Quadrise Fuels International : Half yearly interim report – period ended 31 December 2020

Quadrise Fuels International plc

Company Registration No. 05267512

Interim Report and Consolidated Financial Statements

For the 6 month period to 31 December 2020

Quadrise Fuels International plc

Quadrise Fuels International plc ("Quadrise", "QFI", the "Company" and together with its subsidiaries the "Group") presents its unaudited interim results for the six months ended 31 December 2020

Chairman's Statement

Introduction

The first half of the 2020-21 financial year saw Quadrise make material progress and build firm foundations across a number of key projects in the industrial, upstream and marine markets, despite the challenges imposed by the impact of COVID-19 restrictions. The successful delivery of these key projects will, on the execution of appropriate commercial supply and license agreements, position the Company to deliver sustainable commercial revenues and cash generation. The progress made to date demonstrates the success of the Company's revised strategy, which is to pursue a larger number of project opportunities both directly and through selected partners and agents in key markets.

With the launch of bioMSAR™ in December 2020, Quadrise has set out its intention to build on the class-leading environmental performance of MSAR® technology and fuels and to provide a new renewable transition fuel. bioMSAR™ opens up a completely new market for Quadrise and provides it with the ability to simultaneously develop leading positions in both the existing $135bn p/a heavy fuel oil ("HFO") market as well as the large and rapidly growing renewable biofuels sector. This broader approach would enable Quadrise's customers to use existing fossil fuel resources in the most cost effective and environmentally sensitive way, whilst providing a bridge to a market that will increasingly be met by renewables as we approach 2030.

There is no doubt that it was this twin-track approach that led to the resounding success of the Company's placing of new ordinary shares in early March 2021. Not only did the level of overall demand surpass our initial expectations and enable gross proceeds of £6m to be raised, it also paved the way for two leading institutional investors, Premier Miton and Cannacord Genuity to take significant stakes in the business. The placing proceeds provide Quadrise with the funds to progress to commercial revenues and sustainable cash generation by July 2022 - through the successful migration from positive tests and trials to delivery of commercial supplies to customers - subject to agreeing suitable commercial contractual terms. Additional funds of £1m raised through the significantly oversubscribed open offer provide Quadrise with the ability to accelerate the development of bioMSAR™ and to be able to consider additional opportunities, including those related to glycerine production and sourcing, that we believe could deliver significant value.

During the period under review, we saw a recovery from the challenging crude and liquid fuel product markets that persisted for much of the first half of calendar 2020, as a result of crude oil prices being severely impacted by the combination of the unfolding COVID-19 pandemic and the dispute between the Kingdom of Saudi Arabia ("KSA") and Russia. Crude oil prices have now recovered and of more relevance to MSAR® economics, gasoil-fuel oil spreads, which had risen to ~$350/mt reduced significantly to below $100/mt, (as fuel oil prices remained uncharacteristically strong and middle distillates weakened due to fundamental shifts in supply and demand) have partially recovered, to ~$150/mt. Whilst recent prices and volatility have negatively impacted short-term MSAR® economics in some markets, in most regions they remain favourable and the longer-term trend is still positive. Demand for middle distillates is forecast to recover from COVID-19 disruptions and fuel oil supply is expected to increase with greater production and refining of heavier crude oils. The enhanced environmental performance of MSAR® and bioMSAR™ will, we believe, be of increasing importance to both producers and consumers, alongside its substantial economic benefits.

Despite the disruption caused by COVID-19, the use of high-sulphur fuels in combination with scrubbers is, in our view, the de-facto lowest cost solution to meet the IMO 2020 sulphur standard for the maritime sector, as well as national or World Bank regulations for utilities and industrial consumers. This provides a positive backdrop for Quadrise to work with refiners and fuel consumers to progress MSAR® projects, potentially combined with new environmental initiatives.

New Environmental, Social and Governance ('ESG') Initiatives

Quadrise, through its MSAR® technology and fuels, has always had strong environmental credentials. However, we realised that during 2020 there was a significant shift in attitudes towards the use of sustainable energy, by both industry and society at large. We have therefore dedicated significant effort into emphasising the environmental benefits our MSAR® and bioMSAR™ technologies offer, as well as highlighting our social and governance credentials more clearly. In addition to helping our clients reduce their environmental footprint and decarbonise, and as an integral part of our commitment to supporting the global goal of net-zero carbon emissions by 2050, Quadrise aims to be a leader in its field, by committing to be net-zero carbon by 2030.

