AFC Energy PLC
Annual Report 2016

Plain-text annual report

A F C E N E R G Y P L C A n n u a l R e p o r t & A c c o u n t s 2 0 1 6 DELIVERING ENERGY FOR THE FUTURE ANNUAL REPORT & ACCOUNTS 2016 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 AFC Energy, the industrial fuel cell power company, is the leading developer of low- cost alkaline fuel cell systems using hydrogen to produce zero emission electricity. AFC Energy fuel cell system at our plant in Stade, Germany. Our fuel cell has the potential to be the catalyst which transforms the way in which industries of today produce energy for tomorrow. Visit our website at www.afcenergy.com WHAT WE DO WHY WE DO IT AFC Energy is focused on developing large-scale and distributed stationary fuel cell applications, utilising alkaline fuel cell technology, supplied by industry sourced hydrogen feedstock. The inexorable growth in demand for clean energy coupled with the fact that hydrogen is the number one industrial gas, based on number of molecules produced, means that hydrogen fuel cell technology is here today providing a wide range of power needs. PAGE 04 PAGE 06 HOW WE DO IT WHY WE ARE DIFFERENT Modularised fuel cell system design that can be repeatedly scaled to deliver much higher power outputs. AFC Energy is the only large-scale developer of alkaline fuel cells. Testimony of this was the delivery of a 240kW fuel cell ("240 FC") at our plant in Stade, Germany. PAGE 10 PAGE 09 WELCOME TO THE AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 Strategic Report Chairman's Statement A Year of Breakthroughs Our Technology Market Overview How We Measure up Our Business Model Operational Review Strong Partnerships Managing Our Risks Corporate Social Responsibility Governance Introduction to Governance Our Experienced Leadership Directors' Interests and their Remuneration Directors’ Report Statement of Directors’ Responsibilities Financial Statements Independent Auditor’s Report 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 02–21 22–30 31–50 AFC Energy’s automated stack assembly robot. Quality assurance/control. AFC Energy’s laboratory gas manifold. 01 I S T R A T E G C R E P O R T G O V E R N A N C E 02 03 04 06 08 10 12 16 18 20 22 24 26 28 30 31 32 33 34 35 36 50 FINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 02 CHAIRMAN’S STATEMENT - STAYING THE COURSE After good technical and strategic progress in 2016, AFC Energy is poised to move into commercialisation in 2017 with a strengthened management team and a now strengthened balance sheet. While there may be challenges along the way, the Board and I remain confident that AFC Energy has set the appropriate course to achieve commercialisation. Our experienced leadership and strengthened management team should enable us to continue to make sound progress with our partners. I would like to thank all the staff, partners and contractors working with AFC Energy, in addition to my fellow Board members and shareholders, for their continued support. TIM YEO CHAIRMAN 23 March 2017 TIM YEO CHAIRMAN KEY DEVELOPMENTS The successful generation, in January 2016, of gross electrical output in excess of 200kW at the Company’s first industrial scale fuel cell power plant in Germany, was a strong start to the year. To maintain momentum, in March 2016, the Board issued the 2016 Strategic Milestones. Underpinning these milestones was the necessity to define, and share with our stakeholders, the fundamental metrics which the Company is focusing on to enable the commercialisation of the AFC Energy fuel cell system: Power, Longevity, Availability, Cost, and Efficiency. Both the management team and the Board remain focused on finalising the development of a readily deployable commercial product which is attractive  to our target customer base. Among other 2016 achievements, AFC Energy delivered the Generation 2 (“Gen2”) fuel cell system which operated for more than 1,000 continuous hours (at which point the test was concluded), completed the basic design and engineering of the Company's new 10kW fuel cell system, and initiated and advanced dialogue for several commercial fuel cell opportunities. This was complemented by our success in establishing two new key strategic partnerships with Industrie De Nora S.p.A. and plantIng GmbH – both providing strong technical expertise and sector experience to support AFC Energy deliver its commercialisation objectives. The journey continues into 2017 with the Company now prioritising its activities to enable the commercial deployment of its fuel cell systems. The successful completion of the £8.1 million equity fundraise in March 2017 provides the Company with a strong cash position to achieve this target. OVERVIEW In November 2016, the Paris Agreement on Climate Change came into force. For the first time, legally binding limits to global temperature rises have been agreed by nearly 200 countries. While the carbon emission curbs proposed are not themselves legally binding, the mechanism for periodically tightening those pledges is. Governments including the US, China, India, and from the EU, are now collectively obliged to constrain global warming to no more than 2oC above pre-industrial levels (1.4oC above present levels). While the journey to implement the required carbon emission reductions will inevitably face challenges along the way, not least given the recent pronouncements from the new US administration, it is evident that the wider international community remains committed to a lower carbon economy. There is also support by global business leaders – one prime example being the recent announcement of the establishment of the Hydrogen Council, at the Davos 2017 World Economic Forum. Its members – including Royal Dutch Shell, Alstom, Air Liquide, Daimler and Toyota, among others – plan to invest €10 billion in hydrogen-related products within the next five years. Hydrogen is expected to play a key role in supporting this transition to a low-carbon economy, especially within the transport, energy and petrochemical industry sectors, and the associated value chain. The Board therefore continues to believe that stationary fuel cells have an important role to play globally and that AFC Energy has the technology and team to take a central position within this low-carbon economy, for both industrial scale and distributed generation applications. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016A YEAR OF BREAKTHROUGHS 03 AFC Energy's achievements this year saw breakthrough steps with its technology and the successful completion of target Milestones. 2016 JULY 2016 Next iteration 10kW Fuel Cell Engineering Completed Design and basic engineering of the next iteration 10kW fuel cell, including accompanying Balance of Plant (“BoP”), was completed, accomplishing Milestone 4 of the 2016 Strategic Milestones ahead of schedule. This included a thorough examination of key performance metrics and a Hazard and Operability study (“HAZOP”). The HAZOP was conducted with participants from AFC Energy, plantIng GmbH and independent fuel cell and hydrogen expert consultancy Efficientics. NOVEMBER 2016 Generation 2 Fuel Cell Testing Successfully Completed AFC Energy successfully completed the development of its Gen2 fuel cell stack. Gen2 incorporates design changes to extend the operating life of the fuel cell stack, while increasing stack availability (i.e. the proportion of time the fuel cell stack is on average available to generate power) and reducing cost. These features represent three of AFC Energy's key metrics which have been identified for commercialisation. “These two milestones, in addition to those achieved earlier in the year, position us for delivery of commercial contracts which we continue to pursue and in turn provide the traction needed with our partners for the deployment of units and the fulfilment of the outstanding 2016 Milestones.” ADAM BOND CHIEF EXECUTIVE OFFICER Please visit our website for more news at www.afcenergy.com 2017 JANUARY 2016 Power Output of 204kW Achieved AFC Energy successfully achieved a total power output of 204kW at its 240kW fuel cell (“240 FC”) power plant in Stade, Germany. This provided a number of significant technical “firsts” for the Company. The majority of the 24 stacks trialled in Stade, achieved 10kW or more of power output. Automation of start-up, operation and shutdown were fully demonstrated. The fuel cell system was signed off by German engineers for safety and robustness of design. AUGUST 2016 Strategic Technology Collaboration with De Nora Signed AFC Energy entered a Joint Development Agreement ("JDA") with Industrie De Nora S.p.A. ("De Nora") targeting technological enhancements to AFC Energy's fuel cell system and to further accelerate commercialisation of AFC Energy's technology platform. The parties plan to widen the collaboration to develop new product offerings, combining AFC Energy’s fuel cell system with De Nora's complementary systems, to access new markets for mutual benefit. PAGE 16 NOVEMBER 2016 Agreement with Peel Environmental for Assessment of Hydrogen Fuel Cell Precinct AFC Energy signed an agreement with Peel Environmental Limited ("Peel") to assess the techno-economic feasibility of the UK's largest hydrogen fuel cell precinct at Peel's Protos industrial park in the UK. A positive outcome from the techno-economic assessment for the development of a 35MW to 50MW fuel cell project at the Protos site could see the development of the UK's largest stationary fuel cell project and one of the largest in the world, confirming a growing transition towards a hydrogen-based economy, thereby positioning Protos and AFC Energy at the forefront of this movement. PAGE 17 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201604 OUR TECHNOLOGY OUR TECHNOLOGY Highly Fuel Efficient, Environmentally Acceptable Power Generation Why alkaline fuel cells (“AFCs”)? A fuel cell hosts and facilitates the controlled chemical reaction of hydrogen and oxygen (from the air) to produce an electrical current. The direct conversion of chemical potential energy to electrical energy in a single step means that fuel cells are highly efficient. With their potential for up to 65% electrical efficiency, AFCs have the scope to be the most efficient of all fuel cell types. How Does an Alkaline Fuel Cell Work? AFC ENERGY FUEL CELL SYSTEM ELECTRICITY INPUTS HYDROGEN OXYGEN WATER OUTPUTS HEAT Electron Flow Load Hydrogen Oxygen Water Hydroxyl Ions Anode Electrolyte Cathode ALKALINE FUEL CELL An AFC is a device that implements the reaction of oxygen (from the air) with hydrogen (from an external supply source) to generate heat, electricity and water. Fuel cells are similar to batteries, but differ in one critical area: given the continuous supply of fuel and air, electricity, heat and water can in turn, be continuously generated (batteries have a finite amount of fuel and so, once this is exhausted, they stop operating). The only by-products of AFCs are demineralised water and heat – both of which have commercial value. Apart from water, an AFC is a zero-emission “green”  generator. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201605 Benefits of Alkaline Fuel Cells AVAILABLE HYDROGEN Hydrogen can be generated by renewable energy (such as wind and solar PV) in significant, sustainable quantities. By-product or vented hydrogen sources include: bio-mass, glass production, hydrocarbon processing and chlor-alkali facilities. Vented hydrogen arises as a by-product of many chemical processes, for example, the manufacture of chlorine can result in the generation of excess quantities of hydrogen. WATER AND HEAT AS BY-PRODUCTS AFC by-products consist of water and heat. The production of water is seen as a benefit in specific regions around the world, while the heat produced may be captured and used on site or in a local end-user’s industrial process. This generates heat load, has the potential to further reduce both the end- user’s energy requirements from the grid and their potential carbon emissions. QUIET AND CLEAN AT POINT OF GENERATION AFCs have 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 We aim to reduce the cost of ownership through a lower operating temperature (i.e. below 100°C) with consequential use of more affordable materials. Additionally, we have the ability to recycle the materials we use in our fuel cell system. MORE EFFICIENT AT ALL LEVELS OF UTILISATION An AFC does not burn fuel like an internal combustion engine or turbine so it does not need to drive pistons or turbines. Avoiding this intermediate mechanical step and having a direct conversion route to electricity is what makes an AFC so efficient. An AFC is also "scaleable" without impacting efficiency. The low operating temperature results in quicker start-up times and the use of lower cost construction materials. OPERATING TEMPERATURE Fuel Cell Type Operating Temperature SOLID OXIDE 500–1,000OC MOLTEN CARBONATE 600–700�C PHOSPHORIC ACID 120–150OC POLYMER ELECTROLYTE MEMBRANE <120OC ALKALINE <100OC ELECTRICAL EFFICIENCY 65% 60% 55% 55% 40% 29-31% 25-30% ALKALINE SOLID OXIDE POLYMER ELECTROLYTE MEMBRANE 65% UP TO 60% UP TO 55% UP TO 55% MOLTEN CARBONATE 40% 25-30% 29-31% PHOSPHORIC ACID DIESEL GENERATORS GAS TURBINE (SIMPLE CYCLE) AFC Energy’s 240kW fuel cell system, the world’s largest AFC installation, at our plant in Stade, Germany. Source: www.afcenergy.com/technology/advantages; www.power.cummins.com; www.corporate.man.eu STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 06 MARKET OVERVIEW The production of lower cost power from highly fuel efficient AFCs is competitive against mainstream forms of electricity generation and has enormous market potential in a wide range of industrial settings, sectors and environments. Major Trends Impacting our Market INTERNATIONAL CO-OPERATION Governments are increasingly globally co-ordinated in tackling climate change (e.g. the Paris Agreement) through the adoption of decarbonisation policy agendas – this is evidenced  by the targeting of large-scale, efficient energy integration. Hydrogen storage solutions, when combined with electrolysis and AFC technology can potentially provide a significant hydrogen battery solution for integration with intermittent renewable energy sources. NATIONAL GOVERNMENT POLICIES Governments are utilising fiscal incentive structures to prioritise the improved utilisation of limited resources. By-product hydrogen, vented as a waste product, is gaining increased scrutiny. For example, there is recognition of the need to significantly reduce oil-fired power generation in Saudi Arabia, with the utilisation of hydrogen from the petrochemical industry, with AFCs offering one such solution. Korea is also a firm advocate with fiscal incentives seeking to improve hydrogen utilisation. FUEL CELL SHIPMENTS BY APPLICATION MEGAWATTS BY APPLICATION GLOBAL INDUSTRY Energy intensive sectors are increasingly exposed to government carbon policy and rising power prices. Many international industrial groups now seek cleaner, off grid and long-term affordable energy solutions. The use of by-product vented hydrogen through the adoption of fuel cells will enable industry to mitigate the risk of rising power prices and Government policy. 