ABL Group — Interim / Quarterly Report 2016

Oct 27, 2016

Interim report Q3 2016

HIGHLIGHTS AND KEY FIGURES Q3 2016

HIGHLIGHTS

• Revenues of USD 6.4 million in Q3 2016 vs USD 9.5 million in Q3 2015
• Operating loss (EBIT) of USD 0.7 million in Q3 2016 vs EBIT loss of USD 1.4 million in Q3 2015
• Low activity level due to adverse weather conditions offshore India, vacation months and weak market conditions in the oil and gas market
• Cost efficiency measures continued to take effect throughout the quarter
• Billing ratio of 73% in Q3 2016, down from 75% in Q2 2016
• Order backlog at approximately USD 8.5 million
• OWC maintained high activity within offshore wind market and secured new contract wins
• ADLER Solar results were negatively impacted by lack of larger projects and introduction of new services
• Cash balance at the end of quarter of USD 11.1 million vs USD 11.7 million a quarter earlier
• Continued solid HSE performance and ISO 18001 compliant
• 161 employees(2) vs 175 a quarter earlier

"The oil and gas market remains weak and we must continue our path to improve our operations and cost competitiveness. The measures implemented will continue to take effect throughout 2016 and into 2017. The contract visibility remains short term.

Being adaptive and having the ability to respond quickly to market changes is the key to manage the business successfully. The remainder of 2016 and 2017 will be challenging for the oil and gas industry" says Mr David Wells, CEO of Aqualis ASA."

KEY FIGURES

Amount in USD thousands (except shares, backlog, employees)	Q3 16	Q3 15	YTD 16	YTD 15	FY 2015
FINANCIAL
Total revenues	6 364	9 511	21 380	32 243	40 998
Operating profit (loss) (EBIT)	(698)	(1 415)	(3 006)	(929)	(2 908)
Operating profit (EBIT) adjusted(1)	(698)	(1 415)	(3 006)	(929)	(1 487)
Profit (loss) after taxes	(385)	(1 463)	(3 623)	(469)	(2 198)
Profit (loss) after taxes adjusted(1)	(385)	(1 463)	(3 623)	(469)	(777)
Basic earnings per share (USD)	(0,01)	(0,03)	(0,09)	(0,01)	(0,05)
Average number of outstanding shares (thousands)	42 293	43 461	42 559	43 281	43 337
Cash and cash equivalents at the end of the period	11 091	18 611	11 091	18 611	14 864
OPERATIONAL
Order backlog at the end of the period (USD million)	8,5	15,1	8,5	15,1	10,7
Employees at the end of the period(2)	161	236	161	236	220
Billing ratio(3)	73 %	70 %	72 %	76 %	75 %

(1) Figures excluding impairment of goodwill of USD 1.4 million in FY 2015

(2) Includes contractors on 100% equivalent basis

(3) Billing ratio for technical staff including subcontractors. Excludes management, business development, admin support staff and temporary redundancies. Figure calculated as billable hours / net hours available. Net hours available excludes paid absence and unpaid absence. Figures excluding Adler Solar

THIRD QUARTER GROUP REVIEW

(Figures in brackets represent same period prior year or balance sheet date 2015. Certain comparative figures have been reclassified to conform to the presentation adopted for the current period.)

Group results

Total operating revenues decreased by 33% to USD 6.4 million in Q3 2016 (USD 9.5 million in Q3 2015). The decrease in revenues is due to further weakening of market conditions in the oil and gas sector, but mainly impacted by a reduced portfolio of long term construction monitoring contracts and reduced staff numbers.

Operating expenses decreased by 36% to USD 7.0 million in Q3 2016 (USD 10.9 million in Q3 2015). The reduction in operating expenses were due to the lower activity levels, less use of on-site subcontractors and the phase in of measures implemented to align the cost base with weaker market conditions.

EBIT amounted to a loss of USD 0.7 million in Q3 2016 (loss of USD 1.4 million in Q3 2015). The results for Q3 2016 were impacted by adverse weather conditions and vacation months.

The billing ratio for technical staff (including subcontractors) was 73% in Q3 2016 down from 75% in Q2 2016. It increased at the end of the quarter and was impacted by the fall in activity level during the summer months in Q3 2016. Progress has been made from the beginning of 2016 to improve the billing ratio across most of Aqualis' businesses.

