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Financials

Third Quarter Results Financial Statement And Related Announcement 2018

Financials Archive

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Statements of Comprehensive Income

Statements of Financial Position

Overview

Review of Statement of Comprehensive Income

Breakdown by business segments

Three Months ended 30 September 2018

Nine Months ended 30 September 2018

Continuing Operations

Revenue

Total revenue for the Group for continuing operations decreased by 71.9% from RM1.5 million in 3Q2017 to RM0.4 million in 3Q2018. For 9M2018, total revenue for the Group decreased by 46.0% to RM2.0 million from RM3.7 million in 9M2017. This decrease in revenue for 3Q2018 and 9M2018 was mainly due to the Asset Integrity Management Sector ("AIMS") continuing to experience reduced business activities from the prolonged downturn in the upstream oil and gas industry.

Gross Profit

The Group's gross profit for 3Q2018 declined by 61.6% to RM0.2 million from RM0.6 million in 3Q2017. The Group's gross profit for 9M2018 decreased by 55.1% to RM1.2 million from RM2.7 million for 9M2017. The reduced gross profit for 3Q2018 and 9M2018 was due to AIMS' reduced business activities from the prolonged downturn in the upstream oil and gas industry.

The Group's gross profit margin for 3Q2018 improved to 60.0% compared to 43.9% in 3Q2017 due to a higher proportion of contribution from the Group's proprietary marine growth control products. Similar to 3Q2018, gross profit margin for 9M2018 was maintained at 60.2%, though this was lower than the gross profit margin of 72.5% for 9M2017. The decrease in gross profit margin in 9M2018was due to an increase in gross profit contribution from certain non-proprietary AIMS business including Oxifree thermoplastic corrosion protection in 9M2018 compared to 9M2017.

Other Operating Income

The Group's other operating income for 3Q2018 decreased by RM1.0 million to RM0.1 million from RM1.1 million for 3Q2017. The other operating income for 3Q2018 came principally from property rental income whereas in comparison, other operating income for 3Q2017 came mainly from one-off items including: (i) a reversal of vendor payables and accruals of RM0.8 million due to a renegotiation of contract terms; (ii) write-back of RM0.2 million in sales commission that was previously over-provided; and (iii) a RM0.1 million gain on disposal of property plant and equipment.

The Group's other operating income for 9M2018 decreased by RM1.5 million to RM0.4 million from RM1.9 million for 9M2017. Other operating income for 9M2018 was mainly contributed by: (i) rental income of RM0.2 million; (ii) gain on disposal of property plant and equipment of RM0.1 million; and (iii) write back of property plant and equipment of RM0.1 million. In comparison, other operating income for 9M2017 was mainly contributed by: (i) a reversal of vendor payables and accruals of RM1.2 million due to a renegotiation of contract terms and close-out of projects with over-accruals; (ii) a write back of allowance for doubtful receivables of RM0.2 million due to the settlement of a long outstanding invoice; (iii) write-back of RM0.2 million in sales commission that was previously over-provided; and (iv) rental income of RM0.2 million.

Exchange Loss/Gain

The Group recorded an exchange loss of RM0.4 million in 3Q2018 compared to a marginal exchange loss of RM18 thousand in 3Q2017. For 9M2018, the Group recorded an exchange loss of RM0.7 million compared to an exchange gain of RM1.1 million in 9M2017. The exchange loss for both 3Q2018 and 9M2018 was mainly due to (i) the depreciation of the Indonesia Rupiah for an Indonesian subsidiary which had liabilities denominated in US Dollar and Malaysian Ringgit; and (ii) depreciation of the Malaysian Ringgit for Malaysian subsidiaries which had liabilities denominated in US Dollar.

