Quadrise — Closer to commercial revenues

Quadrise (AIM: QED)

Last close As at 16/07/2024

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Market capitalisation

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Research: Industrials

Quadrise — Closer to commercial revenues

During H123 Quadrise made further progress on the three projects that provide the company with the fastest and most material paths to commercialisation. Assuming that the ongoing discussions regarding a licence agreement with Valkor in Utah complete soon, management expects Quadrise to generate its first commercial revenues, which would be from IP licensing, during Q423 (Q2 CY23).

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Written by

Industrials

Quadrise

Closer to commercial revenues

Alternative energy

Spotlight Update

31 March 2023

Price

1.35p

Market cap

£19m

Share price graph

Share details

Code

QED

Listing

AIM

Shares in issue

1,406.9m

Net cash at end December 2022

£2.6m

Business description

Quadrise is the innovator and global supplier of disruptive fuel blending technology that produces a synthetic, enhanced fuel oil called MSAR and a biofuel called bioMSAR. The technology provides a low-cost and cleaner energy for marine, power and industrial applications.

Bull

bioMSAR gives better CO2 reductions and cost savings than existing biofuels.

Adoption of MSAR improves economics of refinery production and upstream operations.

Adoption of MSAR reduces costs and emissions in marine bunker, industrial and power markets.

Bear

Economics of adoption dependent on oil product spreads.

Ability to progress trials adversely affected by many factors outside Quadrise’s control.

Size of company limits number of projects that can be progressed at any one time.

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Quadrise is a research client of Edison Investment Research Limited

During H123 Quadrise made further progress on the three projects that provide the company with the fastest and most material paths to commercialisation. Assuming that the ongoing discussions regarding a licence agreement with Valkor in Utah complete soon, management expects Quadrise to generate its first commercial revenues, which would be from IP licencing, during Q423 (Q2 CY23).

Historical performance

Year
end

Revenue
(£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

06/19

0.0

(2.8)

(3.0)

(0.32)

0.00

N/A

06/20

0.0

(3.0)

(3.3)

(0.32)

0.00

N/A

06/21

0.0

(2.8)

(2.8)

(0.23)

0.00

N/A

06/22

0.0

(2.7)

(2.8)

(0.19)

0.00

N/A

Source: Company accounts. Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Three key trial programmes ongoing

During H123 Quadrise signed a framework agreement with MSC Shipmanagement covering both proof-of concept (POC) tests and subsequent letter of no objection (LONO) trials of bioMSAR and MSAR, prepared and shipped MSAR and bioMSAR to Morocco for an industrial-scale trial at a client site, and worked with Valkor on a licence and supply agreement for Valkor’s projects in Utah. The next steps, which are planned for Q2 CY23, are completion of HAZOP tests on bioMSAR ahead of MSC’s on-vessel trials, completion of the site trial in Morocco, and completion of the licence and supply agreement with Valkor.

Cash runway to first commercial revenues

Quadrise is still pre-revenue. Stripping out share option and exceptional charges, operating losses widened by £0.3m year-on-year during H123 to £1.7m. Free cash outflow rose by £0.3m to £1.7m, leaving the group with £2.6m in cash and cash equivalents and no debt or convertible securities at end H123. While management remains confident that the group will generate its first commercial revenues during Q423 (Q2 CY23), and has sufficient cash to reach that point, it notes that additional funding will be required to bridge the gap to sustainable cash generation.

Valuation: Modest adoption transformational

We are not presenting forecasts at this stage. However, as a rough guide, based on data from the company, our scenario analysis calculates that even modest adoption of MSAR could generate material revenues and take the company to sustainable profitability. For example, adoption across only 8% of MSC’s global fleet could generate around $106m in licence revenues and would require minimal capex.

H123 financial performance

Quadrise is still pre-revenue. Stripping out share option and exceptional charges, operating losses widened by £0.3m year-on-year during H123 to £1.7m, reflecting a £0.4m increase in production and development costs as test activities on bioMSAR intensified and a £0.1m reduction in administrative costs. Free cash outflow rose by £0.3m to £1.7m through a combination of higher operating losses and a £0.1m increase in inventory linked to the manufacture of MSAR and bioMSAR for the trial at a client site in Morocco. Capex totalled £0.1m (H122: £0.0m) as the group received and commissioned a prototype 5 tonne/hour emulsion system, which will be used to manufacture MSAR and bioMSAR for site trials and potential blend-on-board testing on marine vessels. The group had £2.6m in cash and cash equivalents (£4.4m at end FY22) and no debt or convertible securities at end H123. While management remains confident that the group will generate its first commercial revenues during Q423 (Q2 CY23), and has sufficient cash to reach that point, it notes that additional funding will be required to bridge the gap to sustainable cash generation.