Aqualis has taken steps to improve profitability throughout the quarter. The phase in of profitability measures will continue to take effect during the remainder of 2016.

Results from associated companies amounted to a loss of USD 0.1 million in Q3 2016 and relates to the investment in ADLER Solar. The results were impacted by a lack of larger projects, the introduction and marketing of new services such as repairs of ancillary components, damage management and retrofitting of old PV installations.

Net currency gain was USD 0.3 million in Q3 2016 (USD 0.0 million in Q3 2015) mainly represents unrealised gains on revaluation of USD bank accounts.

Loss after taxes for Q3 2016 of USD 0.4 million (loss of USD 1.5 million in Q3 2015).

Financial position and liquidity

At 30 September 2016, cash and cash equivalents amounted to USD 11.1 million. This compares with USD 11.7 million as of 30 June 2016. The decrease in the cash and cash equivalents is mainly due to the operating loss in the period. The company has no interest bearing debt.

Order backlog

The order backlog at the end of Q3 2016 was USD 8.5 million compared with USD 10.2 million at the end of Q2 2016. Services are shifting towards "call out contracts" which are driven by day-to-day operational requirements and not included in order backlog. Aqualis has won some larger marine and engineering contract awards covering both engineering, design and marine operations during Q3 2016.

Organisational development

At end of Q3 2016, Aqualis had 161 employees (full time equivalents, including contractors on 100% equivalent basis), down from 175 at the end of Q2 2016. The decrease in staff levels in Q3 2016 is related to reduction in specialist technical staff, administrative staff and the use of subcontractors.

Resource availability is no longer an issue in the current market with a surplus of experienced people actively seeking work.

Health, safety, environment and quality

Aqualis' HSEQ management system provides the framework to manage all aspects of our business. The management system is designed to ensure compliance with regulatory requirements, identify and manage risks and to drive continuous improvement in HSEQ performance. During Q3 2016 the company became ISO 18001 compliant. Aqualis has logged roughly 1.0 million man-hours without a lost time incident (LTI) since its incorporation.

Market update Oil and gas market

The activity level in the O&G market remains weak and most clients are under pressure to reduce both costs and headcount, with many asset owning client having significant equipment stacked and off contract. The service industry as a whole is more and more competitive with increasingly short term visibility and focus solely on cost.

The activity level was lower for most of our businesses and service lines in Q3 2016 due to the vacation months, the monsoon period offshore India and the weak market conditions in the oil and gas market. There are opportunities to win new business and the activity in the Middle East area increased at the end of Q3 2016 due to the resumption of the Indian offshore operations.

Aqualis maintain its' focus on supporting our clients with their day-to-day offshore operations given that capex related opportunities are generally weak, and to expand into other market niches.

Renewables

Offshore Wind Consultants (OWC) has maintained high activity level in Q3 2016 within the offshore wind market. Rate pressures and low margins are manifesting themselves as the industry is becoming competitive with new players. OWC continues to build and expand its client base with a number of good market opportunities.

The demand for ADLER Solar's services in the solar market have remained strong in Q3 2016, but skewed towards smaller projects with higher competition and lower margins. The financial results for ADLER Solar has been weak in 2016. ADLER Solar is implementing cost measures and repositioning its services to improve the profitability.

Outlook

Aqualis financial performance is primarily driven by activity in the global oil and gas markets and within European renewables.

In spite of some potential recent stability in oil prices, the overall demand for services from the O&G market is expected to remain weak. Oil companies continue to postpone new investments in spite of the substantial cost efficiencies that have been achieved across the industry. Nevertheless, there are still several opportunities that Aqualis continue to chase.

The activity level and demand visibility remains short term across the oil and gas market. The overall activity level in the market is expected to remain subdued for the rest of 2016 and in 2017. Conversely, we have seen some stability return to the market in Brazil where delayed projects have been resumed.

The activity in the offshore renewables market remain high and Northern Europe has a reasonable project pipeline predicted through to 2020. Market opportunities will be explored in other emerging offshore wind market such as China,Taiwan, and the US.

Solar industry analysts expect global PV demand in 2016 to grow by around 22%. Germany is mature market with 40 GW cumulative solar capacity at the end of 2015, representing 17% of the cumulative solar capacity globally, and it is expected to add 9 GW in new solar capacity from 2016 to 2020. The demand for ADLER Solar's services are expected to grow as the installed solar plants age and new solar plants are installed. ADLER Solar is implementing efficiency and cost measures that are phased in over the next quarters to improve its profitability.