2016 2015 2014 54.8 6.4 47.0 5.2 39.5 2.9 2016 2015 2014 200.8 183.6 113.6 147.8 37.2 277.5 0 10 20 30 40 50 60 0 50 100 150 200 250 300 350 400 450 500 Stationary 1,000 Units Transport Stationary Transport MW Source: E4Tech (2016 is forecast) Source: E4Tech (2016 is forecast) Growing International Commitment to the Hydrogen Economy In January 2017, the Hydrogen Council launched a global initiative at the 2017 World Economic Forum. The Council currently comprises 13 major industrial and energy companies that are committed to help achieve the ambitious goal of reaching the 2oC global warming target set in the 2015 Paris Agreement (COP21). The inaugural members are Air Liquide, Alstom, Anglo American, BMW, Daimler, Engie, Honda, Hyundai Motor Company, Kawasaki Heavy Industries, Royal Dutch Shell, The Linde Group, Total, and Toyota Motor Corporation. Its 13 members collectively invest €1.4 billion annually into the hydrogen and fuel cell sectors and plan to boost this amount to €10 billion over the next five years. The Hydrogen Council has called on governments to support the development of infrastructure for a “hydrogen ecosystem.” Members will collaborate with each other, wider industry, other stakeholders and the public to progress hydrogen technology. “Hydrogen is a versatile energy carrier with favourable energy characteristics since it does not release any CO2 at the point of use as a clean fuel or energy source, and can play an important role in the transition to a clean, low-carbon, energy system…The council will work with, and provide recommendations to, a number of key stakeholders such as policy makers, business and hydrogen players, international agencies and civil society to achieve these goals.” THE HYDROGEN COUNCIL AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201607 How we are Responding AFC Energy is targeting a global opportunity - the generation of electricity that is competitive against mainstream sources has significant market potential across a wide range of regions, both in an industrial and distributed setting. KEY TARGET REGIONS We target partners in markets where there is supportive Government policy, with demonstrated private sector appetite to diversify energy sourcing, through the introduction of our fuel cells. MARKET OPPORTUNITIES The production of low-cost electricity that is competitive against mainstream forms of electricity generation has enormous market potential in a wide range of industrial settings, sectors and regions. KEY TARGET INDUSTRIES We are targeting large-scale stationary industrial power plants, and distributed off grid applications rather than nascent household or vehicle applications. UK Hydrogen could provide significant benefits to the UK’s energy system and play a greater role in the UK’s energy mix. In 2016, the UK launched a public-private roadmap exercise to drive sustainable economic growth in the UK hydrogen and fuel cell industry to 2025 and beyond. GERMANY Within the EU, Germany has led the introduction of fuel cells through the European Fuel Cells and Hydrogen Joint Undertaking ("FCH JU"). Assuming 90% renewables adoption, the Hydrogen Council expects c.170TWh/Year of curtailed renewable power by 2050, which may alone create an opportunity for c. 60GW of electrolysis capacity. Source: "How hydrogen powers the energy transition", January 2017 UNITED ARAB EMIRATES AND OTHER MIDDLE EAST The UAE is at the forefront of the development of renewable energy in the MENA region. AFC Energy is targeting the sale of both power and water into the local market, through utilisation of its fuel cell systems. SOUTH KOREA Financial incentives paid to producers of electricity generated from fuel cells make South Korea a particularly attractive target market for AFC Energy’s fuel cell systems. LARGE-SCALE STATIONARY INDUSTRIAL POWER PLANTS We are focused on industries where hydrogen is easily available and offers low feedstock costs as a by-product from manufacturing processes. Large stationary units refer to multi- megawatt power plants providing primary power. These units are being developed to replace power from the grid and can also be used to provide grid expansion nodes. OFF GRID DECENTRALISED POWER GENERATION Decentralised or distributed applications can be targeted in areas where there is little or no grid infrastructure. This may include isolated, or island communities, remote facilities (e.g. mining), or as a substitute for diesel back up generation. FUEL CELL INTEGRATION OPPORTUNITIES Significant opportunities arise through the potential to develop a hydrogen battery which addresses the power supply/demand challenges encountered with intermittent renewable power. Further, the Company believes that material value can be created through the efficient integration of its fuel cell system, with water treatment and associated electrolysis technologies. NATURAL AND BIOGAS Natural gas and biogas are predominantly methane which is hydrogen-rich. Hydrogen is released using a standard industrial process known as steam methane reforming ("SMR"). Developments in this field are leading to improved economics for the smaller scale reforming of steam methane. ENERGY FROM WASTE ("EFW") Hydrogen can be generated economically from domestic and commercial waste – due to its high hydrocarbon content. AFC Energy’s alkaline fuel cell systems have the potential to generate c. 40% more electrical power from the same waste, lowering carbon emissions by the same amount. ELECTROLYSIS Water electrolysis, using renewable electricity, offers significant benefits to the electricity sector in supporting the integration of renewable generating capacity and providing grid-balancing services. The hydrogen obtained with this technology has a high purity that can reach 99.999 vol.% once the produced hydrogen has been dried and oxygen impurities removed. STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201608 HOW WE MEASURE UP AFC Energy has developed an alkaline fuel cell system which converts hydrogen into power. Its technology has the potential to be a catalyst in transforming the way today's industries produce energy for tomorrow. 1 We aim to partner with industries that have an abundance of hydrogen as a by-product. PAGE 07 Our Value Chain 3 Water and heat as a by-product can be sold for beneficial impact. PAGE 05 2 The hydrogen is tapped straight into the AFC Energy fuel cell. PAGE 04 Technology and Manufacturing At the forefront of innovation, AFC Energy is re-engineering effective technology using modern materials readily available today. PAGE 04 Commercial Potential We are looking to build a pipeline of commercial opportunities through the delivery of a technically optimised fuel cell system. PAGE 07 Leading Partnerships Working with market leading partners helps AFC Energy to deliver a commercial product quicker. PAGE 16 4 The energy produced can be sold to the internal and/or the external grid. PAGE 05 1 2 4 3 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201609 Technical Development Targeting Five Key Metrics Required for a Commercial Power Plant POWER • 204kW produced from first industrial scale fuel cell plant in Germany • In excess of 10kW of power generated from multiple fuel cell stacks operating at the plant, against a 10kW design rating LONGEVITY • Delivered Gen2 fuel cell system which operated continuously for > 1,000 hours • AFC Energy targeting minimum one year longevity AVAILABILITY • Already achieved over 90% availability on stack over one month’s operation (against target of 90%)  • Automation of start up, operation and shutdown supporting enhanced system availability and control from offsite COST • Basic modular design, using standard industrial materials • Ease of operation and maintenance EFFICIENCY • Alkaline fuel cells offer highest electrochemical efficiency of all fuel cells • Potential to deliver up to 65% efficiency WHAT MAKES OUR ALKALINE FUEL CELLS (AFCs) DIFFERENT? The key differentiator for fuel cells, generally, is the high fuel efficiency. AFCs are at the top of the range in this regard. AFCs utilise a liquid electrolyte in the system. This gives us greater flexibility to integrate with parallel technology. Our simple modular design basis for the fuel cell cartridges and balance of plant allow for volume scale up (from kW to MW), utilising the same standard 10kW fuel cell "building block"  for each power plant. Our liquid electrolyte facilitates lower operating temperatures of c. 60oC, versus hundreds or thousands of degrees Celsius for other fuel cell technologies. We therefore have more flexibility to use standard and lower cost industrial materials across the entire fuel cell system – this allows ease of manufacture of modular skids and a lightweight overall unit, lowering capital and operating expenditure. A key objective has been to design the AFC Energy fuel cell system for re-use or recycling, so that 80% is re-usable, making our systems more environmentally attractive whilst reducing the levelised cost of electricity through re-use. All of which contribute to lower cost and competitive advantage. There is scope to integrate our alkaline fuel cells with alkaline electrolysers (which generate hydrogen), which could form a “green” integrated hydrogen generation/ conversion technology platform. The modular approach assists with the standardisation of the manufacturing and assembly processes, streamlines procurement, disassembly and recycling, and simplifies power plant construction, operation and maintenance. This enables us to provide scalable solutions to our prospective customers. AFCs offer the highest electrochemical efficiency of all fuel cells. Our AFCs have the capacity to operate on lower grade industrial hydrogen – we are working to ensure they can accept hydrogen from industrial facilities, with limited required purification. This allows more affordable and a broader range of available feedstock – all of which improve the viability and market potential of our alkaline fuel cells. STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201610 OUR BUSINESS MODEL Our aim is to install, own, operate and maintain stationary alkaline fuel cell systems that generate durable power at the highest levels of fuel efficiency for the future. AFC Energy seeks to be a world-class energy company that deploys low cost, high performance alkaline fuel cell technology to the global market. AFC ENERGY SHAREHOLDER PARTNER DIVIDENDS AFC ENERGY SUPPLIER Project Joint Venture POWER SALES ($) WATER SALES ($) CUSTOMER AFC Energy targets co-ownership of projects through joint ventures, where our interests are aligned with those of our partners, by having “skin in the game”. The building block of every AFC Energy fuel cell system is, currently, the 10kW stack. AFC Energy aims to provide clean power solutions from as small as 10kW up to multi megawatts – the only difference being the associated BoP. We use the same basic fuel cell stack in all systems. The 10kW modular unit provides a low cost “entry option” for prospective partners, which offers a smaller scale demonstration plant that may lead to a large-scale plant development by our partners and customers. One of the trends in the global energy market is the movement towards off-grid, distributed power models where power demand may often be less than a “standard” 240 FC system, but is open to pricing which is substantially higher than conventional wholesale power pricing. Diesel generation is one obvious example where our fuel cells have the potential to displace existing plants. AFC Energy plans to conclude the basic design and engineering on a 1MW capacity fuel cell system, which is capable of deployment in 2017. Targeted Sources of Income SALES REVENUES Although, in the longer term, we may wish to retain ownership of our fuel cell systems, we will  also remain open to opportunities to sell our fuel cell systems, where project and partner requirements require an alternative approach. ELECTRICITY, HEAT AND WATER REVENUES Revenues from the sale of power, heat and water, whether from AFC Energy alone projects, or in conjunction with partners and joint venture arrangements. MAINTENANCE AND SECURITY Our fuel cell projects will have a life of 20+ years operation, providing the opportunity to offer services and maintenance contracts for the fuel cell cartridges and systems, generating long- term annuity revenues. LICENCE REVENUE We remain open to opportunities to generate licence fee income for our fuel cells in markets, which have a longer sales/delivery process. Working in this way may minimise our business development costs and help deliver recognition in complementary markets earlier. DEVELOPMENT INCOME External agency funding enables our share capital to work harder. At AFC Energy, 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 funding agencies fund direct time spent on key technical research, development and demonstration. A portion of overhead recovery is also permitted. This significantly mitigates our monthly cash burn rates. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201611 Integrated Solutions Provider We aim to provide our fuel cells not only for stand-alone power solutions, but also as a flexible building block which can be integrated with other related technologies, delivering a broad range of solutions for our customers. HYDROGEN BATTERY The AFC Energy fuel cell can be deployed as part of a "hydrogen battery" scheme. When grid demand is low, excess power generated from renewable sources, such as wind or solar, can be diverted to a water electrolyser for hydrogen generation. Wind/Solar energy Hydrogen gas Electrolysis Storage Fuel Cell Power Clean H20 for re-use Oxygen gas Treated water for electrolysis The produced hydrogen can then be stored and optimally released to our fuel cells at periods of peak demand (with higher tariffs), to support grid power requirements, when required. WASTE WATER TREATMENT The AFC Energy fuel cell can also be deployed as part of a waste water treatment integrated solution. Following preliminary treatment, waste water can be electrolysed, to generate hydrogen and oxygen. The by-product hydrogen and oxygen can then be delivered to the AFC Energy fuel cell system, to generate power and clean water, which can be re-used. The electrolysis can be powered by, for example, renewable solar or wind power. Further, this system can be supplemented with hydrogen storage, to optimise delivery of power/water for peak demand periods. Creating Value AFC Energy is conscious of its obligation to effectively manage its relationships with a broad group of stakeholders which include: SHAREHOLDERS AFC Energy acknowledges the importance of creating sustained long-term shareholder value, which ultimately hinges on commercialisation of the technology and maintaining a broad-based competitive advantage over substitute or near substitute offerings. PARTNERS AFC Energy places high priority on the need to establish and nurture key strategic partnerships in which our partners can form a clear line of sight on how they will derive long-term exceptional value from their collaboration with us. EMPLOYEES Without our employees, AFC Energy is not able to deliver on our technical milestones and execute the power projects which are required to utilise our technology – AFC Energy is focused on the long-term development of all our staff to ensure they remain motivated to deliver outstanding performance for the business. CUSTOMERS We regard our customers as our partners – if they succeed, then so do we. The Company has identified priority performance  metrics for a commercial product, which our customers will demand – it is our duty to supply this and ensure that our fuel cell system remains robust in divergent environments, reliable and available when power is required. COMMUNITIES AFC Energy is primarily targeting large-scale industrial applications for the fuel cell system but is also considering distributed and related applications (such as water treatment), which has tremendous potential to serve communities. AFC Energy also highly values the relationships it has with those parties with common interests in our project locations and seeks to maintain a positive dialogue and transparency with its local communities and neighbours. STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201612 OPERATIONAL REVIEW 2016 was an important year of consolidation for the Company with material improvements not only in the fuel cell technology platform, but also in the dialogue with several key commercial and strategic partners for AFC Energy. The corporate value gained from AFC Energy’s collaboration with De Nora, and the commencement of commercial project developments with Peel Environmental, cannot be undervalued and positions the Company well for  an accelerated programme of activities in 2017. ADAM BOND CHIEF EXECUTIVE OFFICER In December 2014, the Board of AFC Energy made a conscious decision to switch its focus away from the laboratory to the acceleration of R&D and ultimately the commercialisation of an industrial- scale fuel cell system. In taking this decision, I outlined a three-year window of opportunity which would see AFC Energy progress from a company that had managed to deliver a “9 cell stack” (equivalent to less than 1kW of gross output) through to a technology platform capable of running multi-megawatt projects across several international jurisdictions. identified once a fully industrial system was up and running, and indeed, with these findings came the need for further refinement of the system. To this end, 2016 became the year of consolidation. Having now done the hard yards and exhibited the technical discipline to bring AFC Energy’s fuel cell technology back to where we believe it needs to be in order to drive commercial partnering opportunities, I believe 2017 to be the year in which we start to see the fruits of our collective labour as we close in on the final phase of the three-year window. The commissioning and demonstration of AFC Energy’s 240kW system in Stade in January 2016 went a significant way to demonstrate the capability of the Company’s proprietary fuel cell technology package. In particular, it demonstrated the ability of our system to deliver power from our fuel cell at or near nameplate on a cartridge by cartridge basis, providing empirical evidence for the first time of the technology’s longevity, availability, cost and efficiency. In all cases, the Stade reference plant gave clear guidance as to those areas AFC Energy needed to address before its technology could be classed as “commercial”. It is safe to say 2015 saw significant progress not only in upscaling the stack from 9 cells to 101 cells in a few months, but also in delivering the world’s largest alkaline fuel cell installation in Stade, Germany with a nameplate capacity of 240kW. The progress was tangible and outcomes were transparent insofar as for the first time in AFC Energy’s history, the Company had a reference plant capable of demonstrating the operating capability of its proprietary fuel cell technology. Whilst many investors saw this as the end of the commercialisation roadmap, the process of accelerating the installation in Stade delivered for AFC Energy many findings which could only be OPERATING REVIEW Technology Having spent much of my career in the energy sector, the expectations of a power plant developer and owner on a generation technology provider always come back to their ability to demonstrate five key metrics which at AFC Energy have become known as the “metrics of commercialisation”. These metrics, being Power, Longevity, Availability, Cost and Efficiency, have provided AFC Energy with its internal key performance indicators of success throughout the year. Throughout 2016, AFC Energy embarked on a series of work packages, colloquially named “Gen2”, which sought to address a number of the issues associated with our findings identified at Stade. The endeavours made on these work packages included a more focused discipline by which the technology development and rigorous assessment of these findings became solutions. To the credit of AFC Energy’s team, the culmination of these work packages came in the latter quarter of the year when two of AFC Energy’s stacks, operating at Stade and at the Company’s facilities in Surrey, delivered in excess of 1,000 hours of continuous operation Three-Year Accelerated Path to Commercialisation 2015 2016 Focus: Build and commission world's largest alkaline power plant. Focus: Delivery of second generation fuel cell and initiation of commercial pipeline. 2017 Focus: • Fuel cell deployment • Power project evolution and deployment • Develop robust pipeline of project opportunities to position AFC Energy technology. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201613 AFC stack build. at very high levels of availability over this period. This compared with a few tens of hours at Stade upon initial commissioning in January 2016, ahead of eventually meeting our milestones. In addition to this achievement of longevity and availability was AFC Energy’s demonstration that its technology could accept, without loss, hydrogen sourced at much lower qualities than had been tested previously. The lower grade hydrogen being used in these Gen2 trials was akin to that found at industrial gas plants and capable of being stripped direct from, for example, a chlor-alkali plant – one of AFC Energy’s key target markets for fuel cell deployment. This outcome alone had an enormous impact not only on the size of market AFC Energy would now address, but also on the economics of each project which might otherwise have required extensive investment in hydrogen clean-up before being capable of acceptance by AFC Energy’s fuel cell. The Gen2 design, not only of the fuel cell stack and electrodes, but also the balance of plant, significantly built on the system employed at AFC Energy’s industrial test facility at Stade, incorporating design changes to extend the operating life of the fuel cell stack, while increasing stack availability, and reducing stack cost. In parallel to this work, we identified the significant value that could be extracted from partnering with one of the world’s leading experts in the field of electro-chemistry, Industrie De Nora S.p.A. (“De Nora”) – particularly in learning from their own experiences in the successful provision of long life alkaline systems to the electrolysis and chlor-alkali markets over many decades. To this end, following months of technical due diligence and discussions, the parties entered a Joint Development Agreement (“JDA”) in August 2016 which ran in parallel to the Gen2 development programme. We have been extremely pleased with many of the outcomes from the JDA which are now giving renewed confidence to the delivery of a fuel cell cartridge capable of running for at least twelve months, and indeed, exceeding twelve months in due course. The collaboration between our two companies is progressing very well and we are delighted with the positive working relationship that has formed between our organisations over a relatively short time. We expect further announcements throughout 2017 regarding the success of this relationship and  the tangible benefits we are starting to see from this strategic collaboration. Additionally, through collaboration with De Nora, there is an opportunity for AFC Energy to better address the chlor-alkali sector, a significant producer of vented hydrogen, for which De Nora is a strong part of the supply chain. I believe this collaboration will deliver a technology platform that enhances the commercialisation timeline and our future success in the alkaline fuel cell space. When put together, the advances achieved by AFC Energy as part of the Gen2 programme, with the outcomes of the JDA collaboration with De Nora, “AFC Energy’s objective is to be a world-class energy company that leverages the deployment of low cost, high performance alkaline fuel cell technology to target global industrial scale opportunities.” give me increasing confidence that we are nearing a point when the AFC Energy technology platform will be in a position to positively confirm its ability to meet the five metrics of commercialisation and therefore, position the Company for project collaboration and commercial deployment during the course of the next twelve months. Market Opportunities At the recent World Economic Forum in Davos, the 13-member Hydrogen Council announced its establishment, calling on Governments to support the development of infrastructure for a hydrogen “ecosystem”. Given representation from leading global multinationals including Royal Dutch Shell, Alstom, Air Liquide, Daimler and Toyota, this illustrates the significant resources being devoted to the foundations of a global hydrogen economy. AFC Energy will centre itself STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 14 OPERATIONAL REVIEW CONTINUED Key Commercialisation Metrics POWER LONGEVITY AVAILABILITY COST EFFICIENCY Output delivered by our fuel cells in terms of kWh Period the fuel cells last before requiring replacement Proportion of time operational (excluding maintenance) Cost to install and operate in terms of $/kWh Energy delivered relative to hydrogen input firmly within that international “ecosystem”, initially across several targeted regions/countries, to support the commercialisation of our alkaline fuel cell systems, for industrial scale, distributed and related applications. Addressable market opportunities identified by the Company include large-scale stationary industrial power plants, integration with industrial and chemical plants with surplus hydrogen, and off-grid decentralised power generation. To this end, our business model remains intact and robust in pushing forward with new project collaboration opportunities. The past twelve months have seen an aggressive push by the Company into key target markets and industries within those markets. As a result of this investment, we have positioned AFC Energy well to now begin to capitalise on these opportunities, particularly as the robustness of the technology platform improves and we are able to extract real and empirical data from the operating cartridges that supports the metrics of commercialisation to our partners. It is fair to say that whilst expectations were set through the 2016 Milestones that commercial agreements would be reached within that year, the status