AFC Energy PLC Annual Report 2015

FY2015 Annual Report · AFC Energy PLC

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2015 ANNUAL REPORT

& ACCOUNTS

Welcome to AFC Energy plc

AFC Energy, the industrial fuel cell power company,
is the leading developer of low-cost alkaline fuel cell
systems using hydrogen to produce electricity.

AN EVOLUTIONARY
TECHNOLOGY

Adding Value on page 06

A MILESTONE
YEAR FOR AFC
ENERGY

Highlights on page 02

Visit our website at
www.afcenergy.com

A GLOBAL
OPPORTUNITY

Market Overview
on page 08

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

STRATEGIC REPORT
Highlights
Chairman’s Statement
Adding Value
Market Overview
Business Model and Strategy
Project POWER-UP
Operational Review
Principal Risks and Uncertainties

GOVERNANCE
Board of Directors
Directors’ Report
Statement of Directors’
Responsibilities
Independent Auditor’s Report

FINANCIAL STATEMENTS
Statement of Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Cash Flow Statement
Notes Forming Part
of the Financial Statements
Company Information

“We made significant progress across
the business in 2015 in delivering
against our set of milestones.”
ADAM BOND
CHIEF EXECUTIVE OFFICER

Cartridges connected
for operation

DELIVERING
TECHNICAL
PERFORMANCE

Project POWER-UP
on page 12

OUR BUSINESS
MODEL

Business Model and
Strategy on page 10

OPERATIONAL
REVIEW

Operational Review
on page 14

02
04
06
08
10
12
14
17

18
20

25
26

27
28
29
30

31
48

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

HIGHLIGHTS

A Milestone
Year for AFC

OCTOBER 2015

AFC’s KORE Fuel Cell System
Successfully Achieves Milestone 10

In October 2015, AFC Energy successfully achieved the penultimate
Milestone 10 in its 2015 POWER-UP programme. AFC achieved
Milestone 10 by commencing temporary operation of an entire tier
of eight fuel cell cartridges on the KORE system, where it achieved
a maximum output from the tier of just over 40kWe.

The eight fuel cell cartridges used in this Milestone
10 trial were successfully used to test the second
and third tiers of the KORE system. In order to
preserve their effective operational longevity for
further testing, they were not run to full capacity
in the October trial, nor were they run for an
extended time period.

Each tier (there are three in total) within the
KORE fuel cell system is capable of operating
independently of the other so the successful
operation of a single tier of eight cartridges
was a significant further de-risking of the system
and in particular the Balance of Plant.

See full article at www. afcenergy.com/
news/regulatory-announcements

Following the success of Milestone 10, cartridges
were installed into each of the remaining two
tiers to test the operational capability of the rest
of the system before the final milestone of 240kWe
is trialled. The achievements at the single tier level
provided AFC with the confidence, both in terms
of the fuel cell cartridges and the Balance of Plant,
to push forward with the delivery of Milestone 11.

40kWe

40kWe of power generated
on a single tier

Hitting our Milestones
Ahead of Schedule

We are edging increasingly closer to
delivery of a commercial-scale fuel cell
system capable of deployment across
a range of markets we are focusing on.
We will continue to push hard to achieve
these ambitious goals and ensure the
system we take to market achieves not
only short-term operational success, but
also longevity, safety and stability of power
supply across the life of the project. Our
programme of work for the remainder
of this year and into the next will focus
on these points.

MILESTONE PROGRESS
THIS YEAR

FIRST TIER OF
THE KORE FUEL
CELL SYSTEM IN
OPERATION

COMMISSIONING
OF POWER-UP
KORE AND FIRST
SINGLE CARTRIDGE
OPERATION

CONSTRUCTION
OF POWER-UP
FACILITIES, UTILITIES
AND CONNECTIONS
AT STADE, GERMANY
COMMENCED

AFC’S FIRST 101
FUEL CELL STACK
WAS SUCCESSFULLY
TRIALLED IN THE UK

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015MARCH 2015
AFC signs Milestone
50MW Deal with
Samyoung and Chang
Shin in South Korea for
Fuel Cell Development

See full article at www. afcenergy.com/
news/regulatory-announcements

APRIL 2015
Landmark MoU with
Dubai Carbon Signed

AFC Energy signed a Memorandum of
Understanding with Dubai Carbon Centre
of Excellence (“Dubai Carbon”) at the 2015
Water, Energy, Technology and Environment
Exhibition (WETEX) in Dubai. The MoU provides
a framework for the assessment and potential
deployment of an estimated 300MW of fuel
cell generation capacity in Dubai.

300MW

300MW of fuel cell capacity being
assessed for deployment in Dubai
by the end of 2020

APRIL 2015
Agreement with
Bangkok Industrial
Gas for Fuel Cell
Development in
Thailand

AFC signed a formal Project Development
Agreement with two South Korean partners:
Samyoung Corporation and Chang Shin
Chemical Co. for the deployment of up
to 50MW of fuel cell generation capacity
in Daesan, Korea.

South Korea’s strong incentives in the
deployment of fuel cell technologies
has brought significant investment and
employment opportunities to the Daesan
region, which AFC Energy is proud to support.

“At AFC, I set the ambitious
target of achieving 1GW
(1,000MW) of capacity under
development by the end of
2020 and this MoU brings
us excitingly closer to our
target but I would like to
stress that we still have
a long way to go.”

Adam Bond,
CEO of AFC Energy

See full article at www. afcenergy.com/
news/regulatory-announcements

AFC Energy has executed its first Heads of
Agreement in Thailand to initiate a programme
of commercial fuel cell deployment with a
leading Thai industrial gas company, Bangkok
Industrial Gas Co. Ltd (“BIG”).

The Heads of Agreement establishes a
framework for the assessment and deployment
of an initial 10MW of fuel cell capacity utilising
surplus hydrogen from BIG-owned hydrogen
pipelines and related facilities in the Rayong
Province of Thailand.

FINANCIAL HIGHLIGHT

289.2%

Increase in income

JULY 2015
Commercial Power
Purchase Agreement
with Stadtwerke
Stade, Germany

AFC Energy executed its first commercial
power purchase agreement (“PPA”) with
Stadtwerke Stade GmbH for the sale of
electricity generated at AFC’s fuel cell
generation facility at Stade, Germany.

The sale of electricity under the PPA
represents the first commercial revenue
to be generated from an AFC fuel cell system.

See full article at www. afcenergy.com/
news/regulatory-announcements

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCHAIRMAN’S STATEMENT

Exceeding
Expectations

The Company made great progress
in 2015 both technologically
and commercially.

OVERVIEW
The future for low carbon technology took
a huge positive stride forward in early 2016
following the Paris Conference, which commits
all countries to cut carbon emissions and means
that governments will need to go further and
faster to tackle climate change than ever before.

While fossil fuel prices – notably oil – have
continued to weaken in recent months, following
Paris it is clear that the choice will no longer be
simply about price – the world is now committed
to a lower carbon future.

Stationary fuel cells can play a major part in this
globally and while there has been – and remains
– substantial activity in Japan, South Korea and
the US, the UK and Europe continue to lag behind
outside of the small CHP market. In addition, most
developing countries have had insufficient funds
to invest in low carbon technology but with the
Paris accord promising US$100bn p.a. by 2020,
this should slowly begin to change.

The opportunity for AFC Energy remains
significant.

KEY DEVELOPMENTS
In December 2014, AFC announced plans to
fast-track the development of its KORE fuel cell
system in 2015 and set out an ambitious series
of 11 milestones against which the progress of this
plan could be measured. This would culminate in
the demonstration of power output up to 240kW
in December 2015 – an acceleration of some 18
months over earlier plans. The first 10 milestones
were successfully achieved on time, and Milestone
11 – the key one – was extended by one month
to ensure that the entire 24-cell system was fully
and precisely conditioned before final testing.

In what was a seminal moment for AFC Energy,
the KORE system was initiated at the end of
January 2016 with the cells’ combined power
output reaching in excess of 200kW with 1.3MWh
of electricity delivered into the German grid.

This achievement firmly establishes the next
important phase of development for the
Company.

TIM YEO
CHAIRMAN

INCOME

£2.26m

£0.78m
£0.76m

2015
2014
2013

LOSS

£4.78m

£5.44m

£4.14m

2015
2014
2013

From a commercial standpoint, during the year
the Company signed:
• A formal 50MW project development

agreement with Samyoung Corporation
and Chang Shin Chemical Co. in South Korea

• A Heads of Agreement for 10MW with
Bangkok Industral Gas Co. in Thailand

• A further Memorandum of Understanding
with Dubai Carbon Centre of Excellence for
a potential deployment of 300MW in Dubai

These build on the commercial progress made
in 2014 and demonstrate the very high level of
global interest in the Company’s fuel cell.

Shortly after the year-end – in December 2015
– the Company raised a further £3.6 million from
existing Shareholders to support working capital
requirements in advance of receipt of grant funds
from the EU in relation to the POWER-UP project
in Germany.

PARTNERS
AFC Energy continues to attract – and be
supported by – high quality partners. In 2015,
a joint venture was signed with DUTCO in Dubai
to cover fuel cell deployment in the Middle East.
In addition, a Heads of Agreement was signed
with a major global manufacturing partner for
the international procurement and manufacture
of the cells.

SUMMARY
The Company made good progress in 2015, both
technologically and commercially. My thanks go
to everyone at AFC Energy for what was an
outstanding team effort.

Having now established that the full KORE system
is capable of delivering what it promised, 2016 is
likely to be a pivotal year for the Company as we
further demonstrate the system’s commerciality
and we also anticipate further progress on
manufacturing and commercial orders.

The Board remains confident of the Company's
potential and, with the right resources, of its
ability to achieve shareholder expectations.

TIM YEO
Chairman
23 March 2016

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015STRATEGIC REPORT

GOVERNANCE

FINANCIAL STATEMENTS

Development at Stade

AFC’s key project POWER-UP is demonstrating
the world’s largest alkaline fuel cell system at
Air Products’ ("AP") industrial gas plant in Stade,
Germany.

Milestone 10 demonstrated that the KORE fuel
cell system is capable, on a tier level (comprising
eight fuel cell cartridges), of operating in
an industrial environment and delivering
acceptable power output for dispatch into
the local power grid.

€11.5m

Investment in the project

STADE,
GERMANY

ADDING VALUE

An Evolutionary Technology

Why Alkaline fuel cells? A fuel cell is a cell producing an electric
current direct from a chemical reaction. Alkaline fuel cells are
the most effective of all fuel cell chemistries achieving up to
65% electrical efficiency.

How Does an Alkaline Fuel
Cell Work?

OXYGEN

HYDROGEN

ALKALINE
FUEL CELL

ELECTRICITY

WATER

HEAT

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

Benefits of Fuel Cells

AVAILABLE HYDROGEN

Hydrogen can be made renewable in significant quantities
and is sustainable. Waste hydrogen sources include waste
bio-mass, hydrocarbon waste and chlor-alkali plants where
hydrogen is created as a by-product in the manufacture
of chemicals like chlorine.

WATER AND HEAT AS BY-PRODUCTS

The hydrogen fuel cells’ by-products consist of water
and heat. The production of water is seen as a benefit in
specific regions around the world, while the waste heat
produced may be captured and used on site or in a local
end-user’s industrial process. This has the potential to
further reduce both the end-user’s energy requirements
from the grid and carbon emissions.

MORE EFFICIENT AT ALL LEVELS
OF UTILISATION

Fuel cells do not burn fuel like in an internal combustion
engine or turbine so they do not need to drive pistons
or blades. Avoiding this intermediate mechanical step
and having a direct conversion route to electricity is what
makes fuel cells so efficient. They are "scaleable" without
impacting efficiency unlike many of the world’s existing
power production technologies.

QUIET AND CLEAN AT POINT
OF GENERATION

A fuel cell has very few moving parts. Small electrical
pumps and blowers move gases and liquids around
the system. Therefore, it is quiet compared to traditional
technologies. Its only by-products are water and heat.

LOW LIFETIME COST OF OWNERSHIP

AFC has reduced the cost of ownership through a lower
operating temperature (i.e. below 100 degrees Celsius)
with consequential use of more affordable materials.
Plus over 80% of the materials AFC uses can be recycled.

An alkaline fuel cell is a device that converts oxygen (from the air) and hydrogen (from a supply) into electrical energy, water and heat. It’s chemically comparable to a battery that will provide electric power continuously, as long as you feed it with hydrogen and air. The only by-products are demineralised water and heat – both of which also have commercial applications. Excluding water, an alkaline fuel cell is a zero emission device.Electrically Efficient
With alkaline fuel cell technology yet to find a commercial
foothold, science turned to a number of other electro chemistries.
Each chemistry has been adopted by industry for different niche
applications. Most offer efficiency advantages over how power is
traditionally generated. However, alkaline fuel cells remain the most
electrically efficient of them all.