We fully support the position that renewables should and will play an increasing role in meeting the world's energy needs. However, there will be a long transition period, during which fossil fuels will continue to have an important role. Our technology enables this to be done in a manner which minimises the impact on the environment through significantly reducing emissions compared with the "standard" solutions currently being used. We have materially increased the emphasis on the environmental benefits of our technologies in the Company's marketing and investor relations materials and, more recently, created a distinct ESG section on our website. Additionally, we commenced work in 2020 on a sustainable fuel programme, which resulted in bioMSAR™:

• Our Research, Development and Innovation ("RDI") team investigated opportunities to reduce emissions of SOx and CO2 from MSAR® by enabling sustainable fuel sources to be incorporated into MSAR® to further enhance its environmental benefits.
• We formally launched bioMSAR™ in December 2020, following the successful conclusion of initial testing at the Quadrise Research Facility ("QRF") during H2 2020 which demonstrated that we could produce bioMSAR™ at pilot plant scale, blending 40-50% glycerine, 50-40% residue and c10% water and additives.

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Quadrise Fuels International plc

• In comparison to HFO, bioMSAR™ offers substantial (20-30%) reductions in CO2 emissions. This is similar to using LNG, but with none of the risks of methane slip (or the need for substantial investment in new LNG infrastructure) whilst enabling the use of existing HFO infrastructure - with minimal modification costs.
• We announced in December 2020 our collaboration agreement with Aquafuel Research Ltd ("Aquafuel"), a British company specialising in renewable power innovation using conventional biofuels and glycerine in diesel engines, in connection with the development of bioMSAR™ projects.
• Combustion testing programmes with industry partners commenced in Q4 2020, with initial work successfully completed, as announced

on 1 February 2021. The testing was carried out by Aquafuel using a standard Cummins diesel generator owned by Quadrise. This not only confirmed bioMSAR™ as a viable diesel engine fuel, it also achieved higher efficiency and 20-25% lower NOx compared to baseline testing on diesel at the prevailing test conditions on a high-speed4-stroke diesel engine. The lower NOx emissions of bioMSAR™ are highly beneficial, as most biofuels lead to an increase of NOx emissions of c15% compared with diesel or fuel oil.

• Whilst at an early stage, good progress is being made in developing and promoting projects that offer opportunities for both Aquafuel and Quadrise in a number of markets with high growth opportunities.
• Further third-party testing with Wärtsilä and VTT in Finland during the first half of calendar 2021 will seek to build upon these positive initial results and will incorporate optimisation at various loads on a larger medium speed 4-stroke diesel engine, with further quantification of efficiency and emissions on bioMSAR™. During the second half of the calendar year we also plan to schedule testing on 2-stroke engines.

Other areas of work that are enhancing our ESG credentials include:

• Exhaust Gas Cleaning Systems ("EGCS", also termed "Scrubbers") - An agency agreement for Ecuador was signed in July 2020 with
  Pacific Green Technologies, Inc ("PGT") Group, a company that is becoming a world leader at providing sustainable cleantech solutions for climate change, green energy and emissions control. Their gas scrubbers have applications in the marine, power and industrial sectors that we are developing and, as agent, Quadrise will receive an agency fee based on sales of PGT technology linked to MSAR® projects. The use of MSAR® alongside these solutions enables customers to fund these environmental improvements, whilst ensuring that the local communities are able to benefit from the significant reduction in emissions.
• JGC - We are in discussions with JGC and a major diesel engine OEM regarding a new joint initiative for MSAR® to reduce Japanese refinery CO2 emissions using Combined Heat and Power diesel technology to replace residue-fired boilers.

We continue to have a close working relationship with Nouryon and we have jointly filed a new patent for bioMSAR™. QFI holds regular quarterly meetings with them and discussions between QFI, Nouryon and another Carlyle entity in the downstream sector have continued about possible MSAR® and bioMSAR™ opportunities that we believe could have significant potential to accelerate during 2021.

Developments During the Period and Q1 2021

Despite the unprecedented impact of COVID-19 on global economies, we made substantive progress during the first half of the financial year and this accelerated as we entered calendar year 2021. The main areas of progress are summarised below:

Industrial Applications

Morocco - In November 2019, the Company signed a Material Transfer & Cooperation Agreement with a major chemicals group in Morocco. Rapid progress was made with project plans in early 2020 to enable a phase 1 pilot kiln trial to commence at the client's main site ("Site A") in March 2020. Unfortunately, COVID-19 restrictions led to postponement; this being after the Quadrise Pumping and Heating Unit ("PHU") and the MSAR® fuel (manufactured at QRF) had been received at the client's site.