of the technology at that time provided a challenging platform in which to conclude these transactions. However, each of the partners we have been in dialogue over this time remains open and we are hopeful that 2017 will give rise to an improved platform from which to progress several project deployment opportunities. Whilst our target markets for the most part have remained unchanged, with focus on the Middle East, and North East Asia (Korea and Japan), we have also seen renewed interest from Europe, principally in the UK and Germany. It remains the building block of AFC Energy’s commercialisation model to stay focussed on delivering a viable fuel cell system through adoption of our existing core fuel cell technology platform. Whilst a well-known pitfall of clean tech companies has been to diversify offerings too early and divert focus on what might otherwise be core factors in the development roadmap, we have identified a number of deployment opportunities that, when integrated with other technologies, provide real and market-based solutions to existing market-based problems. Key within this are two new models for AFC Energy’s fuel cell deployment which we believe could generate new growth markets for our technology platform. Firstly, in recognition of the growing need for energy storage solutions and the role of batteries within that mix, I have commissioned AFC Energy to develop a “Hydrogen Battery” which, when integrated with curtailed renewable energy sources, electrolysis and hydrogen buffers, provides an efficient, affordable and robust alternative to “conventional” battery technologies. This integration does not change the form or make-up of AFC Energy’s fuel cell technology, but provides a key conversion technology solution that provides a bridge between intermittent renewable power and flexible power demand profiling as is exhibited in any modern-day power market. AFC Energy is also looking to properly integrate its fuel cell technology platform with tertiary water treatment and again, electrolysis, as a basis for remote water treatment solutions to reduce the cost of offsite wastewater transportation and subsequent treatment for many extractive industries, primarily in oil and gas. This is an early phase development but again, utilising AFC Energy’s existing fuel cell technology platform and architecture to integrate with other technologies to provide a market-based solution to an ever-increasing problem of contaminated water treatment and disposal. POST YEAR-END DEVELOPMENTS In November 2016, we entered into an important agreement with UK-based Peel Environmental (“Peel”), to assess a substantive fuel cell development opportunity at Peel’s Protos Industrial Park located in Chester, UK. This site provides several potential industrial hydrogen sources, some of which are currently venting hydrogen, which in turn, opens the door to scalable fuel cell opportunities. As owner of the Protos site, Peel, together with its regional contacts and permitting and consenting capability, is an ideal partner for AFC Energy to collaborate in the UK’s “Northern Powerhouse”. This project has the potential, following commencement at the 1MW scale, to scale up to an estimated 35MW to 50MW of installed capacity. AFC Energy has already, in conjunction with Peel, commenced dialogue with stakeholders of such potential projects and for the necessary study phase work. With these steps underway, we will provide an update later in 2017. More recently, in March 2017, we announced the successful completion of an £8.1 million fundraise by way of a placement, subscription and shareholder offer, which heralded the arrival of new financial institutions on the share register. In addition, we considered it important to provide our existing shareholders with an opportunity to participate, and this was rewarded with a full take up under the open offer. The fundraise will assist the Company to fulfil its strategy to deliver commercial contracts by 2018. FUNDED PROJECTS: POWER-UP AND ALKAMMONIA AFC Energy continues to pursue the requirements of the POWER-UP and ALKAMMONIA EU-funded programmes. Much of the work required to deliver POWER-UP was undertaken during the course of 2015 with further work throughout 2016 contributing to the overall objectives of the POWER-UP programme and its key stakeholders. AFC Energy continues to hold dialogue with the Fuel Cell and Hydrogen Joint Undertaking (“FCH JU”) with regards the programme and very much appreciates the support the FCH JU have provided the Company in delivering this significant project. The project is due to come to an end on 30 June 2017 and we expect to have delivered the vast majority of outcomes originally agreed with the EU when originally awarded this grant back in 2013. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201615 I S T R A T E G C R E P O R T G O V E R N A N C E I F I N A N C A L S T A T E M E N T S In addition to POWER-UP, and despite a delay as a consequence of one of our key projects partners entering into administration back in 2014, the ALKAMMONIA project continues with the bulk of work required for AFC Energy’s delivery of a small scale system completed (as announced during the course of 2016). We are now awaiting delivery of the pilot scale ammonia cracker from a project partner in the first half of 2017. We look forward to updating the market on this project over the coming months. FINANCIAL OVERVIEW In 2016, AFC Energy’s EU grant and other income was £1.0 million (2015: £2.3 million). The Company continued to be engaged during the year, and at year-end, in three EU-funded projects, ALKAMMONIA, LASER-CELL and POWER-UP. Overall activity on these EU-funded projects was lower than in the previous year, in particular due to the high level of activity associated with the POWER-UP project in the previous year, resulting in lower expenditure through cost of sales. Overall expenditure on research and development qualifying for R&D tax credits was £2.9 million (2015: £3.5 million), demonstrating the continued high-level of commitment to develop the Company’s fuel cell system. An operating loss to 31 October 2016 of £6.3 million (2015: £8.6 million) has been recorded. Cash balances at 31 October 2016, excluding restricted cash, were £2.9 million (2015: £1.8 million). As mentioned in “Post year- end developments” above, subsequent to the year-end in March 2017, the Company successfully raised £8.1 million before expenses through a placement, subscription and shareholder open offer. OUTLOOK In December 2014, AFC Energy’s commercialisation strategy was updated to deliver technical and commercial progression over a three-year window. In 2015, the primary focus was on building and successfully commissioning the world’s largest alkaline fuel cell power plant. In 2016, our focus progressed to the delivery of a second generation fuel cell system and initiation of a commercial pipeline. In 2017, that journey continues, with the opportunity for the commercial deployment of our fuel cell systems. AFC Energy’s objective is to be a world class energy company that leverages the deployment of low cost, high performance alkaline fuel cell technology to target global industrial scale, distributed generation and other related opportunities. Stationary fuel cell applications represent the largest sub- sector in a hydrogen economy that is rapidly building global momentum. In 2017, as we further evaluate our project opportunities, our primary focus remains the deployment of our fuel cell systems in commercial opportunities. As we develop this commercial pipeline, our stakeholders will witness renewed emphasis on system and cartridge cost reductions to ensure our technology can operate in an increasingly competitive and efficient manner. To achieve this, we continue to review our supply chain and the scope for recycling our fuel cells, as well as opportunities to improve the design of key components and system engineering. 2017 will also see further focus on delivering the Company’s commitments with its key partners, including those under the JDA with De Nora where significant advancements in the fuel cell system continue to be made. Our achievements to date optimally position AFC Energy for the delivery of commercial transactions and in turn support collaboration with our partners, for the international deployment of our fuel cell systems. I would like to thank all the staff, partners and contractors working with AFC Energy, together with the EU’s FCH JU, and the Board, for their continued support. This Report, including the “Managing Our Risks" section on page 18, was approved by the Board on 23 March 2017. ADAM BOND CHIEF EXECUTIVE OFFICER 23 March 2017 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 16 STRONG PARTNERSHIPS Strengthening a Complementary Relationship with De Nora In August, AFC Energy signed a Joint Development Agreement with Italy’s Industrie De Nora S.p.A., a global leader in the field of electrochemistry and electrodes. De Nora is the pre-eminent provider of electrodes for electro-chemical processes and technologies internationally, including the chlor-alkali industry. Their Joint Venture with ThyssenKrupp (TK- UhdeChlorineEngineers) is the world's largest integrated EPC provider of chlor-alkali technology solutions. The chlor-alkali industry is one of the largest emitters of by-product hydrogen globally and therefore a key target for AFC Energy. The JDA with De Nora aims to facilitate further material improvement in the performance characteristics of our fuel cell technology and accelerate the timescale for achieving our targeted key metrics for: power, longevity, availability, cost and efficiency. The decision to collaborate followed extensive technical discussions. The JDA provides significant independent validation of AFC Energy and its technology by a world-leading industry player. The parties intend to widen the collaboration to develop new product offerings. This combines the AFC Energy fuel cell system with De Nora’s proprietary technologies in order to provide reliable and performing integrated solutions to open new markets for mutual benefit. Technical and Commercial Benefits of Partnership • Accelerate AFC Energy's technology platform for commercial deployment, unlocking market potential • Fully compatible technology platform operating in alkaline environment • Access to De Nora's world-leading experts in electro-chemical solutions, electrode structure and catalysts, from product development to mass manufacturing Integration with De Nora technology may create new combined solutions which include the AFC Energy fuel cell • • Access to De Nora's international network of chlor-alkali customers. “We are excited to start the JDA with AFC Energy. Our technical teams have been very impressed by the advances which have been made to date by AFC Energy and are confident that further significant steps can be made by both parties working closely together. We look forward to progressing this mutually beneficial partnership with AFC Energy into a long-term strategic and commercial relationship.” LUCA BUONERBA DE NORA’S CHIEF MARKETING AND BUSINESS DEVELOPMENT OFFICER Liquid nitrogen tanks and evaporators. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201617 Strategic Partnership With Peel Environmental AFC Energy agrees with Peel Environmental Limited ("Peel") to assess the techno-economic feasibility of the UK's largest hydrogen fuel cell precinct at Peel's Protos industrial park. Peel Environmental lies at the heart of The Peel Group, one of the foremost enterprises of new infrastructure for the waste, mineral and environmental technology sectors in the UK. The Group's specialist development teams have a proven track record in delivering high quality sustainable projects. Protos is located between Manchester, Liverpool and Chester and will deliver 250 hectares of industrial development in the North West of England. It represents a strategic cluster of businesses encompassing energy intensive industries with associated supply chains. Importantly, it reflects Peel's vision for an energy generation hub that provides secure, low carbon and low cost energy generation to its onsite facilities. AFC Energy will conduct the assessment in collaboration with Peel and other third party partners to review a range of hydrogen sources and offtake arrangements and work with local stakeholders that will see a proposed phasing of fuel cell projects at Protos commencing at 1MW, through to an estimated 35MW to 50MW of installed capacity at the site. "We are delighted to partner with AFC Energy in investigating the feasibility of this commercial-scale hydrogen fuel cell techno- economic feasibility study… A successful hydrogen fuel cell project of this scale will be a first for the UK." MYLES KITCHER MANAGING DIRECTOR OF PEEL ENVIRONMENTAL AND PROTOS A positive outcome from the techno- economic assessment for the development of a 35MW to 50MW fuel cell project at Peel's Protos site could see the development of the UK's largest stationary fuel cell project and one of the largest in the world, confirming a growing transition towards a hydrogen based economy, and thereby positioning Protos and AFC Energy at the forefront of this movement. The feasibility study will be conducted over several months in 2017. 