OPERATING TEMPERATURE
BY FUEL CELL TYPE

Fuel Cell Type

Operating
Temperature

SOLID OXIDE ("SOFC")

500–1,000OC

MOLTEN CARBONATE
("MCFC")

600–700�C

PHOSPHORIC ACID
("PAFC")

120–150OC

POLYMER ELECTROLYTE
MEMBRANE ("PEM")

<120OC

ALKALINE ("AFC")

<100OC

ELECTRICAL EFFICIENCY
BY FUEL CELL TYPE

65%
60%
55%
55%
40%

Liquid Nitrogen tank
and Evaporators

65%
60%
55%
55%
40%

ALKALINE ("AFC")
SOLID OXIDE ("SOFC")
POLYMER ELECTROLYTE MEMBRANE ("PEM")
MOLTEN CARBONATE ("MCFC")
PHOSPHORIC ACID ("PAFC")

Source: www.afcenergy.com/technology/
advantages_of_alkali_fuel_cells.aspx

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
MARKET OVERVIEW

A Global
Opportunity

The production of low-cost
electricity that is competitive
against mainstream forms of
electricity generation has enormous
market potential from a wide range
of industrial settings, sectors
and regions.

Key Target Regions
We are focused on regions that offer attractive
long-term market conditions for electricity
that is generated from fuel cells.

GERMANY

In the EU, Germany has decided to
champion the introduction of fuel cells
and demonstrated solid support via the
European Fuel Cells and Hydrogen
Joint Undertaking ("FCH JU").

2016 Strategic Milestones
We are focused on the delivery of these strategic
milestones throughout the course of 2016.

FUEL CELL STACK AND BALANCE
OF PLANT (“BOP”)

PRODUCT DEVELOPMENT

COMMERCIAL OPPORTUNITIES

Conclude basic design and engineering
on a simple cartridge 10kW system
capable of deployment in 2016.

Conclude basic design and engineering
on a 1MW capacity fuel cell system
capable of deployment in 2017.

Commence scoping studies for at
least three international fuel cell
projects with a focus on the
Middle East and Asia.

Secure contracts for at least two
international fuel cell projects for
delivery in 2017.

Secure value added strategic
partnerships with recognised
industrial and institutional groups.

Develop a second generation
(“Gen 2”) fuel cell stack and BoP
during the second half of 2016.

Operate the Gen 2 fuel cell stack
and BoP over an extended test period
(>1 month) before the end of 2016.

Confirm the availability and longevity
of the fuel cell system to meet
minimum industry standards required
for commercial deployment as agreed
with project partners.

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015UNITED ARAB EMIRATES

THAILAND

SOUTH KOREA

The UAE is at the forefront of the
development of renewable energy in
the MENA region. AFC’s units will produce
for sale not only power but also water
into the local market.

In South-East Asia, Thailand is leading
a push towards a more sustainable
energy mix which has the potential to
include significant fuel cell deployment
opportunities.

Financial incentives paid for electricity
generated from fuel cells make South
Korea a particularly attractive target
market for AFC Energy’s fuel cell systems.

The Global Fuel Cell Market
More fuel cell units, more installed
power. That’s the simple headline
for activity in the fuel cell industry in
2015. AFC focuses on stationary fuel
cell applications.

Portable

Stationary

Transport

Source: www.fuelcelltoday.
com/2015 industry review

OVERALL FUEL CELL MARKET GROWTH 2011-2015

Shipments by application (units)

2011

2012

2013

2014

2015

000’s

Megawatts by application

2011

2012

2013

2014

2015

000’s

100

150

200

250

300

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSBUSINESS MODEL AND STRATEGY

Our Business Model

Our business model is to install, own, operate
and maintain alkaline fuel cell power projects.

AFC seeks to be a fuel cell power provider and will
target joint ventures, in which AFC aligns its interests
with those of its partners, by having “skin in the game”.

Our Strategic Priorities

Our Plan of Action

OUR TECHNOLOGY
Project POWER-UP is proving the ability
of AFC Energy’s alkaline fuel cell system
to deliver the technical performance,
longevity and stability of power output.

In December 2014, announced 11 key
milestones for progression in 2015.
Delivered 10 of 11 milestones by the
end of October 2015.

EXISTING PARTNERS
The POWER-UP consortium consists
of partners with world-class expertise
to achieve the project’s objectives.

Consortium partners include: Air Products
(UK), GB Innomech (UK), Paul Scherrer
Institut (Switzerland), ZBT Centre for fuel
cell technology (Germany) and European
Hydrogen Association (EU).

MULTIPLE MARKETS
Power generation in the industrial sector,
but ancillary applications for waste
water treatment, when combined with
electrolysis, are also being investigated.

ACHIEVING MILESTONES
Conduct an intense and accelerated twelve
month fuel cell development programme
to successfully deliver gross electrical output
of 240kW.

To successfully demonstrate in an industrial
setting all three tiers of the KORE fuel cell
system operated in parallel with each other
and to successfully dispatch power into the
German power grid.

NEW PARTNERS
New partnerships include MoU with Dubai
Carbon for the assessment and potential
deployment of an estimated 300MW of
fuel cell generation capacity, making this
the largest single fuel cell deployment
programme in the world.

AFC’s first Commercial Power Purchase
Agreement ("PPA") with Stadtwerke Stade
and successful delivery of first power into
the grid.

CONTINUAL DEVELOPMENT
Gain experience of more hydrogen
production methods and integration
requirements.

AFC is currently in discussions with potential
customers and partners, who are assessing
opportunities sized at the single cartridge
size, up to multi-mega watt projects.

GROWTH MARKETS
Targeting generation of revenue from
the sale of Balance of Plant, leasing of
modular fuel cell cartridges, operation
and maintenance fees and dividends
from the sale of power and water.

GLOBAL FOOTPRINT
Position and establish the Company in key
international markets.

Targeting commercial partners who are most
likely to be “early adopters” of the technology,
within diversified, international markets.

INNOVATION

PARTNERSHIPS

MULTIPLE MARKETS

CUSTOMER SALES

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015Our Performance

Our Sources of Income

Our Risks

10/11

Milestones achieved

40kWe

Power generated in October 2015

New partnerships this year

360MW

Capacity under assessment

45+

Families of patents

Number of key original markets

DEVELOPMENT INCOME
External agency funding makes our share
capital work harder. At AFC, we look to fit our
development needs within defined funding
rules. This allows projects to be delivered earlier
and with less call on internal financial resources
for capital items.

OVERHEAD COVERAGE
Many agencies fund direct time spent on
key technical research, development and
demonstration. A portion of overhead
recovery is also permitted. This dramatically
improves our monthly cash burn rates.

LICENCE REVENUE
Our initial licence revenues were obtained
last year. Our work with partners in this area is
designed to seed opportunities for our fuel cells
in markets, which have a longer sales/delivery
process such as Waste-to-Energy. Working in
this way minimises our sales costs and helps
deliver market recognition earlier.

CAPITAL SALES REVENUES
Although, in the longer term, we wish to
retain ownership of our fuel cell systems it
may be prudent to engage with some of our
partners to sell our systems as we continue our
development. This additional revenue will help
support the Company during this initial phase.

ELECTRICITY, HEAT AND WATER
REVENUES
An Energy Services Company (“ESCo”)
is AFC Energy’s supply method of choice.
We believe this will reduce decision time,
especially in mature industries, and allow the
Company to take advantage of the expected
longer term growth in global energy prices.

MAINTENANCE AND SECURITY
Our fuel cell projects will have a life of 20+
years operation, meaning the ability to offer
services and maintenance contracts for the
fuel cell cartridges and systems provides
long-term annuity revenues.

TECHNICAL PROGRESS
AFC holds a vast quantity of operational
data that needs to be fully assessed to
identify areas for ongoing improvement.

FINANCIAL RISKS
Financial risks include the risk of additional
development expenditure being required
to produce a commercial product.

CREDIT RISK
Credit risk arises principally from the
Company’s trade and other receivables
and cash and cash equivalents. It is the risk
that the counterparty fails to discharge its
obligation in respect of the instrument. The
maximum exposure to credit risk equals the
carrying value of these items in the financial
statements on page 28.

LIQUIDITY RISK
Liquidity risk arises from the Company’s
management of working capital and
the amount of funding required for the
development programme. It is the risk
that the Company will encounter difficulty
in meeting its financial obligations as they
fall due.

INTEREST RATE RISK
The Company is exposed to interest rate risk
in respect of surplus funds held on deposit.

CURRENCY RISK
The Company operates internationally
and therefore is exposed to fluctuations
in currency exchange rates.

Read more on page 17

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSPROJECT POWER-UP

Delivering Technical
Performance

In the 4th Quarter of 2013, AFC Energy was
awarded a grant of €6.1 million (£4.9 million)
from the European Union’s Seventh Framework
Programme (the Fuel Cells and Hydrogen
Joint Undertaking) to lead a Consortium to
demonstrate the world’s largest alkaline fuel
cell system at Air Products’ industrial gas
plant in Stade, Germany.

Our Progress at Stade

Investment in the project

€11.5m
€6.1m

Backing from the EU

MARCH 2015 – PERMITTING
AFC receives first partial Building Permit
to commence construction. The first partial
building permit included approvals to AFC’s
civil engineering drawings, geotechnical survey
results and landowner approvals and allowed
sub-contractors to proceed with groundworks
and foundations works for the site.

MARCH 2015 – CONSENTING PROCESS
The consenting process for the AFC pilot fuel
cell plant in Stade occurred across several
phases with multiple phase permits issued for
construction, operating and dispatch of power
into the German grid. The KORE fuel cell Balance
of Plant ("BoP") HAZOP assessment was updated
as part of this process.

APRIL 2015 – HAZOP ASSESSMENT
A process hazard assessment of the structure
and facilities designed to house the KORE
system in Stade was undertaken using the
HAZOP methodology. This review took place
in two sessions, in February and April 2015,
led by engineering consultancy plantIng
GmbH and supported by AFC, Air Products
plc and specialised consultancy Efficientics.
A supporting ATEX (potential explosive
atmosphere) study was commissioned
to support the HAZOP results for German
regulatory requirements.

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015PROJECT HIGHLIGHTS
POWER-UP is one of the EU Fuel Cell and
Hydrogen Joint Undertaking’s flagship projects.
The project has a budget of €11.5 million and
a scheduled duration of 51 months, starting
in April 2013 and concluding in June 2017.

Key highlights achieved, or being achieved,
for the project:

GB Innomech, a leading UK automation specialist,
is supporting AFC in objective (3). Throughout
the duration of the POWER-UP project, there will
be tens of thousands of fuel cells and ancillary
components manufactured and assembled
into fuel cell stacks. GB Innomech has used a
combination of established automation processes
to develop and commission a pilot stack assembly
automation system.

1. Delivery of an AFC system that converts
hydrogen into electricity and heat
2. Successful scaled-up manufacture

of fuel cell components

3. Demonstration of an automated process that
assembles components into fuel cell stacks
ready for incorporation within the system
4. Reduced installation and commissioning
times (and costs) of the system through
the development of a modular,
containerised Balance of Plant

5. Effective recycling of substrate plates,

catalyst materials and stack components
6. Understanding and quantifying the direct
and indirect environmental burdens of the
fuel cell system (including its hydrogen supply
and component recycling) and the relevant
socio-economic factors

7. Meeting end-user reliability requirements
and compatibility with end-user’s plant
maintenance schedules

8. Power was successfully dispatched and sold

to the grid

Air Products is supporting AFC Energy in
attaining objectives (1) and (7), by supplying H2
at competitive rates, leasing part of its industrial
facility at Stade, Germany, and having supported
AFC in several aspects of engineering design and
permitting for this pilot plant.

The Paul Scherrer Institut of Switzerland is
performing a technical, environmental and
economic assessment of the project and AFC’s
current state of technology. The focus of these
multi-disciplinary studies is to establish the
long-term viability and sustainability of alkaline
fuel cells, as compared to conventional, and
other environmentally friendly, power generation
technologies. This mainly addresses objective (6),
supported throughout by AFC.

The Centre for Fuel Cell Technology, or ZBT,
has joined the Consortium to ensure project
compliance with German and European
regulations and standards. Part of its work is
to agree the project roadmap and validate key
milestones, as well as granting CE-compliance
for AFC’s technology. Its work addresses parts
of milestones (1) and (7).

MID-TERM REVIEW
On October 2015, the Project Mid-Term Review
was held in Brussels, wherein the EU Fuel Cell and
Hydrogen Joint Undertaking ("FCH JU"), assisted
by external experts, assessed the progress of the
project. Key AFC staff, including representatives of
project partners, were interviewed and questioned
in detail to ascertain the level of progress
achieved, with immediate positive feedback.

Overall, the project has shown good progress
during the period under review. The project
has progressed well despite several major
complications, largely outside of the control of
the project partners. These issues have been
addressed in appropriate ways and presented
and discussed in a transparent fashion. The project
team has worked hard to overcome them and
for the most part succeeded. The main scientific
and technical achievements of the project have
been to design, build, commission and begin to
operate (some of ) an Alkaline Fuel Cell system
in an industrial setting. To do this has required
developments in manufacturing technology, both
production and assembly, which will significantly
assist in meeting future cost and performance
targets. The State of the Art has been significantly
improved and the project should enable
enhanced competitiveness and potentially
bring economic and social value to Europe.