H123: Progress on key programmes

Programme with MSC Shipmanagement 

In July 2022, Quadrise signed a framework agreement with MSC covering both POC tests and subsequent LONO trials. These trials are essential preliminaries to Quadrise potentially supplying its proprietary fuels to MSC for use in its fleet, which is the largest container ship fleet in the world, thus helping MSC to reduce its greenhouse gas emissions. The POC tests will take place on the MSC Leandra, which was previously named the Seago Istanbul and was used by Maersk for its successful demonstrations of MSAR during 2016 and 2017. The Leandra is scheduled to be in a dry dock during April and May 2023 for a routine maintenance and regulatory class inspection, during which time equipment intended to reduce carbon dioxide emissions and improve vessel efficiency will be installed. A project team from Quadrise has already inspected the MSAR emulsion fuel and booster unit on board the vessel. This system will be upgraded and commissioned while the vessel would be in dry-dock anyway, so the time taken to prepare the vessel for MSAR and bioMSAR trials should have minimal impact on when the trials can start.

Provided that agreements can be signed with a suitable feedstock provider and the HAZOP study (see below) does not reveal any major issues, the POC tests could commence in H2 CY23 (Q1 CY23 guidance in October 2022). Assuming that the results from the POC tests are positive, MSC would then conduct lengthier trials (4,000 hours of operation) to provide commercial operating experience, potentially culminating in obtaining LONOs from the engine manufacturer, Wärtsilä. Management expects that the POC tests and LONO trial will take nine months to complete. As the trials progress, Quadrise, MSC and other key stakeholders, such as refineries, will commence discussions regarding the supply of bioMSAR and/or MSAR for use by MSC’s global fleet.

bioMSAR was not available when Maersk carried out the original trials, so as well as getting the Leandra ready for the trials, there need to be further tests on bioMSAR. In December 2022, Wärtsilä Services Switzerland carried out optical combustion and engine wear tests of bioMSAR. The optical combustion test demonstrated that bioMSAR combustion was similar to MSAR. The extended fuel injection test evaluated the wear and fatigue of components in contact with bioMSAR over a prolonged period (over 250 hours). Based on the results of these tests, Wärtsilä recommended a further hazard identification and operability (HAZOP) study to assess feasibility and safe operability prior to use on a two-stroke Wärtsilä engine. Management expects that these tests will be completed in Q2 CY23.

The new LONO tests will require 25,000 tonnes each of bioMSAR and MSAR, which will be manufactured by a third-party who will sell the fuel to MSC, with Quadrise supplying the additives and IP required to make the fuel. Management has yet to complete discussions, which are still ongoing, with third-party fuel suppliers for the production of the fuels for the vessel trials.

Quadrise is also working on a ‘Blend-on-Board’ solution for the production of MSAR or bioMSAR emulsions on vessels. This may be tested under the MSC agreement or with new marine clients that the company is approaching. Aquafuel in the UK has been carrying out tests using bioMSAR and other fuel/biofuel formulations for the Blend-on-Board solution. The results from this activity are expected in Q2 CY23.

Industrial applications with partner in Morocco

Quadrise is working with a Moroccan industrial client, which is considering using MSAR and bioMSAR as a substitute for heavy fuel oil (HFO) to generate power at some of its operations. Quadrise successfully completed a pilot trial at one of the partner’s sites (site A) in Morocco in October 2020. A follow-up industrial-scale trial at a different site (site B) owned by the same group is still delayed from Q1 CY21, initially because of a combination of site access restrictions related to COVID-19 and an internal management reorganisation at the client, which held up signature of a new material transfer and cooperation agreement until May 2022. The signing of this agreement cleared the way for the industrial-scale trial to take place. After a couple of months’ delay caused by global electronic component shortages, which meant that a new MSAR manufacturing unit was not able to start producing fuel for the trial when scheduled, both types of fuel were manufactured and sent to Morocco. However, while the bioMSAR arrived at the client’s site in December 2022, the MSAR was held up in Moroccan customs and did not reach the client’s site until the end of February. The trial equipment is now at the site as well, which has allowed Quadrise to complete the site engineering set-up. The company is now finalising the trial schedule, which has to be integrated with the client’s production schedule, and anticipates that fuel trials will commence in April, with the results available shortly thereafter.

Once the trial has completed, Quadrise will provide the client with a written report on the efficacy of using MSAR and bioMSAR. Provided that the client’s stated parameters regarding fuel performance and product quality are met, the parties will enter into discussions regarding a potential commercial supply agreement, which could potentially be signed in H2 CY23 (H1 CY23 guidance in January), ahead of commercial supply later in the calendar year. An industrial demonstration test at site A, which will be covered by a further agreement, is contingent on the results of the tests at site B.

