowings are as follows:

 
                                    Lender      Lender    Lender 
                                       1           2         3 
--------------------------------  ----------  ---------  -------- 
 Borrowings as per Audited         GBP14.4m    GBP8.9m    GBP1.6m 
  Accounts at 31(st) December 
  2015 
--------------------------------  ----------  ---------  -------- 
 Borrowings as per Audited         GBP14.6m    GBP9.2m    GBP1.7m 
  Accounts at 31(st) December 
  2015 and interest accumulated 
  till 30(th) June 2016 (less 
  principal paid) 
--------------------------------  ----------  ---------  -------- 
 Borrowings Restructured              Yes         No        No 
--------------------------------  ----------  ---------  -------- 
 Is there a corporate guarantee       Yes         No        Yes 
  against the parent company 
  Graphene Nanochem plc? 
--------------------------------  ----------  ---------  -------- 
 Assets Pledged                                GBP13.1m   GBP5.1m 
  (written down to forced sale 
  value during the year) 
--------------------------------  ----------  ---------  -------- 
 Asset Cover Ratio at 31(st) 
  December 2015                                  1.4x      3.0x 
--------------------------------------------  ---------  -------- 
 Borrowings post sale of PPE        GBP7.3m      nil        nil 
  at forced sale value                 * 
--------------------------------  ----------  ---------  -------- 
 
           *    Assuming that PPE from Lender 2 and Lender 3 are realised at forced-sale value to settle outstanding loans from Lender 2 and Lender 3 and the balance used to reduce Lender 1 borrowings. 

Upon completion of the rationalisation plan, the Group's plans to realise the sale of its non-core assets at its carrying value to fully repay Lenders 2 and 3 with excess funds to be utilized to reduce the liabilities of Lender 1. If this is successfully achieved the Group should see a carrying value of a single debt going forward in the range of GBP7.3 mil depending on additional costs that would be deducted for the restructuring.

As part of the restructuring exercise as per the announcement made on 11 April 2016, a receiver and manager has been appointed by Lender 2 to manage the sale of the non-core assets. The Directors recognise the uncertainty over the value of the assets subject to disposal, even though these assets have been written down to forced sale value. Furthermore, Lender 2, does not have a corporate guarantee from the parent company limiting recourse to the parent company and its effects to the Group as a Going Concern.

The Group is confident that the 3.0x asset cover over borrowings of Lender 3 of GBP1.6m is sufficient to fully settle the borrowings upon sale of the PPE.

The business will be carried on in a new wholly-owned subsidiary, Platinum TechSolve Sdn. Bhd., and will leverage on the Group's proprietary nanotechnology platforms and joint venture with SCOMI to provide performance enhancing solutions within the oilfield chemicals and water treatment sectors that have higher margins and longer term opportunities. The Group is continuing its chemicals sales through SCOMI that are providing the Group with working capital through payment upon order. The Group also has a pipeline of water treatment projects in Asia, Africa and the Middle East, funding for which is expected to be met via joint ventures, specialist water treatment funds, private equity, and a proposed equity offering in the coming months.

The implementation of the rationalisation plan, which management believes will be successful, is expected to significantly reduce the Group's debt balance and interest rate expense, which will have a positive impact of strengthening the Group's balance sheet. Further, the utilization of operating cash flows in the near term for advancement of the recalibrated business plan rather than repayment of debt, bodes well for the Group as it focuses on available resources and growth strategies on long term, higher margin business opportunities.

In view of the net current liabilities and shareholders' deficiency of the Group, the ongoing discussions with the Group's financiers and the rationalization plan also being dependent upon the Group having access to sufficient funds, the directors consider there is a material uncertainty that casts significant doubt upon the Group's ability to continue as a going concern. However the Directors consider that it is appropriate to prepare the financial statements of the Group and the Company on a going concern basis, and accordingly, the financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that may be necessary, if the going concern basis of preparing the financial statements of the Group and of the Company is not appropriate."

The Company wishes to also refer readers to the Company's interim results for the six months ended 30 June 2016 and the update to the debt rationalisation plan contained therein.

Auditor limitations

Regarding the auditor's comments that it was not able to obtain all the information and explanations considered necessary for the purpose of its audit, the Company confirms that all information was provided to the auditor's partner company Crowe Clark Whitehill Malaysia, who carried out the audit in situ. However, the Company notes that Crowe Clark Whitehill in London was responsible for signing off the accounts and therefore must acknowledge certain limitations as the final signatory.

For further information:

 
 Graphene NanoChem              Tel: [phone] 
 Jespal Deol, Chief Executive 
  Officer 
 
 Panmure Gordon (NOMAD and 
  Broker) 
 Adam James / Tom Salvesen      Tel: [phone] 
                                 2500 
 
 Yellow Jersey PR Limited       Tel: [phone] 
  (Media)                        275 882 
 Dominic Barretto / Harriet 
  Jackson 
 

About Graphene NanoChem

Graphene Nanochem plc (AIM: GRPH), is an international provider of nanotechnology performance enhancing solutions for global industries. The Group employs nanoprocesses and nanomaterials to design, engineer and enhance the performance of mainstream products for a wide range of industrial applications. It has established two major functional platforms in the energy and water sectors, and the Group, through partnerships with established industry players, is focused on building market opportunities in both sectors whilst continuing its developmental work in other strategic application areas of nanotechnology.

Headquartered in Malaysia, Graphene Nanochem was admitted to the AIM of the London Stock Exchange on 26 March 2013, following the reverse acquisition of Biofutures International plc, and trades under the symbol GRPH.L. To find out more, please visit www.graphenenanochem.com.

This information is provided by RNS

The company news service from the London Stock Exchange

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December 29, 2016 11:19 ET (16:19 GMT)