POWER-UP CONSORTIUM
To achieve the objectives of project POWER-UP,
AFC Energy and AP have put together an
international Consortium of
world-class expertise:

AFC Energy plc (UK)
Air Products plc (UK)

GB Innomech (UK)
Paul Scherrer Institut
(Switzerland)

Project Co-ordinator
World’s leading
supplier of Hydrogen
and site host
Automation specialists
Independent
technical,
environmental and
economic evaluation

ZBT Centre for fuel cell CE marketing
technology (Germany)

European Hydrogen
Association (EU)

and regulatory
compliance
Publicity and
dissemination
of results

JUNE 2015 – FINAL BUILDING PERMIT
AFC receives final Building Permit to conclude
construction allowing AFC and its contractors to
erect all above ground infrastructure including
the industrial steel frame building to house the
KORE fuel cell system, all storage tanks, piping,
connection points and ancillary above ground
equipment. The medium voltage grid code
compliance requirements for the fuel cell power
conditioning infrastructure were also agreed upon
in this period with Stadtwerke Stade, Transmission
System Operator ("TSO") for the region supported
by Siemens.

AUGUST 2015 – CONSTRUCTION
AFC announces that it has successfully completed
the initial commissioning phase of its first KORE
fuel cell system at Stade, generating just over
7.5kWe from a single fuel cell stack. This was the
culmination of an accelerated construction period
on site, effectively erecting and fitting out the
building (mechanical, process, electrical and control
and instrumentation works) within eight weeks.

KORE COMMISSIONING
EU FCH JU funded project POWER-UP will last for
51 months. Its start date is April 2013 and it will be
concluded in June 2017.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

OPERATIONAL REVIEW

Operational
Review

The Company is looking ahead to build upon
an already established pipeline of commercial
opportunities and drive the findings from the
development phase into a technically
optimised and relevant fuel cell system.

The past 12 months represent a pivotal year
for AFC Energy, where we have undertaken
to demonstrate for the first time AFC Energy's
KORE fuel cell system, representing the
largest alkaline fuel cell system in operation
internationally today.

OPERATING REVIEW
Technology
Throughout 2015, AFC conducted an intense
and accelerated twelve month fuel cell
development programme attaining ten out
of the eleven internally set milestones. These
consisted of a number of firsts for the Company,
including the successful testing of a 25 cell
stack system, a 51 cell stack and ultimately
a complete stack of 101 cells.

This final 101 fuel cell stack test demonstrated
the operability of the fundamental building
block of the KORE system giving us the flexibility
to consider a whole range of alternative products
– from a single cartridge product to multi-mega
watt systems.

As a result, AFC Energy has picked up a lot
of interest from potential customers assessing
smaller energy requirement opportunities in
integers of 10kWs, dramatically expanding
AFC’s market potential. Whilst the market
potential exists for AFC Energy's systems at
a range of different capacity sizes, including
smaller scale systems, the Company's
immediate focus remains firmly on large
stationary systems in markets where positive
environmental and fiscal drivers exist.

Achieving the penultimate Milestone 10 in
October 2015 demonstrated for the first time
the capability of the KORE fuel cell system on
a tier level (each of the three tiers comprising
of eight fuel cell cartridges for a total of 24
cartridges, or 2,424 cells, operating in sequence),
in an industrial environment and delivering
acceptable power output for dispatch into
the local power grid.

ADAM BOND
CHIEF EXECUTIVE OFFICER

POST YEAR-END DEVELOPMENTS
Equity Funding
Following on from the penultimate Milestone
10 in December 2015, we announced that the
Company had raised a total of £3.6 million by way
of a subscription and Shareholder offer at an issue
price of 20p per share. One of the great attributes
of AFC Energy is its very loyal Shareholder
base and it was most pleasing to see that the
Shareholder offer was 3.8 times oversubscribed.

The net proceeds of the subscription were
deployed to enable AFC to complete pre-
commissioning activities in relation to Milestone
11, as well as support the short-term working
capital requirements of the Company, in advance
of the receipt of EU grant funds by way of
reimbursement of expenditure for the
POWER-UP project.

MILESTONE 11
Since the fundraise, receipt of >€1 million has
been received for work complete to 30 June
2014, and a further £1.5-£2 million is expected
from the EU before year end. In January 2016,
we completed our final Milestone 11, achieving
a gross electrical output in excess of 200kW
from AFC’s proprietary KORE fuel cell system
in Stade, Germany. This was the first time that
all three tiers of the KORE fuel cell system had
operated in parallel with each other. While total
power of 204kW was down from the nameplate
240kW, a maximum output of 11.7kW per stack
was achieved, exceeding the 10kW nameplate
capacity; an excellent achievement given where
we were twelve months earlier. This is one of the
key de-risking achievements of the technology
to date. In addition, over 1.3MWh of power was
generated and sold into the grid under the Power
Purchase Agreement with local utility Stadtwerke
Stade. Importantly, one of the key successes from
trialling the KORE fuel cell system has been the
vast quantity of operational data that has been
acquired. This has enabled the team to fully assess
and identify further areas where improvements
can be made to optimise the fuel cell system,
which at present is the largest alkaline fuel cell
system in the world today.

Following Milestone 11, AFC signed a strategic
engineering partnership and services agreement
with Germany-based engineering consultancy
plantIng GmbH to support the optimisation and
rollout of AFC Energy's alkaline fuel cell systems.
As plantIng has provided engineering support
and Engineering Procurement Construction
Management services to AFC's POWER-UP project
at Stade for over a year, the firm already boasts
a deep knowledge and understanding of AFC 's
fuel cell technology. The Engineering Agreement
includes a significant investment by plantIng
of their time and resources in supporting AFC
Energy in addressing the identified deployment
opportunities that exist in Germany, Europe
and internationally. The decision by plantIng
to invest their own time into this optimisation
exercise further demonstrates the market
potential of the technology and the quality
of the partners we are able to attract and
collaborate with.

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015“We continue to work on commercial
opportunities and attract further
interest as we progress.”
ADAM BOND
CHIEF EXECUTIVE OFFICER

2016 STRATEGIC MILESTONES
AND OUTCOMES
In March 2016, AFC Energy announced its
eight 2016 strategic milestones and outcomes.
Milestones 1 to 3 refer to technical optimisation
of the fuel cell system during the second half of
2016; operating the second generation system
over an extended test period before the end of
2016 and confirming the availability and longevity
of the fuel cell system to meet minimum industry
standards required for commercial deployment.
Milestones 4 and 5 cover the development of
two new system configurations to be developed
in conjunction with AFC’s engineering partner
plantIng: the completion of the basic design
and engineering on a single cartridge 10kW
system capable of deployment in 2016 and a
larger 1MW capacity fuel cell system capable of
deployment in 2017. The final three milestones,
6 to 8, involve commercial opportunities including
the commencement of scoping studies for at
least three fuel cell projects internationally, with
a focus on the Middle East and Asia; securing
confirmed contracts for at least two AFC fuel
cell projects internationally and securing value
added partnerships with recognised industrial and
institutional key players. Importantly, the eight
milestones continue to emphasize the positioning
of AFC Energy as an industry leading stationary
fuel company focusing on large industrial
installations, whilst recognising the further
potential that exists for optimisation of the system
capacity necessary to meet market demand.

PARTNERSHIPS
The POWER-UP programme in Stade has been
our main point of focus and its success would
not have been possible without the involvement
of our key partners.

We now have a system operating in Germany
at an industrial plant owned by Air Products,
which in turn accepts hydrogen from Dow
Chemicals.

Engineering and design work associated with
delivering the POWER-UP programme on site
was supported by our engineering partners
plantIng and Artelia.

In the meantime, AFC signed Memorandum
of Understandings ("MoUs") in three of its key
regions, including the Middle East (Dubai),
South-East Asia (Thailand) and northeast
Asia (South Korea).

I’ve already mentioned the Power Purchase
Agreement with the utility Stadtwerke Stade.
This represents the first commercial revenue
for AFC, but just as importantly, it allows us
to learn how to integrate and interface our
KORE power plant with a modern day,
established power grid.

AFC continues to work with its partners across
a number of opportunities.

Control Panel for the Distributed
Control System

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOPERATIONAL REVIEW CONTINUED

2014/5 Milestones
Achieved

11 Achieve first commercial
scale operability
of KORE module

Phase-2 POWER-UP
programme

Phase-1 POWER-UP
programme

Commissioning
of POWER-UP KORE

Installation of
POWER-UP KORE
system

Conclude construction
of POWER-UP facilities

Commence construction
of POWER-UP facilities,
Stade

101-cell stack trials

51-cell stack trials

Appoint engineering
consultant

25-cell stack trials

In view of the lack of certainty that currently
exists for Waste2Tricity Ltd ("W2T") and
Waste2Tricity International (Thailand) Ltd as
regards Government fiscal support mechanisms
in the UK and Thailand for its waste to energy
developments, together with a reduction in
available working capital, whilst these delays
continue preventing the payment of outstanding
licence fees to AFC Energy, the Board has
considered it prudent to write down both its
investment in W2T Ltd and the licence fees
receivable from W2T Ltd and W2T Thailand.
However, we would like to express our ongoing
support for W2T and confidence in its prospects
once it has obtained the clarity it requires both
as regards Government support and funding.

FUNDED PROJECTS: PROJECT POWER-UP
POWER-UP has been AFC’s key project for the
past 12 months. The €6.1 million EU-part funded
programme represents the world’s first large-scale
demonstration of an alkaline fuel cell system. ZBT
GmbH has joined the consortium to ensure that
the POWER-UP system complies with all relevant
national and European regulations and will ensure
that the system is CE-compliant by the end of
the project. The project is due to conclude in
June 2017.

FINANCIAL OVERVIEW
In 2015, AFC’s EU grant and other income
increased to £2,313,586 (2014: £796,135).

AFC continued to receive support from the EU
by way of grants which strongly underpin the
AFC research and development programme.
Throughout the year and at the year end, the
Company was engaged in three EU funded
projects, ALKAMMONIA, LASERCELL and POWER-
UP, with the focus during the year primarily on
POWER-UP, which entails the construction and
delivery of the first KORE system to an operational
site in Germany. Increased expenditure on the site
and on the KORE module itself is reflected in cost
of sales. R&D spend qualifying for R&D tax credits
increased substantially to £3.48 million (2014:
£1.28 million) as a change in HMRC rules now
allows some R&D expenditure relating to the
EU funded projects and included in cost of sales
to qualify for credits.

Overall post tax losses to 31 October 2015
were £4.8 million (2014: £5.4 million). Cash
balances at 31 October, excluding restricted
cash, were £1.8 million (2014: £4.9 million).
As mentioned (in post year-end developments),
subsequent to the year end in December 2015
and January 2016, the Company successfully
raised £3.6 million before costs through
a placing and offer for subscription, which
was oversubscribed by a factor of 3.8 times.

OUTLOOK
AFC now has a fuel cell cartridge capable of
operating at or above its nameplate capacity
and we are continuing the momentum created
in 2015 to confirm the longevity of the fuel cell
system to meet the industry standards required
for commercial deployment.

I said last year that our targets were ambitious
and they remain so. I still firmly believe that
we will achieve our aggressive target of
1GW (1,000MW) of fuel cell capacity installed
or under development by the end of 2020.

Finally, I would like to thank again all the staff and
contractors working with AFC together with the
FCH JU for their continued support in delivering
this project. I also wish to recognise the massive
contribution and sacrifices made by many
to achieve this outcome. 2016 is going to
be another exciting year for AFC.

This Report, including the Principal Risks and
Uncertainties on page 17, was approved
by the Board on 23 March 2016.

ADAM BOND
Chief Executive Officer
23 March 2016

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015PRINCIPAL RISKS AND UNCERTAINTIES

Managing
Risks

Effective risk management underpins the delivery of our objectives. It is essential to
protecting our reputation and generating sustainable shareholder value. We aim to
identify key risks at an early stage and develop actions to eliminate them or mitigate
their impact and likelihood to an acceptable level.

Risk management processes are embedded at both company and project levels and
form an integral part of day-to-day business activity. They help management and
delivery teams to identify and understand the risks they face in delivering business
objectives and to develop mitigations to manage those risks.

Risk and Impact

Management Strategy

Delayed technology development necessary
to meet minimum industry and commercial
standards of the fuel cell system

Since 2015, AFC Energy has implemented a robust control of technological progress against a budgeted
plan adopting principles of “technology readiness levels” ("TRL"). External partners have also been
identified and where relevant, engaged to support the development plan with transparent KPIs and
road maps to a product that meets commercial power, availability, longevity, efficiency and cost metrics.

Insufficient working capital to fund the
Company’s technology development plan
and operate the business

The adoption of a budgeted technology development plan, supported by prudent budgetary controls
that can be measured and monitored periodically provides a robust means of mitigating risk of
insufficient working capital. The ability to demonstrate progress against predefined milestones that
demonstrate substantive commercial development of the fuel cell system also enhances the Company’s
ability to access new funding if required through the capital markets.

