Year end report Scandinavian Enviro Systems AB (publ) January – December 2018

Rights issue adds capital of MSEK 84.5

N.B. The English text is an in-house translation of the original Swedish text. Should there be any disparities between the Swedish and the English text, the Swedish text shall prevail.

Q4 2018

Jan-December 2018 

Significant events after the end of the period

Change in strategy to become leading supplier of recovered carbon black (rCB)

During the first half of 2018, Enviro's board of directors – in collaboration with its management and external analysts – performed a study of the market, the company’s position, and its opportunities for growth going forward. The most important lessons learned were the disruptive potential of recovered carbon black in the USD 20 billion virgin carbon black market and the very high potential for profits held out by our plants. Those lessons prompted the board to change business model to adopt an aggressive position as the leading supplier of rCB in a rapidly growing market. The manifestation of this strategy will be for Enviro to enter as partial-owner in its future plants. The ownership share will vary depending on the market, the partners and financial capacity. The business model will generate multiple cashflows, which creates excellent growth conditions in what is a fast-growing market. The strategy will lead to an increase in Enviro’s cash flows from all the plants it establishes.

Adding SEK 84.5 million through a rights issue

In December, the company executed a rights issue to put in place the conditions for implementing the new strategy. The growth in the carbon black market and the increased interest in recovered carbon black means that the timing of our new strategy is optimal. The new capital will create the conditions required to be able to increase the company’s ownership gradually in future plants and this, in turn, means that the company can benefit from the profitability generated from the sale of recovered resources, which will provide the company with the ability to grow and expand in the long term. Irrespective of the relatively uncertain period in the stock markets, the results from the issue show that our presentation of our company and its opportunities is attractive to a broad range of investors. Because of the way the issue was structured – since warrant-holders are offered to subscribe for additional shares at a discount and on certain conditions ­– the opportunity exists for executing an additional capital injection in Q3 2019. In the meantime, our hope is that the company will have completed several initiatives until then, which will improve our ability to reach our strategic goals.

Major interest from North American markets

At year-end, Enviro signed a Memorandum of Understanding (MoU) with Earth Energy Recycling Ltd. in Texas. This is just one of the MoU’s Enviro has with prospective partners in the United States. Earth Energy Recycling is an established actor within the area of tyre recycling across the state and has existing facilities for the collection and processing of end-of-life tyres. After several years of pilot studies based on our proven technology, the stable, high quality of our carbon black, and the growing interest in our ecological oil, they have chosen Enviro as their partner They have also determined that Enviro, with our know-how and our well-crafted Basic Design, are well equipped to implement a project of this magnitude and ensure the effective and profitable operation of the plant.

There are many reasons for the growing interest in North America. Market demand for carbon black is expected to increase in the coming years, and since there are limitations made to the existing manufacturing of virgin carbon black, there is a deficit of virgin material. This deficit is exacerbated by the strict regulations and penalties that have been introduced to counteract the environmental issues produced by existing production. Many existing plants have been forced to invest major sums in emissions purification and ordered to pay fines for failure to comply with those requirements. This, in combination with the materials deficit, has driven up prices for carbon black – and that creates openings for alternatives such as recycled carbon black to gain market shares more quickly. This development also means that carbon black is decoupled from oil prices and made less sensitive to lower oil prices. We are expecting the price floor to be higher than previously, which benefits the profitability for recycled material. After all our raw material costs are low and, in many cases, our materials even generate revenue.

Our project in Buffalo, New York – where we have extended our existing MoU – will continue and even be deepened in Q1 2019 with, among other things, site visits to Niagara Falls, New York. For many years, TreadCraft has been running an extensive tyre collection enterprise and their production activities currently include industry fuel from end-of-life tyres. Like many others, they have identified Enviro as a leading actor with next-generation technology for meeting ever stricter demands for sustainability and value creation.

In Canada, market actors have adopted a wait-and-see attitude with respect to their newly introduced manufacturer liability legislation in Ontario and how it will impact them in practice. We also have an MoU with the company ArticCan. And we will continue our discussions on establishing a plant. However, this project has been given a lower priority for the time being.

At year end, we initiated discussions with yet another experienced tyre recycler on the U.S. East Coast. We are looking forward to report back on the development of that collaboration over the coming year.

Intensified dialogues with several leading tyre manufacturers related to implementation of Enviro’s recovered carbon black

Tyre manufacturers are responsible for over 70% of all carbon-black consumption and they are a driving force in the current increased interest in sustainability and resource recycling. For many years, we have – together with several of the leading manufacturers of tyres – tested our material in various phases in the hope that we might replace virgin carbon black in various types or components of tyres in the long term. The intensified efforts and clear goals for increasing the share of recovered carbon black in new tyres are felt throughout our ongoing dialogues. Our technology is one of the solutions to the liability challenges and we are in discussions for more detailed collaborative partnerships with tyre manufacturers as well as other industry actors.

As of this report we have categorized the development of the sales of recovered carbon black in three main categories namely “Active orders”, “Waiting order” and “In production test”. Those customer statuses are the most mature and will be most relevant to follow. This does not mean that the customer status not mentioned is not relevant but since this quantity is increasing, we have elected not to display them here.