Strong project execution, adaptability to market changes and demand, responsiveness, and a continued broadening of the client base provides the foundation for developing Aqualis going forward. Aqualis' greatest long term growth potential lies with its' ability to widen and strengthen the global client portfolio and client loyalty.

Resource planning and forecasting remains challenging due to the short term visibility and the dynamic market conditions in the oil and gas market. Aqualis' aims to break even in EBIT in Q4 2016 subject to current market outlook.

Oslo, 26 October 2016

The Board of Directors of Aqualis ASA

Condensed interim Financial Statements Q3 2016

Consolidated Statement of Income

Amounts in USD thousands	Note	Q3 16	Q3 15	YTD 16	YTD 15	FY 2015
Revenues	5	6 364	9 511	21 380	32 243	40 998
Total revenues		6 364	9 511	21 380	32 243	40 998
Payroll and payroll related expenses		(4 280)	(6 126)	(15 188)	(18 594)	(23 717)
Depreciation, amortisation and impairment	6	(48)	(129)	(178)	(526)	(2 027)
Other operating expenses		(2 631)	(4 671)	(8 691)	(14 052)	(17 965)
Total operating expenses		(6 959)	(10 926)	(24 057)	(33 172)	(43 709)
Share of net profit (loss) from associates	7	(103)	-	(329)	-	(197)
Operating profit (loss) (EBIT)	5	(698)	(1 415)	(3 006)	(929)	(2 908)
Finance income		2	5	17	19	28
Finance expenses		(2)	-	(3)	7	(45)
Net foreign exchange gain (loss)	4	326	19	(576)	684	1 419
Profit (loss) before taxes		(372)	(1 391)	(3 568)	(219)	(1 506)
Income tax expenses		(13)	(72)	(55)	(250)	(692)
Profit (loss) after taxes		(385)	(1 463)	(3 623)	(469)	(2 198)

Consolidated Statement of other Comprehensive Income

Amounts in USD thousands	Note Q3 16	Q3 15	YTD 16	YTD 15	FY 2015
Profit (loss) after taxes	(385)	(1 463)	(3 623)	(469)	(2 198)
Other comprehensive income
Currency translation differences	(216)	1 182	1 166	-	(4 543)
Income tax effect	-	-	-	-	(587)
Total comprehensive income	(601)	(281)	(2 457)	(469)	(7 328)
Attributtable to:
Equity holders of the parent company	(601)	(281)	(2 457)	(469)	(7 328)
Non-controlling interests	-	-	-	-	-
Earnings per share (USD): basic and diluted	(0,01)	(0,03)	(0,09)	(0,01)	(0,05)

Condensed interim Financial Statements Q3 2016

Consolidated Statement of Financial Position

Amounts in USD thousands	Note	30.09.2016	31.12.2015
ASSETS
Non-current assets
Equipment		215	371
Investment in associates	7	3 281	3 283
Deferred tax assets		15	14
Intangible assets	6	17 513	17 119
Total non-current assets		21 024	20 787
Current assets
Trade receivables	8	5 640	7 667
Other receivables		2 719	2 876
Cash and cash equivalents	4	11 091	14 864
Total current assets		19 450	25 407
Total assets		40 474	46 194
EQUITY AND LIABILITIES
Equity
Share capital		705	705
Treasury shares		(15)	-
Share premium		47 344	47 344
Other paid in capital		529	432
Retained earnings		(13 629)	(10 819)
Total equity		34 934	37 662
Non-current liabilities
Deferred tax liability		643	587
Total non-current liabilities		643	587
Current liabilities
Trade payables		1 486	1 128
Income tax payable		15	586
Other current liabilities		3 396	6 231
Total current liabilities		4 897	7 945
Total liabilities		5 540	8 532
Total equity and liabilities		40 474	46 194