Insufficient operational capability and
capacity to deliver project contracts

Loss or breach of intellectual property

Health and safety breaches of incidents

Design and quality issues with AFC Energy’s
fuel cell systems

The strategy for transition of AFC Energy from a technology development company into a vehicle for
commercial deployment focuses on long-term partnerships and collaborations with industry leading
companies. Our partners are identified and developed to complement AFC Energy’s project execution
capability, both in terms of understanding local regulatory environments, through to construction,
funding, operational and logistical support. This strategy will continue to be employed over the short
to medium term by the Company.

AFC Energy has long benefited from the external advice provided by highly qualified patent attorneys
and legal practitioners. The integrity of the Company’s IP management and the manner in which all
contractual negotiations with third parties takes place to ensure IP protection and compliance is of
critical importance to the maintaining of shareholder value and prosperity of the Company. IP registers
are reviewed regularly both in terms of existing patents, but also in terms of future and unregistered
protection. Staff education and internal controls over IT systems and cyber threats are conducted by
third party expert consultants to provide assurance over the integrity of our systems.

Failure of health and safety systems put at risk the reputational integrity of the Company and its
operational capability at its respective facilities. Robust health and safety management and an
environment of continuous improvement and reinforcement of safety culture is paramount for the
Company and enforced at all levels of the management and staff. Adherence to codes and standards
surrounding health and safety provides a transparent mitigation to the risk of breaches and ensures
the integrity of AFC Energy’s health and safety remains intact for the sake of our employees, partners,
contractors and shareholders.

As the Company progresses to a commercial business entity, design defects and poor quality
management could have a direct impact on the Company’s market reputation and positioning, with
consequential loss of value to shareholders, together with the potential for financial consequences
(eg. performance warranties and guarantees). AFC Energy adopts a very high standard of control over
manufacturing processes and quality controls mitigating to a large extent the risk of product quality
issues and failure. Further, negotiations with partners on commercial contracts cannot over commit the
Company in terms of financial exposure whilst the technology continues to mature. Strict adherence
to the Manufacturing Readiness Levels (MRL) and the consequential commercial flow on of respective
MRLs in partner contracts will provide a high level of risk mitigation from the issues of design and
quality management across our project portfolio.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSBOARD OF DIRECTORS

Board of Directors

The Board is responsible for the
overall conduct of the Company's
business and meet regularly to
discuss reviews and reports on the
business and plans of the Company.

COMMITTEES MEMBER KEY

Chair of committee

Member of committee

Audit committee

Remuneration committee

AIM Rules Compliance committee

2 3

TIM YEO
Non-Executive Chairman

ADAM BOND
Chief Executive Officer

Tim Yeo was appointed Chairman
of AFC Energy in 2007. He is a
non-executive director of Groupe
Eurotunnel SE, Chair of the University
of Sheffield Energy 2050 Industrial
Advisory Board and Chair of New
Nuclear Watch Europe. He was
formerly Member of Parliament for
South Suffolk and Chairman of the
House of Commons Energy and
Climate Change Select Committee.

Adam has over 15 years’ experience
operating within the international
energy sector both in executive
management positions for listed
energy companies, and in advisory
capacities to both Governments
and the private sector. Adam is well
networked internationally across the
conventional and unconventional
energy sectors and has a strong
understanding of energy markets
and deal making within that sector.
Adam’s mandate is focused on
driving AFC Energy’s transition to
an industry leading alkaline fuel cell
company, whose focus is on project
execution in defined key global
markets. Adam was a Non-Executive
Director of AFC Energy since 2012,
and was formerly Director of both
Waste2Tricity Ltd and JS Yerostigaz
(Uzbekistan). He is qualified with
Bachelors' degrees in commerce and
law and a Master in Laws (Taxation).

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 20151

2 3

CHRISTOPHER TAWNEY
Finance Director

MITCHELL FIELD
Non-Executive Director

EUGENE TENENBAUM
Non-Executive Director

EUGENE SHVIDLER
Non-Executive Director

Christopher Tawney brings over
25 years' senior level experience
in public and private businesses,
and has extensive expertise in the
cleantech and technology sectors.
Most recently, Christopher was FD for
three years at Algaecytes Limited, a
biotechnology company. In addition,
he also served as FD for Dettingen
Ltd, a financial consultancy where he
fulfilled similar boardroom roles for
a number of early-stage cleantech
companies including the solar power
company, Sonnedix Solar LP, clean
energy business, Coomtech Ltd, and
a forestry carbon start-up, Global
Oxygen.

Mitchell, who lives in Wales, owns
Richards and Appleby Ltd, which
is engaged in the manufacture,
sales and distribution of branded
toiletries and cosmetics. Among
these are Leighton Denny, and
several well-known heritage brands,
including "Cyclax" which formerly
held the Royal Warrant from Her
Majesty the Queen. His principal
role is sales and marketing, dealing
with blue-chip companies in the
UK and exporting to over 60
companies internationally. Mitchell
has other investments and manages
interests in fashion, property, import/
export and general trading.

Eugene served as head of corporate
finance for OAO Sibneft in Moscow
from 1998 through 2001. In 1994,
he joined Salomon Brothers where
he worked until 1998. Prior to that,
he spent five years in corporate
finance with KPMG in Toronto,
Moscow and London. He was
an auditor at PriceWaterhouse
in Toronto from 1987 until 1989.
Eugene is a chartered accountant
and holds a Bachelors degree
in commerce and finance from
the University of Toronto. He has
numerous other directorships;
notably, he is a member of the
boards of Chelsea FC plc, Evraz
plc (a FTSE 250-listed company)
and Highland Gold Mining Ltd
(an AIM-quoted company).

Eugene worked at Russian oil major
OAO Sibneft from 1996 through
2005, initially as senior vice president
and, from 1998, as president of the
company. Eugene is a graduate of
the I. M. Gubkin Moscow Institute of
Oil and Gas with a Masters in Applied
Mathematics and he received an
MBA and Masters in International
Taxation from Fordham University
in New York. He is currently non-
executive Chairman of Highland
Gold Mining Ltd, an AIM-quoted
company, and is a member of the
Board of Evraz plc, a FTSE 250-listed
company.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSDirectors’ Report

The Directors present their report together with the audited financial statements for the year ended 31 October 2015. The comparative period was from
1 November 2013 to 31 October 2014. Information required under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 has
been included within the Directors’ report and accounts.

PRINCIPAL ACTIVITY AND REVIEW OF BUSINESS DEVELOPMENTS
The principal activity of AFC Energy plc (or “the Company”) is the development of fuel cells.

Reviews of operations, business developments and current projects are included in the Chairman’s Statement, the Strategic Report and
Operational Review.

RESULTS AND DIVIDEND
The results for the year are set out in the Statement of Comprehensive Income on page 27.

No dividends were paid in the year. The Directors do not intend to declare a dividend in respect of the year.

DIRECTORS AND THEIR INTERESTS
The Directors who served during the year were:

Tim Yeo
Adam Bond
Ian Williamson
Christopher Tawney
Dr Gene Lewis
Mitchell Field
Sir John Sunderland
Eugene Shvidler
Eugene Tenenbaum

Non-Executive Chairman
Non-Executive (appointed Chief Executive Officer on 1 December 2014)
Chief Executive Officer (resigned 30 November 2014)
Finance Director
Technical Director (resigned 27 November 2014)
Non-Executive
Non-Executive (resigned 15 April 2015)
Non-Executive
Non-Executive

A Director appointed during or after the year must stand for re-appointment at the first Annual General Meeting after such appointment. No Directors
were appointed during the relevant period. Adam Bond, Eugene Shvidler and Eugene Tenenbaum are required to retire by rotation in accordance with
the Company’s Articles of Association and, being eligible, offer themselves for re-election.

On 31 October 2015 the beneficial interests of Directors and their families in the equity share capital of the Company were:

Number of
Ordinary shares
of 0.1p
2015

Number of
Ordinary shares
of 0.1p
2014

877,272
2,644,810
2,250,000
13,853,633
50,000

877,272
2,644,810
–
13,853,633
50,000

Tim Yeo
Mitchell Field
Adam Bond
Eugene Shvidler
Christopher Tawney

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

On 31 October 2015 the Directors’ interests over share capital of the Company were:

Options/
Warrants
granted in
year

Options/
Warrants
exercised/
lapsed in
year

1 November
2014

1,100,000
1,000,000

350,000
750,000

–
–

–

6,000,000

500,000

Tim Yeo

Mitchell Field

Adam Bond

Christopher Tawney

31 October
2015

1,100,000
1,000,000

350,000
750,000

Exercise
price

£0.031
£0.240

Date from
which
exercisable1

Expiry
date

18/04/2012
14/04/2013

17/04/2019
13/04/2020

18/04/2012
14/04/2013

17/04/2019
13/04/2020

6,000,000

£0.510

17/7/2015

17/7/2025

Type

Warrant
Warrant

Unapproved
Option

500,000

£0.170

20/3/2018

19/3/2025

EMI Option

–
–

–

Note:
1

Warrants/Options exercisable from/after 14 April 2013 are subject to achievement of performance conditions.

Eugene Tenenbaum had no direct interest over share capital during the reporting period.

DIRECTORS’ REMUNERATION

Name

Tim Yeo (see note 25)
Ian Williamson
Dr Gene Lewis
Adam Bond (see note 25)
Mitchell Field (see note 25)
Sir John Sunderland (see note 25)
Eugene Tenenbaum
Eugene Shvidler
Christopher Tawney

Share-based
payment
expense
£

Other
compensation1
£

Company
pension
contributions
£

–
13,778
371
144,531
–
–
–
–
11,321

38,525
216
157
–
–
5,700
–
–
3,551

–
–
493
–
–
–
–
–
1,351

Salary
£

18,821
168,099
11,348
661,932
–
–
–
–
118,456

Total
2015
£

57,346
182,093
12,369
806,463
–
5,700
–
–
134,679

Total
2014
£

58,325
370,613
160,076
25,567
25,000
21,600
17,200
17,200
23,833

Note:
1 Other compensation includes private medical insurance, benefits and consultancy fees.
2 £331,000 of Adam Bond’s salary was paid in shares.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

Directors’ Report

CONTINUED

DIRECTORS’ SERVICE CONTRACTS
Tim Yeo’s services as a Chairman and Non-Executive Director are provided under a service agreement with the Company dated 1 January 2012 for an
indefinite term, subject to a minimum of six months’ notice. Additional consultancy services are provided under an agreement between the Company
and Locana Corporation (London) Ltd dated 1 January 2012.

Adam Bond’s services as Chief Executive Officer and Director during the period were provided under secondment agreements between the Company
and Linc Energy Ltd. The secondment agreements expired on 31 December 2015, at which point Adam became an employee of the Company. During
the year ended 31 October 2015, a portion of Adam’s remuneration was paid to him by Linc Energy and later recharged to the Company. This amount totalled
£212,438. A further portion of his salary was settled through the issuance of shares in the Company. A total of 2,250,000 were issued to Adam Bond during
the year. The value of the shares received was £331,000. The Company also provided Adam with £87,124 to compensate him in relation to different tax
jurisdictions between the UK and Australia. Management believes this amount to be recoverable from the taxing authorities. The remaining £31,170
was accrued for at the end of the year and paid subsequent to year end. As part of Adam Bond’s contract with the Company, he was granted 6,000,000
share options. These options have performance conditions attached to them. 3,000,000 of the options will only vest if specific operational targets for
energy output are met. The remaining options will only vest if the share price achieves and sustains targeted amounts with equal portions vesting at
share prices of £1.00, £1.50 and £2.00. During the year the Company recorded an expense relating to these options of £144,531.

Mitchell Field’s services as a Non-Executive Director are provided under the terms of a Non-Executive letter dated 17 October 2013 for an indefinite term,
subject to a minimum of six months’ notice (see also note 25). Additional consultancy services are provided under an agreement between the Company
and Richards & Appleby Ltd dated 17 October 2013. During the year to 31 October 2015 Mitchell agreed not to be remunerated.

Eugene Shvidler’s services as a Non-Executive Director are provided under the terms of a letter of appointment, dated 17 October 2013, for an indefinite term,
subject to a minimum of six months’ notice. Additional consultancy services are provided under an agreement between the Company and Eugene Shvidler
dated 17 October 2013. During the year to 31 October 2015 Eugene agreed not to be remunerated.

Eugene Tenenbaum’s services as a Non-Executive Director are provided under the terms of a letter of appointment, dated 17 October 2013, for an indefinite
term, subject to a minimum of six months’ notice. Additional consultancy services are provided under an agreement between the Company and Eugene
Tenenbaum dated 17 October 2013. During the year to 31 October 2015 Eugene agreed not to be remunerated.

Christopher Tawney’s services are provided under a service agreement with the Company dated 18 August 2014 for an indefinite term, subject to six months’
notice by either party.

BOARD CHANGES
Details of changes to the membership of the Board are disclosed within the “Directors and Their Interests” section on page 20.

CAPITAL STRUCTURE
Details of the Company’s share capital are disclosed in notes 17 and 18 to the financial statements.

Shareholder funds have been used for the development and testing of industrial scale fuel cell systems than can compete with conventional electricity
generation technologies.