Whilst Site A was closed to external visitors and non-essential employees from March 2020, the QFI project team worked closely with the client and our Moroccan agent to minimise the impact on the overall project timetable. The first action taken by the Quadrise project team was to engage positively with the client and obtain their agreement to bring forward the second phase feasibility study originally planned to have followed the successful completion of the pilot plant trial. Work on this phase 2 commenced in Q2 2020 and the pilot trial was successfully completed by QFI in October 2020. Rather than immediately progressing from the pilot trial to the commercial trial, as initially planned, the client and QFI jointly agreed to undertake the intermediate stage of an industrial scale trial at another of the client's locations ("Site B"), as this location has more operational flexibility for accommodating a larger scale trial.

As announced on 2 February 2021, the work on the newly planned industrial-scale trial is progressing, with the new PHU (which can be utilised for both the industrial and commercial trials) fabricated and ready for shipment. The Site B trial requires around 60mt of MSAR® fuel, which is beyond the capacity of QRF and thus needs to be manufactured by a third party. Our initial plans for this were impacted by the recent tightening of COVID-19 restrictions in the UK and we are now finalising contingency plans for the fuel to be manufactured and sent directly to site. The joint project team are working with the client's Site B to finalise plans for the trial, that is scheduled to be completed as early as possible in H1 2021 along with the phase 2 feasibility study. QFI will be paid £100,000 for the industrial trial and phase 2 study under existing agreements with the client.

Following the successful conclusion of the industrial trial, the plan is to complete the commercial trial at Site A, which is the major fuel oil consumer, by early/mid H2 2021. Assuming the successful conclusion of these trials, the intention would then be to conclude a commercial supply agreement covering one or more of the client's sites in Morocco before calendar year end. Planned milestones are:

• Q2 calendar year 2021 - industrial scale trial at Site B. Complete phase 2 feasibility studies for the commercial trial at Site A. 
• Early/mid H2 calendar year 2021 - commercial trial at Site A.
• Conclude a commercial supply agreement with the client after the successful conclusion of the commercial trial at Site A.

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Upstream Applications

Utah - Following the signature in Q1 2020 of a Memorandum of Understanding ("MOU") with Valkor Technologies ("Valkor") to investigate the potential deployment of MSAR® technology in Utah, USA, we were delighted to announce on 18 August 2020 a Commercial Trial Agreement ("CTA") with Greenfield Energy LLC ("Greenfield") a joint-venture between Valkor and Tomco Energy plc ("Tomco"). This covers testing at the Petroteq Oil Sands Plant ("POSP") located at the Asphalt Ridge Facility in Utah, USA, which is managed by Greenfield. The first phase of the CTA ("Phase 1"), for which Quadrise is being paid $150,000, includes:

• Proof of Concept ("POC") formulation and test work at QRF using oil samples supplied by Greenfield. 
• Loan of Quadrise MSAR® commercial production equipment, MSAR® test equipment and supply of MSAR® additives.
• Supply of specialist services and personnel to assist Greenfield in completing the commercial scale demonstration trial to produce 600 barrels (100mt) of power grade MSAR®.

The POC formulation and test work was originally scheduled for H2 calendar 2020. However, this was reliant on samples being received at QRF. With the start-up of the POSP delayed until January 2021, as announced by Tomco in December 2020, this POC work has now been pushed back to Q2 calendar year 2021. As soon as we have received representative samples at QRF, we would expect the testing and report work to be completed within 2-3 weeks. The MMU is ready to be sent to the POSP site and we await Greenfield's confirmation to ship. The trial will then commence once the Quadrise project team is able to gain safe access (under COVID-19 restrictions) to the site.

Pending the successful completion of Phase 1, Quadrise will then work with Greenfield to develop plans for commercial MSAR® production facilities capable of treating 10,000 barrels of oil per day ("Phase 2") and to agree terms for the granting of a conditional MSAR® licence to Greenfield once commercial agreements have been signed.

Marine Applications

MSC - We announced in January 2021 that we had signed a JDA with MSC Shipmanagement of Cyprus, a part of the MSC group which is a world leader in container shipping and cruise lines. We are now, through the JDA, undertaking the preparatory work to enable LONO trial(s) aboard MSC container shipping vessel(s).