Condensed interim Financial Statements Q3 2016

Consolidated Cash Flow Statement

Amounts in USD thousands	Note	Q3 16	Q3 15	YTD 16	YTD 15	FY 2015
Cash flow from operating activities
Profit (loss) before taxes		(372)	(1 391)	(3 568)	(219)	(1 506)
Non-cash adjustment to reconcile profit before tax to cash flow:
Estimated value of employee share options		17	40	97	215	254
Depreciation, amortisation and impairment		48	129	178	526	2 027
Share of net loss from associates	7	103	-	329	-	197
Changes in working capital:
Changes in trade receivables and trade creditors		524	621	2 385	(1 945)	(2 537)
Changes in other receivables and other current liabilities		(483)	72	(2 678)	468	693
Proceeds on realisation of customer contract		-	-	-	421	421
Interest received		(1)	(5)	(4)	(13)	(16)
Income tax paid		(87)	-	(649)	(178)	(142)
Effects related to currency unrealised		(403)	(761)	376	(1 476)	(1 646)
Cash flow (used in)/from operating activities		(654)	(1 295)	(3 534)	(2 201)	(2 255)
Cash flow from investing activities
Purchase of equipment		(1)	(86)	(8)	(287)	(293)
Interest received		1	5	4	13	16
Acquisition of associate		-	-	-	-	(3 480)
Cash flow (used in)/from investing activities		-	(81)	(4)	(274)	(3 757)
Cash flow from financing activities
Purchase of treasury shares		-	-	(368)	-	-
Proceeds from share issue		-	289	-	289	289
Cash flow (used in)/from financing activities		-	289	(368)	289	289
Net change in cash and cash equivalents		(654)	(1 087)	(3 906)	(2 186)	(5 723)
Cash and cash equivalents beginning period		11 686	20 397	14 864	21 790	21 790
Effect of movements in exchange rates		59	(699)	133	(993)	(1 203)
Cash and cash equivalents end period	4	11 091	18 611	11 091	18 611	14 864

Condensed interim Financial Statements Q3 2016

Consolidated Statement of Changes in Equity

						Foreign currency
Amounts in USD thousands	Share capital	Treasury shares	Share premium	Other paid in capital	Retained earnings	translation reserve	Total equity
Equity at 01.01.2016	705	-	47 344	432	3 145	(13 964)	37 662
Profit (loss) after taxes	-	-	-	-	(3 623)	-	(3 623)
Foreign currency translation reserve	-	-	-	-	-	1 166	1 166
Purchase of treasury shares	-	(15)	-	-	(353)	-	(368)
Share-based payment	-	-	-	97	-	-	97
Equity at 30.09.2016	705	(15)	47 344	529	(831)	(12 798)	34 934

Notes to the interim Financial Statements

Note 1: General information

Aqualis ASA ("the Company") is a Norwegian public limited liability company. The Company was established when the owners of Weifa ASA established it as a fully owned subsidiary and transferred the offshore business from Weifa ASA to this new company. The transfer of business within the group did not result in any change of economic substance and it is therefore not considered a business combination. Accordingly, the consolidated interim financial statements of Aqualis ASA are a continuation of the group values transferred from Weifa ASA in the spin-off of the marine and offshore business.

Weifa ASA transferred 100 percent of the shares in the subsidiaries Aqualis Offshore Ltd, Tristein AS and Offshore Wind Consultants Ltd to Aqualis ASA on the 24 July 2014. The ownership of the subsidiaries and the related excess values from the acquisitions of the subsidiaries are consequently continued in the group interim financial statement of Aqualis ASA.

The shares of the Company were listed on Oslo Stock Exchange on 13 August 2014. The Company and its subsidiaries (together the Aqualis Group/the Group) is a public company that offers energy consultancy services to the oil and gas, wind and solar sectors globally. The group, including associates employs experienced consultants across 22 offices in 15 countries worldwide.

Note 2: Basis of preparations and statements

Basis for preparation

The financial statements are presented in USD, rounded to the nearest thousand, unless otherwise stated. As a result of rounding adjustments, the figures in one or more row or column included in the financial statements and notes may not add up to the total of that row or column.

Statements and accounting policies:

The financial information is prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" ("IAS 34"), and according to the group accounting principles as described in this report. The accounting policies applied are consistent with those applied and described in the consolidated annual financial statements for 2015 which are available on www.aqualis.no. The interim financial statements have not been audited.

Note 3: Critical accounting estimates and judgements in terms of accounting policies

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosures of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

Assumptions and estimates are based on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the entity. Such changes are reflected in the assumptions when they occur. The items affected by estimates in Group accounts includes valuation of goodwill, purchase price allocations related to acquisitions and assessment of value of trade receivables.