Administrative Expenses

Administrative expenses in 3Q2018 reduced by 16.5% to RM2.6 million from RM3.1 million in 3Q2017, whilst administrative expenses in 9M2017 reduced by 20.5% to RM7.6 million from RM9.6 million in 9M2017. The lower administrative expenses were mainly due to cost reduction initiatives undertaken by the Group including: (i) reducing manpower headcount and salary cuts; and (ii) disposal of non-essential fixed assets to reduce depreciation expenses. The reduction in depreciation expenses of 44.3% to RM0.3 million in 3Q2018 and of 40.4% to RM0.9 million was mainly due to the disposal of a corporate office at Level 22 of PJX-HM Shah Tower in Petaling Jaya, Selangor, Malaysia. Amortisation of intangible assets decreased by 32.7% to RM35 thousand in 3Q2018 and by 34.0% to RM105 thousand in 9M2018 mainly due to the full impairment of a license for corrosion control technology no longer in use.

Selling and Distribution Costs

Selling and distribution costs represent commissions payable to agents for AIMS sales made for the Group. 3Q2018 had a sales and distribution cost of RM41 thousand compared to a positive figure of RM33 thousand for 3Q2017 due to a reversal of an over-accrual of sales and distribution costs. Sales and distribution cost of RM57 thousand for 9M2018 was a 64.6% reduction from the RM161 thousand for 9M2017, which was reflective of reduced business activities of the Group in the upstream oil and gas industry.

Other Operating Expenses

Other operating expenses for 3Q2018 increased to RM63 thousand from RM12 thousand in 3Q2017 mainly due to a RM45 thousand write-down of inventory value. Other operating expenses for 9M2018 increased to RM141 thousand from RM19 thousand in 9M2017 mainly due to a writing-off of inventory of RM78 thousand and the aforementioned write-down of inventory value of RM45 thousand.

Share of Results of Associates

Share of results of associates was a marginal loss of RM3 thousand for 3Q2018 as compared to a gain of RM0.3 million for 3Q2017. For 9M2018, share of results of associates was a marginal loss of RM25 thousand compared to a loss of RM0.5 million for 9M2017. The lower loss for 9M2018 is due to an increase in business activities of an AIMS associate, IEV (Malaysia) Sdn. Bhd. for the period under review.

Finance Costs

Finance costs for 3Q2018 and 3Q2017 remained at the same level of about RM145 thousand whereas finance cost for 9M2018 of approximately RM440 thousand was a 4.4% reduction from RM460 thousand for 9M2017. The gradual reduction of finance cost is in line with the gradual repayment of borrowings.

Loss Before Tax

For reasons set out above, the Group recorded a loss before tax of RM2.9 million for 3Q2018 from its continuing operations compared to a loss before tax of RM1.2 million for 3Q2017. For 9M2018 the Group recorded a loss before tax of RM7.3 million, which was a 47.7% increase from 9M2017's loss before tax of RM5.0 million.

Discontinued Operations

Mobile Natural Gas Sector ("MNGS")

Due to lower world energy prices and a challenging mobile natural gas business landscape in Indonesia, the Group's MNGS has been reporting losses since the financial year ended 31 December 2015 and the Group has previously communicated its intention to exit from the mobile natural gas business. As announced on 16 October 2018, 18 October 2018 and 29 October 2018, the Group is seeking shareholders' approval in an extraordinary general meeting for the disposal of 630,910 ordinary shares, representing 95% of the total issued and paid-up share capital of PT. IEV Gas to PT. Digas Energi Semesta for a total consideration of Indonesia Rupiah 960 million. With the disposal of this loss-making subsidiary, the Group would then exit from the mobile natural gas business in Indonesia.

Due to the expiry of a major gas sales agreement during 2Q2018, MNGS revenue for 3Q2018 declined by 23.3% to RM5.3 million from RM6.9 million for 3Q2017. Mainly for that same reason, MNGS revenue for 9M2018 declined by 24.3% to RM17.6 million from RM23.3 million for 9M2017. Due to lower energy prices, heightened risks from a changed business landscape and a shrinking compressed natural gas ("CNG") market, MNGS suffered a gross loss of RM133 thousand in 3Q2018 from a marginal gross profit of RM76 thousand in 3Q2017. Although MNGS generated a gross profit for first halfyear of FY2018, that was offset by the gross loss in 3Q2018 resulting in gross loss of RM15 thousand for 9M2018. In comparison, there was a larger gross loss of RM0.7 million in 9M2017 due mainly to: (i) the closure of a major toll bridge for structural repairs which forced the Group's CNG delivery vehicles to a make a long detour resulting in higher operating costs; (ii) non-renewal of a CNG supply contract; and (iii) reduced CNG pricing.