• During Q1 calendar 2021, the planning and preparatory work commenced to enable a LONO trial(s) of Marine MSAR® to take place on a vessel with a MAN ME engine, and potentially on a vessel with a Wärtsilä/Win GD Flex engine.
• During Q2-Q3 calendar 2021, we will be working to procure the equipment for fuel production, and the vessel(s) fuel booster system(s) and to commence the process of preparing the vessel(s) and the fuel production site to enable the commencement of the LONO trial(s) in the second half of 2021.
• H2 calendar 2021 will see the active commencement of the trial on the vessel(s), with all the preparatory and commissioning work having been completed for both fuel production and on-vessel storage and use of MSAR®. Once the initial MSAR® fuel has been loaded and the on-board systems commissioned, the vessel(s) will then be bunkering Marine MSAR® throughout the 4,000- hour LONO trial(s). The details of the LONO process and relevant inspections and milestones will be agreed between the parties during the initial phase of the work under the JDA.

As we have previously highlighted, we continue to have discussions with other owners and operators in the marine market, relating to potential trials and commercial roll-out of MSAR® and bioMSAR™ more widely in the sector. However, ensuring the successful conclusion of the trial work with MSC and progressing this to commercial supply contracts will be our primary focus in the short-term. As noted previously, there remains a general consensus that scrubbers alongside the use of high-sulphur fuels is the lowest cost solution for operators; though scrubber installation activity was lower than expected during 2020, because of the impact of COVID-19 on shipyard/drydock availability and scrubber manufacturing - however reports are more positive from suppliers in 2021.

We had also indicated during 2020 that we were evaluating an opportunity to establish or link with a physical bunker fuel supplier, to provide a supply network for high sulphur fuels in parallel with MSAR® for LONO testing and subsequent commercial supply. With the bunker market adversely impacted by COVID-19, this work was paused. However, this is a market opportunity that we will continue to review, albeit it is not considered a high priority at this time. Any decision to enter this market would be alongside trusted counterparties who can manage the commodity price risk, provide the working capital requirements and counterparty credit facilities and manage the logistics of a physical bunkering operation.

Power Applications, Refinery Refuelling, & Co-Development Opportunities

Middle East

During the period we undertook a major profile-raising initiative in the Middle East through the publication of a White Paper (in English and Arabic) in August 2020, which demonstrated the benefits that the adoption of MSAR® technology and fuels could provide to the region. In addition, we updated our website, so that most of it is now available in Arabic, including our animated video. These activities have been very well received and through targeted use of social media we have significantly raised the profile of Quadrise in the region amongst key decisions makers. These targeted activities will continue in support of our direct business development activities in key markets in the region;

Kingdom of Saudi Arabia ("KSA") - Quadrise, alongside our local partners Al Khafrah Holding Group ("AKHG") continued to look at ways to improve engagement with key stakeholders during the period. This including publication of the Middle East White Paper and enabling most of the content on our website to be available in Arabic. As we have recently outlined, given the structure of the market for fuel production and use within KSA, we believe that demonstrating progress in the industrial, upstream and marine markets, as planned, will be fundamental to unlocking this significant opportunity. We will therefore continue to keep key stakeholders informed of our progress during 2021, with a view to being able to re-establish plans for active MSAR® testing and subsequent commercial roll-out.

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Kuwait - During the period there has been no material progress to report, and as a result this is not currently a high priority.

South & Central America

Subsequent to the profile-raising activities in the Middle East, we published an America's White Paper (in Spanish and English) in December 2020, which demonstrated the benefits that the adoption of MSAR® technology and fuels could provide to the region. In addition, we updated our website, so that most content is also now available in Spanish, including our animated video. As was the case with those activities in the Middle East, through targeted use of social media we have significantly raised the profile of Quadrise in the region amongst key decisions makers. Targeted activities will continue in support of our direct business development activities in the key markets:

Ecuador: Freepoint Commodities - This is a good example of how Quadrise's longstanding business development experience can lead to project opportunities progressing very rapidly from a "standing start". QFI and Freepoint jointly met with senior management of the national oil company in Ecuador in early January 2020 to review an exciting MSAR® opportunity for refinery refuelling, leading to domestic power generation and export opportunities that would reduce energy costs and emissions for the country. This is a refinery well- known to Quadrise, as we had worked on a project there several years earlier, that would, however, have required very significant investment and working capital. Following the initial meeting, a three-person team from Quadrise visited the refinery and the adjacent power utility in early March 2020. Whilst rapid progress was made during the first half of 2020, during the second half of 2020, there was very limited progress, primarily driven by the presidential elections in Ecuador and potential restructuring of the oil sector. Once the future structure is confirmed, Quadrise will be in a position to continue its discussions, as MSAR® technology has the opportunity to add significant value, irrespective of the organisational structure of the industry.