Note 4: Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents are comprised of the following:

Amounts in USD thousands	30.09.2016	31.12.2015
Cash at banks	11,091	14,864
Total	11,091	14,864

Distributed in the following currency:

	Local		Local
Amounts in thousands	Currency	USD	Currency	USD
US Dollars (USD)	8,910	8,910	11,442	11,442
Norwegian Krone (NOK)	7,873	978	17,235	1,957
Other currencies		1,203		1,465
Total		11,091		14,864

Note 5: Segment information

Aqualis has one operating segment, which services the marine and offshore sector. This is the only business segment used for internal reporting. The table below shows operating revenues and profit for entities in different geographical areas.

Amounts in USD thousands	Q3 16	Q3 15	YTD 16	YTD 15	FY 2015
Revenues
Middle East	2,082	2,669	8,485	10,006	12,953
Far East	1,618	3,521	5,109	10,557	13,298
Europe	2,068	2,632	6,143	9,336	12,030
Americas	929	1,260	3,170	4,734	5,662
Eliminations	(333)	(571)	(1,527)	(2,390)	(2,945)
Total revenues	6,364	9,511	21,380	32,243	40,998
Operating profit (loss)
Middle East	(171)	(589)	(441)	(472)	(404)
Far East	(52)	103	(134)	1,002	709
Europe	-	(110)	(864)	688	768
Americas	(125)	(293)	(265)	(514)	(719)
Share of net income from associates	(103)	-	(329)	-	(197)
Corporate group costs	(226)	(486)	(818)	(897)	(933)
Eliminations	(21)	(40)	(155)	(736)	(2,132)
Total operating profit (loss)	(698)	(1,415)	(3,006)	(929)	(2,908)

Note 6: Intangible assets

	Customer
Amounts in USD thousands	contracts	Goodwill	Total
Cost
At 01.01.2016	547	18 540	19 087
Additions	-	-	-
Effect of movements in exchange rates	-	597	597
At 30.09.2016	547	19 137	19 684
Amortisation and impariment
At 01.01.2016	547	1 421	1 968
Impairment charge for the period	-	-	-
Effect of movements in exchange rates	-	203	203
At 30.09.2016	547	1 624	2 171
Net book value at 30.09.2016	-	17 513	17 513
Net book value at 31.12.2015	-	17 119	17 119

Note 7: Investment in associates

Aqualis acquired a 49.9% share in ADLER Solar Services GmbH ("ADLER Solar") on 29 October 2015. The investment is classified as an associate in which Aqualis has significant influence. The investment is accounted for through the equity method in the group financial statements.

In order to conclude on the classification of the investment, management has considered the relevant facts and circumstances including the ownership of shares, the composition of remaining shareholders, options to acquire further shares, composition of the Board of Directors and the decision-making processes related to relevant activities. Aqualis has an option right to acquire an additional 10.1% in ADLER Solar during the period 1 April 2017 through 31 March 2019.

Amounts in USD thousands (100%)	30.09.2016	31.12.2015	29.10.2015
Current assets	2 314	1 972	3 650
Non-current assets	1 268	1 003	958
Current liabilities	(2 799)	(1 350)	(2 452)
Non-current liabilities	(1)	(305)	(439)
Net assets	782	1 320	1 717

			29.10.15 to
Amounts in USD thousands (100%)	Q3 16	YTD 16	31.12.15
Revenue	3 270	10 088	1 481
Profit (loss) after taxes	(175)	(570)	(378)

Amounts in USD thousands (49.9%)	30.09.2016	31.12.2015	29.10.2015
Proportion of the Group's ownership interest in ADLER Solar	390	659	857
Goodwill	2 383	2 466	2 488
Deferred tax	(39)	(45)	(47)
Customer related assets	233	287	300
Effect of movements in exchange rates	314	(84)	-
Carrying amount of Group interest in ADLER Solar	3 281	3 283	3 598

Note 8: Trade receivables

The ageing of trade receivables at the reporting date was:

Amounts in USD thousands	30.09.2016	31.12.2015
Not overdue	2 155	3 608
Overdue 1-30	1 026	1 756
Overdue 31-60	542	648
Overdue 61-90	488	396
More than 90 days	1 429	1 259
Total	5 640	7 667

Note 9: Subsequent events

There are no significant events after balance sheet date.

Bleikerveien 17 1387 Asker Norway Tel: +47 416 00 100 www.aqualis.no