Renewable Energy Sector ("RES")

As stated previously, the Group has decided to exit from the rice-husk biomass business in Vietnam. The Vietnam biomass plant ("MK-1 Plant") is leased to a third party for a two-year period with an option to purchase at the end of the lease period. With the entering into a lease arrangement, the related building and equipment previously listed in property plant and equipment and long-term land use rights have been reclassified as finance lease receivable. On 1 June 2018 the Group entered into a Sales and Purchase Agreement with BSB Investment and Development Co. Ltd. ("BSB") to effect the purchase and complete the transfer of the MK-1 Plant and its related assets during FY2018.

The other operating income under discontinued operations of RM0.3 million for 3Q2018 and RM0.5 million for 9M2018 was mainly for lease income related to the lease of the MK-1 Plant. Other operating expenses of RM0.8 million for 9M2018 was for (i) RM0.5 million loss on disposal of property plant and equipment related MK-1 Plant's briquetting system; and (ii) RM0.3 million loss on disposal of finance lease asset in relation to the disposal of MK-1 Plant. The revenue generated for 9M2017 of RM0.37 million was from the sale of briquettes which was produced in the previous financial year of FY2016. The price of rice husk, the material required to produce briquettes, has remained high during the harvest seasons in 9M2017, making it uneconomical to produce briquettes. For 9M2017 RES recorded a gross loss of RM89 thousand due to the high cost of rice husk as a feedstock and the capping of briquette sales price due to competition from alternate fuels.

Exploration and Production Sector ("EPS")

The Group had on 8 January 2018 received a letter from PT Pertamina EP ("PEP") terminating the Operations Cooperation Agreement ("Agreement") in the Pabuaran Operation Area effective 2 January 2018 and has made a claim on the disbursement of a bank guarantee amounting to US$2.34 million. The said letter was served on the basis of PT IEV Pabuaran KSO, a subsidiary of the Group not fulfilling certain conditions and obligations of the Agreement including to spend on a US$18.6 million work program by 11 December 2017. The Group has completed the process of handing over to PEP the Pabuaran Operation Area and its associated materials and documents. With the termination of the Agreement, the Group will exit from EPS. To date, EPS has not generated any revenue.

In aggregate for MNGS, RES and EPS, administrative expenses for 3Q2018 reduced to RM0.7 million from RM1.2 million for 3Q2017, whilst for 9M2018, administrative expenses reduced to RM2.2 million from RM4.0 million for 9M2017. The significant reduction in administrative expenses stem largely from the winding down of operations in RES and EPS including the retrenchment of employees. MNGS also saw a 13.5% reduction in administrative costs for 9M2018 compared to 9M2017 due mainly to an asset impairment provided for in FY2017 resulting in reduced depreciation expenses for FY2018.

In aggregate MNGS, RES and EPS recorded a loss of RM1.0 million for 3Q2018 and a loss of RM2.9 million for 9M2018, compared to a loss of RM1.1 million for 3Q2017 and a loss of RM4.8 million for 9M2017.

Review of Statement of Financial Position

Current Assets

Trade receivables decreased by RM5.2 million to RM12.6 million as at 30 September 2018, from RM17.8 million as at 31 December 2017, due mainly to the settlement of AIMS project invoices. The current portion of other receivables and prepayments increased by RM0.3 million to RM3.9 million as at 30 September 2018 from RM3.6 million as at 31 December 2017, with the increase mainly due to the net settlement sum receivable from the disposal of a corporate office located at Level 22 of PJX-HM Shah Tower and offset by the reclassification of PT IEV Gas' other receivables and prepayments as assets held for sale. The current portion of the finance lease receivable as at 30 September 2018 rose to RM4.9 million from RM65 thousand as at 31 December 2018. This was due to the non-current portion of finance lease receivable of RM5.1 million as at 31 December 2017 being reclassified as being current after the Group's subsidiary, IEV Vietnam LLC, entered into a transfer agreement with BSB of Vietnam to dispose of the MK-1 Plant during FY2018 instead of at the end of the 2-year lease. Inventories values reduced to RM2.6 million as at 30 September 2018 from RM3.1 million 31 December 2017 mainly due to: (i) the reclassification of PT IEV Gas' inventories as assets held for sale; and (ii) the write down and write off of approximately RM0.1 million inventory values.

