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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.
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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
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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
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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
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AFC ENERGY PLC
Unit 71.4 Dunsfold Park
Stovolds Hill
Cranleigh
Surrey GU6 8TB
T: 01483 276726
www.afcenergy.com