Converting oil from oil sands in Utah

In April 2022, Quadrise signed a phased commercial development agreement with energy services company Valkor Technologies to commercialise MSAR and bioMSAR technology at Valkor’s projects in Utah. Valkor has equity stakes in multiple heavy oil projects in Utah including Greenfield Energy, Petroteq Energy and Heavy Sweet Oil LLC. The agreement provides a framework for the potential delivery of commercial revenues from bioMSAR/MSAR manufactured using oil from one or more of these projects. For several months ending in August 2022, Valkor carried out an extensive core sampling programme to accurately define the recoverable reserves from surface oil sands and sub-surface heavy oil in Utah. It also worked with partners to optimise the solvent extraction process for extracting oil from the sand. Valkor is still waiting for drilling permits for four pilot wells, which it hopes to receive in Q2 CY23 (Q4 CY22 guidance in October), enabling it to extract its first oil as soon after that as the weather permits. Some of this oil will then be used by Quadrise for on-site trials converting oil to bioMSAR and MSAR during H2 CY23. We note that Quadrise has already demonstrated it can convert oil from this area into MSAR and bioMSAR, so this step should involve working out the optimal process for converting the oil rather than the overall viability of conversion.

The two parties are currently finalising commercial terms for an MSAR and/or bioMSAR licence and supply agreement with the aim of concluding discussions in Q2 CY23 (Q1 CY23 guidance in January). Signing this agreement would potentially trigger the receipt of licence revenues and of Quadrise supplying Valkor with equipment for manufacturing emulsion fuel in Utah ahead of potentially receiving royalty revenues later in the calendar year as Valkor starts to extract oil and convert it to low-sulphur variants of bioMSAR and/or MSAR.

bioMSAR: Developing variants for the longer term

At present bioMSAR is made from a mixture of renewable glycerine, oil residues, water and specialist surfactants from Nouryon, so there is a risk that commercial volumes of bioMSAR may be restricted in the longer term by the availability of glycerine. In July 2022, Quadrise announced a joint development agreement with biofuel specialist Vertoro, under which the two companies are investigating the use of Vertoro’s advanced crude sugar oil, which is a by-product of its process for extracting lignin from waste woody biomass, as a cost-effective supplement or alternative to glycerine. The first fuel resulting from this initiative is currently being tested on a diesel engine at Aquafuel, which intends to release the results of the tests early in Q2 CY23. The costs of this initiative are currently being supported by the EU Innovation Fund. In addition, Quadrise is continuing to work on a net zero variant of bioMSAR with a number of renewable fuel counterparties. Management aims to be able to offer a net zero biofuel by 2030.

Valuation: Modest adoption transformational

Exhibit 1: Possible financial implications for Quadrise from different MSAR adoption scenarios

Power market

Number of MSAR manufacturing units

2

3

4

6

Production capacity (HFO equivalents Mtpa)

0.5

0.7

0.9

1.4

Production capacity (HFO equivalents kpbd)

8.8

13.2

17.5

26.3

% global HFO market

0.1%

0.2%

0.2%

0.4%

Revenues – licence model (US$m)

22.9

33.6

44.3

67.2

EBITDA attributable to projects – licence model (US$m)

4.9

7.3

9.6

14.5

Revenues – tolling model (US$m)

32.2

49.9

67.7

101.2

EBITDA attributable to projects – tolling model (US$m)

1.5

7.4

13.4

16.1

Capex – tolling model (US$m)

(9.8)

(16.8)

(23.8)

(37.8)

Marine market

Number of vessels using MSAR

18

27

36

54

% MSC fleet

2.5%

3.7%

5.0%

7.5%

Revenues – licence model (US$m)

35.9

53.0

70.2

106.1

EBITDA attributable to projects – licence model (US$m)

5.4

7.9

10.4

15.8

Revenues – tolling model (US$m)

43.3

66.6

89.9

134.4

EBITDA attributable to projects – tolling model (US$m)

0.1

5.3

10.5

11.8

Capex – tolling model (US$m)

(9.8)

(16.8)

(23.8)

(37.8)

Source: Edison Investment Research based on company data

As Quadrise has yet to generate commercial revenues, its value resides in the potential future cash flows generated from volume production of MSAR and bioMSAR. Since there is substantial uncertainty on when the various projects Quadrise is working on with its partners will progress to commercialisation, precluding the preparation of estimates, we present a high-level scenario analysis based on data from the company, which we understand is derived from the numerous detailed case studies it has carried out for prospective clients. This shows potential revenues, EBITDA and capex requirements attributable to projects for various levels of adoption by global refineries and penetration of MSC’s shipping fleet. We note that minimal capex is required for projects where MSAR technology is installed on a licensing basis, although the potential profit and risk is substantially less than if Quadrise were manufacturing fuel on a toll basis (ie charging a fee per tonne of MSAR and bioMSAR manufactured as it did for the production of fuel for the Maersk trials). We expect that Quadrise will form a separately financed joint venture with a partner for projects involving production on a tolling basis, thus avoiding substantial investment in capex and minimising shareholder dilution.