Non-Current Assets

Net carrying value of property, plant and equipment decreased by RM5.3 million to RM1.9 million as at 30 September 2018 from RM7.2 million as at 31 December 2017. This was due to: (i) depreciation charges of RM2.3 million; (ii) reclassification of PT IEV Gas' property plant and equipment of RM3.2 million to assets held for sale; (iii) disposal of property plant and equipment of RM0.5 million; and partially offset by capital expenditure of RM0.7 million for operational equipment for various subsidiaries. Net book value of intangible assets decreased to RM0.2 million as at 30 September 2018, from RM0.3 million as at 31 December 2017, due mainly to amortisation charges during the financial period 9M2018.

Non-current portion of other receivables and prepayments reduced to RM9 thousand as at 30 September 2018 from RM0.8 million as at 31 December 2017 due mainly to the reclassification of PT IEV Gas' other receivables and prepayments as assets held for sale. The non-current portion of finance lease receivable, which was RM5.1 million as at 31 December 2017 has been reclassified as current as the Group had entered into a transfer agreement with BSB of Vietnam for the disposal of the MK-1 Biomass Plant during FY2018.

Capital and Reserves

Currency translation reserve increased by RM0.3 million to RM0.7 million as at 30 September 2018 from RM0.4 million as at 31 December 2017, due mainly to the appreciation of the US Dollar against the Malaysian Ringgit and other regional currencies during the period in review.

Accumulated losses for the Group increased by RM10.2 million to RM102.9 million as at 30 September 2018 from RM92.7 million accumulated losses as at 31 December 2017.

Non-Current Liabilities and Current Liabilities

Bank borrowings decreased by RM6.6 million to RM3.0 million as at 30 September 2018 from RM9.6 million as at 31 December 2017, mainly due to the settlement of bank loan related to the disposal of an office at Level 22 PJX-HM Shah tower. Finance leases was nil as at 30 September 2018 from RM0.2 million as 31 December 2017 due mainly to the reclassification of PT IEV Gas' finance leases to liabilities held for sale.

Trade payables decreased by RM4.3 million to RM15.2 million as at 30 September 2018 from RM19.5 million as at 31 December 2017, due mainly to (i) reclassification of PT IEV Gas' trade payables to liabilities held for sale; and (ii) settlement of AIMS related project vendors. Other payables as at 30 September 2018 increased by RM2.7 million to RM17.4 million as compared to other payables as at 31 December 2017 of RM14.7 million. The increase was mainly due to deposits and progress payments received for the sale and disposal of the MK-1 Plant in Vietnam.

The Group has negative working capital of RM6.0 million as at 30 September 2018 and RM6.3 million as at 31 December 2017. This negative working capital position was due to the provision for termination liabilities of RM7.7 million recorded under other payables arising from the discontinuation of the Pabuaran KSO recognized at the end of FY2017. Barring any unforeseen circumstances, the Group should be able to meet its working capital commitments for the next 12 months in view of the Group's estimated earnings for FY2018, proceeds from the sale of the corporate office unit in Malaysia and biomass plant in Vietnam within FY2018, settlement negotiations of termination liabilities and potential corporate exercises.

The Group is in a net liability position of RM4.3 million as at 30 September 2018 due mainly to comprehensive loss of RM9.9 million for 9M2018 and provision for termination liabilities of RM7.7 million in relation to the discontinuation of the Pabuaran KSO. Barring any unforeseen circumstances, the Group should be able to operate as a going concern for the next 12 months in view of the Group's estimated earnings for FY2018, planned disposal of the loss-making mobile natural gas business in Indonesia, settlement negotiations of termination liabilities and potential corporate exercises.