On 21 March 2016, the Company was aware of the following holdings of 3% or more in the Company’s issued share capital:

Ervington Investments Limited
Age of Reason Foundation
Yady Worldwide
Barclayshare Nominees Limited
TD Direct Investing Nominees (Europe) Limited
Mr Eugene Shvidler
Hargreaves Lansdown (Nominees) Limited
Hargreaves Lansdown (Nominees) Limited

Approximate
percentage of the
Number Company’s issued
share capital
of shares

39,610,494
22,602,402
22,269,705
21,059,268
15,402,098
14,432,737
11,522,962
9,520,300

12.85%
7.33%
7.23%
6.83%
5.00%
4.68%
3.74%
3.09%

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

FINANCIAL INSTRUMENTS
Financial instruments are disclosed in note 21.

POLITICAL AND CHARITABLE DONATIONS
Charitable donations in the year amounted to £nil (2014: £nil).

CORPORATE GOVERNANCE
The Company does not comply with the UK Corporate Governance Code. However, the Board has reported on the Company’s Corporate Governance
arrangements by drawing upon best practice available, including those aspects of the UK Corporate Governance Code it considers to be relevant to the
Company and best practice. The Board is assisted in this regard by a number of committees with delegated authority.

The Company’s organisational structure has clearly documented and communicated levels of responsibility, delegated authority and reporting procedures.
The professionalism and competence of employees is maintained through recruitment, performance appraisal, written job descriptions, personal training
and development plans. The Board supports the highest levels of commitment and integrity from employees. Expected standards of behaviour are set out
in the Staff Handbook, a copy of which is given to all employees.

AUDIT COMMITTEE
The Company’s Audit Committee members during the financial year were Mitchell Field (Chairman), Sir John Sunderland, Adam Bond and Eugene
Tenenbaum. The Committee meets at least twice a year, on dates linked to the Company’s financial calendar, and at any other time when it is appropriate
to discuss audit, accounting or control issues.

The Committee’s principal responsibilities are:
• To monitor the integrity of the financial statements of the Company, reviewing the annual and interim financial statements to ensure that they present

a balanced assessment of the Company’s position

• To review accounting policies
• To review with the management and the Company’s external Auditor the effectiveness of internal controls
• To oversee the publication of reserve and resource statements to ensure compliance with best practice under AIM rules
• To review with the Company’s external Auditor the scope and results of their audit
• To oversee the relationship with the Auditor

The Auditor attends meetings of the Committee except when their appointment or performance is being reviewed. Executive Directors attend as and
when appropriate.

REMUNERATION COMMITTEE
The Remuneration Committee’s members during the financial year were Sir John Sunderland (Chairman), Tim Yeo, and Mitchell Field. The Committee reviews
the performance of the Executive Directors and sets the scale and structure of their remuneration and the basis of their service agreements. In determining
remuneration, the Committee seeks to enable the Company to attract and retain Executives of the highest calibre. In doing so, the Committee takes advice
as appropriate from external advisers on executive remuneration. The Committee also makes recommendations to the Board concerning allocation of share
options to employees.

No Directors participate in discussions or decisions concerning their own remuneration. This Committee is also responsible for nominating candidates,
for the approval of the Board, to fill either Executive or Non-Executive vacancies or additional appointments to the Board. The Committee retained
independent search consultants in respect of the appointment of the Chief Executive and Finance Director.

Details of the Directors’ remuneration, service agreements and their interests in the share capital of the Company are disclosed in the Directors’ Report.

EMPLOYEES
AFC is an equal opportunities employer and it is our policy to ensure that all job applicants and employees are treated fairly and on merit, regardless
of their race, gender, marital status, age, disability, religious belief or sexual orientation. In common with many organisations we operate a performance
appraisal system, the aim of which is to support employees to contribute fully to the organisation and to assist them to fulfil their potential. The Company
encourages the involvement of its employees in its performance through both its Save As You Earn Scheme and its Share Option plan.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSDirectors’ Report

CONTINUED

AIM RULES COMPLIANCE COMMITTEE
The AIM Rules Compliance Committee comprises Tim Yeo and Mitchell Field and meets as appropriate.

The Committee monitors internal procedures, resources and controls to enable the Company to comply with AIM rules.

INFORMATION DISCLOSED IN THE STRATEGIC REPORT AND OPERATIONAL REVIEW
The following matters required to be disclosed in this Report under the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations
2008 are covered in the Strategic Report on pages 16 to 17: the principal risks and uncertainties and key performance indicators.

PAYMENTS TO CREDITORS
The Company’s policy is to settle the terms of payment with its suppliers when agreeing the terms of each transaction, either by accepting the suppliers’
terms or by making the suppliers aware of alternative terms, and to abide by the agreed terms. Trade creditors of the Company at 31 October 2015
represented 125 days (2014: 128 days) of annual purchases.

LIABILITY INSURANCE FOR COMPANY OFFICERS
The Company maintains Directors’ and Officers’ liability insurance cover for its Directors and officers to the extent permitted under the Companies Act 2006.

RESEARCH AND DEVELOPMENT
The Company invests substantially in research and development and makes claims under the Government’s R&D tax credit scheme. In the year to 31 October
2015, relevant expenditure totalled £3,475,657 (2014: £1,284,044).

GOING CONCERN
The Company has cash of £1,756,445 at 31 October 2015. In order to ensure that the Company has sufficient cash resources to meet its short-term
requirements, a firm placing and shareholder offer were completed in December 2015 and January 2016 respectively, raising approximately £3.6 million
before expenses. The Directors now believe there is adequate resource available to continue operations for the next twelve months. The Directors believe
that future fundraising will be necessary to help the Company achieve its milestones and future growth potential and are confident in the ability of the
Company to raise additional funds through the market, or at the project level as deemed appropriate at the time.

POST-BALANCE SHEET EVENTS
Details of post-balance sheet events are provided in note 23 to the financial statements.

RELATIONS WITH SHAREHOLDERS
The Board attaches great importance to maintaining good relationships with Shareholders. The Board regards the Annual General Meeting as an opportunity
to communicate directly with investors, who are encouraged to attend and participate.

AUDITOR
A resolution to reappoint the Auditor of the Company, Grant Thorton UK LLP, will be proposed at the forthcoming Annual General Meeting. Grant Thorton UK
LLP have expressed their willingness to continue as Auditor of the Company.

This report was approved by the Board on 23 March 2016 and signed on its behalf by

CHRISTOPHER TAWNEY
Finance Director and Company Secretary

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015Statement of
Directors’ Responsibilities

The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable law and International Financial
Reporting Standards.

Company law requires the Directors to prepare financial statements for each financial period. Under that law the Directors have elected to prepare the
financial statements in accordance with International Financial Reporting Standards as adopted for use in the European Union. The financial statements
are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing
those financial statements, the Directors are required to:
• Select suitable accounting policies and then apply them consistently
• Make judgements and estimates that are reasonable and prudent
• State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial

statements

• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business

The Directors confirm that they have complied with the above in preparing the financial statements.

The Directors are responsible for keeping adequate accounting records which disclose with reasonable accuracy at any time the financial position
of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding
the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Company’s website (www.afcenergy.com) and legislation in the United Kingdom
governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

STATEMENT OF DISCLOSURE TO AUDITOR
So far as the Directors are aware, there is no relevant audit information (as defined by section 418 of the Companies Act 2006) of which the Company’s
Auditor is unaware, and each Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit
information and to establish that the Company’s Auditor is aware of that information. This confirmation is given and should be interpreted in accordance
with section 418 of the Companies Act 2006.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSIndependent Auditor’s Report

TO THE SHAREHOLDERS OF AFC ENERGY PLC

We have audited the financial statements of AFC Energy PLC for the year ended 31 October 2015 which comprise the statement of financial position, the
statement of comprehensive income, the cash flow statement, the statement of changes in equity and the related notes. The financial reporting framework
that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has
been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members
as a body, for our audit work, for this report, or for the opinions we have formed.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR
As explained more fully in the Directors’ Responsibilities Statement set out on page 25, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in
accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices
Board’s Ethical Standards for Auditors.

SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate.

OPINION ON FINANCIAL STATEMENTS
In our opinion the financial statements:
• give a true and fair view of the state of the Company’s affairs as at 31 October 2015 and of its loss for the year then ended;
• have been properly prepared in accordance with IFRSs as adopted by the European Union; and
• have been prepared in accordance with the requirements of the Companies Act 2006.

OPINION ON OTHER MATTER PRESCRIBED BY THE COMPANIES ACT 2006
In our opinion the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared
is consistent with the financial statements.

MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
• adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
• the financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.

CHRISTOPHER SMITH
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London
23 March 2016

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015Statement of Comprehensive Income

FOR THE YEAR ENDED 31 OCTOBER 2015

EU Grant income
Cost of sales

Gross (loss)/profit

Other income
Administrative expenses

Operating loss

Financial income/(loss)

Loss before tax

Taxation

Loss for the financial year and total comprehensive
loss attributable to owners of the Company

Basic loss per share
Diluted loss per share

All amounts relate to continuing operations.

The notes on pages 31 to 47 form part of these financial statements.

Year ended
31 October 2015
£

Year ended
31 October 2014
restated £

Note

2,262,506
(4,846,933)

782,236
(1,029,460)

(2,584,427)

(247,224)

51,080
(6,112,856)

13,899
(5,037,309)

(8,646,203)

(5,270,634)

3,294,272

(587,663)

(5,351,931)

(5,858,297)

569,706

421,280

(4,782,225)

(5,437,017)

10
10

(1.66)p
(1.66)p

(2.42)p
(2.42)p

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

Statement of Financial Position

AS AT 31 OCTOBER 2015

Assets
Non-current assets
Intangible assets
Property and equipment
Investment
Derivative financial instrument

Current assets
Inventory and work in progress
Derivative financial instrument
Trade and other receivables
Cash and cash equivalents
Restricted cash

Total assets

Capital and reserves attributable to owners of the Company
Share capital
Share premium
Other reserve
Retained deficit

Total equity attributable to Shareholders

Current liabilities
Trade and other payables

Note

31 October 2015
£

31 October 2014
restated £

31 October 2013
£

11
12
13
15

14
21
15
16
16

17
17

338,176
116,328
–
–

279,073
609,441
52,500
479,761

180,733
858,806
52,500
–

454,504

1,420,775

1,092,039

219,421
1,308,859
3,458,340
1,756,445
91,105

157,048
753,909
3,502,892
4,858,203
–

174,469
–
1,717,808
6,961,338
–

6,834,170

9,272,052

8,853,615

7,288,674

10,692,827

9,945,654

289,904
33,947,857
2,207,441
(30,830,087)

285,684
33,332,478
3,032,472
(27,089,095)

223,325
27,566,408
2,792,504
(21,652,078)

5,615,115

9,561,539

8,930,159

1,673,559

1,131,288

1,015,495

1,673,559

1,131,288

1,015,495

Total equity and liabilities

7,288,674

10,692,827

9,945,654

The notes on pages 31 to 47 form part of these financial statements.

These financial statements were approved and authorised for issue by the Board on 23 March 2016.

TIM YEO
Chairman

CHRISTOPHER TAWNEY
Finance Director and Company Secretary

AFC Energy plc
Registered number: 05668788

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

Statement of Changes in Equity

FOR THE YEAR ENDED 31 OCTOBER 2015

Balance at 1 November 2013
Loss after tax for the year
Comprehensive income for the year
Issue of equity shares
Equity-settled share-based payments

Transactions with owners

Balance at 31 October 2014

Loss after tax for the year
Comprehensive income for the year
Issue of equity shares
Equity-settled share-based payments

Transactions with owners

Balance at 31 October 2015

Share
Capital
£

223,325
–
–
62,359
–

Share
Premium
£

27,566,408
–
–
5,766,070
–

Other
Reserve
£

2,792,504
–
–
–
239,968

Retained
Loss
£

(21,652,078)
(5,437,017)
(5,437,017)
–
–

Total
Equity
£

8,930,159
(5,437,017)
(5,437,017)
5,828,429
239,968

62,359

5,766,070

239,968

–

6,068,397

285,684

33,332,478

3,032,472

(27,089,095)

9,561,539

–
–
4,220
–

4,220

–
–
615,379
–

–
–
–
(825,031)

(4,782,225)
(4,782,225)
–
1,041,233

(4,782,225)
(4,782,225)
619,599
216,202

615,379

(825,031)

1,041,233

835,801

289,904

33,947,857

2,207,441

(30,830,087)

5,615,115

Share capital is the amount subscribed for shares at nominal value.

Share premium represents the excess of the amount subscribed for share capital over the nominal value of these shares net of share issue expenses.

Other reserve represents the credit to equity in respect of equity-settled share-based payments.

Retained earnings represent the cumulative loss of the Company attributable to equity Shareholders.