Mexico:Redliner - MSAR® opportunities in Mexico are wide-ranging and include upstream, refinery refuelling, domestic power generation and fuel exports that also reduce imports. Our principal activities are with our agents Redliner, who have been progressing opportunities with the national oil company and have successfully engaged with stakeholders at very senior levels. Despite this, as the client has not concluded a non-disclosure agreement, this has prevented the essential sharing of information, and so we have not been able to undertake the techno-economic study for multiple refineries as planned. Whilst this is frustrating, it is not unusual in this market and we continue to work with Redliner to progress activities as there is a clear economic rationale. Most recently MSAR® briefings were submitted directly by Redliner to the Energy Secretary and key Directors (Upstream and Refining) of the national oil company. Further discussions with the major independent power project developer, who is supportive of MSAR® fuel's economic and environmental advantages for new build power projects in the region, depend on progress with the national oil company.

Other

There are no material updates to report on opportunities with the European Oil Major, the European Refiner, Bitumina, API Poly-GCL or Maersk Line.

Research, Development & Innovation ("RDI") and Operations Activities

RDI activities remain a core function and underpin our technology-led offering. QRF houses our pilot plant and research laboratory in Essex and is the hub for these activities alongside the provision of critical operational support for active projects and consulting for third parties.

Operational support activities during the period were focused on enabling the trial at the Moroccan pilot facility to progress at the earliest opportunity. The ability to utilise QRF to produce relatively small volumes of MSAR® fuel in 1m³ IBCs proved to be instrumental in our work to progress the project in Morocco, though for the next industrial scale trials we will be using a third party to produce the c.60mt of MSAR® required and this will be supplied in ISOTANKS directly to Morocco.

Testing of the oil samples from Greenfield will be a priority (once they have been received), ahead of planned on-site trial activities in Utah in H1 calendar 2021. Despite the delays in receiving the samples, QRF did progress all the necessary work to ensure that all the test equipment was adequately prepared for the challenges of working in the very cold winter/early spring conditions in Utah, and it is ready to be shipped,once we have received confirmation that Greenfield is ready to accept it at the POSP site.

Perhaps most critically during the period, the RDI team completed initial testing and scoping for a new programme of work at QRF to further improve the environmental performance and credentials of MSAR® using sustainable and renewable fuel sources. This culminated in the formal launch of bioMSAR™ in December 2020. The work on bioMSAR™ development and testing, including the addition of other renewables (such as lignin) to allow the further displacement of fossil fuel residues (with the potential to progress to a fully renewable bioMSAR™ fuel in due course) will remain a priority at QRF during 2021.

Response to the COVID-19 Pandemic and Cost Reduction Actions

COVID-19Mitigations - Throughout 2020 we put in place pragmatic and measured initiatives to protect our staff, their families and the business; ensuring that we could continue to operate. QRF remained operational throughout the year, following COVID-19 guidelines with no direct impact on planned testing and operational support activities. Whilst our London office briefly reopened during the summer of 2020, most staff continued to work effectively from home - and this remains the plan in the short-term. This has had limited impact on our activities, with very effective use being made of in-country agents/representatives, together with web-based conferencing communications to initiate new agreements. We worked effectively with our clients in Morocco and Utah throughout this process, to actively manage any potential impacts on overall project timetables.

Despite the global disruption caused by COVID-19, Quadrise has continued to progress business development activities on multiple fronts, and the levels of engagement with partners, prospective clients and project stakeholders have generally increased. We believe that this is a result of the economic and environmental advantages that MSAR® offers being more widely known in the market and that these advantages are even more crucial now. The most recent and clear confirmation of our success in this regard is that the discussions with MSC were conducted almost entirely on-line (after some initial face-to-face meetings during Q1 2020), prior to being concluded and announced on 21 January 2021.

Cost Reduction Actions - We continue to operate with a small but strong leadership team at Quadrise. Mindful that all our activities are currently funded directly from cash reserves which have been significantly increased as a result of the recent successful fundraise, we have always had a keen eye on costs, and acted early, ahead of the general lockdown to have a further close review of our cost base. As a result, we took the decision to exercise the break clause in the lease at our London Office, formally leaving on 5 February 2021. With current restrictions

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