Review of Statement of Cash Flows

For 3Q2018 the Group's operating activities used a net cash of RM4.7 million. This was mainly due to: (i) an operating loss before working capital changes of RM2.9 million; (ii) increase in operating receivables of RM1.2 million; (iii) increase in long term other receivables and prepayments of RM0.4 million; (iv) decrease in operating payables of RM0.3 million; (v) increase in inventories of RM0.1 million and (vi) interest payments of RM0.1 million. These were partially offset by a decrease in amounts due from an associate of RM0.3 million. Investing activities for 3Q2018 generated net cash of RM8.8 million which was from the disposal of a corporate office for RM9.2 million and was partially offset by the purchase of property, plant and equipment of RM0.3 million. Financing activities for 3Q2018 used RM6.5 million for the settlement of a bank borrowing associated with the disposal of a corporate office.

For 9M2018, the Group used net cash of RM3.4 million in its operating activities. This was mainly due to: (i) an operating loss before working capital changes of RM6.8 million; (ii) interest payments of RM0.4 million; (iii) increase in long term other receivables and prepayments of RM0.4 million and (iv) payment of long term employment benefits of RM0.1 million; which were partially offset by (i) an increase in operating payables of RM3.0 million; (ii) a decrease in operating receivables of RM0.9 million; and (iii) decrease in amount due from associate of RM0.4 million. Net cash generated from investing activities for 9M2018 of RM8.7 million was for disposal of a corporate office for RM9.2 million which was partially offset the by the net acquisition of property, plant and equipment of RM0.6 million. Net cash used in financing activities of RM6.7 million for 9M2018 was for: (i) the settlement of a bank loan of RM6.6 million associated with the disposal of a corporate office; and (ii) the repayment of finance lease obligations of RM0.1 million.

As a result of the above and after considering currency translation differences, the cash and cash equivalents balance was RM2.2 million as at 30 September 2018, as compared to RM4.4 million as at 30 September 2017.

Commentary

Oil price rising trend has reversed and fallen into the bear market, with Brent oil price tumbled 15.0 % since its peak in early October 20181, due to deteriorating demand and rising supply from key oil producers. A key OPEC meeting on November 11th 2018 will decide if OPEC will consider cutting output next year2, making the second production U-turn in just a few months. This signals the level of uncertainty in a market that experiences huge shifts in supply and demand.

The Group maintains its course in building a technology-centric organisation that offers advanced technologies and integrated engineering solutions that generates time and cost savings to its customers worldwide. The Asset Integrity Management (AIM) services focus on three key areas namely inspection, corrosion control and structural integrity. Over the last 12 months, the Group has built a comprehensive suite of inspection and corrosion control solutions through M&A and strategic alliances with selected technology providers, and is on track to become a Centre for Disruptive Technologies with a distribution network throughout Asian region. Besides providing specific inspection technologies to meet challenging inspection needs such as in-service inspection of tanks and non-piggable pipelines, the Group will also develop its total inspection capabilities by offering innovative deployment methods that deliver advanced inspection technologies.

In addition to existing steel structures in upstream and downstream facilities, the Group is also studying the feasibility of offering similar AIM solutions to concrete structures in South East Asia in collaboration with its technology partners. This could potentially lead to the market of concrete infrastructures and buildings. The feasibility study on new foundation engineering solutions to support the construction industry through collaboration with EXT Co., Ltd. of Korea, is progressing and scheduled to be completed by mid 2019.

Besides AIMS business, the Group continues to receive contract award for decommissioning studies and pursues new Transportation and Installation (T&I) turnkey contracts with its partner, Heerema Marine Contractors in Malaysia.

Documentation for the sale of both the MK-1 Biomass Plant and the office at PJX are in progress and the Group has received partial payment of these assets as per the terms and conditions of the respective sales and purchase contract.

The Group is divesting the MNGS operation in Indonesia and exiting the MNGS sector, as it is no longer commercially viable in the low oil price environment. An extraordinary general meeting was held today and the shareholders have approved the disposal of PT IEV Gas.

1 OPEC Considers 2019 Oil Production Cuts in Yet Another U-Turn – Bloomberg.com 9 November 2018

2 OPEC Fears Another Downturn In Oil, OilPrice.com 9 November 2018

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