Enviro first with official customer within solid tyres

As the first company in the world in our industry segment, we were able to present an official customer within the tyre segment at year’s end. Elastomeric, part of the Hexpol Group, is currently using our material in their solid tyres. The potential volumes in that segment are major, and we expect to be able to substitute a relatively large share of the carbon black used in that type of tyres. We have extensive dialogues and are engaged in testing with several other leading actors within this segment in Europe, Asia, and the United States.

Investments to deliveries according to anticipated increased demand

Interest in sustainable and recycled material is growing rapidly within the tyre and rubber industry segments. For a long time, to establish adoption of our carbon black material across various applications and to lay the groundwork for greater demand of raw materials from future plants, Enviro has focused on these actors. These efforts are starting to bear fruit and, in order to meet demand before new production capacity from new plants will be available, we will invest in our Åsensbruk plant during the spring. These investments mostly pertain to increasing capacity that will improve efficiency in our industrial operation while also implementing some of the improvements that will be present in future plants.

“Bio” oil from Enviro’s process produces positive environmental results in fossil fuels

Enviro has primarily focused on the commercialisation of plants for materials recycling from end-of-life tyres and the carbon black with the greatest value by content per tonne. We have come far along in that effort while also conducting several research projects over the past two years to evaluate the best strategy for creating value by also using the oil that we are recycling in the process. Since the sellable volume of oil from a plant is approx. 45% of the volume of processed tyres, increasing the profitability of the recycled oil is important and we are currently taking clear steps in that direction.

In a project executed with, among others, RISE (Research Institutes of Sweden), Ragn-Sells and the petroleum industry, we have characterized and upgraded Enviro’s pyrolysis oil through various refinery technologies. At RISE Energy Technology Centre’s laboratory in Piteå, we have conducted pilot-scale experiments where we have compared upgrading pure fossil oil to oil consisting of 20% pyrolysis oil. The findings show that that there are no major differences and that pyrolysis oil is excellently suited for fuel. Pyrolysis oil has a lot of similarities with fossil oil and might therefore replace fossil oil in the production of e.g. fuel. Moreover, the natural rubber in tyres means that the pyrolysis oil is partially bio-based. The pyrolysis oil consists of approx. 40-80% of biological contents from natural rubber depending on which tyre mix is used. This means that pyrolysis recovery of oil from end-of-life tyres is a step towards a society free of fossil fuel.

Intensive period

During the spring of 2019, the company’s resources will be focused on the most promising plant projects, which are the ones that will allow us to realise our new business model and strategy optimally. The foundation of interest that we have already laid will now be prioritised and scaled down to create the best possible conditions for the successful project implementation and profitable operation of future plants. A number of parameters based on our shareholders’ long-term interests will be the basis for how we choose to move forward. One of the prioritised projects is the plant in Nyborg, Denmark, where our partner WindSpace has leased land from the local municipality through a subsidiary. Together with the other projects covered by MoUs in the United States, this one is prioritised. But there are a couple of additional projects on our priority list with excellent potential in the near term.

Status ongoing customer contacts for plants. Above the project Enviro evaluates as being the top regarding the chance of realising an agreement. As a result of the change in the business model we intend to prioritize projects where we evaluate that (co) ownership has our most interest. A clearer focus will result in a shorter project list for the future, but we will utilize our resources and possibilities where our business model can create the best profitability

In my time as CEO, 2018 has been the most interesting and intensive period, and 2019 has continued to increase in intensity. The team is delivering results across all divisions and daily shows the kind of dedication and competency on which our market position is based. I look forward to realising our new business model this year and, in so doing, to establishing our company even more strongly as the leading actor in the recycled carbon black market and as owners of plants based on our unique, patented technology.

Thomas Sörensson

Chief Executive Officer

For more information, please contact: 
Thomas Sörensson, CEO Enviro, +46 (0)735-10 53 43, thomas.sorensson@envirosystems.se
Urban Folcker, CFO Enviro, +46 (0)760-00 13 11, urban.folcker@envirosystems.se
Alf Blomqvist, Board Chairman Enviro, +46 733 149 700, alf@blomqvistunlimited.com

Mangold Fondkommission AB, +46 8 503 01 550, info@mangold.se, is Enviro’s Certified Advisor at Nasdaq First North Stockholm.

Scandinavian Enviro Systems AB 
Regnbågsgatan 8C 
SE-417 55 Gothenburg, Sweden
info@envirosystems.se 
www.envirosystems.se

Scandinavian Enviro Systems AB (publ) is required to publish this information under the EU market abuse regulation. The information is provided by the contact person listed above for publication on February 28th, 2019, at 08:20 CET.

Enviro is a company developing, building and operating industrial plants for material recovery from End of Life Tyres (ELT). The company has developed a process, based on a patented technology, where gas generated in the process is heating the tyres in absence of oxygen. This enables the materials in the tyres to decompose and be recovered instead of incinerated. Thus, a sustainable recovery of the resources Carbon black, Oil, Steel and Gas is obtained. The products are used in new products, replacing fossil resources to help the customers reach their sustainability targets. Enviro was founded in 2001, has its head office in Gothenburg and runs its own plant for ELT tyres in Åsensbruk, Sweden. The company is listed on the Nasdaq First North securities exchange with Mangold Fondkommission AB, tel. +46 (0)8 5030 1550, as its Certified Advisor. www.envirosystems.se


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