35-50MW Targeted installed capacity at the site Liquid nitrogen tanks and evaporators. STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201618 MANAGING OUR RISKS Effective risk management underpins the delivery of our objectives. It is essential to protect our reputation and generate 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 FRAMEWORK Y IDEN TIF I M P L E M E NT A S S E S S M ITIG ATE OUR APPROACH TO RISK There are a number of risks and uncertainties that could adversely impact the achievement of the Company’s strategy. The Board of Directors has identified and discussed the risks that are considered to have the highest severity and likelihood, along with the mitigations the Company adopts to either avoid the risk occurring or manage the impact. OUR RISK MANAGEMENT PROCESS The Executive Directors are responsible for managing and mitigating the risks to the Company. The Audit Committee reviews the processes and controls for ensuring key risks are identified and managed appropriately. The Committee is responsible for monitoring the quality of internal controls and for ensuring that the financial performance of the Company is properly monitored, controlled, and reported. The AIM Rules Compliance Committee is responsible for, among other things, monitoring the quality of internal procedures, resources and controls to enable compliance by the Company with the AIM Rules and the AIM Rules for Nominated Advisers. Risk management processes have been embedded at both Company and project levels, and form an integral day-to-day business activity. The processes support management and project teams to identify and understand the risks they face in delivering Company objectives and to develop mitigations to manage those risks. Our Principal Risks Risk 1 HEALTH AND SAFETY The risk of health and safety incidents or breaches. 2 TECHNOLOGY The risk is that we will not be able to successfully develop and apply the Company’s alkaline fuel cell technology to potential products at the right cost or performance. The risk that technology is successfully developed but slower than anticipated. The risk that technical failure at product trials could affect ability to provide a product to customers. 3 COMPETITION AND MARKET OPPORTUNITY The risk that the advantages of our technology are eroded by competitors and this impacts the Company’s future profitability and growth opportunities. 4 INTELLECTUAL PROPERTY The Company’s competitive advantage is at risk from a loss or breach of its intellectual property rights. 5 OPERATIONAL There is a risk that the Company has insufficient operational capability and capacity to deliver project contracts in compliance with contractual commitments. 6 DESIGN AND QUALITY The risk of design and quality issues with our alkaline fuel cell technology. 7 ACCESS TO FINANCE The risk the Company has insufficient capital to fund technology and early project development – this may require additional equity funding to achieve commercialisation. 8 REGULATORY AND COMPLIANCE The risk that the Company or its staff breach applicable regulations. 9 KEY PERSONNEL The risk that key technical personnel who possess critical design know-how, depart the Company. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016Our Principal Risks 19 Change During the Year Mitigation Robust health and safety management, and continuous improvement and reinforcement of a safety-first culture in all work place environments, is paramount for the Company and enforced at all levels. The Company has implemented a robust control of technological progress against a budgeted plan, adopting principles of “technology readiness levels”. Adherence to codes and standards surrounding health and safety provides a transparent framework to minimise the risk of incidents, and ensures the integrity of AFC Energy’s health and safety remains intact for the sake of our employees, partners, contractors and shareholders. External partners have also been identified and where relevant, engaged to support the development plan with transparent KPIs and road maps to develop a product that meets commercial product metrics, relating to power, longevity, availability, cost and efficiency. The Company is targeting different regional markets and we are broadening the application of our product in order to minimise the risk of failure in a single market or product. We continuously monitor market developments, and competitor activity. The Company benefits from external advice provided by qualified patent attorneys. 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 are of critical importance to maintaining shareholder value. IP registers are reviewed regularly both in terms of existing patents, and also in terms of future and unregistered protection. The strategy for transition from technology development to commercial deployment focuses on long-term partnerships and collaboration with industry leading companies. Our partners and specialist external advisers 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. As the Company progresses towards product commercialisation, design defects and poor quality management, within the manufacturing processes, could have a direct impact on the Company’s market reputation, with consequential loss of value. The Company adopts a high standard of manufacturing process and quality control to mitigate to a large extent the risk of product quality issues and failure. The Company adopts a budgeted technology development plan, aligned to pre-defined milestones, supported by prudent budgetary controls that can be measured and monitored to provide a robust means of mitigating risk of insufficient working capital. The Company is targeting meeting its financing needs from a mix of grant funding, tax credits and equity funding, which may be sought from institutional, retail or strategic sources. Once it reaches project deployment, additional sources of debt funding, such as project finance will also be considered. The Company is publicly listed on the AIM market, which results in significant disclosure and reporting obligations to the regulator, investors and other stakeholders. The Board and management, in consultation with its Nomad and legal advisers seek to ensure that applicable legislation is complied with. Further, the AIM Rules Compliance Committee actively supervises this area to ensure compliance. Key technical staff possess significant know-how regarding the ongoing development of the Company’s technology. Loss of these staff members may adversely affect the ability of the Company to progress its research and development in a manner which is likely to achieve commercialisation. The Company actively monitors remuneration policy to ensure that staff are incentivised to remain with the Company. The Company requires current and former employees and directors to comply with stringent confidentiality obligations. KEY Risk increased Risk reduced No change STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201620 CORPORATE SOCIAL RESPONSIBILITY The following section provides an overview of our material corporate responsibility activities, explains why they are important to us, and how we manage them. Environment Employees AFC Energy’s products are designed to minimise any adverse impact on the environment, while reducing the carbon footprint of our customers' electricity generation, and in particular, enhance the utilisation of sources of renewable energy that would otherwise be wasted. Our Stade plant in Germany fully complies with the stringent environmental requirements of our partners. At the heart of our business is a dedicated, innovative team committed to our vision of an affordable fuel cell for the industrial market. We aim to recruit the best talent and be an equal opportunities employer, keeping our staff free from workplace discrimination and harassment. We also invest in their training and development, to equip our business with the skills and expertise to succeed. Air travel and building operations have been identified as two of the major factors in the Company’s carbon emissions, and consequently, the Company encourages recycling across the business and also acts responsibly to minimise its carbon footprint created by travel. During the year ending 31 October 2016 we have complied with all environmental legislation and there were no reportable environmental incidents by the Company. During 2017 we will also work with Bureau Veritas to develop our processes and systems, with the aim of achieving ISO 14001 (Environmental Management) accreditation. Governance and Business Ethics We do not tolerate bribery and corruption, and are committed to acting with integrity in all our business dealings and relationships. We strive to always comply with the UK Bribery Act 2010, and have adopted our own anti- bribery policy. We aim to always act ethically, and ensure our business partners adopt the same stringent standards. Health, Safety and Security We are committed to achieving and maintaining the highest health and safety standards. We work positively and proactively to create an open culture, and to engage all employees to help maintain our excellent safety record. To support this, we invest in specialist roles and systems. We commission regular reviews of our health and safety arrangements, calling on independent external practice experts to keep us informed of industry developments and insights – so we can continue to improve. During the year ending 31 October 2016 there were no Lost-Time Accidents across the Company’s sites. During 2017 we will be working with Bureau Veritas, the global leader in testing, inspection and certification, to develop our processes and systems with the aim of achieving OHSAS 18001 (Occupational Health and Safety) accreditation. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201621 AFC Energy’s plant in Stade, Germany. STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201622 INTRODUCTION TO GOVERNANCE The Board is highly committed to meeting the standards of corporate governance. The external Auditor attends meetings of the Committee except when their appointment or performance is being reviewed. Executive Directors attend as and when appropriate. BOARD AND COMMITTEE MEETINGS The table below shows the number of Board and Committee meetings of the Company held during the year, and the attendance of the individual Directors. REMUNERATION COMMITTEE The Company’s Remuneration Committee members during the financial year comprised of Tim Yeo (Chairman) 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 employee incentive schemes. It should be emphasised that this information does not fully reflect the contribution made to the Company’s business by many of the Directors, who have also attended other meetings and events relating to the Company’s business and activities during the year. Number of meetings held Attendance by: Tim Yeo Adam Bond Mitchell Field BOARD 7 7 7 6 5 6 No Directors participate in discussions or decisions concerning their own remuneration. Eugene Shvidler Eugene Tenenbaum 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 Financial Officer. Details of the Directors’ remuneration, service agreements and their interests in the share capital of the Company are disclosed in the Directors’  Report. AIM RULES COMPLIANCE COMMITTEE The Company’s AIM Rules Compliance Committee members comprise of Tim Yeo (Chairman) and Mitchell Field. The Committee meets as appropriate. The Committee is responsible for, among other things, monitoring the quality of internal procedures, resources and controls to enable compliance by the Company with the AIM Rules and the AIM Rules for Nominated Advisers. EMPLOYEES 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. The Company 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. THE ROLE OF THE BOARD The Board is collectively responsible for the long- term success of the Company and is ultimately responsible for its strategy, management, direction and performance. The Board sets the Company’s strategic aims, ensures that the necessary financial and human resources are in place for the Company to meet its objectives, reviews progress towards the achievement of objectives and reviews the performance of management. The Board establishes the values, culture, ethics and standards of the Company and sets the framework for prudent and effective controls which enable risk to be assessed and managed. The Company does not comply with the UK Corporate Governance Code (“Code”). However, the Board has reported on the Company’s Corporate Governance arrangements by drawing upon best practice available, including those aspects of the Code it considers to be relevant to the Company and best practice. The Board has delegated authority to its Committees to carry out the tasks defined in the Committees’ terms of reference. The Committees are – the Audit Committee; the Remuneration Committee; and the AIM Rules Compliance Committee. The Board has delegated the day- to-day management of the Company to the Chief Executive Officer. AUDIT COMMITTEE The Company’s Audit Committee members during the financial year comprised of Mitchell Field (Chairman) and Eugene Tenenbaum. The Committee meets formally twice a year, on dates linked to the Company’s financial calendar, and at any other time when it has been 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; • To review the annual and interim financial statements to ensure that they present a balanced assessment of the Company’s position; • To review accounting policies and their application within the Company’s financial statements; • To review with the executive management and the Company’s external Auditor the effectiveness of internal controls; • To review with the Company’s external Auditor the scope and results of their audit; and • To oversee the relationship with the external Auditor. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201623 CONTROL ENVIRONMENT There is an organisational structure with clearly defined lines of responsibility and delegation of accountability and authority. RISK MANAGEMENT The Company employs Directors and senior personnel with the appropriate knowledge and experience for a business engaged in activities in its field of operations, and undertakes regular risk assessments and reviews of its activities. Details of risks to the business which the Board considers to be potentially material are set out in the Strategic Report on pages 18 and 19. FINANCIAL INFORMATION The Company prepares detailed budget and working capital projections which are approved annually by the Board and are maintained and updated regularly throughout the year. Detailed  management accounts and working capital cash flows are prepared and compared to budgets and projections to identify any significant  variances. MANAGEMENT OF LIQUID RESOURCES The Board is risk averse when investing the Company’s surplus cash. The Company’s treasury management policy is reviewed periodically, and sets out strict procedures and limits on how surplus funds are invested. REVIEW OF CORPORATE GOVERNANCE The Board strives to comply with the key principles of the Code given the size of the Company and the nature of its operations. These have not been formally reviewed by the Company’s auditors. The auditors’ responsibility extends only to reading this report as a part of the Annual Report and Accounts and considering whether it is consistent with the audited financial statements. RELATIONS WITH SHAREHOLDERS The Board considers effective communication with shareholders to be very important, and encourages regular dialogue with investors. Shareholders will be given at least 21 days’ notice of the Annual General Meeting, at which they will have the opportunity to discuss the Company’s development and performance. The Company’s web site www.afcenergy.com contains full details of the Company’s activities, press releases, Regulatory News Service announcements, share price details and other information. MAINTENANCE OF A SOUND SYSTEM OF INTERNAL CONTROL The Directors have overall responsibility for ensuring that the Company maintains a system of  internal control to provide them with reasonable assurance that the assets of the Company are safeguarded and that shareholders’ investments are protected. The system includes internal controls appropriate for a company of the size of AFC Energy, and covers financial, operational, compliance (including health and safety) controls and risk management. Such systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives; any system can provide only reasonable, and not absolute, assurance against material misstatement or loss. The process in place for reviewing AFC Energy’s system of internal control includes procedures designed to identify and evaluate failings and weaknesses, and to ensure that necessary action is taken to remedy the failings. The Board has considered its policies with regard to internal controls as set out in the Code and undertakes assessments of the major areas of the business and methods used to monitor and control them. In addition to financial risk, the review covers operational, commercial, regulatory and health and safety risks. The risk review is an ongoing process with reviews being undertaken on a regular basis. The key procedures designed to provide an effective system of internal controls that are operating up to the date of sign-off of this report are set out below. STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201624 OUR EXPERIENCED LEADERSHIP The Board is responsible for the overall conduct of the Company and meets regularly to discuss reviews and reports on the business and plans of the Company. COMMITTEE MEMBERSHIP KEY Chair of Committee Member of Committee 1 Audit Committee 2 Remuneration Committee 3 AIM Rules Compliance Committee 32 TIM YEO NON-EXECUTIVE CHAIRMAN ADAM BOND CHIEF EXECUTIVE OFFICER YEAR APPOINTED 2007 YEAR APPOINTED* 2014 SKILLS AND EXPERIENCE Tim Yeo was formerly Member of Parliament for South Suffolk and Chairman of the House of Commons Energy and Climate Change Select Committee. OTHER COMMITMENTS He is a non-executive director of Groupe Eurotunnel SE, Chair of the University of Sheffield Energy 2050 Industrial Advisory Board, Chair of New Nuclear Watch Europe and Honorary Ambassador of Foreign Investment Promotion for South Korea. SKILLS AND EXPERIENCE Adam has over 18 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). * Previously Non-Executive Director from 2012. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 25 1 2 32 3 1 JIM GIBSON CHIEF OPERATING OFFICER MITCHELL FIELD NON-EXECUTIVE DIRECTOR EUGENE TENENBAUM NON-EXECUTIVE DIRECTOR EUGENE SHVIDLER NON-EXECUTIVE DIRECTOR YEAR APPOINTED 2017 YEAR APPOINTED 2008 YEAR APPOINTED 2013 YEAR APPOINTED 2013 SKILLS AND EXPERIENCE Jim has almost 30 years' experience in operations management and business development roles within the engineering contracting sector. Jim spent 23 years at Foster Wheeler working in operational, business and commercial roles. This was followed by two years at ThyssenKrupp working in process technology/ business development. SKILLS AND EXPERIENCE Mitchell, who lives in Wales, is part owner of Richards and Appleby Holdings Ltd, a mid-sized manufacturing group engaged in the production, sales and distribution of branded personal care products. Among these are Leighton Denny, James Read and Joan Collins as well as several well-known heritage brands, including "Cyclax" which formerly held the Royal Warrant from Her Majesty the Queen. OTHER COMMITMENTS His principal role is sales and marketing, dealing with numerous blue-chip companies in the UK and over 60 companies internationally. Mitchell has other investments and manages interests in retailing, property, import/export and general trading. SKILLS AND EXPERIENCE 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. OTHER COMMITMENTS He has numerous other directorships; notably, he is a member of the boards of Chelsea FC plc and Evraz plc (a FTSE 250-listed company). SKILLS AND EXPERIENCE 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. OTHER COMMITMENTS He is currently 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 STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201626 DIRECTORS' INTERESTS AND THEIR REMUNERATION INTRODUCTION The Remuneration Committee is committed to maintaining high standards of corporate governance and has taken steps to comply with the principles of best practice in so far as it can be applied practically given the size of the Company and the nature of its operations. Since it is not a requirement for companies which have securities listed on the AIM market of the London Stock Exchange to comply with the disclosure requirements of the Directors’ Remuneration Report Regulations 2013 or to comply with the UKLA Listing Rules and the disclosure provisions under schedule 8 to SI 2008/410 of the large and medium-sized companies and groups (accounts and reports) regulations 2008, certain disclosures are not included below. DIRECTORS AND THEIR INTERESTS The Directors who served during the year and during the period up until the signing of these financial statements were: Tim Yeo Adam Bond Jim Gibson Christopher Tawney Mitchell Field Eugene Shvidler Eugene Tenenbaum Non-Executive Chairman Chief Executive Officer Chief Operating Officer (appointed 6 February 2017) Finance Director (resigned 26 August 2016) Non-Executive 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. Consequently, Jim Gibson offers himself for re-election. Mitchell Field is required to retire by rotation in accordance with the Company’s Articles of Association and, being eligible, offers himself for re-election. On 31 October 2016 the beneficial interests of Directors and their families in the equity share capital of the Company were: Tim Yeo Adam Bond Jim Gibson Mitchell Field Eugene Shvidler Eugene Tenenbaum Number of Ordinary shares of 0.1p 2016 Number of Ordinary shares of 0.1p 2015 877,272 2,750,000 90,000 2,894,810 14,432,737 – 877,272 2,250,000 90,000 2,644,810 13,853,633 – On 31 October 2016 the Directors’ interests over share capital of the Company were: Tim Yeo Mitchell Field 1 November 2015 1,100,000 1,000,000 350,000 750,000 Adam Bond 6,000,000 Options/ Warrants granted in year Options/ Warrants exercised/ lapsed in year – – – – – – – – – – 31 October 2016 1,100,000 1,000,000 350,000 750,000 Exercise price £0.031 £0.240 £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 17/07/2015 17/07/2025 Type Warrant Warrant Warrant Warrant Unapproved Option Note: 1 Warrants/Options exercisable from/after 14 April 2013 are subject to achievement of performance conditions. Eugene Tenenbaum and Jim Gibson had no direct interest over share capital during the reporting period. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 27 DIRECTORS’ REMUNERATION The remuneration policy has been designed to ensure that Executive Directors receive appropriate incentive and reward given their performance, responsibility and experience. When assessing this, the Remuneration Committee seeks to ensure that the policy aligns the interests of the Executive Directors with those of shareholders. The Company’s remuneration policy for Executive Directors is to: • Consider the individual’s experience and the nature, complexity and responsibilities of their work in order to set a competitive salary that attracts and retains management of the highest quality • Link individual remuneration packages to the Company’s long-term performance through long-term share-based plans • Provide post-retirement benefits through payment into defined contribution pension schemes • Provide employment-related benefits including company car and medical insurance. The remuneration of the Non-Executive Directors is determined by the Executive members of the Board in consultation with the Chairman, based on a review of current practices in other equivalent companies. The Non-Executive Directors do not receive any pension payments, nor do they participate in any of the bonus schemes. Remuneration is based on a fixed fee, plus a separate fee for any additional consulting services. Name Tim Yeo (see note 25) Adam Bond (see note 25) Christopher Tawney (resigned 26 August 2016) Mitchell Field (see note 25) Eugene Tenenbaum Eugene Shvidler Share-based payment expense £ Other compensation1 £ Company pension contributions £ – 821,002 – – – – 40,200 213,850 30,377 11,400 – – – – 2,504 – – – Total 2016 £ 56,575 1,334,852 124,974 25,000 11,200 11,200 Salary £ 16,375 300,000 92,093 13,600 11,200 11,200 Total 2015 £ 57,346 806,463 134,679 – – – Note: 1 Other compensation includes issuance of shares in the Company, private medical insurance, other benefits, consultancy fees and compensation for loss of office (in respect of Christopher Tawney). £91,250 of Adam Bond’s other compensation was paid in shares. 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 initially provided under a secondment agreement between the Company and Linc Energy Ltd. The secondment agreement expired on 31 December 2015, at which point he became an employee of the Company under a service agreement dated 1 January 2016. During the year ended 31 October 2016, a portion of Adam’s remuneration was paid to him by Linc Energy Ltd. and recharged to the Company. A further portion of his salary, totalling £91,250, was settled during the year through the issuance of 500,000 shares in the Company. Included in Adam’s other compensation is a £100,000 bonus that has been accrued for as a result of meeting certain performance conditions. The payment of the bonus has not yet been claimed by Adam and is pending final Board approval. During 2015, the Company remitted taxation to HMRC on Adam’s behalf in relation to different tax jurisdictions between the UK and Australia. Management believes an amount of £187,000 to be recoverable. As part of Adam’s contract with the Company, in 2015 he was granted 6,000,000 share options with an exercise price of £0.51 per share. 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, and 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. In accordance with IFRS 2 (Share-Based Payment), the Company recognises as an employee expense the fair value of options granted to employees. The fair value is determined using an appropriate pricing model, and the resulting expense is recognised over the period in which the performance and/or service conditions are fulfilled ending on the date on which the employee becomes fully entitled to the award. During the year the Company recorded a non-cash expense of £821,002 relating to the options granted to Adam. The vesting conditions for the options has not been reached and hence Adam has not received any cash benefit from the options in the year. Further details are contained in notes 2, 3 and 18. 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. 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 2016 Eugene did not charge the Company for any consultancy services. 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 2016 Eugene did not charge the Company for any consultancy services. During the year to 31 October 2015 Eugene agreed not to be remunerated. STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 28 DIRECTORS’ REPORT The Directors present their report together with the audited financial statements for the year ended 31 October 2016. The comparative period was from 1 November 2014 to 31 October 2015. 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 32. No dividends were paid in the year. The Directors do not intend to declare a dividend in respect of the year. BOARD CHANGES Details of changes to the membership of the Board are disclosed within the “Directors and their Interests” section on page 26. CAPITAL STRUCTURE Details of the Company’s share capital are disclosed in note 17 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 20 March 2017, the Company was aware of the following holdings of 3% or more in the Company’s issued share capital: Ervington Investments Limited Schroder Investment Management Limited Barclayshare Nominees Limited Lynchwood Nominees Limited TD Direct Investing Nominees (Europe) Limited Pershing Nominees Limited Mr. Eugene Shvidler Hargreaves Lansdown (Nominees) Limited (15942) Hargreaves Lansdown (Nominees) Limited (HLNOM) Hargreaves Lansdown (Nominees) Limited (VRA) HSDL Nominees Limited FINANCIAL INSTRUMENTS Financial instruments are disclosed in note 21. POLITICAL AND CHARITABLE DONATIONS Charitable donations in the year amounted to £nil (2015: £nil). Approximate percentage of the Number Company’s issued share capital of shares 39,610,494 33,000,000 24,035,239 22,473,954 19,408,708 14,687,409 14,432,737 14,326,728 13,112,349 12,653,110 12,025,901 10.13% 8.44% 6.15% 5.75% 4.96% 3.76% 3.69% 3.66% 3.35% 3.24% 3.08% INFORMATION DISCLOSED IN THE STRATEGIC REPORT 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 12 to 15 and 18 to 19 respectively: the key performance indicators and the principal risks. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 29 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 2016 represented 28 days (2015: 125 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 2016, relevant expenditure was £2,914,050 (2015: £3,475,657). GOING CONCERN The Company had cash of £2,910,862 at 31 October 2016. In order to ensure that the Company has sufficient cash resources to meet its short-term requirements, a placing, subscription and open offer was completed in March 2017, raising approximately £8.1million before expenses. The Directors now believe there is adequate financial 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. AUDITOR A resolution to reappoint the Auditor of the Company, Grant Thornton UK LLP, will be proposed at the forthcoming Annual General Meeting. Grant Thornton UK LLP have expressed their willingness to continue as Auditor of the Company. This report was approved by the Board on 23 March 2017 and signed on its behalf by ADAM BOND Chief Executive Officer STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201630 STATEMENT 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. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF AFC ENERGY PLC 31 We have audited the financial statements of AFC Energy PLC for the year ended 31 October 2016 which comprise the statement of comprehensive income, the statement of financial position, the statement of changes in equity, the cash flow statement 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 30, 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 2016 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 2017 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201632 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 OCTOBER 2016 EU Grant income Cost of sales Gross loss Other income Administrative expenses Operating loss Finance (cost)/income 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 36 to 49 form part of these financial statements. Year ended 31 October 2016 £ Note Year ended 31 October 2015 £ 967,606 (1,883,650) 2,262,506 (4,846,933) (916,044) (2,584,427) 146,479 (5,561,096) 51,080 (6,112,856) (6,330,661) (8,646,203) (148,233) 3,294,272 (6,478,894) (5,351,931) 822,830 569,706 (5,656,064) (4,782,225) 5 8 9 10 10 (1.86)p (1.86)p (1.66)p (1.66)p AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 2016 33 31 October 2016 £ Note 31 October 2015 £ 11 12 13 14 21 15 16 16 17 17 344,457 89,384 – 338,176 116,328 – 433,841 454,504 150,932 – 2,595,963 2,910,862 112,077 219,421 1,308,859 3,458,340 1,756,445 91,105 5,769,834 6,834,170 6,203,675 7,288,674 310,014 37,843,613 3,234,492 (36,486,151) 289,904 33,947,857 2,207,441 (30,830,087) 4,901,968 5,615,115 19 1,295,904 1,673,559 1,295,904 1,673,559 19 5,803 5,803 – – 6,203,675 7,288,674 Assets Non-current assets Intangible assets Property and equipment Investment 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 Non-current liabilities Trade and other payables Total equity and liabilities The notes on pages 36 to 49 form part of these financial statements. These financial statements were approved and authorised for issue by the Board on 23 March 2017. TIM YEO Chairman ADAM BOND Chief Executive Officer AFC Energy plc Registered number: 05668788 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 34 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 OCTOBER 2016 Balance at 1 November 2014 Comprehensive loss for the year Issue of equity shares Equity-settled share-based payments Transactions with owners Balance at 31 October 2015 Comprehensive loss for the year Issue of equity shares Equity-settled share-based payments Transactions with owners Balance at 31 October 2016 Note Share Capital £ 285,684 – 4,220 – Share Premium £ 33,332,478 – 615,379 – Other Reserve £ 3,032,472 – – (825,031) Retained Deficit £ (27,089,095) (4,782,225) – 1,041,233 Total Equity £ 9,561,539 (4,782,225) 619,599 216,202 4,220 615,379 (825,031) 1,041,233 835,801 289,904 33,947,857 2,207,441 (30,830,087) 5,615,115 17 18 – 20,110 – – 3,895,756 – – – 1,027,051 (5,656,064) – – (5,656,064) 3,915,866 1,027,051 20,110 3,895,756 1,027,051 – 4,942,917 310,014 37,843,613 3,234,492 (36,486,151) 4,901,968 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 charge to equity in respect of equity-settled share-based payments. Retained deficit represents the cumulative loss of the Company attributable to equity Shareholders. The notes on pages 36 to 49 form part of these financial statements. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 CASH FLOW STATEMENT FOR THE YEAR ENDED 31 OCTOBER 2016 35 Cash flows from operating activities Loss before tax for the year Adjustments for: Depreciation and amortisation Impairment of intangible asset investment (Profit)/Loss on disposal of tangible assets Equity-settled share-based payment expenses Payment of shares in lieu of cash Interest received R&D tax credits receivable Loss/(Gain) 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 Decrease/(Increase) in Inventory and Work in Progress Decrease/(Increase) in trade and other receivables (Decrease)/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 increase/(decrease) in cash and cash equivalents Cash and cash equivalents at start of year 31 October 2016 £ Note 31 October 2015 £ (6,478,894) (5,351,931) 11,12 18d 8 21 12 11 8 21 172,608 – (40,750) 1,027,051 326,632 (3,415) (104,291) 149,687 (4,951,372) 927,121 (20,972) 68,489 862,377 (371,852) 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 (3,486,209) (6,478,415) (81,424) (70,287) 40,750 3,415 (36,845) (98,980) 4,800 5,775 (107,546) (125,250) 3,600,000 (11,000) 1,159,172 288,599 – 3,213,308 4,748,172 3,501,907 1,154,417 1,756,445 (3,101,758) 4,858,203 Cash and cash equivalents at end of year 16 2,910,862 1,756,445 The notes on pages 36 to 49 form part of these financial statements. STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 36 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 March 2017 the Company successfully raised approximately £8.1 million before expenses through a placing, subscription and open offer. The Directors 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. 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 16 in future periods. b. 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. c. 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. d. Grants The Company participates in three projects, LASER-CELL, ALKAMMONIA and POWER-UP, which receive funding from the EU. 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. e. Other Income Other income represents sales by the Company of waste materials. 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 alkaline fuel cell system installed at Stade in Germany under the EU funded POWER-UP project is considered to be development expenditure to date, as the module is the first of its kind that has been produced and has not yet operated at full power output for an extended period. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 37 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED 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 activities associated with grant-funded projects. 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 statement of comprehensive income 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 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 statement of comprehensive income. l. Intangible Assets Expenditure on research activities is recognised in the statement of comprehensive income 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 statement of comprehensive income. m. Cash and Cash Equivalents Cash and cash equivalents comprise cash balances and call deposits with major banking institutions realisable within three months. Restricted cash is €125,000 held in escrow to support a bank guarantee in favour of Air Products GmbH relating to contractual obligations by the Company in relation to the Stade site in Germany. STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201638 NOTES FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED 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 statement of comprehensive income 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. Capitalised leased assets are depreciated over the estimated useful life of the asset. 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 the statement of comprehensive income. Operating Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the statement of comprehensive income on a straight-line basis over the period of the lease. 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. q. Financial Instruments Financial assets and liabilities are recognised on the balance sheet when the Company becomes a party to the contractual provisions of the instrument. • Cash and cash equivalents comprise cash held at bank and short-term deposits • Receivables are recognised initially at fair value and subsequently held at amortised cost less an allowance for any uncollectable amounts when the full amount is no longer considered receivable • Trade payables are not interest bearing and are stated at their nominal value • Equity instruments issued by the Company 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 In 2014, the Company 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 was dependent on the Company’s share price performance and gains and losses arising on monthly settlements are reflected in the statement of comprehensive income in administrative expenses. The financial instrument closed in April 2016 and, hence, as at 31 October 2016, the financial instrument had a zero value. 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 statement of comprehensive income on the date of cancellation. t. Provisions Provisions are recognised when the Company has a present obligation as a result of a past event and it is probable that the Company 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. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201639 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED u. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the statement of comprehensive income 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 statement of comprehensive income 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. 3. 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: Useful Lives and Impairment of Intangible Assets Intangible assets are amortised 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 2016 (2015: £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 that, until the Company’s fuel cell system is proven to be commercially deployable, it would not be appropriate to capitalise development expenditure. Consequently, all development expenditure has been charged to the statement of comprehensive income during the year ended 31 October 2016. 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. STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 201640 NOTES 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 2016, 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: R&D tax credit receivable Depreciation/Impairment of property and equipment Amortisation/Impairment of intangible assets R&D expenditure Write off of Waste2Tricity investment and receivable Equity-settled share-based payment expense Foreign exchange differences Auditor’s remuneration – audit Auditor’s remuneration – corporation tax Auditor’s remuneration – R&D tax credit 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 2016 £ Year ended 31 October 2015 £ (59,487) 238,414 64,240 2,914,050 – 1,027,051 (334,898) 30,900 3,500 19,500 (174,937) 198,769 79,522 3,475,657 558,983 216,202 42,975 30,000 9,500 – Year ended 31 October 2016 Number Year ended 31 October 2015 Number 37 6 43 £ 39 5 44 £ 1,983,582 239,738 37,976 1,027,051 2,660,709 317,242 35,095 216,202 3,288,347 3,229,248 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 7. DIRECTORS’ REMUNERATION Wages and salaries Social security Equity-settled share-based payment expense Other compensation Company pension contributions The emoluments of the Chairman The emoluments of the highest-paid Director Company pension contributions of highest-paid Director 41 Year ended 31 October 2016 £ Year ended 31 October 2015 £ 379,355 65,113 821,002 295,827 2,504 978,656 131,225 170,001 48,149 1,844 1,563,801 1,329,875 56,575 57,346 1,334,852 661,932 – – The remuneration, details of share options and interests in the Company’s shares of each Director are shown in the Directors’ Report on pages 26 and 27. 