The notes on pages 31 to 47 form part of these financial statements.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

Cash Flow Statement

FOR THE YEAR ENDED 31 OCTOBER 2015

Cash flows from operating activities
Loss before tax for the year
Adjustments for:
Depreciation and amortisation

Impairment of intangible asset investment

Loss on disposal of tangible assets
Equity-settled share-based payment expenses
Payment of shares in lieu of cash
Finance income
R&D tax credits receivable

(Gain)/Loss on derivative financial investment

Cash flows from operating activities before changes in working capital and provisions
R&D tax credits received
(Increase) in restricted cash
(Increase)/Decrease in Inventory and Work in Progress
(Increase) in trade and other receivables
Increase in trade and other payables
Cash absorbed by operating activities

Cash flows from investing activities
Purchase of plant and equipment
Additions to intangible assets
Proceeds of disposal of tangible assets
Interest received

Net cash absorbed by investing activities

Cash flows from financing activities
Proceeds from the issue of share capital
Costs of issue of share capital
Derivative financial asset

Net cash from financing activities

Net (decrease) in cash and cash equivalents
Cash and cash equivalents at start of year

Cash and cash equivalents at end of year

The notes on pages 31 to 47 form part of these financial statements.

Note

31 October 2015
£

31 October 2014
restated £

(5,351,931)

(5,858,297)

11,12

18d

12
11

278,291
52,500
286,743
216,202
331,000
(5,775)
(174,937)
(3,288,497)
(7,656,404)
813,696
(91,105)
(62,373)
(24,500)
542,271
(6,478,415)

(36,845)
(98,980)
4,800
5,775

312,487
–
–
239,968
–
(48,667)
–
636,330
(4,718,179)
361,174
–
17,421
(1,724,978)
115,793
(5,948,769)

(51,247)
(110,215)
–
48,667

(125,250)

(112,795)

288,599
–
3,213,308

6,232,428
(403,999)
(1,870,000)

3,501,907

3,958,429

(3,101,758)
4,858,203

(2,103,135)
6,961,338

1,756,445

4,858,203

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

Notes Forming Part
of the Financial Statements

1. CORPORATE INFORMATION
AFC Energy plc (“the Company”) is a public limited company incorporated in England & Wales and quoted on the Alternative Investment Market
of the London Stock Exchange.

The address of its registered office is Finsgate, 5-7 Cranwood Street, London, EC1V 9EE.

2. BASIS OF PREPARATION AND ACCOUNTING POLICIES
The financial statements of AFC Energy plc have been prepared in accordance with International Financial Reporting Standards (“IFRSs”), International
Accounting Standards (“IASs”) and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations (collectively “IFRSs”) as adopted for
use in the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The Company prepares cash flow forecasts based on current estimates of future revenues and expenditure. These are agreed by the Board and monitored
against actual expenditure to ensure the Company’s resources are sufficient for the Directors to prepare the accounts on a going concern basis. In December
2015 and January 2016 the Company successfully raised £3.6 million before expenses in a placing and an offer for subscription that was oversubscribed by
a factor of 3.8 times. The Directors therefore remain confident that they will continue to be able to raise money to fund the Company’s continuing activities
as required.

The accounting policies set out below have, unless otherwise stated, been applied consistently in these financial statements.

Judgements made by the Directors in the application of these accounting policies that have significant effect on the financial statements and estimates
with a significant risk of material adjustment in the next year are discussed in note 3.

a. New and Revised Standards Adopted by the Company
• IFRS 10 Consolidated Financial Statements is effective from 1 January 2014. This requires a parent to present consolidated financial statements as those
of a single economic entity, replacing the requirements previously contained in IAS 27 Consolidated and Separate Financial Statements and SIC-12
Consolidation – Special Purpose Entities.

• IFRS 11 Joint Arrangements is effective from 1 January 2014. The core principle of the standard is that a party to a joint arrangement determines type

of joint arrangements in which it is involved by assessing the rights and obligations and accounts for those rights and obligations in accordance with the
type of joint arrangement. Joint ventures now must be accounted for using the equity method. Joint operator which is a newly defined term recognises
its assets, liabilities, revenues and expenses and relative shares thereof.

• IFRS 12 Disclosures of Interests with Other Entities is effective from 1 January 2014. It requires increased disclosure about the nature, risks and financial

effects of an entity’s relationship with other entities along with its involvement with other entities.

• Amendments to IAS 27 Separate Financial Statements is effective from 1 January 2014. It requires that when an entity prepares separate financial

statements, investments in subsidiaries, associates, and jointly controlled entities are accounted for either at cost, or in accordance with IFRS 9 Financial
Instruments/IAS39 Financial Instruments: Recognition and Measurement.

• Amendments to IAS 28 Investments in Associates and Joint Ventures is effective from 1 January 2014. This standard supersedes IAS 28 Investments in
Associates and prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when
accounting for investments in associates and joint ventures.

• Amendments to IAS 32 Financial Instruments: Presentation is effective from 1 January 2014. The standard outlines the accounting requirements for the

presentation of financial instruments, particularly as to the classification of such instruments into financial assets, financial liabilities and equity instruments.
The standard also provides guidance on the classification of related interest, dividends and gains/losses, and when financial assets and financial liabilities
can be offset.

• Amendments to IAS 36 Impairment of Assets is effective from 1 January 2014. The standard seeks to ensure that an entity’s assets are not carried at more

than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use).

b. Standards, Amendments and Interpretations to Published Standards not yet effective
At the date of authorisation of these financial statements, the IASB and IFRIC have issued the following standards and interpretations, which are effective
for annual accounting periods beginning on or after the stated effective date. These standards and interpretations are not effective for and have not been
applied in the preparation of these financial statements:

• IFRS 9 Financial Instruments is effective from 1 January 2015. This standard includes requirements for recognition and measurement, derecognition

and hedge accounting.

• IFRS 15 Revenue from contracts with customers. The new standard will replace IAS 18 Revenue and IAS 11 Construction contracts. It will become effective

for accounting periods on or after 1 January 2018 at the earliest.

• IFRS 16 Leases is effective from 1 January 2019. Management has not yet analysed the input to the Financial Statements upon adoption.

The Company expects no impact from the adoption of IFRS 9. As the Company is not currently revenue generating, there would be no impact relating
to the adoption of IFRS 15 on the current financial position. The Company will determine the effects of the adoption of IFRS 15 in future periods.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNotes Forming Part
of the Financial Statements

CONTINUED

2. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED

c. Capital Policy
The Company manages its equity as capital. Equity comprises the items detailed within the principal accounting policy for equity and financial details
can be found in the Statement of Financial Position. The Company adheres to the capital maintenance requirements as set out in the Companies Act.

d. Revenue
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured.
Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and other sales taxes or duty. Revenue arising from
the provision of services is recognised when and to the extent that the Company obtains the right to consideration in exchange for the performance
of its contractual obligations. Licence income is recognised in accordance with the substance of the agreement. When a licensee has the right to use
certain technology for a specified period of time, this is usually on a straight-line basis over the life of the agreement in accordance with IAS 18.

e. Grants
The Company participates in three projects, LASERCELL, ALKAMMONIA and POWER-UP, which receive funding from the European Union. These grants are
based on periodic claims for qualifying expenditure incurred by all the entities participating in each project consortium. The Company acts as coordinator for
all three projects and submits claims and receives funding on behalf of the other participants in each project consortium. Grant funds of other participants
are paid over to them as soon as they are received and only the grant funding relating specifically to the Company’s activities is reflected in the statement
of comprehensive income. The qualifying expenditure is shown in the statement of comprehensive income as cost of sales. Grants, including grants from
the European Union, are recognised in the statement of comprehensive income in the same period as the expenditure to which the grant relates.

f. Development Costs
Development expenditure does not meet the strict criteria for capitalisation under IAS 38 and has been recognised as an expense. Expenditure on and
relating to the Company’s KORE fuel cell module installed at Stade in Germany under the EU funded POWER-UP project is considered to be development
expenditure to date, as the KORE module is the first of its kind that has been produced and has not yet operated at full power output for an extended period.

g. Foreign Currency
The financial statements of the Company are presented in the currency of the primary economic environment in which it operates (the functional currency)
which is pounds sterling. In accordance with IAS 21, transactions entered into by the Company in a currency other than the functional currency are recorded
at the rates ruling when the transactions occur. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates
prevailing at the balance sheet date.

h. Inventory and Work in Progress
Inventory is recorded at the lower of cost and net realisable value. Work in progress is valued at cost, less the cost of work invoiced on incomplete contracts
and less foreseeable losses. Cost comprises purchase cost plus production overheads.

i. Trade and Other Receivables
Trade and other receivables arise principally through the provision by the Company of goods and services to customers (trade debtors). They also include
other types of contractual monetary assets. These assets are initially recognised at fair value and are subsequently measured at amortised cost less any
provision for impairment.

j. Loans and Other Receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial
measurement, loans and receivables are carried at amortised cost using the effective interest method less any allowance for impairment. Gains and losses
are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

The Company’s loans and receivables include cash and cash equivalents. These include cash in hand, and deposits held at call with banks.

k. Property and Equipment
Property and equipment are stated at cost less any subsequent accumulated depreciation and impairment losses.

Where parts of an item of property and equipment have different useful lives, they are accounted for as separate items of property and equipment.

Depreciation is charged to the income statement within cost of sales and administrative expenses on a straight-line basis over the estimated useful lives
of each part of an item of property, plant and equipment. The estimated useful lives are as follows:

• Leasehold improvements
• Fixtures, fittings and equipment
• Vehicles

1 to 3 years
1 to 3 years
3 to 4 years

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015
2. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED

k. Property and Equipment continued
Expenses incurred in respect of the maintenance and repair of property and equipment are charged against income when incurred. Refurbishment
and improvement expenditure, where the benefit is expected to be long lasting, is capitalised as part of the appropriate asset.

The useful economic lives of property, plant and equipment and the carrying value of tangible fixed assets are assessed annually and any impairment
is charged to the income statement.

l. Intangible Assets
Expenditure on research activities is recognised in the income statement as an expense as incurred. Expenditure in establishing a Patent is capitalised
and written off over its useful life.

Other intangible assets that are acquired by the Company are stated at cost less accumulated amortisation and impairment losses.

Amortisation of intangible assets is charged using the straight-line method to administrative expenses over the following period:

• Patents

20 years

Useful lives are based on the management’s estimates of the period that the assets will generate revenue, which are periodically reviewed for continued
appropriateness and any impairment is charged to the income statement.

m. Cash and Cash Equivalents
Cash and cash equivalents comprise cash balances and call deposits with major banking institutions realisable within 3 months. Restricted cash is €125,000
held in escrow to support a bank guarantee relating to the Stade site.

n. Other Financial Liabilities
The Company classifies its financial liabilities as:

• Trade and Other Payables
These are initially recognised at invoiced value. These arise principally from the receipt of goods and services. There is no material difference between
the invoiced value and the value calculated on an amortised cost basis or fair value.

• Deferred Income
This is the carrying value of income received from a customer in advance which has not been fully recognised in the Income Statement pending delivery
to the customer. The carrying value is fair value.

o. Leases
Finance Leases
Finance leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at
the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance
of the liability. Finance charges are reflected in profit or loss. Capitalised leased assets are depreciated over the shorter of the estimated useful life
of the asset and the lease term, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term.

Operating Leases
Operating lease rentals are charged to the Income Statement on a straight-line basis over the lease term.

p. Financial Assets
All of the Company’s financial assets are loans and receivables and investments. Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market. They are included in current assets at fair value and comprise trade and other
receivables and cash and cash equivalents. Investments are accounted for at cost less impairment.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNotes Forming Part
of the Financial Statements

CONTINUED

2. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED

q. Financial Instruments
Financial assets and liabilities are recognised on the balance sheet when the Group becomes a party to the contractual provisions of the instrument.

• Cash and cash equivalents comprise cash held at bank and short-term deposits
• Trade payables are not interest bearing and are stated at their nominal value
• Equity instruments issued by the Group are recorded at the proceeds received except where those proceeds appear to be less than the fair value of the
equity instruments issued, in which case the equity instruments are recorded at fair value. The difference between the proceeds received and the fair
value is reflected in the share-based payments reserve.

r. Valuation of Derivative Financial Instrument
The Company has placed shares with Lanstead Capital L.P. and at the same time entered into an equity swap agreement in respect of the subscriptions for
which consideration will be received monthly over an 18 month period as disclosed in the notes to these financial statements. The amount receivable each
month is dependent on the Company’s share price performance and gains and losses arising on monthly settlements are reflected in the income statement
in administrative expenses. At each period end the financial instrument is valued at fair value based on the share price of the Company at that date. The
instrument is accounted for as fair value through profit and loss; any change in the fair value of the derivative financial instrument is reflected in the statement
of comprehensive income in administrative expenses.

s. Share-Based Payment Transactions
The Company awards share options and warrants to certain Directors and employees to acquire shares of the Company. The fair value of options and warrants
granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period
during which the Directors and employees become unconditionally entitled to the options or warrants. The fair value of the options and warrants granted is
measured using the Black-Scholes option valuation model, taking into account the terms and conditions upon which the options and warrants were granted.
The amount recognised as an expense is adjusted to reflect the actual number of share options and warrants that vest only where vesting is dependent upon
the satisfaction of service and non-market vesting conditions or where the vesting periods themselves are amended by the introduction of new schemes and
the absorption of earlier schemes by agreement between the Company and the relevant Directors and employees. Where options or warrants granted are
cancelled, all future charges arising in respect of the grant are charged to the income statement on the date of cancellation.

t. Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to settle
the obligation. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation
at the balance sheet date and are discounted to present value where the effect is material.

u. Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates
to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable or recoverable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance
sheet date together with any adjustment to tax payable in respect of previous years.