Exhibit 1 shows that adoption across only 8% of MSC’s global fleet of around 700 vessels including chartered ships could generate around $106m in licence revenues and $15.8m EBITDA and be transformational for Quadrise. The other two projects closest to commercialisation are smaller. Commercial adoption by the Moroccan partner would require the output from one MSAR manufacturing unit (MMU), ie c 2–5kbd. This would be only part of the output from a single refinery such as the Cepsa site, which produced MSAR for the Maersk trial and has an output of 240kbd. The projected output from extraction of oil and oil sands in Utah is 3–10kbd for each site. In our opinion, adoption of MSAR in any one of the projects closest to commercialisation would encourage multiple customers to use the fuel, which could potentially support profits beyond the upper range of our analysis.

Exhibit 2: Financial summary

£000s

2019

2020

2021

2022

Year end 30 June

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

22

0

17

75

EBITDA

 

 

(2,780)

(3,006)

(2,752)

(2,671)

Operating Profit (before amort. and except.)

 

 

(3,010)

(3,178)

(2,887)

(2,791)

Amortisation of acquired intangibles

0

0

0

0

Exceptionals

0

(1,199)

(1,266)

(13)

Share-based payments

(154)

(474)

(303)

44

Reported operating profit

(3,164)

(4,851)

(4,456)

(2,760)

Net Interest

(3)

(139)

46

(2)

Profit Before Tax (norm)

 

 

(3,013)

(3,317)

(2,841)

(2,793)

Profit Before Tax (reported)

 

 

(3,167)

(4,990)

(4,410)

(2,762)

Reported tax

184

147

150

164

Profit After Tax (norm)

(2,829)

(3,170)

(2,691)

(2,629)

Profit After Tax (reported)

(2,983)

(4,843)

(4,260)

(2,598)

Minority interests

0

0

0

0

Net income (normalised)

(2,829)

(3,170)

(2,691)

(2,629)

Net income (reported)

(2,983)

(4,843)

(4,260)

(2,598)

Average Number of Shares Outstanding (m)

888.7

982.8

1,175.4

1,406.9

EPS - normalised (p)

 

 

(0.32)

(0.32)

(0.23)

(0.19)

EPS - diluted normalised (p)

 

 

(0.32)

(0.32)

(0.23)

(0.19)

EPS - basic reported (p)

 

 

(0.34)

(0.49)

(0.36)

(0.18)

Dividend per share (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

3,654

3,506

3,384

3,322

Intangible Assets

2,924

2,924

2,924

2,924

Tangible Assets

730

582

460

398

Investments & other

0

0

0

0

Current Assets

 

 

1,396

2,766

7,279

4,703

Stocks

61

61

61

0

Debtors

169

213

117

103

Cash & cash equivalents

1,060

2,380

7,006

4,423

Other

106

112

95

177

Current Liabilities

 

 

(288)

(2,243)

(276)

(262)

Creditors

(288)

(198)

(276)

(262)

Tax and social security

0

0

0

0

Short term borrowings

0

0

0

0

Convertible securities

0

(2,045)

0

0

Long Term Liabilities

 

 

0

0

0

0

Long term borrowings

0

0

0

0

Other long term liabilities

0

0

0

0

Net Assets

 

 

4,762

4,029

10,387

7,763

Minority interests

0

0

0

0

Shareholders' equity

 

 

4,762

4,029

10,387

7,763

CASH FLOW

Op Cash Flow before WC and tax

(2,780)

(3,072)

(2,752)

(2,671)

Working capital

(77)

(140)

191

(21)

Exceptional & other

130

65

7

5

Tax

184

147

150

164

Net operating cash flow

 

 

(2,543)

(3,000)

(2,404)

(2,523)

Capex

(24)

(24)

(29)

(58)

Acquisitions/disposals

0

0

0

0

Net interest

(3)

1

46

(2)

Equity financing

1,401

2,343

6,513

0

Dividends

0

0

0

0

Net Cash Flow

(1,169)

(680)

4,126

(2,583)

Opening net debt/(cash)

 

 

(2,229)

(1,060)

(2,380)

(7,006)

FX

0

0

0

0

Other non-cash movements

0

2,000

500

0

Closing net debt/(cash)

 

 

(1,060)

(2,380)

(7,006)

(4,423)

Source: Company data

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This report has been commissioned by Quadrise and prepared and issued by Edison, in consideration of a fee payable by Quadrise. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by Quadrise and prepared and issued by Edison, in consideration of a fee payable by Quadrise. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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United Kingdom

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