8. FINANCE COST (Loss)/Gain on derivative financial instrument Interest on finance lease Bank interest receivable Total finance (cost)/income 9. TAXATION Recognised in the statement of comprehensive income R&D tax credit – current year R&D tax credit – prior year Total tax credit Reconciliation of effective tax rates Loss before tax Tax using the domestic rate of corporation tax of 20.00% (2015: 20.42%) Effect of: R&D tax credit – prior year Expenses not deductible for tax purposes Above the line tax credit R&D allowance Tax credit on losses surrendered Depreciation in excess of capital allowances Losses surrendered for research and development Unutilised losses carried forward Fixed asset differences Total tax credit Year ended 31 October 2016 £ Year ended 31 October 2015 £ (149,687) (1,961) 3,415 3,288,497 – 5,775 (148,233) 3,294,272 Year ended 31 October 2016 £ Year ended 31 October 2015 £ (613,732) (209,098) (569,706) – (822,830) (569,706) (6,478,894) (5,351,931) (1,295,779) (1,092,864) (209,098) 209,151 – (478,253) (613,452) 4,920 846,141 697,625 15,915 – 659,518 185,396 (450,148) (569,706) 47,737 232,349 418,012 – (822,830) (569,706) STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 42 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 £5,656,064 (2015: loss of £4,782,225) 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 2016 Year ended 31 October 2015 (1.86)p (1.86)p (5,656,064) (1.66)p (1.66)p (4,782,225) Number Number 304,858,560 288,431,626 Diluted earnings per share As set out in note 18, there are share options and warrants outstanding as at 31 October 2016 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. 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 2016 Patents £ 445,927 – 70,521 2015 Patents £ 748,113 (401,166) 98,980 516,448 445,927 107,751 – 64,240 469,040 (401,166) 39,877 171,991 107,751 344,457 338,176 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 43 Leasehold improvements £ Fixtures, fittings and equipment £ Motor vehicles £ Total £ 272,759 45,852 18,851 – 337,462 – – 2,693,951 (45,852) – (1,326,821) 1,321,278 81,424 (238,797) 10,495 – 17,994 (10,495) 17,994 – – 2,977,205 – 36,845 (1,337,316) 1,676,734 81,424 (238,797) 337,462 1,163,905 17,994 1,519,361 240,104 9,783 39,645 – 289,532 47,930 – 2,117,457 (9,783) 194,882 (1,035,277) 1,267,279 54,537 (238,797) 10,203 – 3,887 (10,495) 3,595 5,901 – 2,367,764 – 238,414 (1,045,772) 1,560,406 108,368 (238,797) 337,462 1,083,019 9,496 1,429,977 – 47,930 80,886 53,999 8,498 14,399 89,384 116,328 12. PROPERTY AND EQUIPMENT Cost At 31 October 2014 Transfers Additions Disposals At 31 October 2015 Additions Disposals At 31 October 2016 Depreciation At 31 October 2014 Transfers Charge for the year Disposals At 31 October 2015 Charge for the year Disposals At 31 October 2016 Net Book Value At 31 October 2016 At 31 October 2015 13. INVESTMENT As at 31 October 2016 the Company held 230,000 shares representing 17.5% (2015: 230,000 shares representing 23%) of the share capital of Waste2Tricity Ltd (“W2T”) (a company registered in England & Wales). 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. Investment in W2T 14. INVENTORY AND WORK IN PROGRESS Inventory Work in progress Year ended 31 October 2016 £ Year ended 31 October 2015 £ – – Year ended 31 October 2016 £ Year ended 31 October 2015 £ 150,932 – 150,932 219,421 – 219,421 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 44 NOTES FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED 15. TRADE AND OTHER RECEIVABLES Current: R&D tax credits receivable EU grants receivable Other receivables There is no significant difference between the fair value of the receivables and the values stated above. 16. CASH AND CASH EQUIVALENTS Cash at bank Bank deposits Year ended 31 October 2016 £ Year ended 31 October 2015 £ 673,219 1,409,642 513,102 718,023 2,513,395 226,922 2,595,963 3,458,340 Year ended 31 October 2016 £ Year ended 31 October 2015 £ 1,137,819 1,773,043 675,603 1,080,842 2,910,862 1,756,445 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 escrow to support a bank guarantee in favour of Air Products GmbH relating to contractual obligations by the Company in relation to the Stade site in Germany. 17. ISSUED SHARE CAPITAL At 31 October 2015 Issue of shares on 18 January 2016 Issue of shares on 21 January 2016 Issue of shares on 18 April 2016 Issue of shares on 19 May 2016 Issue of shares on 6 July 2016 Issue of shares on 19 August 2016 At 31 October 2016 All issued shares are fully paid. Number Ordinary shares £ Share premium £ Total £ 289,903,943 18,000,000 250,000 190,000 720,000 250,000 700,000 289,904 18,000 250 190 720 250 700 33,947,858 3,571,000 56,625 28,785 50,670 34,125 154,550 34,237,762 3,589,000 56,875 28,975 51,390 34,375 155,250 310,013,943 310,014 37,843,613 38,153,627 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 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. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 45 Number of options Weighted average remaining contractual life Exercise price 7,980,000 7,615,000 (1,150,000) (590,000) 13,855,000 – (1,220,000) (730,000) 3.13-35.75p 17-51p 3.13-24p 32-41p 3.13-51p – 3.13-20.75p 17-34p 6.3 yrs 7.7 yrs 11,905,000 3.13-51p 7.1 yrs Number of warrants Weighted average remaining contractual life Exercise price 7,047,800 100,000 – 6,947,800 – – 3.13-24p 3.13p – 3.13-24p – – 5.1 yrs 4.1 yrs 6,947,800 3.13-24p 3.1 yrs Number of SAYE Weighted average remaining contractual life Exercise price 2.2 yrs 1.3 yrs 1,065,259 – (485,503) (8,409) 571,347 399,537 488,714 (141,516) – 18.6-22p – 18.6-22p 22p 18.6-22p 12p 18.6-22p 22p – 18a. SHARE OPTIONS At 31 October 2014 Options granted in the year Options exercised in the year Options lapsed in the year At 31 October 2015 Options granted in the year Options exercised in the year Options lapsed in the year At 31 October 2016 18b. WARRANTS At 31 October 2014 Warrants exercised in the year Warrants lapsed in the year At 31 October 2015 Warrants exercised in the year Warrants lapsed in the year At 31 October 2016 18c. SAYE During the year the Company operated a share save scheme. At 31 October 2014 SAYE issued during the year SAYE lapsed/cancelled during the year SAYE exercised during the year At 31 October 2015 SAYE issued during the year SAYE lapsed/cancelled during the previous year correction SAYE lapsed/cancelled during the year SAYE exercised during the year At 31 October 2016 1,318,082 18.6-22p 1.3 yrs STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 46 NOTES FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED 18d. EQUITY-SETTLED SHARE-BASED PAYMENTS CHARGE Share Options Option price (p) 3.13 10 17 17.5 24 20.75 32 34 35.75 39.25 41 51 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) 3.13 10 17 18.75 23.75 20 31.75 34 35.75 39.25 41 58 113.8% 46% 80% 188% 188% 214.8% 243% 80% 124.7% 80% 80% 75% 4.4% 4.4% 1.5% 4.4% 4.4% 4.4% 4.4% 1.5% 1.5% 1.5% 1.5% 2.1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 2.0 2.5 2.5 2.5 2.5 2.0 2.5 2.5 2.5 2.5 2.5 2.5 2 2.5 9.48 14.07 17.80 15 24 18.96 21.8 21.89 22.86 32.00 Total charge for the year (2015: £210,779) Warrants Warrant price (p) 3.13 24 Total charge for the year (2015: £nil) SAYE SAYE price (p) 22 18.6 12 Average grant date share price (p) 3.13 23.75 Average expected volatility (p.a.) 113.8% 188% Average risk-free interest rate (p.a.) 4.4% 4.4% Average dividend yield (p.a.) 0% 0% Average implied option life (years) 2.0 2.5 Average fair value per option (p) 2 17.8 Average grant date share price (p) 27.5 23.25 15 Average expected volatility (p.a.) 124.7% 137.5% 78.6% Average risk-free interest rate (p.a.) Average dividend yield (p.a.) Average implied option life (years) Average fair value per option (p) 1.5% 1.5% 0.7% 0% 0% 0% 2.5 2.5 2.0 21.69 19.24 8.4 Total charge for the year (2015: £5,423) Total equity-settled share-based payment charge for the year (2015: £216,202) Amount expensed in the 2016 accounts £ – – – – – – – 9,552 – 40,489 49,778 821,002 920,821 Amount expensed in the 2016 accounts £ – – – Amount expensed in the 2016 accounts £ 50,511 51,092 4,627 106,230 1,027,051 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 which vest in two years. Certain options and warrants granted to Directors are also subject to performance conditions. Adam Bond received 6,000,000 options on 17 July 2015 with vesting conditions that include market and non-market based conditions. Under the market-based conditions vesting is contingent on the average share price of the Company reaching certain targets. Under non-market based conditions vesting is contingent on the Company’s fuel cell system installed at Stade in Germany reaching certain output of wattage targets and the Company entering into commercial contracts. 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 for non-market based conditions and a Log-normal Monte Carlo stochastic model for market conditions. Both are appropriate considering the effects of the vesting conditions, expected exercise period and the dividend policy of the Company. AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 19. TRADE AND OTHER PAYABLES Current liabilities: Trade payables Deferred income Finance lease liability Other payables Accruals Non-current liabilities: Finance lease liability 20. OPERATING LEASE COMMITMENTS Non-cancellable operating leases are as follows: Within one year Between one and five years Greater than five years 47 Year ended 31 October 2016 £ Year ended 31 October 2015 £ 357,118 105,727 16,246 677,211 139,602 1,066,600 115,698 – 319,483 171,778 1,295,904 1,673,559 5,803 5,803 – – Year ended 31 October 2016 £ Year ended 31 October 2015 £ 80,836 11,717 – 146,496 69,260 – 92,553 215,756 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 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 profit and loss: Level 3 derivative financial instrument Total financial assets Trade and other payables Total financial liabilities Year ended 31 October 2016 £ Year ended 31 October 2015 £ 2,910,862 2,595,963 – 5,506,825 1,301,707 1,301,707 1,756,445 3,458,340 1,308,859 6,523,644 1,673,559 1,673,559 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 48 NOTES FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED 21. FINANCIAL INSTRUMENTS CONTINUED 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 • 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 was classified as a Level 3 derivative financial instrument, is the fair value of the equity swap with Lanstead Capital L.P. (“Lanstead”), entered in October 2014. The equity swap was for an 18-month period ending in April 2016. As at 31 October 2016, the derivative financial instrument is closed and the value is £nil (2015: £1,308,859). In October 2014 the Company 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% of these shares with a reference price of 13.3333 per share (the “Reference Price”). 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%) 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 was greater or lower than the Reference Price at each swap settlement, the Company received 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. Value in 2015 Losses recognised in profit and loss Settlements received Value in 2016 £ 1,308,859 (149,687) (1,159,172) – 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 2016 £ Year ended 31 October 2015 £ 2,595,963 2,910,862 3,458,340 1,756,445 The Company’s principal trade and other receivables arose from: a) annual payments for various services held as pre-payments b) VAT debtors receivable from UK and German tax authorities c) an R&D tax credit d) grant funding receivable from the EU. 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 2016 49 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 2016 £ Year ended 31 October 2015 £ 1,301,707 1,673,559 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 monitors and reviews its policies in respect of currency risk on a regular basis. At 31 October 2016 the Company held no monetary assets or liabilities in currencies other than the functional currency of the operating units involved (2015: £nil). 22. CAPITAL COMMITMENTS The Company had no capital commitments outstanding at 31 October 2016 (2015: £nil). 23. BOARD CHANGES AND POST-BALANCE SHEET EVENTS Board changes are reported under “Directors and their Interests”. In March 2017, the Company undertook a placing, subscription and open offer, raising approximately £8.1 million before expenses. 24. ULTIMATE CONTROLLING PARTY There is no ultimate controlling party. 25. RELATED PARTY TRANSACTIONS During the year ended 31 October 2016: £nil 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 (2015: £2,280). Mr. Field is also a Director and Shareholder of Richards and Appleby Ltd. At 31 October 2016, the sum owing to Richards and Appleby Ltd was £nil (2015: £4,780). £65,392 was invoiced by Linc Energy Ltd (a company registered in Australia) for the services of Adam Bond as Director of AFC Energy plc (2015: £212,438). Linc Energy Ltd was, until 30 September 2015, a major Shareholder in the Company. At 31 October 2016 the amount owing to Linc Energy Ltd was £nil (2015: £42,761). £40,200 (plus VAT) was invoiced by Locana Corporation (London) Ltd (a company registered in England & Wales) for consultancy services (2015: £37,640). Mr. Yeo is also a Director and Shareholder of Locana Corporation (London) Ltd. At 31 October 2016, the sum owing to Locana was £3,350 (2015: £3,350). STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 50 COMPANY INFORMATION Principal Place of Business Unit 71.4 Dunsfold Park Stovolds Hill Cranleigh Surrey GU6 8TB Auditor Grant Thornton LLP Grant Thornton House Melton Street Euston Square London NW1 2EP Solicitors Memery Crystal LLP 44 Southampton Buildings London WC2A 1AP Registrars Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Directors Tim Yeo Adam Bond Jim Gibson Mitchell Field Eugene Shvidler Eugene Tenenbaum Company Secretary Richard Tuffill Registered Office Finsgate 5–7 Cranwood Street London EC1V 9EE Registered in England: 05668788 Joint Broker Peat & Co 118 Piccadilly London W1J 7NW AIM Nominated Adviser and Joint Broker Cantor Fitzgerald Europe One Churchill Place Canary Wharf London E14 5RB Bankers Barclays Bank PLC 40/41 High Street Chelmsford Essex CM1 1BE AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016Design & production www.carrkamasa.co.uk A F C E N E R G Y P L C A n n u a l R e p o r t & A c c o u n t s 2 0 1 6 AFC ENERGY PLC Unit 71.4 Dunsfold Park Stovolds Hill Cranleigh Surrey GU6 8TB T: 01483 276726 www.afcenergy.com 

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