Deferred tax assets are not recognised due to the uncertainty of their recovery.

v. R&D Tax Credits
The Company’s research and development activities allow it to claim R&D tax credits from HMRC in respect of qualifying expenditure; these credits
are reflected in the income statement in administrative expenses or in the taxation line depending on the nature of the credit.

w. Pension Contributions
The Company operates a defined contribution pension scheme which is open to all employees and makes monthly employer contributions to the scheme
in respect of employees who join the scheme. These employer contributions are currently capped at 3% of the employee’s salary and are reflected in the
statement of comprehensive income in the period for which they are made.

x. Restatement of Comparatives
Certain balances have been restated from 2014; this relates to the derivative financial instrument which had been included with trade and other receivables
on the face of the statement of financial position and is now shown separately. The amounts received and receivable under EU grants have been reclassified
from Revenue to EU Grant Income.

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 20153. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION AND UNCERTAINTY

In the preparation of the financial statements management makes certain judgements and estimates that impact the financial statements. While these
judgements are continually reviewed, the facts and circumstances underlying these judgements may change, resulting in a change to the estimates that
could impact the results of the Company. In particular:

Carrying Values of Property and Equipment
The Company monitors internal and external indicators of impairment relating to its property and equipment. Management has considered whether
any indicators of impairment have arisen over certain assets relating to these assets. After assessing these, management has concluded that no impairment
has arisen during the year and subsequent to 31 October 2015 (2014: £nil).

Useful Lives and Impairment of Intangible Assets, and Property and Equipment
Intangible assets, and property and equipment are amortised or depreciated over their useful lives. Useful lives are based on the management’s estimates
of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. After undertaking a comprehensive review
of intangible assets, management has concluded that no impairment has arisen with respect to intangible assets during the year and subsequent to
31 October 2015 (2014: £nil).

Income Taxes and Withholding Taxes
The Company believes that its receivables for tax recoverable are adequate for all open audit years based on its assessment of many factors, including past
experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgements about future
events. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact income tax expense
in the period in which such determination is made.

Capitalisation of Development Expenditure
The Company uses the criteria of IAS 38 to determine whether development expenditure should be capitalised. After assessing these, management
has concluded it would not be appropriate to capitalise development expenditure incurred during the year ended 31 October 2015.

Share-Based Payments
Certain employees (including Directors and senior Executives) of the Company receive remuneration in the form of share-based payment transactions,
whereby employees render services as consideration for equity instruments (“equity-settled transactions”).

The fair value is determined using an appropriate pricing model.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or
service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (“the vesting date”). The cumulative
expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired
and the Company’s best estimate of the number of equity instruments that will ultimately vest. The profit or loss charge or credit for a period represents
the movement in cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated
as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance and/or service conditions are satisfied.
Where the terms of an equity-settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified.
An additional expense is recognised for any modification which increases the total fair value of the share-based payment arrangement, or is otherwise
beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award
is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that
it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

Licence Fees
Licence fees are recognised on a straight line basis over the life of the licence, with payments being received in staggered instalments. Fees which
are contingent on an event are recognised when the Company believes that it is probable that the event will occur.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSNotes Forming Part
of the Financial Statements

CONTINUED

4. SEGMENTAL ANALYSIS
Operating segments are determined by the chief operating decision maker based on information used to allocate the Company’s resources. The information
as presented to internal management is consistent with the Statement of Comprehensive Income. It has been determined that there is one operating
segment, the development of fuel cells. In the year to 31 October 2015, the Company operated mainly in the United Kingdom and in Germany.
All non current assets are located in the United Kingdom.

5. OPERATING LOSS
This has been stated after:

Government grants received and receivable
R&D tax credit receivable
Depreciation/Impairment of property and equipment
Research and Development expenditure
Amortisation/Impairment of intangible assets
Write off of Waste2Tricity investment and receivable
Equity-settled share-based payment expense
Foreign exchange differences
Auditor’s remuneration – audit
Auditor’s remuneration – tax
Auditor’s remuneration – other services

6. STAFF NUMBERS AND COSTS, INCLUDING DIRECTORS
The average numbers of employees in the year were:

Support, operations and technical
Administration

The aggregate payroll costs for these persons were:

Wages and salaries (including Directors’ emoluments)
Social security
Employer’s pension contributions
Equity-settled share-based payment expense

Year ended
31 October 2015
£

Year ended
31 October 2014
£

(2,262,506)
(174,937)
198,769
3,475,657
79,522
558,983
216,202
42,975
30,000
9,500
–

(591,269)
–
300,612
1,284,044
11,875
–
239,968
44,211
20,000
2,500
14,360

Year ended
31 October 2015
Number

Year ended
31 October 2014
Number

39
5

37
12

2,660,709
317,242
35,095
216,202

2,214,039
247,339
31,443
239,968

3,229,248

2,732,789

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

7. DIRECTORS’ REMUNERATION

Wages and salaries
Social security
Equity-settled share-based payment expense
Other compensation (see note 25)
Company pension contributions

The emoluments of the Chairman

The emoluments of the highest-paid Director

Company pension contributions of highest paid Director

Year ended
31 October 2015
£

Year ended
31 October 2014
£

978,656
131,225
170,001
48,149
1,844

667,078
80,535
83,829
82,923
12,569

1,329,875

926,934

57,346

58,325

661,932

370,613

–

8,000

The remuneration, details of share options and interests in the Company’s shares of each Director are shown in the Directors’ Report on pages 20 and 21.

8. FINANCIAL INCOME

Gain/(Loss) on derivative financial instrument
Bank interest receivable

Total interest receivable

9. TAXATION

Recognised in the income statement

Research and development tax credit – current year

Total tax credit

Reconciliation of effective tax rates

Loss before tax

Tax using the domestic rate of corporation tax of 20.42% (2014: 21.67%)

Effect of:
Expenses not deductible for tax purposes
Above the line tax credit
Research and development allowance
Research and development tax credit
Depreciation in excess of capital allowances
Losses surrendered for research and development
Unutilised losses carried forward

Total tax credit for the year

Year ended
31 October 2015

Year ended
31 October 2014

3,288,497
5,775

(636,330)
48,667

3,294,272

(587,663)

Year ended
31 October 2015
£

Year ended
31 October 2014
£

(569,706)

(421,280)

(569,706)

(421,280)

(5,351,931)

(5,858,297)

(1,092,864)

(1,269,298)

659,518
185,396
(450,148)
(569,706)
47,737
232,349
418,012

151,115
19,643
(347,762)
(421,280)
65,133
625,971
755,198

(569,706)

(421,280)

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

Notes Forming Part
of the Financial Statements

CONTINUED

10. LOSS PER SHARE
The calculation of the basic loss per share is based upon the net loss after tax attributable to ordinary Shareholders of £4,782,225 (2014: loss of £5,437,017)
and a weighted average number of shares in issue for the year.

Basic loss per share (pence)
Diluted loss per share (pence)
Loss attributable to equity Shareholders

Weighted average number of shares in issue

Year ended
31 October 2015

Year ended
31 October 2014

(1.66)p
(1.66)p
(4,782,225)

(2.42)p
(2.42)p
(5,437,017)

Number

288,431,626

224,533,287

Diluted earnings per share
As set out in note 18, there are share options and warrants outstanding as at 31 October 2015 which, if exercised, would increase the number of shares
in issue. However, the diluted loss per share is the same as the basic loss per share, as the loss for the year has an anti-dilutive effect.

2015
Patents
£

748,113
(401,166)
98,980

2014
Patents
£

637,898
–
110,215

445,927

748,113

469,040
(401,166)
39,877

457,165
–
11,875

107,751

469,040

338,176

279,073

11. INTANGIBLE ASSETS

Cost
Balance at 1 November
Retirements
Additions

Balance at 31 October

Amortisation
Balance at 1 November
Retirements
Charge for the year

Balance at 31 October

Net book value

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

12. PROPERTY AND EQUIPMENT

Cost
At 31 October 2013
Additions

At 31 October 2014
Transfers
Additions
Disposals

At 31 October 2015

Depreciation
At 31 October 2013
Charge for the year
At 31 October 2014

Transfers
Charge for the year
Disposals

At 31 October 2015

Net Book Value
At 31 October 2015
At 31 October 2014

Leasehold
improvements
£

Fixtures, fittings
and equipment
£

Motor Vehicles
£

Total
£

221,512
51,247

272,759
45,852
18,851
–

2,693,951
–

2,693,951
(45,852)
–
(1,326,821)

10,495
–

10,495
–
17,994
(10,495)

2,925,958
51,247

2,977,205
–
36,845
(1,337,316)

337,462

1,321,278

17,994

1,676,734

213,057
27,047
240,104

9,783
39,645
–

1,847,390
270,067
2,117,457

(9,783)
194,882
(1,035,277)

6,705
3,498
10,203

–
3,887
(10,495)

2,067,152
300,612
2,367,764

–
238,414
(1,045,772)

289,532

1,267,279

3,595

1,560,406

47,930
32,655

53,999
576,494

14,399
292

116,328
609,441

There are no assets held under finance leases.

13. INVESTMENT
The Company holds 23% in Waste2Tricity Ltd (“W2T”) (a company registered in England & Wales). As at 31 October 2015 the Company held 230,000 shares
representing 23% (2014: 230,000 representing 23%) of the share capital of W2T. In the view of the Directors this investment has no value currently and
has been recognised at cost less impairment. No revenue was recognised in the period under the licence agreements with Waste2Tricity Limited and
Waste2Tricity International (Thailand) Limited and accrued licence fees receivable as at 31 October 2014 of £506,483 has also been written off.

Investment in W2T

Year ended
31 October 2015
£

Year ended
31 October 2014
£

–

52,500

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

Notes Forming Part
of the Financial Statements

CONTINUED

14. INVENTORY AND WORK IN PROGRESS

Inventory
Work in progress

15. TRADE AND OTHER RECEIVABLES

Current:
R&D tax credits receivable
EU grants receivable
Other receivables

Year ended
31 October 2015
£

Year ended
31 October 2014
£

219,421
–

88,304
68,744

219,421

157,048

Year ended
31 October 2015
£

Year ended
31 October 2014
£

718,023
2,513,395
226,922

787,075
419,183
2,296,634

3,458,340

3,502,892

The trade and other receivables balances are categorised as loans and other receivables. There is no significant difference between the fair value of the trade
and other receivables and the values stated above.

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

16. CASH AND CASH EQUIVALENTS

Cash at bank
Bank deposits

Year ended
31 October 2015
£

Year ended
31 October 2014
£

675,603
1,080,842

2,956,871
1,901,332

1,756,445

4,858,203

Cash at bank and bank deposits consist of cash. There is no material foreign exchange movement in respect of cash and cash equivalents. Restricted cash,
not included in cash and cash equivalents, is €125,000 held in an escrow account to support a bank guarantee relating to the Stade site.

17. ISSUED SHARE CAPITAL

At 31 October 2014
Issue of shares on 3 December 2014
Issue of shares on 5 December 2014
Issue of shares on 6 March 2015
Issue of shares on 20 March 2015
Issue of shares on 2 April 2015
Issue of shares on 20 April 2015
Issue of shares on 28 May 2015
Issue of shares on 17 June 2015
Issue of shares on 17 July 2015

At 31 October 2015

All issued shares are fully paid.

Number

Ordinary shares
£

Share premium
£

Total
£

285,683,534
1,000,000
150,000
1,000,000
770,000
100,000
308,409
530,000
100,000
262,000

285,684
1,000
150
1,000
770
100
308
530
100
262

33,332,478
99,000
9,450
85,000
57,090
3,030
54,042
110,420
45,650
151,698

33,618,162
100,000
9,600
86,000
57,860
3,130
54,350
110,950
45,750
151,960

289,903,943

289,904

33,947,858

34,237,762

The Company considers its capital and reserves attributable to equity Shareholders to be the Company’s capital. In managing its capital, the Company’s
primary long-term objective is to provide a return for its equity Shareholders through capital growth. Going forward the Company will seek to maintain
a gearing ratio that balances risks and returns at an acceptable level and also to maintain a sufficient funding base to enable the Company to meet its
working capital needs. The Company’s commercial activities are at an early stage and management considers that no useful target debt to equity gearing
ratio can be identified at this time.

Details of the Company’s capital are disclosed in the Company statement of changes in equity.

There have been no other significant changes to the Company’s management objectives, policies and processes in the year nor has there been any change
in what the Company considers to be capital.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

Number of options

Weighted
average remaining
contractual life

Exercise price

6,865,000
1,375,000
(50,000)
(210,000)
7,980,000
7,615,000
(1,150,000)
(590,000)

3.13-35.75p
35.75p
3.13-24p
32-35.75p
3.13-35.75p
17-51p
3.13-24p
32-41p

6.58 yrs

6.27 yrs

13,855,000

3.13-35.75p

7.69 yrs

Number of warrants

Weighted
average remaining
contractual life

Exercise price

9,007,900
–
(1,960,100)
7,047,800
100,000
–

3.13-24p
–
24p
3.13-24p
3.13p
–

6.25 yrs

5.13 yrs

6,947,800

3.13-24p

4.13 yrs

Notes Forming Part
of the Financial Statements

CONTINUED

18a. SHARE OPTIONS

At 31 October 2013
Options granted in the year
Options exercised in the year
Options lapsed in the year
At 31 October 2014
Options granted in the year
Options exercised in the year
Options lapsed in the year

At 31 October 2015

18b. WARRANTS

At 31 October 2013
Warrants exercised in the year
Warrants lapsed in the year
At 31 October 2014
Warrants exercised in the year
Warrants lapsed in the year

At 31 October 2015

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

18c. SAYE
During the year the Company operated a share save scheme.

At 31 October 2013
SAYE issued during the year
SAYE lapsed/cancelled during the year
At 31 October 2014
SAYE issued during the year
SAYE lapsed/cancelled during the year
SAYE exercised during the year

At 31 October 2015

18d. EQUITY-SETTLED SHARE-BASED PAYMENTS CHARGE

Number of SAYE

Weighted
average remaining
contractual life

Exercise price

553,082
655,928
(143,751)
1,065,259
–
(485,503)
(8,409)

22p
18.6p
22p
18.6-22p
–
18.6-22p
22p

3.1 yrs

2.2 yrs

571,347

18.6–22p

1.3 yrs

Share options

Option price
(p)

10
17
22
23
23
3.13
17.5
24
20.75
32
34
35.75
39.25
41
51

Adjustments for leavers

Total charge for the year (2014: £224,802)

Average
grant date
share price
(p)

Average
expected
volatility
(p.a.)

Average
risk-free
interest rate
(p.a.)

Average
dividend
yield
(p.a.)

Average
implied
option life
(years)

Average
fair value
per option
(p)

10
17
20
21
14
3.13
18.75
23.75
20
31.75
34p
35.75
39.25
41
51

46%
80%
46%
46%
46%
113.8%
188%
188%
214.8%
243%
80%
124.7%
80%
80%
80%

4.4%
1.5%
4.4%
4.4%
4.4%
4.4%
4.4%
4.4%
4.4%
4.4%
1.5%
1.5%
1.5%
1.5%
1.5%

0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%

3.5
3.5
3.5
3.5
3.5
3.0
3.5
3.5
3.0
3.5
3.5
3.5
3.5
3.5
3.5

2.5
9.48
6
6
2
2
14.07
17.80
15
24
18.96
21.8
21.89
22.86
28.44

Amount
expensed
in the 2015
accounts
£

–
(11,322)
–
–
–
–
–
–
–
(984)
(100,568)
(58,897)
(2,110)
(30,842)
(138,860)

129,804

210,779

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

Notes Forming Part
of the Financial Statements

CONTINUED

18d. EQUITY-SETTLED SHARE-BASED PAYMENTS CHARGE CONTINUED

Warrants

Warrant price
(p)

10
22
3.13
24
30

Adjustments for leavers

Total charge for the year (2014: £nil)

SAYE

SAYE price
(p)

22
18.6

Average
grant date
share price
(p)

Average
expected
volatility
(p.a.)

Average
risk-free
interest rate
(p.a.)

Average
dividend
yield
(p.a.)

Average
implied
option life
(years)

Average
fair value
per option
(p)

20
20
3.13
23.75
23.75

46%
46%
113.8%
188%
188%

4.4%
4.4%
4.4%
4.4%
4.4%

0%
0%
0%
0%
0%

3.5
3.5
3.0
3.5
3.5

10
6
2
17.8
17.64

Average
grant date
share price
(p)

27.5
23.25

Average
expected
volatility
(p.a.)

124.7%
137.5%

Average
risk-free
interest rate
(p.a.)

1.5%
1.5%

Average
dividend
yield
(p.a.)

0%
0%

Average
implied
option life
(years)

3.5
3.5

Average
fair value
per option
(p)

21.69
19.24

Adjustments for leavers

Total charge for the year (2014: £2,565)

Total equity-settled share-based payment charge (2014: £383,415)

Amount
expensed
in the 2015
accounts
£

–
–
–
–
–

–

Amount
expensed
in the 2015
accounts
£

6,767
945

2,289

5,423

216,202

Expected volatility has been based on the 3.5 year historical volatility of share price. Vesting requirements are three years for the exercise of warrants and
options, except for 500,000 options granted to Ian Williamson which vest in two years. Certain options and warrants granted to Directors are also subject
to performance conditions.

The fair value of services received in return for share options and other share-based incentives granted is measured by reference to the fair value of share
options and incentives granted. This estimate is based on a Black-Scholes model, adjusted for non-vesting market-related conditions, which is considered
most appropriate considering the effects of the vesting conditions, expected exercise period and the dividend policy of the Company.

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

19. TRADE AND OTHER PAYABLES

Trade payables
Deferred income
Other payables
Accruals

20. OPERATING LEASE COMMITMENTS

Non-cancellable operating leases are as follows:
Within one year
Between one and five years
Greater than five years

Year ended
31 October 2015
£

Year ended
31 October 2014
£

1,066,600
115,698
319,483
171,778

543,878
68,744
311,378
207,288

1,673,559

1,131,288

Year ended
31 October 2015
£

Year ended
31 October 2014
£

146,496
69,260
–

49,190
61,954
–

215,756

111,144

The lease commitments relate to accommodation and three vehicles.

21. FINANCIAL INSTRUMENTS
In common with other businesses, the Company is exposed to risks that arise from its use of financial instruments. This note describes the Company’s
objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these
risks is presented throughout these financial statements. The significant accounting policies regarding financial instruments are disclosed in note 2 and
the significant accounting estimates and judgements are set out in note 3.

Principal Financial Instruments
The principal financial instruments used by the Company, from which financial instrument risk arises, are as follows:

Loans and receivables
Cash and cash equivalents
Trade and other receivables
Fair value through through profit and loss
Level 3 derivative financial instrument
Total financial assets
Trade and other payables
Total financial liabilities

Year ended
31 October 2015
£

Year ended
31 October 2014
£

1,756,445
3,458,340

1,308,859
6,523,644
1,673,559
1,673,559

4,858,203
3,502,892

1,233,670
9,594,765
1,131,288
1,131,288

Financial instruments that are measured subsequent to initial recognition at fair value are grouped into three levels based on the degree to which the fair
value is observable as defined by IFRS 7:

Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets and liabilities;

Level 2 fair value measurements are those derived from inputs, other than quoted prices included within Level 1, that are observable either directly
(i.e. as prices) or indirectly (i.e. derived from prices); and

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

Notes Forming Part
of the Financial Statements

CONTINUED

21. FINANCIAL INSTRUMENTS CONTINUED

Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable
market data.

The derivative financial instrument above, which is classified as a Level 3 derivative financial instrument, is the fair value of the equity swap with Lanstead
Capital L.P. (“Lanstead”) in the amount of £1,308,859. In October 2014 the Company initially issued 22,000,000 new ordinary shares of 0.1p each in the capital
of the Company (“Ordinary Shares”) at a price of 10p per share to Lanstead for £2,200,000. The Company simultaneously entered into an equity swap with
Lanstead for 75 per cent of these shares with a reference price of 13.3333p per share (the “Reference Price”). The equity swap is for an 18 month period ending
in April 2016. All 22,000,000 Ordinary Shares were allotted with full rights on the date of the transaction.

Of the subscription proceeds of £2,200,000 received from Lanstead, £1,870,000 (85 per cent) was invested by the Company in the equity swap.
Investment in the equity swap was a condition of the placing with Lanstead.

To the extent that the Company’s volume weighted average share price is greater or lower than the Reference Price at each swap settlement, the Company
will receive greater or lower consideration calculated on a pro-rata basis i.e. volume weighted average share price/Reference Price multiplied by the monthly
transfer amount. As the amount of the effective consideration receivable by the Company from Lanstead under the swap agreements will vary subject to the
movement in the Company’s share price and will be settled in the future, the receivable is treated for accounting purposes as a derivative financial asset and
has been designated at fair value through profit or loss, where it is included in administrative expenses. The fair value is determined by using the share price
at the measurement date and a historical volatility calculated based on the remaining life of the swap. Historical volatility, the unobservable input in the
fair value measurement, was 69.61% at 31 October 2015 (2014: 58.31%). A reasonably possible change in the volatility used would not lead to a significant
change in the fair value of the instrument.

Value in 2014
Gains recognised in profit and loss
Settlements received
Value in 2015

1,233,670
3,288,497
(3,213,308)
1,308,859

No financial instruments have been transferred between Levels during the year.

General Objectives, Policies and Processes
The Board has overall responsibility for the determination of the Company’s risk management objectives and policies and, while retaining ultimate
responsibility for them, it has delegated part of the authority for designing and operating processes that ensure the effective implementation of the
objectives and policies to the Company’s finance team. The Board receives reports from the financial team through which it reviews the effectiveness
of the processes put in place and the appropriateness of the objectives and policies it sets.

The overall objective of the Board is to set policies that seek to reduce ongoing risk as far as possible without unduly affecting the Company’s competitiveness
and flexibility. Further details regarding these policies are set out overleaf.

Credit Risk
Credit risk arises principally from the Company’s trade and other receivables and cash and cash equivalents. It is the risk that the counterparty fails
to discharge its obligation in respect of the instrument. The maximum exposure to credit risk equals the carrying value of these items in the financial
statements as shown below:

Trade and other receivables
Cash and cash equivalents

Year ended
31 October 2015
£

Year ended
31 October 2014
£

3,458,340
1,756,445

3,502,892
4,858,203

The Company’s principal trade and other receivables arose from: a) annual payments for various services held as pre-payments b) a VAT debtor c) an R&D tax
credit d) a derivative financial asset and e) grant funding receivable from the European Union. Credit risk with cash and cash equivalents is reduced by placing
funds with a range of banks with acceptable credit ratings and government support where applicable and on term deposits with a range of maturity dates.
At the year end, most cash was temporarily held on short-term deposit, following maturity of term deposits.

AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2015

21. FINANCIAL INSTRUMENTS CONTINUED

Liquidity Risk
Liquidity risk arises from the Company’s management of working capital and the amount of funding required for the development programme. It is the
risk that the Company will encounter difficulty in meeting its financial obligations as they fall due. The Company’s policy is to ensure that it will always have
sufficient cash to allow it to meet its liabilities when they become due.

The principal liabilities of the Company are trade and other payables in respect of the ongoing product development programme. Trade and other payables
are all payable within two months. The Board receives cash flow projections on a regular basis as well as information on cash balances.

Interest Rate Risk
The Company is exposed to interest rate risk in respect of surplus funds held on deposit and uses fixed interest term deposits to mitigate this risk.

Fair Value of Financial Liabilities

Trade and other payables

Year ended
31 October 2015
£

Year ended
31 October 2014
£

1,673,559

1,131,288

There is no difference between the fair value and book value of trade and other payables.

The Company does not enter into forward exchange contracts or otherwise hedge its potential foreign exchange exposure. The Board considers that this
exposure is not currently material. The Board monitors and reviews its policies in respect of currency risk on a regular basis. At 31 October 2015 the Company
held no monetary assets or liabilities in currencies other than the functional currency of the operating units involved (2014: nil).

22. CAPITAL COMMITMENTS
The Company had no capital commitments outstanding at 31 October 2015 (2014: £51,780).

23. BOARD CHANGES AND POST-BALANCE SHEET EVENTS
Board changes during the year are reported under “Directors and their interests”. The Company also undertook a firm placing and shareholder offer,
raising £3.6 million before expenses.

24. ULTIMATE CONTROLLING PARTY
There is no ultimate controlling party.

25. RELATED PARTY TRANSACTIONS
During the year ended 31 October 2015:

£2,280 (plus VAT) was invoiced by Richards and Appleby Ltd (a company registered in England & Wales) for the services of Mitchell Field as a Director
of AFC Energy plc (2014: £11,400). Mr Field is also a Director and Shareholder of Richards and Appleby Ltd. At 31 October 2015, the sum owing to Richards
and Appleby Ltd was £4,780 (2014: nil).

£212,438 was invoiced by Linc Energy Ltd (a company registered in Australia) for the services of Adam Bond as Director of AFC Energy plc (2014: £25,567).
Linc Energy Ltd was, until 30 September 2015, a major Shareholder in the Company. At 31 October 2015 the amount owing to Linc Energy Ltd was £42,761
(2014: £1,667).

£37,640 (plus VAT) was invoiced by Locana Corporation (London) Ltd (a company registered in England & Wales) for consultancy services (2014: £40,050).
Mr Yeo is also a Director and Shareholder of Locana Corporation (London) Ltd. At 31 October 2015, the sum owing to Locana was £3,350 (2014: £1,675).

£nil was invoiced by John Sunderland Associates Ltd (a company registered in England & Wales) for the services of Sir John Sunderland as a Director
of AFC Energy plc (2014: £8,000). Sir John Sunderland is also a Director and Shareholder of John Sunderland Associates Ltd. At 31 October 2015, the sum
owing to John Sunderland Associates Ltd was nil (2014: nil).

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS