AFC Energy PLC
Annual Report 2023

Plain-text annual report

DISPLACING DIESEL ANNUAL REPORT for the year ended 31 October 2023 Displacing Diesel Our strategy is built around displacing diesel in strategic markets. We do this by commercialising our three key product offerings over the development cycle from investment to revenue. With our S Series H-Power Generator already earning revenue, our strategy is to grow that revenue stream whilst developing the S+ H-Power Generator and Fuel conversion technology platforms to the revenue stage over the near- term and medium-term. STRATEGIC REVIEW Highlights Our strategy and business model Chair’s report Chief Executive Officer’s report Chief Financial Officer’s report Key Performance Indicators Manufacturing Scale up – Fuel Cell Market opportunity – Fuel Processing Market opportunity – Construction Market Market opportunity – Cracker Technology Joint ventures Section 172 Risk management ESG REPORT ESG Committee report ESG Governance and Strategy Environmental Social Our commitments to ESG and Sustainability How we support the UN sustainability goals 1 2 4 6 12 15 16 18 20 22 24 25 26 29 30 32 34 37 38 GOVERNANCE REPORT Corporate Governance Statement Directors’ report Board of Directors Roles of the Board and sub-committees Audit and Risk Committee report Nomination Committee report Remuneration Committee report Statement of Directors’ responsibilities Independent Auditor’s report FINANCIAL STATEMENTS Statement of comprehensive income Statement of financial position Statement of changes in equity Cash flow statement 39 40 42 44 46 48 49 59 60 69 70 71 72 Notes forming part of the financial statements 73 Company information 98 HIGHLIGHTS FINANCIAL – FY 2023 and subsequent TECHNOLOGY being developed in FY2023 £26.6m £27.4m Orderbook* Cash at year end £4.1m R&D tax credit received S Series generator (30kW) S+ Series generator (200kW) Small scale ammonia cracking plant COMMERCIAL – customers in FY 2023 ESG – progress in FY2023 Strategic and distribution relationships Lost time injuries Nil Carbon footprint ESG Committees 2022 & 2023 data captured & compared to 2021 baseline Focused on developing and empowering our people * The aggregate of the committed and uncommitted elements within existing contracts (see also CEO report). DISPLACING DIESEL 1 STRATEGICREVIEWAnnual Report 2023 AFC Energy PLC OUR STRATEGY AND BUSINESS MODEL Our strategy is built around displacing diesel generators. We do this through investing in our three key product platforms over the product cycle from research to revenue. DISPLACING FUEL CELL FUEL PROCESSING Our fuel processing platform is focussed on the growing opportunities around the fast developing global green ammonia trade and will be looking to deliver revenue in the medium term. Our S Series, air cooled, generator is focussed on the construction sector and is already generating revenue. As we continue to build market traction with the S Series, we’ll be developing the S+ Series, liquid cooled, in parallel and looking to deliver revenue in the near term. 2 DISPLACING DIESEL STRATEGICREVIEWAnnual Report 2023 DIESEL PRODUCT-LED STRATEGY Development Development S Series H-Power Generator S+ Series H-Power Generator Development Fuel Processing Development 31/10/2023 Revenue Revenue Revenue Revenue DISPLACING DIESEL 3 STRATEGICREVIEWCHAIR’S REPORT Leading the transition COP 28 was held in Dubai in 2023 and renewed the focus on the global need to decarbonise and the opportunities this is creating. AFC Energy was represented by our CEO, Adam Bond, and with hydrogen high on the COP agenda, there was a lot of interest in our technology and products. It was also a great backdrop for the fuel cell and then fuel processing announcements we made around the time. Strategic development The construction sector remains our primary commercial focus due to its reliance on diesel generators and the I wish to thank Joe for his six-years of service and wish him well in his retirement. growing pressure to displace diesel when tendering Taking over from Joe on 1 August 2023, I’m delighted to for contracts. welcome Duncan Neale to the Board. Duncan has both the breadth and depth of experience in the role and in the To this end, the joint venture announced with Speedy Hire energy sector that will serve the Company well as we look combines perfectly their marketing and logistical to scale. strength with our hydrogen fuelled equipment and technical expertise. Contents The first H-Power Generator passed factory acceptance Environmental, Social and Governance (ESG) A great deal of focus has understandably been on the testing in March 2024 and I’m delighted to report that important role that the Company’s products can play in feedback has already been very positive, particularly from decarbonising the environment. However, as we grow and the potential JV customers that have visited. start to manufacture in volume, we need to take further The Board Graeme Lewis retired as chief financial officer and resigned I am pleased that Monika Biddulph has taken on leading as a director from the board on 30 November 2022. I wish ESG activity for the Board, and especially pleased by the to thank Graeme for his service and wish him well way that this has been embraced by all our employees. You in retirement. can see more detailed information later in her ESG report steps ourselves as a company. Taking over from Graeme, Peter Dixon-Clarke joined us on 1 December 2022, bringing with him his considerable fund raising and transactional experience from across the energy sector. Our employees I would like to thank our employees for their continued commitment to what has been a milestone year. on page 29. Jim Gibson resigned on 9 June 2023, and I wish to thank him for his five years of service. Jim’s duties as chief operating Gary Bullard officer have been shared amongst the existing C-suite. Chair 25 March 2024 This year saw the retirement of Joe Mangion as non- executive and chair of the Audit Committee on 31 July 2023. 4 DISPLACING DIESEL STRATEGICREVIEWAFC Energy PLC We announced the signing of our Joint Venture with Speedy Hire plc, named Speedy Hydrogen Solutions (“SHS”), and then followed that with the news, that we had demonstrated a world first in modular hydrogen production from our cracker system. DISPLACING DIESEL 5 STRATEGICREVIEWAnnual Report 2023CHIEF EXECUTIVE OFFICER’S REPORT Displacing diesel The 2023 financial year saw the global hydrogen market grow with over half a trillion US dollars of new projects in the pipeline to support industry’s decarbonisation commitments. In recognition of how this rapidly expanding industry is The success of these first generation trials evidenced evolving, and the growing importance of decarbonised industry demand for our zero emission generators, which ammonia as a hydrogen carrier in the facilitation of was the impetus behind our initial Heads of Agreement with global trade, we have commenced consideration of Speedy Hire signed in July 2023 (which was subsequently standalone divisions within AFC Energy reflecting both the converted to a joint venture in the form of Speedy Hydrogen consumption (fuel cells) and production (fuel conversion Solutions post year end) and first commercial orders or ammonia cracking) of hydrogen. This delineation from Acciona and Speedy Hydrogen Solutions (post year would reflect the fact that whilst there is a clear overlap in end). These partnerships provided valuable insights that technologies where ammonia cracking can facilitate fuel informed the 30kW generator product which, post year cell deployments, there is also a growing number of stand end, culminated in delivery of the Company’s first Factory alone enquiries for the cracker technology that gives rise to Acceptance Test (announced in March 2024) and its first a value proposition that perhaps is not currently reflected in independent Attestation of Conformity for CE Mark from the value of AFC Energy. global certification agency, TUV SUD (March 2024) – both Across our fuel cell division, in the 2023 financial year, ten first generation 10kW H-Power Towers were successfully This strategy has proven highly successful and whilst deployed to customer sites predominantly in the not reflected in the earned revenue in the 2023 financial construction sector. The aim of these deployments year, can be evidenced in the order book of £27m as at massive achievements for the Company. was to: the date of this report highlighting both committed and uncommitted orders on existing contracts for S Series validate the operation of the S Series fuel cell technology generators derived from customer contracts including in the form of generators; Acciona and Speedy Hydrogen Solutions. This order book validate the plant hire business model for the UK construction market; would not have been possible without the investment of time and resources throughout 2023. validate the pain points and drivers for uptake of In parallel with customer deployments was a programme hydrogen powered fuel cell generators; of cost reduction that successfully represented a 50% obtain valuable customer feedback to build into subsequent H-Power Generator platforms; fall in component and material costs brought about by engineering and scaled component procurement. This cost down approach to the H-Power Generator platform generate nominal revenue from the weekly rental of has continued to evidence further value enhancements H-Power Towers; and into 2024, including the confirmation of a robust and validate a contractual order book of new generator orders. 6 globally diversified supply chain across all key components positioning AFC Energy well for manufacturing scale up. DISPLACING DIESEL STRATEGICREVIEWAFC Energy PLCThis strategy has proven highly successful and whilst not reflected in the earned revenue in the 2023 year, can be evidenced in the order book of £27 million. DISPLACING DIESEL 7 STRATEGICREVIEWAnnual Report 2023CHIEF EXECUTIVE OFFICER’S REPORT CONTINUED The growing displacement of the global diesel generator production of hydrogen at the point of demand. Since market represents a US$20bn per annum opportunity launch, we have hosted many visitor groups from across which, through tightened regulation and emission the Globe to the site, reflecting industry’s growing interest standards, corporate sustainability targets, and rising costs in ammonia adoption as a clean and sustainable fuel of of compliance, makes AFC Energy’s H-Power Generator the future. an increasingly viable alternative to support industry’s roadmap to a decarbonised future. The vast adoption of diesel generation by industry, Speedy Hydrogen Solution (“SHS”) Joint Venture SHS, our new joint venture with Speedy Hire, signed in whether for prime or backup power, creates a sizeable November 2023, is a market first and aligns perfectly with prize to chase, however our immediate focus remains our stated business model of selling H-Power Generators on the construction market with its immediate wholesale to plant hire companies for onward rental to decarbonisation challenges. the construction sector and temporary power markets. Throughout this overview, a theme resonates with all our The UK construction market is aggressively moving partners, that the time to displace diesel is now and whilst towards the displacement of diesel generators with it will take time to transition from the material sunk cost in high profile projects such as HS2 stating there will be no diesel generators in the market today, the pressure to find diesel generators on site by 2029. Speedy Hire and SHS alternative off-grid power solutions is imminent. are aiming to step into this void with viable alternative technologies that include hydrogen fuelled generators. Our fuel conversion division has also reached new milestones during the course of the year culminating in the Since announcement of our first Heads of Terms with launch of the world’s largest modular, scalable ammonia Speedy Hire in July 2023, market demand for the H-Power cracker platform in late 2023. Much of 2023 was spent in Generators has exceeded expectations and will the design, engineering and build phase of this platform, surpass first year orders based on current business including the launch of the Company’s next generation model projections. ammonia cracker which is designed for low cost, efficient The UK construction market is aggressively moving towards the displacement of diesel generators with high profile projects such as HS2 stating there will be no diesel generators on site by 2029. 8 DISPLACING DIESEL STRATEGICREVIEWAFC Energy PLCPost year end, SHS committed to an initial £2.0m TAMGO are marketing both our S Series (air cooled) and purchase of generators from AFC Energy. The generators S+ Series (liquid cooled) H-Power Generators to end- are to be delivered during the first six months of calendar customers in the industrial and off-grid power markets in year 2024, with the intention of increasing orders for the the Kingdom of Saudi Arabia and a further 16 countries in first full year (12 months ended 31 October 2024) up to the MENA and surrounding region. Several client proposals £4.7m. The initial focus of orders is on the S Series air- have already been submitted to Saudi companies seeking cooled fuel cell platform sized at 30kW. to adopt hydrogen as part of their off-grid power solution. The generators are exclusively available for hire, via Speedy TAMGO will provide local customer support with on the Hire, to its customers, in the UK and Ireland. This exclusivity ground maintenance and servicing of our generators, will apply for an initial three-year period subject to an annual along with engineering, design, commissioning and logistics minimum order quantity which increases each year. support direct to customers. Speedy’s customers have already shown strong interest and We continue to believe this region presents unprecedented established a growing pipeline of demand, driven particularly growth potential for the H-Power Generator platform with by changing tender requirements and emission regulations, additional benefits of working with a partner with strong where UK infrastructure and construction projects are pedigree in localised manufacturing capability within the targeting the removal of diesel generators by as early Saudi market. This positions AFC Energy and TAMGO to as 2029. create a market leading positioning for our technology TAMGO distribution agreement In September 2023, we announced the signing of an exclusive distribution agreement with Saudi Arabia’s The ACCIONA In April 2023, having hosted our first 10kW H-Power Tower Machinery Group LLC, which trades as TAMGO. trial in 2022, ACCIONA was the first to sign a lease for our within the MENA region. new 30kW H-Power Generator for a six-month period with TAMGO is an approved vendor to many of Saudi Arabia’s an option to purchase the system at a pre-agreed price. largest infrastructure and mining projects including NEOM, Red Sea Global and Qiddiya. In a number of these As part of the agreement, a battery storage unit will be projects, the target of displacing diesel generators is harmonised for operation with the fuel cell generator, within the current decade, and so presents a near-term providing a total 50kVA nameplate generator package. growth trajectory further supporting our business model The combined system is expected to undergo factory of partnering with dealers and plant hire businesses which acceptance testing shortly with deployment to provide immediate access to global markets in a timely Spain thereafter. cost efficient manner, enabling the Company to meet the accelerated path to decarbonisation many construction projects are on. DISPLACING DIESEL 9 STRATEGICREVIEWAnnual Report 2023CHIEF EXECUTIVE OFFICER’S REPORT CONTINUED ABB E-mobility (ABB) In March 2023, we announced the successful operation and validation of our first high-power density, liquid cooled Fuel Processing – Modular Ammonia Cracker Ammonia has continued to gain international importance fuel cell stacks with ABB E-mobility. The stacks, referred to as a clean hydrogen carrier fuel with the announcement as the “S+” Series (as distinct from the Company’s “S” Series of billions of dollars in new ammonia production plant air cooled technology), were delivered to Germany for investment during 2023. With global hydrogen trade successful independent validation in October 2022. expected to be facilitated through the shipping of clean ammonia at scale, the importance of ammonia cracking Since then, our engineers have been designing and testing and the reproduction of hydrogen at the point of demand the 200kW generator packaging and, following receipt from ammonia, is also growing in importance. of our new 140kW (gross) fuel cell stacks in 2023 and long lead component ordering, we are nearing initial operation AFC Energy remains at the forefront of distributed of the 200kW H-Power system. This is a landmark moment ammonia cracking technology with the launch, during for our latest, complementary liquid cooled generator March 2023, of the Company’s latest generation ammonia technology allowing us to now achieve nameplate fuel cracker reactor technology, and subsequently (post year cell ratings from 10kW (air cooled) through to in excess of end), its first, and the world’s largest, modular, scalable 100kW (liquid cooled). ammonia cracker facility here in the UK. Delivery of the pilot cracker facility was the culmination of two years of Following successful validation of the S+ Series technology technology development, design, engineering and build with ABB E-mobility and their funding of this development, before announcing the commissioning of the 400kg per we entered into an agreement with ABB establishing a day facility in December 2023. It is being used to validate pipeline for the purchase of their first ten 200kW S+ Series and test the design, engineering, components, operation fuel cell generators over a defined term. The first of these and safety aspects of the technology. systems will be purchased from AFC Energy as part of the revised contract, with the subsequent nine at ABB’s option. The plant has been designed to produce fuel cell grade ABB also invested a further £2m into AFC Energy giving hydrogen with power consumed locally at a fraction of the them a total equity stake of just over 2% in the Company. power consumed by an equivalent sized electrolyser. This makes it an ideal source of distributed hydrogen, whether used in stationary or maritime applications. Ammonia has continued to gain international importance as a clean hydrogen carrier fuel with the announcement of billions of dollars in new ammonia production plant investment during 2023. 10 DISPLACING DIESEL STRATEGICREVIEWAFC Energy PLCDemand for such applications is growing rapidly with the Hydrogen Council, in collaboration with McKinsey, forecasting that 400 out of the 660 million tons of hydrogen needed for carbon neutrality by 2050 will be transported over long distances, with ammonia expected to account for about 45% of that 660 million tons. Outlook The 2024 financial year is all going to be about delivery. Delivery of our first 30kW H-Power Generators to Speedy Hire (through SHS) and its customers. Delivery of our first 50kVA H-Power Generator to ACCIONA. Delivery of first orders from TAMGO across the Saudi and MENA regions. To meet this demand, there is already a well-established supply chain for ammonia, which enables a lower barrier to its adoption globally as a hydrogen carrier fuel. However, the lack of commercially available ammonia cracking technologies within the existing value chain presents an enormous opportunity for AFC Energy. During 2024, AFC Energy will be working to design and engineer a containerised ammonia cracker platform, including purification technology, to enable mobile units to produce hydrogen at the point of consumption. The containerised cracker platform, will be a standalone product capable of being sold to hydrogen consumers, positioning AFC Energy at the forefront of this emerging global market. As an initial step in the commercialisation of this technology, we have signed our first Letter of Intent in 2023 with the trading arm of one of Europe’s largest energy companies to market the potential for ammonia and green ammonia as a hydrogen carrier fuel based on a perceived demand for modular crackers from its customers. This is in addition to the growing list of customer enquiries wishing to explore the potential for networked hydrogen production through ammonia cracking across Europe. The ammonia cracker technology platform is an exciting and key part of the global value chain and the strides forward made during 2022 and 2023 continues to position AFC Energy at the forefront of this technology. To achieve this, we have continued to focus on the securing of our supply chain, with component qualification taking place across most of 2023. We are also focussing on scaling up our manufacturing capabilities to meet the growing demand for our generators. We plan to do this through a combination of strategic partnerships within our sub-assembly supply chain and a modest investment into our on-site assembly capabilities. This will ensure effective management of working capital. Work on the liquid cooled generator for ABB continues, with initial testing expected to complete within 2024, to be followed by CE marking prior to shipping. In the meantime, early pre-ordering of the 200kW H-Power Generator is available with active marketing of the system already underway with TAMGO for the Saudi market. We continue to see interest in our hydrogen power generators from global distributors and plant hire businesses and so collaborative working with this sector to support decarbonisation requirements of their customers will also be an important part of 2024. The Board also intends to explore options to both demonstrate and unlock the material unrecognised value of our ammonia cracking technology to the benefit of shareholders through industry partnerships and other strategic avenues. Adam Bond Chief Executive Officer 25 March 2024 DISPLACING DIESEL 11 STRATEGICREVIEWAnnual Report 2023CHIEF FINANCIAL OFFICER’S REPORT £27.4m closing cash position Financial highlights for the 2023 financial year were: ~ £27.4m closing cash position; ~ £8.5m of qualifying R&D investment; ~ £4.1m of R&D tax credits received; and ~ £4.3m UK Government Grant awarded. Result for the year After revenue of £0.2m (2022: £0.6m) the Company Cash flow summary Net loss before tax produced a loss after tax of £17.5m (2022: £16.4m) for the Non-cash items 2023 financial year. R&D credits received Working capital movements This loss was driven by operating costs of £20.0m (2022: £19.7m) offset by interest earned of £0.5m (2022: £0.1m) Investing activities and R&D tax credits of £2.1m (2022: £3.0m). Financing activities Of the £20.0m of operating costs, £4.7m (2022: £5.1m) Opening cash related to R&D materials, £9.6m (2022: £7.6m) to staff costs Closing cash and £5.7m (2022: £7.0m) to other administrative expenses. £’m (19.6) 2.2 4.1 0.2 (13.1) (1.2) 1.5 (12.8) 40.2 27.4 Of the administrative expenses, £2.4m (2022: £3.5m) activities) of £13.1m equated to an average of £1.1m per related to non-cash items, mainly depreciation and share month, suggesting a cash runway, at similar expenditure Operational cash burn (i.e., before investing or financing based payments. levels, of 24-months beyond the end of the 2023 financial year. This cash runway will reduce in proportion to the The reduction of expected R&D tax credits, from £3.0m to rate at which the Company scales up its commercial and £2.1m, is due to the changes in UK Government legislation, manufacturing capabilities. effective 1 April 2023, which reduced the value of the uplift from 130% to 86%, as well as reducing the recovery rates and tightening definitions around qualifying expenditure. Strong closing cash position of £27.4m A summary of the cash flow for the 2023 financial year is set out within the table below: £8.5m of qualifying R&D investment £8.5m (2022: £9.0m) of the Company’s R&D invested is expected to qualify under the UK Government’s R&D tax credit scheme. This was deployed as follows: Qualifying R&D expense Materials Staff costs Other costs £’m 3.3 4.7 0.5 8.5 12 DISPLACING DIESEL STRATEGICREVIEWAFC Energy PLC The £8.5m was deployed approximately 40%, 25% and 35% invested should still be expensed as operating costs. For across each of the Company’s three value streams, being: the 2024 financial year that is expected to change, due to air cooled generators; liquid cooled generators; and fuel the continued progress during that year. processing respectively. In the case of air cooled generators, the investment funded Receipt of £4.1m in R&D tax credits Of the £4.1m (2022: £0.5m) received, £1.1m related to the the customer driven evolution from the 10kW H-Power 2021 financial year and £3.0m to the 2022 financial year. Tower to the 30kW H-Power Generator, the success of which culminated in the JV with Speedy Hire. The Company received two years’ worth of R&D tax credits during the 2023 financial year because it accelerated In the case of liquid cooled generators, the investment submission of its 2022 corporation tax return. The full value funded the customer driven evolution from the 100kW fuel of the £3.0m claim, lodged in July 2023, was received in cell laboratory test to the 200kW generator unit, currently September 2023. undergoing laboratory testing. In the case of fuel processing, the investment funded construction of our pilot modular ammonia cracker. Award of a £4.3m UK Government Grant In July 2023, the Company announced the award of a UK This has been designed to a scale equivalent to a 1MW Government Grant worth up to £4.3m to the Company. electrolyser, meaning an output of 400kg of hydrogen per day to fuel cell purity, and currently undergoing a series of The grant was awarded by the Department for Energy onsite field tests to prove out the economics and useability. Security and Net Zero under its Red Diesel Replacement scheme, which aims to displace diesel in the construction, The Company has assessed each of the three value quarrying and mining sectors. streams against the six tests set out within the accounting standard that need to be met before the related investment The grant will reimburse 50% of eligible costs of the next can be capitalised as intangible assets. generation air cooled and liquid cooled fuel cell generators. Based on the above assessment, the Company has financial year and will be recorded in the Statement of concluded that for the 2023 financial year the amounts Comprehensive Income as other income. First receipts under the grant will occur during the 2024 DISPLACING DIESEL 13 STRATEGICREVIEWAnnual Report 2023CHIEF FINANCIAL OFFICER’S REPORT CONTINUED AFC Energy PLC The developments must culminate in a field trial for both the air cooled and liquid cooled generators, alongside a hybrid Going concern To deliver on the Company’s intention to capitalise on battery, at one, or more, of the quarries. If the field trials are its growing market opportunities it needs to scale up its delayed beyond the March 2025 closing date then there is a manufacturing output and continue investing in research and high risk of under recovery. development, both of which will require additional funding. No recoveries were made under this grant during the 2023 Whilst the Board recognises the challenges of fundraising in financial year. The first claim has now been made and the current economic climate, it is confident that when the receipt expected in due course. Company chooses to seek additional funding that it will be ABB E-mobility (ABB) During the 2023 financial year, the Sale & Development available. This view is based primarily on the: recent technical successes of both the fuel cell and fuel agreement with ABB was revised by both parties. Under processing teams; the revised agreement, ABB has, for a pre-agreed total and defined term, a discount to be spread over the purchases of the first ten eligible fuel cell systems. UK Government requirements for construction tenders to include a non-diesel solution for onsite electricity generation; The total cash value of the original contract was £4.0m and growing levels of interest expressed by the construction this remained unchanged after the revision, with £2.0m market in the recent joint venture with Speedy Hire plc; having been received in the 2022 financial year and the £2.0m balance received in the 2023 financial year in return positive feedback from external advisors; and for the purchase of newly issued shares in the Company. growing levels of institutional engagement, in both the Joint venture (JV) with Speedy Hire The commercial elements of the JV are covered within the fuel cell and fuel processing value streams, particularly following recent site visits. CEO report. This is further discussed in the notes to the accounts. Whilst the plan to enter into the JV was announced during the 2023 financial year, the contracts were not completed Outlook At the end of February 2024, the Company held £18.0m of until after it. cash balances. Of the £9.4m of outflow since the end of the 2023 financial year, nearly half related to capital purchases, In terms of JV funding, initial investments became inventory build-up of £2.6m and other working capital. The unconditional on signing of the contract, with future cash average monthly cash outflow from operations therefore injections conditional on certain pre-agreed operational remained consistent with Board expectations at £1.3m milestones set out within the JV agreement. per month. Subsequent injections are to be funded in the form of The 2024 financial year has started strongly with successful commercial interest-bearing loan notes, issued in equal factory acceptance testing of the first 30kW H-Power share by each of the partners. Payment is expected to be Generator in March and the growing pipeline of orders made from the existing cash resources of each company, driven by the JV with Speedy Hire. with the option to seek external debt at a suitable point in the future. To maintain exclusivity in the UK and Ireland, a minimum Chief Finance Officer order of H-Power Generators has been agreed between 25 March 2024 Peter Dixon-Clarke the partners. This quantity increases annually and is phased over three years, being the minimum term of the exclusivity agreement. 14 DISPLACING DIESEL STRATEGICREVIEWAnnual Report 2023 KEY PERFORMANCE INDICATORS Commercial (£000s) Revenue Deferred revenue Financial (£000s) Operating loss Year ended 31 October 2023 Year ended 31 October 2022 277 582 1,423 1,600 20,020 19,612 Liquidity (Unrestricted cash and cash equivalents) 27,366 40,220 Cash absorbed by operating and investing activities 14,381 15,352 Scale up (average headcount) Support, operations and technical employees 113 77 Health and safety On-site hours Near miss Lost Time Injuries (LTI) 205,982 152,453 9 NIL 10 NIL DISPLACING DIESEL 15 STRATEGICREVIEW MARKET OPPORTUNITY – FUEL CELL Scaling-up delivery AFC Energy PLC 2024 is all about delivery. Delivery of our first H-Power Generators to our JV with Speedy Hire, to ACCIONA and to TAMGO. To achieve this, we are focussing on securing our supply chain and scaling up our manufacturing. We’ll do this through a combination of strategic partnerships within our supply chain and a modest investment into on-site assembly. 16 DISPLACING DIESEL STRATEGICREVIEWAnnual Report 2023 DISPLACING DIESEL 17 STRATEGICREVIEWMARKET OPPORTUNITY Fuel Processing AFC Energy PLC Ammonia has continued to gain international importance as a hydrogen carrier fuel with announcements during 2023 of billions of dollars of investment. With a global hydrogen trade to be facilitated through shipping ammonia at scale, the ability to produce hydrogen at the point of use, via ammonia cracking, will be critical. With the launch, in December 2023, of the Company’s first, and the world’s largest, modular scalable cracker here in the UK, AFC Energy remains at the forefront of this technology. 18 DISPLACING DIESEL STRATEGICREVIEWAnnual Report 2023 DISPLACING DIESEL 19 STRATEGICREVIEWMARKET OPPORTUNITY Construction AFC Energy PLC The UK construction market is aggressively moving towards the displacement of diesel generators. With high profile projects such as HS2 stating that there will be no diesel on site by 2029, the JV with Speedy Hire PLC is perfectly placed to step into this void with its hydrogen powered generators. Market enquiries, via SHS, are already exceeding expectations and current manufacturing capacity. 20 DISPLACING DIESEL STRATEGICREVIEWAnnual Report 2023 DISPLACING DIESEL 21 STRATEGICREVIEWR E V E W I S T R A T E G C I MARKET OPPORTUNITY Cracker Technology Hydrogen, being the lightest and least dense fuel brings around challenges in moving it long distances. Ammonia is a compound that contains 75% hydrogen and can be liquified, meaning that it is easier to trade around the globe as it is moved as a liquified gas. The AFC Energy Cracker Technology is designed to Green Hydrogen made in countries with copious and capitalise on this growing trade by converting the ammonia large-scale low-cost renewable energy can be readily back into hydrogen at a high level of purity suitable for a transformed into green ammonia. Over the next few wide range of applications. years, the number of green hydrogen plants coming on stream will increase with the bulk of them using ammonia as their method of moving the hydrogen to their ultimate global destinations. HYDROGEN - H2 AMMONIA - NH3 ~ Hydrogen is a great clean fuel, but it is difficult and expensive to move in ~ Ammonia is a widely traded commodity chemical, used in multiple any significant volume industries (but predominantly fertilizer) ~ Conventionally moved in either pipelines or specially converted trailers ~ Transported widely as a liquid using standard tanks ~ Can be utilised as a ‘Hydrogen-Carrier’ with Ammonia Cracking Technology Hydrogen Made here Cheap / Plentiful renewables Hydrogen Converted to Ammonia Hydrogen Needed in Europe ~ High Energy Costs ~ Unreliable Renewables AFC’s Ammonia Cracker Hydrogen Made here Cheap / Plentiful renewables ‘Energy’ transported in bulk as Liquid Ammonia Hydrogen Converted to Ammonia 22 DISPLACING DIESEL AFC Energy PLCR E V E W I S T R A T E G C I Deployable Purified Hydrogen Generation for Transport & Power Pilot Fuel generation for Large Combustion Engines (> MW Class) Core Ammonia Cracker Technology Hydrogen Rich Combustible Fuel Gas for Industrial Applications At the heart of the AFC Energy ammonia cracker will The future applications of the Cracker technology are be our modular reactor. This compact reactor not only almost limitless, however we are prioritising looking catalytically cracks the ammonia, but also thermally at both combustion and pure hydrogen generation processes the gas streams, recovering heat where applications as these appear to be the likely early appropriate to improve and boost the efficiency. The adopter routes to transition away from fossil fuels into philosophy behind the AFC Energy modular reactor is ammonia based fuels. that multiple units can be combined to increase the gas throughput. During the 2023 financial year we launched our pilot R&D site where we can demonstrate our prototype systems at a scale equivalent of a 1MW electrolyser (400kg/day Hydrogen output). The intention is to prove out the operations, economics and useability on this site whilst we look to off-take the hydrogen for our fuel-cell and wider applications. At a suitable time, we will substitute the existing cracker for our own Bulk Liquid Ammonia Cracker Hydrogen Purification Hydrogen modular cracker. TRANSPORT – RAIL TRANSPORT – ROAD DISPLACING DIESEL 23 Annual Report 2023JOINT VENTURES AFC Energy and Speedy plc Joint Venture (JV) signed on 14 November 2023. UK and Ireland JV to provide dedicated hydrogen H-Powered Generator plant hire business servicing the UK and Irish construction and temporary power markets. 50:50 JV incorporated on a 50:50 basis and called Speedy Hydrogen Solutions (SHS). 4 Four directors appointed to the board of JV, two from Speedy and two from AFC Energy. £1.25m Initial cash injection to JV, as equity, of £1.25m (£0.625m each). 3 years Mutual exclusivity, subject to minimum order quantity by the JV over first three years, with option to extend. £2.0m > c.£4.7m JV commitment to an initial order of £2.0m for delivery of generators with the contractual ability to increase orders up to c.£4.7m in the first year, by mutual consent. Phased Subsequent H-Power Generator sales orders and deliveries to be on a phased basis. SMA AFC Energy to procure and sell hydrogen fuel and provide technical and operational support under a Supply and Maintenance Agreement (“SMA”). Speedy Speedy to provide marketing, accounting and logistical support. Pipeline Strong customer interest already being generated, with growing pipeline. 24 DISPLACING DIESEL STRATEGICREVIEWAFC Energy PLCSECTION 172 Companies Act 2006, Section 172(1) Directors’ statement – promoting the success of the Company. The Directors are fully aware of and understand their statutory duty under the Act. A Director of a company must act in the way he or she considers, in good faith, would be most likely to promote the success of the Company for the benefit of its members and, in doing so, have regard (amongst other matters) to the following factors: The likely consequences of any decision on the long- term value of the Company through the annual strategic review and risk appraisal processes which are reviewed and approved by the Board; The interests of the Company’s employees through monitoring employee welfare and safety, annual appraisal and setting a clear remuneration policy. The Directors recognise that employees are fundamental to the future growth and success of any company. Such success depends on looking after our employees, as described further in the ESG and Remuneration Committee reports. The Board is mindful that decisions and oversight often have to balance the differing needs of stakeholders, and ensures this is taken into consideration when making critical decisions; The need to foster the Company’s business relationships with suppliers, customers and others through the development of strategic agreements with supply chain and distribution channel partners; The impact of the Company’s operations on the community and the environment, monitored by the ESG Committee which agrees on activities, sets goals, monitors KPIs and reviews and updates policies and procedures. An evaluation of our impact is assessed in the ESG Committee report; The desirability of the Company maintaining a reputation for high standards of business conduct by reviewing and updating the Company’s policies and setting out the high standards and behaviours expected from those that work for us or with us; and The need to act fairly between members of the Company. After weighing up all relevant factors, the Directors consider which course of action best promotes the long- term success of the Company, taking into consideration the impact on stakeholders. In doing so, the Directors act fairly as between the Company’s members. The Board is ultimately responsible for the direction, management, performance and long-term sustainable success of the Company. It sets the Company’s strategy and objectives, considering the interests of all its stakeholders. A good understanding of the Company’s stakeholders enables the Board to factor the potential impact of strategic decisions on each stakeholder into boardroom discussions. By considering the Company’s purpose, vision and values together with its strategic priorities the Board aims to make sure that its decisions are fair. The Board has always, both collectively and individually, taken decisions for the long term that align with our strategic direction and consistently aims to uphold the highest standards of business conduct. Board resolutions are always determined with reference to the interests of the Company’s employees, its business relationships with suppliers and customers, and the impact of its operations on communities and the environment. Stakeholder input to our decision making during the period has included: Consultation with, and site visits by, shareholders, market professionals and professional advisers to diversify and strengthen the professional experience and independence of the Board and senior managers to cover commercial, product development, technology and finance. The Nomination Committee report sets out further details of the processes followed; Market sounding and site validation projects confirm that end users are prepared to pay a premium to reduce emissions. Furthermore, end users and strategic partners have provided feedback identifying potential improvement to future versions of the Company’s products; and The ESG Committee report includes an evaluation of existing programmes and day-to-day operational activity which already align with our high level commitments set out in the report to the environment, wider society and governance treating all stakeholders fairly whilst maintaining high standards of business conduct in accordance with internal policies and procedures. This statement serves as an overview of how the Directors have performed this duty in the financial period and engaged with the Company’s key stakeholders to help to inform the Board’s decision-making. Further details of the consultation processes applied during this period are set out in the Nomination Committee, Remuneration Committee and Strategic reports. These initiatives should be read in conjunction with the Corporate Governance section which sets out the decision making and risk appraisal processes together with delegation of authorities. DISPLACING DIESEL 25 STRATEGICREVIEWAnnual Report 2023RISK MANAGEMENT The Company’s business exposes it to a broad range of risks. Its approach to managing these risks has therefore been to create a system of internal controls, which looks to manage, rather than eliminate, risk. Whilst the Company has an Audit & Risk Committee, responsibility for risk management lies with the entire Board. The Board has adopted a policy of reviewing and updating the table below on a quarterly basis. Commercial risk Detail Likelihood Impact Trend Mitigation Products are at an early stage of commercialisation, and so may not initially perform to customer expectations and may take time to gain traction in target markets. The fuel cell offering comes in two platforms, being air cooled and liquid cooled. Of these, only the former is generating revenue at this stage. High High Most development and commercialisation workstreams are undertaken in conjunction with, and are reliant upon, strategic partners. Several strategic partnerships, including two with plant hire companies, are already in place and discussions around additional partnerships, beyond existing exclusivity restrictions, are ongoing. High High High system costs may reduce competitiveness compared to other fuel cell systems. The Company does not yet manufacture at the scale required to generate material cost savings from operational and purchasing efficiencies. High High Competitiveness, compared to non-hydrogen solutions, depends on the delivered price of hydrogen. Customers’, particularly plant hire companies, buying decisions are expected to be driven by the total cost of ownership, being both upfront capital expenditure and ongoing operational expenditure. High High Strict quality control procedures during manufacturing and acceptance tests prior to shipping combined with readily available on-site support. Working with strategic partners, such as plant hire companies, will help in penetrating markets, particularly where those partners already have a presence. Suitable sparing policy such that spare fuel cell modules are made and stored as part of any production run. Extensive and continued due diligence to confirm financial, technical and commercial competence and alignment Pursuit of multiple partnerships, to mitigate negative impact of any single relationship. Geographic exclusivity clauses, within the plant hire and distribution agreements. A proactive value engineering process with a clear product roadmap and bulk component purchases supported by manufacturing drop sizes. Supply chain pricing tension and resilience from using multiple suppliers, where appropriate. Increasing levels of global investment in the hydrogen supply chain, particularly in green hydrogen. Pursuit of an integrated fuelling strategy covering both direct hydrogen and hydrogen from ammonia. Recent high success rate when applying for applicable government grants. 26 DISPLACING DIESEL STRATEGICREVIEWAFC Energy PLCTechnological risk Detail Likelihood Impact Trend Mitigation Ongoing development requires ready access to test equipment and facilities. Increased activity in the hydrogen space means that timely access to suitable test equipment cannot be guaranteed and so may lead to delays in product development. High High The Company has good relations with existing suppliers, both in the UK and Europe. It is also exploring an opportunity to develop its own test facility. The growing levels of customers; employee turnover and strategic partnerships increase the risk of “leakage” of intellectual property and/ or “know how”. H-Power Towers were first deployed in August 2022 and the first H-Power Generator was factory acceptance tested in March 2024. Average employee headcount grew during the 2023 financial year from 84 to 120. Medium Medium Using specialist advisers, internal controls, and employee briefings to capture; protect and exploit internally generated IP. Partner agreements contain non- disclosure and IP protection provisions. The Company does not sell into markets where there is a high risk of “reverse engineering”. Operational risk Detail Likelihood Impact Trend Mitigation The Company manufactures and deploys its own product to customer sites and often procures the fuel required by those customers for power generation. Whilst many materials and sub- assemblies are sourced externally, the Company undertakes assembly operations and also handles volatile and/ or corrosive chemicals, such as hydrogen and ammonia, both on and off-site. Medium High The Company has a dedicated health & safety officer along with a dedicated HSE management & tracking system. The HSE system incorporates a wide range of functionality, including modules such as “Accident/ Incidents Management”; “Permit to Work” and “Risk Assessment”. The supply chain is international and certain components are sole sourced. Most key components, by value, are sourced from within Europe and North America. Medium High Moving away from sole sourcing for the majority of suppliers, to achieve greater resilience and cost competitiveness. Some components are sourced from China, and shipped via the Red Sea, where shipping is currently under threat from missiles and drones launched from Yemen. The supply chain is unproven at the scale envisaged. Driving down costs will require material production increases over the coming years. Medium High Global pandemics, such as Covid 19. Effective collaboration, both internally and externally (particularly the ability to attend customer sites) is critical to the success of the business. Medium Medium Good planning, along with a growing order book and strong balance sheet will help in developing stronger and more equitable supplier relationships as output grows. The Company has a Business Continuity Plan, which includes the requirement for robust information technology systems able to support remote working if required. DISPLACING DIESEL 27 STRATEGICREVIEWAnnual Report 2023RISK MANAGEMENT Corporate risk Detail Likelihood Impact Trend Mitigation Failure to meet shareholder expectations. Medium High Fundraisings in 2020 and 2021 increased expectations and poor performance could deter new investors from buying or existing investors from holding. Further, the improving macroeconomic outlook may stall and deter capital markets from further exposure. The Company does not purchase key person insurance. Senior staff have highly specialised skills which would be hard to replace following an unplanned departure. High High Competition attracting & retaining skilled personnel. In addition to the inflationary environment, the sector is seeing increasing demand for skilled personnel. High High Cyber risk. The use of networked systems across a growing organisation, along with being a listed entity, increases the risk of cyber- attacks, such as ransom demands Medium High The Company focuses on cash burn and operates strict cost control measures on a project-by-project basis. It also has contingency plans in place to curtail certain projects if necessary to slow the rate of cash burn. The Company has adequate cash balances to meet its liabilities as they fall due for at least the next 12-months. The Company has a proactive remuneration committee with access to specialist advice and a mixture of shorter- term incentives, such as cash bonuses, and longer-term incentives, such as options, to retain and motivate employees. The Company has a proactive remuneration committee with access to specialist advice and a mixture of shorter- term incentives, such as cash bonuses, and longer-term incentives, such as options, to retain and motivate employees. The Company is accredited under the “Cyber Essentials” programme, the government-backed scheme created by the National Cyber Security Centre. Political risk Detail Likelihood Impact Trend Mitigation Customers and strategic partners in multiple jurisdictions. The Company is UK based with customers and strategic partners in the UK; Europe and the Middle East. Medium High Seeking specialist external advice, particularly on tax and tariff related matters. State sponsored aggression against other countries. High High Invasions, such as those by Russia of Ukraine and Hamas of Israel, have global consequences, including material increases to the cost of energy, which drives consumer inflation and places greater pressure on salary inflation. The Company has a proactive remuneration committee with access to specialist advice and a mixture of shorter- term incentives, such as cash bonuses, and longer-term incentives, such as options, to retain and motivate employees. Emissions targets and government support can impact customer purchasing decisions. The Company’s current customer base is in the UK; Europe and Middle East, all of which are jurisdictions where considerable support, both legislative and financial, will be required for the continued energy transition. Medium Medium Prioritise customers that already have the budget to proceed with their projects, rather than those still subject to government funding. Financial risk Detail Likelihood Impact Trend Mitigation The Company does not yet generate positive cash flow. The Company is at an early stage of commercialisation and so does not generate the gross margins required to support its costs. It will therefore require additional funding to scale-up at the rate envisaged. High High Continued sales growth and product development will drive down manufacturing costs per unit and improve product margin. Having a multi jurisdiction supply Whilst sales revenue is mainly High High chain exposes the Company to £ denominated, the majority of foreign exchange risk. inventory costs are in US$ or €. The Company holds accounts in all three of the main currencies it trades in. Production planning allows it to hedge when suitable. The Strategic Report on pages 1 to 28 has been approved by the Directors and signed on their behalf by: Peter Dixon-Clarke 25 March 2024 28 DISPLACING DIESEL STRATEGICREVIEWAFC Energy PLCESG COMMITTEE REPORT Making good progress Displacing Diesel is a route to flexible, clean energy we’re passionate about along with our customers and investors. We are proud and active players in the energy transition. Recognising the challenges around hydrogen production, as highlighted by the Hydrogen Council, we have expanded our strategy and activities to include the development of proprietary ammonia cracking technology to produce green hydrogen out of green ammonia. Our S Series and S+ Series fuel cells and carrier fuel conversion products are a key alternative to diesel generators, often in grid constrained locations. Enabling the required shift away from diesel to hydrogen has huge potential to reduce greenhouse gas emissions, air pollution and noise pollution. ESG is an essential and integrated part of our business, and it is what our customers, investors, suppliers, communities, and employees expect. Over the last year we have made good progress around employee wellbeing and training, governance, and health and safety and environmental programmes. Monika Biddulph ESG board sponsor and Non-Executive Director 25 March 2024 “ Sustainability proudly sits at the heart of our business and products. Over the last year we have made good progress in several key areas, with the materiality matrix guiding the ESG Committee in the prioritisation of activities” DISPLACING DIESEL 29 Annual Report 2023ESGREPORT ESG GOVERNANCE AND STRATEGY Governance and strategic focus Our approach The ESG Committee is led by Monika Biddulph, board ESG materiality assessment As the company grows and implements manufacturing sponsor and chair, with committee members including scaleup, materials sourcing and supply chain management employee volunteers as well as specialist functions as well as the implementation of processes across the such as Health and Safety, Human Resources, Finance, company become increasingly important, and are a focus of Procurement, and Facilities. The Committee regularly the 2024 financial year. Also during the 2024 financial year, a reports to the board on its activities and makes refresh of the materiality matrix will be conducted, ensuring recommendations to the board on ESG strategy. we concentrate our efforts on those issues that are most relevant and material for the business and our stakeholders. Further details on Governance are in the Governance section, with details on Product Benefits and ESG link to strategy in the CEO and chair section of the report. ESG materiality matrix l s r e d o h e k a t s o t e c n a t r o p m g n i s i R i Carbon footprint Developing clean energy solutions Legal and regulatory compliance Product benefits and customer service Health and safety Supply chain and materials sourcing Business ethics Product end-of-life management Waste and waste management Employee engagement Employee development and wellbeing Board composition and responsibilities Educational and industrial partnerships Charity and community engagement Diversity, equity and inclusion Regulation, policy and engagement Rising importance to AFC Energy Environmental issues Social issues Governance issues Product benefit issues The materiality matrix identifies key areas of focus for AFC Energy and its stakeholders, and helps set priorities on actions. The materiality matrix will be refreshed during the 2024 financial year to ensure that we concentrate our resources on the issues that are most material for the Company and its stakeholders. 30 30 DISPLACING DIESEL DISPLACING DIESEL AFC Energy PLCESGREPORT ESG GOVERNANCE AND STRATEGY Health and Safety Health and Safety is at the foundation of our culture. We seek to provide and maintain a safe and healthy work environment for our employees, contractors and other people involved in our operations. Our existing Health & Safety Policy demonstrates our commitment to the prevention of injury and ill health in accordance with the Health & Safety at Work Act (1974) and its associated regulations. In June 2023, we introduced new HSE software, including modules on Incident, Action, Risk Assessment, Audit, Permit to Work and Advanced Root Cause Analysis. This system enables easy reporting of safety observations and tracking of actions combined with practical feasibilities for analysis, trends and dashboards. Health and safety On-site hours Near miss Lost Time Injuries (LTI) LTI per onsite hours 2023 2022 2021 205,982 152,453 78,505 9 NIL NIL 10 NIL 2 1 NIL 0.000013 Training We provide all employees with access to a range of online training courses, including mandatory training modules leadership team enhance the interaction and improve communication between leaders and teams. covering health and safety and other compliance areas We are proud to announce the installation of Health, Safety, such as anti-bribery, anti-corruption, data security, fire and Environment General Information Boards in our main awareness, and privacy policy. These are completed by all offices. These boards serve as comprehensive hubs, new starters during their on-boarding process, with regular featuring crucial information such as our HSE Policies, KPIs refresher training for all employees. and results, minutes of H&S Committee meetings and daily changing photo cards of our First Aiders and Fire Marshals. In addition, face-to-face health & safety training is provided in-house and through third party specialists. To further enhance our emergency response capabilities, These include Fire Marshal, First Aid, Ammonia Safety and we have strategically placed Automated External Gas Safety training. Emergency Response Teams also Defibrillators (AEDs) adjacent to each board. received additional training such as First Aid at Work. As of November 2023, we were able to achieve the highest To encourage a culture of proactive reporting and number of both first aiders and fire marshals in the continuous improvement, our HSE Podium proudly organisation so far with more than 13% of total employees displays the employees with the highest number of being first aiders and more than 18% being fire marshals. safety observations. Communication Improved format H&S Committee Meetings aid and Over the 2024 financial year we will be working towards a Health & Safety Management System (in accordance with accelerate the decision-making process and action ISO 45001: 2018) and will be implementing ISO 14001. follow-up. Regular Safety Walks with members of the senior DISPLACING DIESEL 31 Annual Report 2023ESGREPORT ENVIRONMENTAL Continuing progress Our employee survey results over three years say we are a society that believes climate change is an important issue in our life and at AFC Energy we want to help the world to reduce carbon emissions. Employee Engagement & Total Emissions In our annual carbon footprint surveys, we asked our We are proud to report that more than 80% of our employees believe that climate change is real and that humans have had a significant contribution to employees about their transportation methods, fuel types, it. Additionally, over 60% of our employees think that the impact of working from home, and their views on climate change is an important issue in their lives. This climate change and the UN sustainability goals. shows that our employees are committed to reducing our environmental impact. EMPLOYEE OPINION We asked employees how much they agree or disagree with these standard questions (shown below), with the following options available for them to score their response by: 1 - Strongly Disagree, 2 - Disagree, 3 - Neutral, 4 - Agree, 5 - Strongly Agree 5 4 3 2 1 0 2021 2022 2023 32 5 4 3 Climate change is an important issue in my life I am confident in quantifying carbon emissions resulting from my lifestyle choices and actions I believe humans have had an appreciable contribution to climate change I believe our climate is changing It is important for me to be working for an organisation that takes responsibility for its actions relating to climate change DISPLACING DIESEL AFC Energy PLCESGREPORTENVIRONMENTAL We have now completed carbon footprint measurements for FY 2021 through to FY 2023. Operational Emissions We remain committed to contributing towards a greener, more sustainable future, and we believe that our efforts As expected in a fast-growing company that is scaling up will make a positive difference in the fight against manufacturing, we have increased our total scope 3 carbon climate change. footprint but were able to keep our scope 1 carbon footprint low, and reduce our carbon footprint per employee in all Most of our operational emissions - more than 80% of categories. As we are using wholly green electricity for the total operational footprint are coming from employee heating and power, there are no scope 2 carbon emissions. commutes and international travel. The introduction of We expect that, as manufacturing scales up, our total scope commute, resulting in a positive impact in reducing our 3 carbon footprint will increase and we will therefore focus emissions per employee. flexible working helped our employees to reduce their on our supply chain, sustainable sourcing, and scope three emissions. ) e 2 O C t ( t n i r p t o o F n o b r a C ) e 2 O C t ( t n i r p t o o F n o b r a C 3000 2500 2000 1500 1000 500 0 60 50 40 30 20 10 0 TOTAL EMISSIONS PER SCOPE PER YEAR 2,375 2,267 2,382 2,278 1,564 1,571 6.94 6.96 10.49 0 0 0 Scope 1 Scope 2 Scope 3 Total 2021 2022 2023 TOTAL EMISSIONS PER SCOPE PER EMPLOYEE PER YEAR 48.89 49.10 37.10 37.21 20.80 20.90 0.22 0.11 0.10 0 0 0 Scope 1 Scope 2 Scope 3 Total 2021 2022 2023 *scope 1 of 2021 has been restated due to better data granularity DISPLACING DIESEL 33 Annual Report 2023ESGREPORT SOCIAL Empowering people Our people are fundamental to creating value for the business. We made good progress implementing our HR strategy this year, to engage, strengthen, grow and retain our people and teams whilst embracing diversity and inclusion and empowering people to be their authentic selves. Developing our people To implement our people strategy, we introduced HiBob, an HR To further allow personal development our iHasco on-line training platform was expanded to give all employees access information system. This now enables employees to update to all iHasco courses, including soft skills training, leadership and their own details, book leave and engage with others across technical training, in addition to its use for mandatory training. the entire business. During the 2023 financial year the Company’s headcount Employee reward and recognition We completed both a mid-year and an end of year external continued to grow by 18% and is expected to grow further in salary benchmarking review to ensure that we are staying FY24. We now have the ability to automate our onboarding competitive not only for our new starters but for our process, store, and access our people data easily and existing teams too. We also introduced core competencies accurately, which provides us with easy access to the data that and salary bandings to enable our managers to have is essential for our growth strategy. meaningful development discussions with their teams. Going forward, we will utilise HiBoB for objectives setting, Our benefits were reviewed and a second successful save personal development, policy and compliance and use the as your earn share save scheme was launched. data it provides to achieve strong business outcomes. We also held two employee recognition events in 2023, our Summer BBQ and Christmas lunch. Colleagues were voted for by their peers and were recognised for demonstrating our corporate values. GENDER YEARS OF SERVICE EMPLOYEE AGE 17+ • Female • Male A 36+ • 0-1 • 1-2 • 2-5 • 5-10 • 10-15 • >15 A 26+ • 20-29 • 30-39 • 40-49 • 50-59 • 60+ 34 DISPLACING DIESEL AFC Energy PLCESGREPORT83 + 38 + 16 + 2 + 4 + 4 + 27 + 27 + 15 + 5 + A SOCIAL To implement our people strategy, we introduced HiBob, an HR information system. This now enables employees to update their own details, book leave and engage with others across the entire business. DISPLACING DIESEL 35 Annual Report 2023ESGREPORTSOCIAL Community Outreach In the 2023 financial year we partnered with a local As part of our diversity and inclusion initiatives, we have established a multi-faith/multi-purpose room to recognise secondary school, Glebelands. A team of five employees those that may need a quieter room, and have introduced from different parts of the business presented a careers gender-neutral toilets. talk to 120 GCSE students, providing insights to different roles within STEM, and shared their personal career Wellbeing has been a big focus for AFC Energy this year. journeys. We have created a partnership programme with We have introduced an employee assistance programme a local science academy, and, in the 2024 financial year, to offer employees easy access to advice, whether it be we will be hosting five work experience students who excel wellbeing, financial or legal. within Science and providing them with a week of real work life experiences. Remote working and core hours were introduced in the 2023 financial year, allowing our colleagues to work from A team of Engineers attended Tanbridge House School in home and provide them with the flexibility to start and finish Horsham to provide an interactive demonstration of how at a time that suits their personal needs. fuel cells work using small cars and various levels of salt water, allowing the students to race the cars and document the results. We held a coffee morning in aid of the Royal Marsden Cancer Charity, where all proceeds (£908) from the cake sale went to the charity. Employee Engagement, culture, and values We strive to provide an engaging and supportive environment for our employees to work at their best. We hold regular “town hall” and team meetings to update on company progress and, of course, to celebrate our successes. In addition we have this year introduced coffee mornings with the CEO and CFO and opportunities to meet the non-executive directors. Our values Responsibility We take care of our people and our planet Customer first We’re driven by delivering great outcomes for our customers Innovation We are pioneering disruptive solutions to decarbonise the future Accountability We’re committed owners of structured plans and outcomes Collaboration We diligently deliver by working together towards shared goals STAFF NATIONALITIES Global Team – AFC Energy thrives with talent from across of the world 36 DISPLACING DIESEL AFC Energy PLCESGREPORTCOMMITMENTS Environmental ~ Development of zero-emission fuel Social ~ Embedding effective health & safety Governance ~ Strong Board oversight cell generators at point of use practices into everything we do ~ Supporting employees with their embedded throughout the business ~ Effective decision-making personal development ~ Clear diversity & inclusion practices and employee wellbeing programs ~ Commitment to help the communities we live in ~ Strong operational, financial and procurement processes ~ Driving change through effective KPIs ~ Ability of systems to use multiple sources of fuel to accelerate deployment to support decarbonisation ~ Development of hydrogen generation systems ~ Providing a path to carbon footprint reduction ~ Completing ISO 14001 Environmental certification ~ Implementing effective supply chain and procurement management DISPLACING DIESEL DISPLACING DIESEL 37 37 Annual Report 2023ESGREPORTHOW WE SUPPORT THE UN SUSTAINABILITY GOALS Air pollution remains a significant health issue in many cities across the world, particularly amongst the young or vulnerable. The replacement of diesel generators with hydrogen fuel cells such as ours reduces air pollution. Our fuel cell technologies produce zero emissions at the point of use, replacing their fossil fuel equivalent in use today. With increased production and availability of clean hydrogen and its falling price (forecasted to halve in We partner with industry to support the decarbonisation of hard-to-abate sectors such as construction, maritime, rail and data centres. For example our strategic partnership with Speedy, to provide H-Power Generators to the construction industry, and Tamgo, for distribution into Saudi Arabian and near east industrial and off-grid power markets. The vision for a world without price by 2030), we are playing our part in hydrocarbons often puts hydrogen delivering affordable, clean energy. We employ a diverse workforce with professional, technical, engineering, scientific and other highly specialised skills and experience. Our people join and stay with us because of the opportunity to work on innovation and sustainability. centre stage. We are contributing to the global efforts to get to both net zero and real zero with our hydrogen generation and hydrogen fuel cell technologies. 38 38 DISPLACING DIESEL DISPLACING DIESEL AFC Energy PLCESGREPORTCORPORATE GOVERNANCE STATEMENT I am pleased to introduce our corporate governance report for the year ended 31 October 2023. The Board and I take corporate governance very seriously A General Counsel and Company Secretary was and are committed to high standards of governance, appointed, further enhancing the Company’s ensuring Board procedures are robust, kept up to date and governance structure and processes to support sound appropriate for a Company of our size. The Board reviews decision making. A revised Delegation of Authority its procedures periodically to ensure that they evolve as the process was introduced earlier in the financial year. business grows. As a publicly listed business we follow the Quoted Companies Alliance Corporate Governance Code (the QCA Code) and its principles in ensuring the business acts fairly, professionally and with integrity in all its work. Details Through the work of the Chairman and the Company Secretary, we ensured that Directors have the necessary and up-to-date experience, skills and capabilities required to effectively discharge their functions. of how the QCA Code is applied can be found at The Company continued to promote a zero-tolerance https://www.afcenergy.com/investors/aim-rule-26/ approach to bribery and corruption and maintains best corporate-governance. practice policies for all personnel to comply with. During the 2023 financial year: The Company continued to deliver its strategy and business model, promoting long-term value creation for all our shareholders. The Company continued to seek to understand and meet shareholders needs and expectations, delivering The Company provided regular and timely communication to the market and shareholders on how the Company is both governed and performs, creating a “feedback loop” with our key stakeholders to ensure continuous improvement. our requirements under Section 172 of the Companies Gary Bullard Chair 25 March 2024 Act. The Company, and its ESG Committee considered wider stakeholder and social responsibilities and their implications for long-term success, . Risk management continued to be effectively embedded throughout the business, overseen by the Audit and Risk Committee. The Board maintained a well-functioning, balanced team that actively drives and supports the continued success of the business. DISPLACING DIESEL 39 Annual Report 2023GOVERNANCEREPORTDIRECTORS’ REPORT The Directors present their report together with the audited financial statements for the 2023 financial year. The comparative period was from 1 November 2021 to 31 October 2022. Principal activity and review of future business developments The principal activity of AFC Energy plc (the Company) is the Significant shareholdings of greater than 3.00% at 15 March 2024 Hargreaves Lansdown plc Interactive Investor Janus Henderson Investors HSDL Stockbrokers Barclays Smart Investor 41 development of fuel cells and fuel conversion. DWP Bank A review of future business developments is included within the Chair’s, Chief Executive’s and Chief Financial Officer’s reports on pages 6 to 14. Results and dividends The operating loss before tax for the year was £19.6m (2022: £19.5m). ING-DIBA Frankfurt HSBC Trinkaus & Burkhardt AJ Bell Financial instruments Financial instruments are disclosed in note 25 of the financial statements. % 13.96 11.46 6.93 6.01 4.42 3.90 3.50 3.22 3.19 56.59 No dividends were paid in the year. No dividend will be paid in respect of the current year. Board members Details of the Board membership during the period are set Liability insurance for company officers The Company maintains Directors’ and Officers’ liability insurance cover for its directors and officers to the extent out in the Nomination Report. permitted under the Companies Act 2006. On 31 October 2023 the beneficial interests of Directors and their families in the equity share capital of the Company were: Gary Bullard Adam Bond Gerry Agnew Number of Ordinary shares of 0.1p 2023 Number of Ordinary shares of 0.1p 2022 500,000 3,583,169 621,684 225,000 3,583,169 N/A 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, relevant qualifying expenditure was £8.5m (2022: £9.1m). Risk management The responsibility of the Board is to determine financial risks and delegate to the finance function their management by setting policies and objectives. The management of credit, None of the other directors had a direct interest over share liquidity and interest rate risks are set out in note 24 to the capital during the reporting period. financial statements. Going concern See disclosures within the CFO report and notes to the accounts. 40 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTEvents after the reporting period Details of the following events since the financial year end Auditor A resolution to reappoint the Auditor of the Company, are provided as follows: Grant Thornton UK LLP, will be proposed at the forthcoming launch of Speedy Hydrogen Solutions, a joint venture expressed their willingness to continue as Auditor of Annual General Meeting. Grant Thornton UK LLP have with Speedy Hire plc, the near-term financial impact of the Company. which will be an investment by the Company into the JV of £0.625m; build and commission of modular ammonia to hydrogen cracking plant, the near-term financial impact of which will not be material; Brendan Keane Company Secretary acquisition of certain UK mobile hydrogen storage and 25 March 2024 distribution assets from Octopus Hydrogen, the near- term financial impact of which, along with some other post year end capital purchases, will be less than £1.0m; attestation of conformity of CE Mark, the near-term financial impact of which will not be material; and first factory acceptance test of 30kW generator, the near-term financial impact of which will not be material. None of the above are considered to be adjusting events. Disclosure of information to the auditor The directors confirm that: so far as each director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and the directors have taken all the steps they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the company’s auditor is aware of that information. DISPLACING DIESEL 41 Annual Report 2023GOVERNANCEREPORTBOARD OF DIRECTORS GARY BULLARD Non-Executive Chairman ADAM BOND Chief Executive Officer PETER DIXON-CLARKE Chief Financial Officer MONIKA BIDDULPH GERRY AGNEW DUNCAN NEALE Non-Executive Director Non-Executive Director Non-Executive Director Appointed to Board 2021 2014 2022 2021 2019 2023 Appointed to Board Relevant skills and experience Experienced Chairman, Non- Executive Director and executive in industrial and information technology industries. Broad experience in the scale up of high-volume manufacturing and supporting high value, high growth businesses in the commercialisation of technology. Over 25 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. Qualified with Bachelors’ degrees in Commerce and Law and a Master in Laws (Taxation). Previous appointments Senior management positions in IBM, BT and Logica. Director of JS Yerostigaz (Uzbekistan). Non-Executive Director of Chloride plc and Rotork plc. Previously Non-Executive Director of AFC Energy plc 2012 - 2014. A Deloitte trained Chief Financial Officer with over 35 years of experience, of which 25 have been at senior management or board level. Over 20 years’ experience in Over 20 years’ experience in fuel Duncan Neale is a big 4 trained commercial, operational and cell technology and systems with Chartered Accountant and technical areas of international both Rolls-Royce and LG Fuel Cell experienced Non-Executive Relevant skills and experience technology businesses. PhD Systems Inc. Before joining the Director and Audit Chair, with a in Experimental High Energy Board of AFC Energy, Dr Agnew corporate finance, fundraising, Physics from ETH Zurich. served as Senior Fellow on the audit and M&A background. Rolls-Royce Council of Fellows, attending the Company Chief Technology Officer’s Technology Strategy workshops. Broad experience primarily in the Energy sector, but also in the Financial Services and Charity sectors, and always in high profile organisations undergoing strategic change. Most roles have been UK based, but usually with a strong international element and time spent overseas in countries including: USA, Norway, Kuwait, Ethiopia, Falkland Islands and Indonesia. Member of Senior Leadership Dr Agnew spent seven years as Experience primarily in the Previous appointments Team IP Products at Arm Chief Technology Officer and Energy sector, but also in helping Holdings plc. Non-Executive Chief Technology Adviser to LG to scale Technology companies. Director Linaro Limited Fuel Cell Systems Inc. Prior to For over 25 years he has held this he was Chief Technologist numerous senior finance roles, of Rolls-Royce Fuel Cell Systems, including as Chief Financial Executive VP Engineering at Officer for listed and private Rolls-Royce Fuel Cell Systems companies. and Chief Engineer Fuel Cell Systems at Rolls-Royce. Other current appointments Chairman: Gooch & Housego plc Non-Executive Director: Spirent Communications plc. Non-Executive Director of Ilika plc, Celebrus plc and Power Roll Limited. Non-Executive Director and Audit Chair of Atrato Onsite Other current appointments Energy plc and Gresham House Energy Storge Fund plc. Trustee of Cambodian Children’s Fund UK 42 42 DISPLACING DIESEL DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTPrevious appointments Senior management positions in Director of JS Yerostigaz Broad experience primarily Broad experience in the scale up of high-volume manufacturing and supporting high value, high growth businesses in in advisory capacities to both governments and the private sector. the commercialisation of Adam is well networked technology. internationally across the conventional and unconventional energy sectors and has a strong understanding of energy markets and deal making within that sector. Qualified with Bachelors’ degrees in Commerce and Law and a Master in Laws (Taxation). IBM, BT and Logica. (Uzbekistan). Non-Executive Director of Previously Non-Executive Chloride plc and Rotork plc. Director of AFC Energy plc 2012 - 2014. in the Energy sector, but also in the Financial Services and Charity sectors, and always in high profile organisations undergoing strategic change. Most roles have been UK based, but usually with a strong international element and time spent overseas in countries including: USA, Norway, Kuwait, Ethiopia, Falkland Islands and Indonesia. GARY BULLARD ADAM BOND PETER DIXON-CLARKE Non-Executive Chairman Chief Executive Officer Chief Financial Officer MONIKA BIDDULPH Non-Executive Director GERRY AGNEW Non-Executive Director DUNCAN NEALE Non-Executive Director Appointed to Board 2021 2014 2022 2021 2019 2023 Appointed to Board Relevant skills and experience Experienced Chairman, Non- Over 25 years’ experience A Deloitte trained Chief Executive Director and executive operating within the international Financial Officer with over in industrial and information energy sector both in executive 35 years of experience, of technology industries. management positions for which 25 have been at senior listed energy companies, and management or board level. Over 20 years’ experience in commercial, operational and technical areas of international technology businesses. PhD in Experimental High Energy Physics from ETH Zurich. Over 20 years’ experience in fuel cell technology and systems with both Rolls-Royce and LG Fuel Cell Systems Inc. Before joining the Board of AFC Energy, Dr Agnew served as Senior Fellow on the Rolls-Royce Council of Fellows, attending the Company Chief Technology Officer’s Technology Strategy workshops. Duncan Neale is a big 4 trained Chartered Accountant and experienced Non-Executive Director and Audit Chair, with a corporate finance, fundraising, audit and M&A background. Relevant skills and experience Member of Senior Leadership Team IP Products at Arm Holdings plc. Non-Executive Director Linaro Limited Dr Agnew spent seven years as Chief Technology Officer and Chief Technology Adviser to LG Fuel Cell Systems Inc. Prior to this he was Chief Technologist of Rolls-Royce Fuel Cell Systems, Executive VP Engineering at Rolls-Royce Fuel Cell Systems and Chief Engineer Fuel Cell Systems at Rolls-Royce. Experience primarily in the Energy sector, but also in helping to scale Technology companies. For over 25 years he has held numerous senior finance roles, including as Chief Financial Officer for listed and private companies. Previous appointments Other current appointments Chairman: Gooch & Housego plc Non-Executive Director: Spirent Communications plc. Non-Executive Director of Ilika plc, Celebrus plc and Power Roll Limited. Non-Executive Director and Audit Chair of Atrato Onsite Energy plc and Gresham House Energy Storge Fund plc. Trustee of Cambodian Children’s Fund UK Other current appointments DISPLACING DIESEL DISPLACING DIESEL 43 43 Annual Report 2023GOVERNANCEREPORTROLES OF THE BOARD AND SUB-COMMITTEES 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 strategic aims, ensures that the Deployment of our technology with strategic partners and necessary financial and human resources are in place end users real life settings to gain feedback on the market to meet financial and ESG objectives, reviews progress readiness of our equipment. towards the achievement of these objectives and reviews the performance of management. The Board establishes the values, culture, ethics and standards of the Company Board responsibilities The Board has overall responsibility for promoting the and sets the framework for prudent and effective controls success of the Company and balancing the interests of all which enable risks to be assessed and managed. The stakeholders. The Executive Directors have day-to-day Company currently follows the QCA Code. The Board responsibility for the operational management of the has delegated authority to its committees to carry out activities. The Non-Executive Directors are responsible the tasks defined in the Committees’ terms of reference. for bringing independent and objective judgement to The Committees are the Audit and Risk Committee, Board decisions. the Remuneration Committee and the Nominations Committee. The Board has delegated the day-to-day There is a clear separation of the roles of Chief Executive management of the Company to the Chief Executive Officer and Non-Executive Chairman. The Chairman Officer. Stakeholder input to decision making Consultation with shareholders, market professionals and is responsible for overseeing the running of the Board, ensuring that no individual dominates the Board’s decision- making and ensuring the Non-Executive Directors are properly briefed on matters. The Chairman has overall responsibility for corporate governance matters. The Chief professional advisers to set an appropriate aggregate Executive Officer has overall responsibility for implementing cap on fees for non-executive directors to provide the strategy of the Board and managing day-to-day sufficient but not excessive flexibility over the next few business activities. The Company Secretary is responsible years to recruit and retain suitably experienced and for ensuring that Board procedures are followed, and qualified non- executive directors to support and work applicable rules and regulations are complied with. with the executive team. The Company has a remuneration policy that can attract, management of the Company and meets at least six times retain and motivate senior executives and employees in a year and all key operational and investment decisions are The Board is responsible to the shareholders for the proper line with shareholder objectives and going forward the subject to Board approval. remuneration report will be put to vote in the AGM. The organisational structure is clearly documented Consultation with shareholders, market professionals, and communicated, identifying levels of responsibility, customers and employees to identify their expectations delegated authority and reporting procedures. The Board and priorities in regard to ESG reporting. External advisers supports the highest levels of commitment and integrity have been used to measure our carbon footprint and from employees. Expected standards of behaviour are set create a materiality matrix to prioritise actions and the use out in the Employee Handbook, a copy of which is available of resources. The results of these reports are described in to all employees. The Company is an equal opportunities more detail in the ESG report. employer, and its policy is 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. 44 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTROLES OF THE BOARD AND SUB-COMMITTEES The Board considers effective communication with Such systems are designed to manage, rather than shareholders to be especially important and encourages eliminate, the risk of failure to achieve business objectives regular dialogue with investors. Shareholders will be given at as any system can only provide reasonable, and not least 21 days’ notice of the Annual General Meeting, at which absolute, assurance against material misstatement or loss. they will have the opportunity to discuss the Company’s The process in place for reviewing AFC Energy’s system of development and performance. The Company’s website internal controls includes procedures designed to identify www.afcenergy.com contains full details of the Company’s and evaluate failings and weaknesses, and to ensure that activities, press releases, Regulatory News Service necessary action is taken to remedy the failings. announcements, share price details and other information. The Board has considered its policies regarding internal The Directors have overall responsibility for ensuring that controls, as set out in the QCA Code, and undertakes the Company maintains a system of internal controls to assessments of the major areas of the business and provide them with reasonable assurance that the assets methods used to monitor and control them. The review of the Company are safeguarded, and that shareholders’ covers commercial, technological, operational, corporate investments are protected. The system includes internal and political risks. The risk review is an ongoing process with controls appropriate for the Company. reviews being undertaken on a quarterly basis. The table below shows the number of Board and Committee meetings of the Company held during the financial year, and the attendance of members. Board meetings Audit Committee Remuneration Committee Nomination Committee Gary Bullard Monika Biddulph Gerry Agnew Adam Bond Peter Dixon-Clarke (Appointed 1 December 2022) Duncan Neale (Appointed 1 August 2023) Joe Mangion (resigned 31 July 2023) Jim Gibson (resigned 9 June 2023) Graeme Lewis (resigned 30 November 2022) *Attended as an invitee, not a member of the Committee 7 7 7 7 6 1 6 4 1 3* 3 3 4* 4* — 4 — 1* 2* 2 2 1* — — 2 — — DISPLACING DIESEL 2 2 2 — — — — — — 45 Annual Report 2023GOVERNANCEREPORT AUDIT AND RISK COMMITTEE REPORT The Audit and Risk Committee (the Committee) plays Duncan Neale has significant senior financial experience, a central role in the review of the Company’s financial which is further detailed in his biography. The wider reporting, risk review and internal control processes. Committee is considered to have sufficient, recent and relevant financial experience and competence to discharge The Committee’s role is to assist the Board in its financial its responsibilities. oversight of the Company and ensuring its effective financial integrity through the regular review of its financial The Technical Advisory Board, comprising Gerry Agnew, processes and performance, and by remaining up to who is also a member of the Committee, supported by date with the latest regulatory changes and evolution external technical advisers from academia and industry, of best practice. works alongside the Committee to ensure that the Company has appropriate technical risk management The Committee’s main responsibilities include: and processes. Satisfying itself as to the integrity of the financial Committee meetings are usually attended, as invitees, by statements and other formal announcements relating the External Auditor, the Board Chair, the Chief Executive to financial performance and ensuring compliance with Officer and Chief Financial Officer. The Committee also applicable accounting standards, regulations and rules; meets with the External Auditor without the Executive Supporting the Board, which retains responsibility, in monitoring and reviewing the effectiveness of internal financial controls and risk management policies and systems; Monitoring and reviewing the going concern status of the Company; Satisfying itself of the independence and effectiveness of the external auditor, and making recommendations to the Board in relation to the appointment and remuneration of the external auditor, and the policy relating to their non-audit services; and Considering the need for an internal audit function. Directors being present. Assessing that the risk and control framework and processes are operating accurately The Company prepares a Board approved budget, which includes a cash flow projection. Actual performance is compared during the year to the budget to identify variances and take action if required. The Board is risk averse when investing the Company’s cash. The Company’s policy is to deposit funds with leading regulated financial institutions based in the UK. The Committee considers certain key areas of risk management and supports the Board in overseeing a company-wide approach to risk management. The Significant financial reporting matters During the period, the Committee received and considered Committee met four times during the period. reports from the Chief Financial Officer in respect of The Committee is composed of non-executive directors subsequently approved the disclosure set out in the the critical accounting estimates and judgements and and was chaired by Joe Mangion until his resignation on 31 financial statements. July 2023 and replacement by Duncan Neale from 1 August 2023. Duncan is supported by Gerry Agnew and Monika The Committee considered the following significant Biddulph, who were both members for the whole year. financial reporting matters, estimates and judgements, amongst others, when approving the financial statements for the 2023 financial year. 46 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTAUDIT AND RISK COMMITTEE REPORT Onerous contracts Throughout the year, the performance of each open contract is reviewed and the expected unavoidable cost Risk management and internal controls The Committee has monitored the risk management of delivering that contract is compared to the expected processes and recommended that the Company’s risk revenue from doing so. Where the expected costs suggest management matrix be reviewed, at least quarterly, by a gross loss, the contract is treated as an onerous contract the Board. and a provision is recognised immediately through the profit and loss. The Committee has confirmed that the inventory management improvements being implemented will be The Committee agreed that no such provisions needed to required to support the scaling up of the business. be made in the year. The Committee has not seen it as necessary to appoint an Valuation and disclosure of share-based payments internal auditor. Share based payments are accounted for in accordance with IFRS 2 and specific consideration has been given to: Duncan Neale Audit and Risk Committee Chair 25 March 2024 Application of a Black Scholes valuation model for options where the performance criteria are not market- based and application of a Monte Carlo valuation model for options where the performance criteria are market- based. Reviewing the assumptions, especially for share price volatility, used in the valuation models. Independent professional advisers have been employed to provide the valuations and discuss the best treatment to adopt. The Committee agreed with the valuation and accounting treatment adopted. Going concern See discussion of this within the CFO report and notes to the accounts. DISPLACING DIESEL 47 Annual Report 2023GOVERNANCEREPORTNOMINATION COMMITTEE REPORT The Nomination Committee ensures that the Board possesses All the other directors have been re-elected at either of the an appropriate balance of skills, knowledge, experience, prior two AGMs. diversity and independence amongst the Directors. To assist in identifying and nominating candidates for the Board, the The Board considers itself to be sufficiently independent and Committee oversees succession planning for the Executive adheres to the QCA Code recommendation that a board and Non-Executive Directors and Senior Management. should have at least two independent Non-Executive Directors. The Nomination Committee also has responsibility for the The Committee determines a Non-Executive Director’s oversight of talent development throughout the Company. independence by evaluating their character and judgement, in The Nomination Committee also has the responsibility line with the QCA Code. for ensuring there is appropriate diversity in the Company especially at senior management and Board level. Although the recent Board changes have further improved The Directors who served during the year and during the continues to grow it will be important to make further progress period up until the signing of these financial statements were: on our gender balance at all levels in the company. Although the percentage gender balance on the Board as the company Directors we ensured we had a diverse short list in the process for the appointment of the new Audit Chair role, we ultimately selected Gary Bullard: Non-Executive Chairman a male candidate. We are looking for an opportunity to appoint Adam Bond: Chief Executive Officer an additional female director to the Main Board, either through Graeme Lewis: Chief Financial Officer natural rotation or by adding an additional director. (resigned 30 November 2022) Jim Gibson: Chief Operating Officer Upon the retirement of Joe Mangion who had served as (resigned 9 June 2023) Audit Chair and Senior independent Director the Committee Peter Dixon-Clarke: Chief Financial Officer (appointed 1 December 2022) instigated an external search for a suitable replacement. After considering a diverse slate of suitably qualified candidates the Gerry Agnew: Non-Executive Monika Biddulph: Non-Executive Joe Mangion: Non-Executive Duncan Neale: (resigned 31 July 2023) Non-Executive (appointed 1 August 2023) In accordance with the Company’s Articles of Association, a director appointed during or after the year must stand for re-appointment at the first Annual General Meeting after such appointment. Further, any Director who was not elected or re-elected at either of the two preceding Annual General Meetings must stand for re-appointment at the Annual General Meeting. Duncan Neale was appointed subsequent to the most recent Annual General Meeting and therefore offers himself for election. The Committee reviewed the balance of skills, experience and independence of the Board. For Non-Executive Directors, independence in thought and judgement is vital to facilitating constructive and challenging debate in the boardroom and is essential to the operational effectiveness of the Board. The appraisal system seeks to identify areas of concern and make recommendations for any training or development to enable the Board member to meet their objectives which will be set for the following year. The appraisal process will also review the progress made against prior year targets to ensure any identified skill gaps are addressed. Committee unanimously recommended the appointment of Duncan Neale as his replacement, who brings extensive finance and Audit Chair experience from a range of sectors including energy. Directors’ service contracts or appointment letters and the terms of reference of the sub-committees of the Board make provision for a director to seek personal advice independently in furtherance of his or her duties and responsibilities. To support effective future succession and appointments, the Committee will continue to engage with external stakeholders (including shareholders and regulators) when appropriate. During the course of the year the Committee also spent time reviewing the succession plans for executive and senior management and in reviewing what actions could be taken to increase diversity at all levels in the Company. The Committee believes that the Company has a well- balanced Board whose skills, experience and independence covering research, product development, commercial and finance are aligned to the current business and stakeholder needs. Gary Bullard Nomination Committee Chair 25 March 2024 48 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORT REMUNERATION COMMITTEE REPORT On behalf of the Board, I am pleased to present the 2023 Directors’ Remuneration Report, which sets out the remuneration paid to the Directors in the 2023 financial year and the implementation of our remuneration policy for the 2024 financial year. AFC Energy is listed on the Alternative Investment Market (AIM) and therefore provides these remuneration disclosures on a voluntary basis. As such, the charts and tables included here are unaudited, but, in general, our disclosures have been prepared in accordance with best practice. We draw attention to the following decisions of the Committee as part of our efforts to respond to shareholder feedback and continuously improve governance: Holding an advisory shareholder vote on the remuneration report on a voluntary basis; Creating and maintaining a Remuneration Committee which is made up entirely of independent Non-Executive Directors with relevant experience, and that complies with the QCA Code; Operating an LTIP scheme for Executive Directors and senior leaders in the business; Maintaining an equal pension policy for our entire workforce, including Executive Directors; Keeping a consistent philosophy of reward throughout the business, which for the C-suite is strongly linked to performance and transparency; and Consulting and maintaining an open dialogue with shareholders and advisory bodies on all key remuneration decisions. We transitioned to new structures in 2022 following a fundamental review and feedback from investors. Although this has worked well, the committee are currently reviewing this to ensure it continues to attract and retain high quality individuals against a climate of evolving market conditions. Following this review any changes will be disclosed in next year’s remuneration report. Incentive outcomes during the year Annual Bonus For the year under review, stretching annual bonus targets had been set to continue the Company’s drive toward achieving sustained revenue and subsequent profitability and objectives were structured so that maximum payout could only be achieved for exceptional performance. Bonuses for the year were based on a blend of 40% financial, 50% operational and 10% ESG objectives. For the financial objectives an overall payout of 26.0% was determined reflecting a threshold performance for sales revenue and a stretch performance for overall spend. There was no payout in regard to an order book objective that was not met. All assessments were made in line with the Remuneration Policy described in detail below and first rolled out in the previous year’s Annual Report. For the operational objectives, 37.5% of a maximum 50% bonus pool was paid out. In achieving this determination, the Committee noted excellent performance in cost per kW reduction and improved resilience of fuel cell generator units. At the same time differentiating capability had been demonstrated in modular ammonia cracker implementation and novel cracker product cleanup, extending this to fuel cell standard. Mission critical areas such as health and safety and progress toward CE certification for fuel cell generators were also delivered to full requirement. The Company continues to operate an ESG objective grouping and the Committee assessed performance in this area to warrant the full 10% payout. Overall, the bonus earned across all objective areas came to 73.5% of maximum. The Committee did not exercise any discretion in this outcome although some judgement was required in interpreting two of the more technical programme objectives and for this independent third party review was obtained. DISPLACING DIESEL 49 Annual Report 2023GOVERNANCEREPORTREMUNERATION COMMITTEE REPORT LTIP vesting The final tranche of the legacy transition awards granted in Directors’ remuneration policy This section of the report sets out the remuneration policy the 2021 financial year reached the end of its performance for Executive Directors and outlines how this policy has period in March 2023. However, the share price targets been implemented for the 2023 financial year and will be were not met and 1,617,188 corresponding options lapsed. implemented for the 2024 financial year. All 5,439,229 of the remaining LTIP awards have three-year vesting periods. The Remuneration Policy outlines the principles and framework for remuneration allowing the Board of In light of continued changes in economic circumstances, Directors and management to attract and retain high a mid-year benchmarking review was conducted, and quality employees with a sustainable and fair approach. salaries adjusted where required. An inflationary rise of 4.03% was applied to qualifying staff and directors in The Policy focuses on Board and other members of November 2023. Closing remarks AFC Energy has grown rapidly and made significant the C-suite within the Company but equally provides a framework for all other employees regardless of seniority. The Policy acknowledges the Company’s intention to: improvements in building processes, particularly around Promote the long-term success of the Company and project authorisation and budgeting, while preserving the ensure the alignment of interests between Senior culture that has got it to where it is now. We continue to be Management, Non-Executive Directors and shareholders guided by investors, employees and other key stakeholders including but extending beyond value creation; as we navigate our way through the challenges of ensuring we have the right people and that they are attracted and motivated not just to stay but to take the business to another level. This starts at the top and we look to reward our leaders while challenging them to go higher without Provide a remuneration structure which looks to attract and retain high quality candidates into senior roles within AFC Energy through being competitive with those of businesses of similar size; and excessive risk. We look forward to your continued support Provide a long-term incentive structure to retain senior in this journey. management while ensuring maximum award levels are capped. This policy will be reviewed and updated annually by the Remuneration Committee and discussed from time to time with shareholders. Composition of the Committee Gerry Agnew (Chair) Duncan Neale Monika Biddulph Number of meetings: 2 The Board Chair and Chief Executive Officer sometimes attend as invitees, when appropriate. Gerry Agnew Remuneration Committee Chair 25 March 2024 50 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTREMUNERATION COMMITTEE REPORT The Policy adopts a framework structured around several key elements, and is summarised in the tables below: Element (purpose and link to strategy) Operation Opportunity Performance metrics Company and individual performance are considered when setting Executive Director base salaries. Base salary To reflect size and scope of the role and individual’s performance and contribution. Payable in cash. Generally, but subject to prevailing economic conditions and changes of roles and/ or responsibilities, salaries are reviewed annually with changes effective from the beginning of the financial year but may be reviewed at other times if the Committee considers this appropriate. The Committee reviews base salaries with reference to: The size and scope of the individual’s roles While there is no maximum salary level, salary increases will generally be in line with increases awarded to other employees in the Company. However, larger increases may be made at the discretion of the Committee to take into account circumstances such as: Changes in an individual’s role or responsibility To reflect an individual’s contribution to the company The individual’s performance and experience Where a salary is significantly behind market practice Implementation of Remuneration Policy for 2024 financial year Base salaries increased by 4.03% with effect from 1 November 2023 to: CEO £333k CFO £228k These increases match the average increase across the wider workforce. Pension and other benefits To provide market- competitive benefits and pension. Annual bonus To incentivise executives to achieve annual financial and operational targets in line with key strategic objectives considering risk and shareholder interests. For Board Members this will also include observations from prior board effectiveness reviews. Business performance and the external economic environment Market practice at other companies of a similar size and complexity Salary increases across the Group From 1 November 2021, all employees have been eligible for a Company matching contribution towards AFC Energy’s chosen pension provider of 5% of salary before taxation. Employees in this scheme also contribute 5% salary towards their pension. The Committee has discretion to make alternative arrangements on a case-by- case basis. When determining such arrangements, the Committee will consider cost and market practice. The annual bonus is normally based on performance over the financial year and the bonus plan shall be documented and updated annually considering the Company’s targets and the individual’s objectives. After the year-end the Committee determines the extent to which pre-defined targets have been met. The final quantum of the bonus, which is subject to an annual cap, will be dependent upon success of the executive in delivering their targets, with flexibility to adjust up and down to reflect the overall performance of business and individual performance. Bonuses are non-pensionable. For employees that have reached lifetime allowance limit, the Company contribution can be paid as salary but will not be grossed up. All other benefits are at an appropriate level considering market practice. Not performance related. In line with policy, Executive Directors will receive 5% contribution from AFC alongside their own contribution of 5% salary. Objectives have been set based on a blend of 40% financial, 50% operational and 10% ESG objectives. An “on target” performance would be expected to deliver 75% of maximum. A minimum threshold achievement will deliver a bonus of not more than 25% of maximum. Maximum payout is 120% salary for the CEO and 80% for other Executive Directors . In conjunction with the Executive Directors, measures are selected each year by the Committee to ensure continued focus on the Company’s objectives and in line with the Business Plan. The Committee may decide that the bonus entitlement be subject to a minimum delivery of the Company’s financial targets. Typically, but at the discretion of the Remuneration Committee, the indicative split of the annual bonus going forward should normally be 40% financial, 40% operational and 20% personal objectives. DISPLACING DIESEL 51 Annual Report 2023GOVERNANCEREPORTREMUNERATION COMMITTEE REPORT Opportunity Performance metrics The maximum award level will be 120% of salary for the CEO with the CFO level raised from 70% to 80% salary reflecting the greater responsibility of this role with the reduction to two executive directors. Other C-suite will not automatically be eligible to the scheme but those that do will have a maximum award equal to or less than board level executives. Performance testing will be based on Compound Annual Growth Rate (CAGR – expressed in % terms) of Total Shareholder Return (TSR), which for the time being is expected to be entirely share price based but accommodating future dividends when these become possible. Implementation of Remuneration Policy for 2024 financial year Awards are anticipated to be granted with both Relative TSR and Absolute TSR conditions, consistent with the awards granted during the 2023 financial year. 2023 financial year. However, LTIP arrangements are currently being reviewed and any changes will be disclosed in next year’s remuneration report. Element (purpose and link to strategy) Operation LTIP To attract and retain Executive Directors and Senior Managers of a high calibre and align their interests with the long-term objectives of the Company. Annual grants of nil-cost options are scaled according to salary which then vest conditionally three years later based on achievement of performance targets set at grant. The performance share plan (PSP) will remain within the overall limit for all option allocations of 10% of share capital. Annual awards will normally be made after the announcement of the Interim Results to avoid potential conflicts. Good leavers* will retain pro-rated awards according to the fraction of the three- year period they work for the Company with details, along with malus and clawback terms based on advice from external advisers regarding current industry standards. *Good leavers are typically those leaving through retirement, redundancy, injury or death. Pay scenario charts The charts below provide estimates of the potential future reward opportunity for the current Executive Directors in FY 2023-24 in line with the policy described above. The potential is split between the different elements of remuneration under four different performance scenarios: “Minimum”, “On Target”, “Maximum” and “Maximum with 50% share price growth”. CEO CEO CFO CFO £1,400k £1,400k £1,200k £1,200k £1,000k £1,000k £800k £800k £600k £600k £400k £400k £200k £200k £0k £0k Min On Target Max Min On Target Max Max (incl share price growth) Max (incl share price growth) £1,400k £1,400k £1,200k £1,200k £1,000k £1,000k £800k £800k £600k £600k £400k £400k £200k £200k £0k £0k Min On Target Max Min On Target Max Max (incl share price growth) Max (incl share price growth) Fixed pay Annual Bonus Fixed pay Annual Bonus LTIP LTIP Share price growth Share price growth 52 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTREMUNERATION COMMITTEE REPORT In illustrating potential reward opportunities, the following assumptions have been made: Component Minimum On-target Maximum Maximum + 50% price growth Base Salary Benefits Pension CEO: £333k CFO: £228k Based on single figure for the 2023 financial year 5% of base salary Target bonus (75% of maximum) Threshold vesting (25% of maximum) Maximum bonus Maximum vesting Maximum vesting with 50% share price growth Annual Bonus No bonus payable LTIP No LTIP Vesting Service contracts Executive Directors CEO CEO CFO CFO £1,400k £1,400k £1,200k £1,200k £1,000k £1,000k £800k £800k £600k £600k £400k £400k £200k £200k £0k £0k £1,400k £1,400k £1,200k £1,200k £1,000k £1,000k £800k £800k £600k £600k £400k £400k £200k £200k £0k £0k Min On Target Max Min On Target Max Max (incl share price growth) Max (incl share price growth) LTIP LTIP Fixed pay Annual Bonus Share price growth Fixed pay Annual Bonus Share price growth Min On Target Max Min On Target Max Max (incl share price growth) Max (incl share price growth) Service contracts for all employees, including the Executive directors, shall specify reasonable notice periods, defined as normally three to six months and not exceeding one year with no additional liquidated damages clauses. Payments due on termination shall be limited to basic salary and benefits. Annual bonus payments shall be related only to the period worked and shall not extend to periods of unworked notice or gardening leave. Executive Director Adam Bond Peter Dixon-Clarke Jim Gibson Graeme Lewis Non-Executive Directors Date of service contract 1 January 2016 1 December 2022 4 October 2018 (Resigned with effect 9 June 2023) 31 December 2019 (Resigned with effect 30 November 2022) The Non-Executive Directors signed letters of appointment with the Company for the provision of Non-Executive Directors’ services for an indefinite term, which may be terminated by either party giving three months’ written notice except for Gary Bullard whose contract specifies one month. The Non-Executive Directors’ fees are determined by the Board. Non-Executive Director Date of service contract Gary Bullard Joe Mangion Gerry Agnew Monika Biddulph Duncan Neale 5 March 2021 5 December 2017 (Resigned with effect 31 July 2023) 9 September 2019 3 December 2021 1 August 2023 DISPLACING DIESEL 53 Annual Report 2023GOVERNANCEREPORT REMUNERATION COMMITTEE REPORT Non-Executive Director policy table Details of the policy, introduced in the 2022 financial year, on fees paid to our Non-Executive Directors and how this policy will be implemented for the 2024 financial year are set out in the table below: Implementation of Remuneration Policy for 2023-2024 A review of senior non- executive remuneration was undertaken in October 2023 with input from remuneration advisers regarding fees in AIM listed companies of a similar size. No significant change in NED fees was felt to be necessary, however on the basis of this advice, the staff inflationary rise of 4.0% was applied to non-executive and chair fees. Element (purpose and link to strategy) Operation Opportunity Performance metrics Not applicable. The fees of Non- Executive Directors shall normally be reviewed annually to ensure that they are in line with market conditions and any changes to said fees will be approved by the Board as a whole following a recommendation from the Chief Executive. Fees To attract and retain high- calibre individuals to serve as Non-Executive Directors. Fee levels are set to reflect the time, commitment and experience of the Chairman and the Non- Executive Directors, taking into account fee levels at other companies of a similar size and complexity and to other UK companies. The fees are normally paid in cash monthly but by mutual consent may be paid in shares if this is considered appropriate. Payments of shares may be made annually instead of monthly. Non-Executive Directors receive cash fees only and will not be granted interests in share option schemes or warrants. The Chair and Non-Executive Directors shall expressly not participate in any performance related plans or bonuses. Further additional fees may be paid to reflect additional time, Committee or Board responsibilities if this is considered appropriate. 54 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTREMUNERATION COMMITTEE REPORT Annual report on remuneration The following section provides details of how AFC Energy’s During the year, the Committee sought internal support from the Chief Executive Officer, who attended Committee remuneration policy was implemented during the 2023 meetings by invitation from the Committee Chair, to advise financial year. Remuneration Committee membership and activities in 2023 The Remuneration Committee’s members at 31 October on specific questions raised by the Committee and on matters relating to the performance and remuneration of senior managers. The Committee has appointed PricewaterhouseCoopers 2023 were Gerry Agnew, Chair, Monika Biddulph and (PwC) to provide independent advice on executive Duncan Neale. All members of the Committee are remuneration matters. PwC is a signatory to the Code of independent Non-Executive Directors. Gary Bullard, Conduct for Remuneration Consultants in the UK. The fees Company Chairman, was also invited to attend paid to PwC in relation to advice provided to the Committee when appropriate. for the 2023 financial year were £40,000. The Committee evaluates the support provided by PwC annually and is The Committee operates under Terms of Reference comfortable that they remain independent. PWC provide which set out its duties, including reviewing all senior advice in relation to the SAYE scheme and no non- executive appointments and determining the Group’s remuneration related advice was provided by PwC to the policy in respect of the terms of employment, including Group in the year. remuneration packages of Executive Directors and other designated members of senior management. Remuneration Review During the summer of 2023, the organisation undertook The Committee’s Terms of Reference are available on a significant exercise to ensure that rewards were aligned request from the Company Secretary. The Remuneration with roles and responsibilities throughout the organisation Committee met formally twice during the 2023 financial following significant expansion and with the introduction of year and also on an ad hoc basis when required. many new staff. Remuneration Committee activities during the 2023 At this time, annual salaries and bonus multipliers were financial year were as follows: increased for other members of the C-suite and it was Approval of the Directors’ Remuneration Report considered appropriate to increase CFO annual bonus Review and approval of the Executive Directors’ performance against the annual objectives level from 70 to 80%. This quantum is within the existing maximum under our remuneration policy. Determination of performance targets for the C-suite The organisation continues to evolve as the emphasis of annual bonus for the year ahead activity shifts away from research to development and Determination of performance targets for the LTIP grant manufacture, and the Committee will continue to consider appropriate levels of pay which incentivise our senior Review of developments in corporate governance and management team to deliver on our strategy. best practice Review of remuneration arrangements and policies for senior management/C-suite Overseeing the continued implementation of the all employee SAYE scheme, revised and updated in recognition of its 10 year anniversary DISPLACING DIESEL 55 Annual Report 2023GOVERNANCEREPORTREMUNERATION COMMITTEE REPORT Single total figure of remuneration for Directors The table below sets out a single figure for the total remuneration received by each Director for the financial year ended 31 October 2023: Basic salary/fees £000 Taxable benefits £000 Pension £000 Annual bonus £000 LTIP3 £000 Total £000 FYE 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 Executive Director Adam Bond 319 309 Peter Dixon-Clarke 1 201 Jim Gibson4 Graeme Lewis 235 109 — 232 176 Non-Executive Director Gary Bullard 100 100 Gerry Agnew5 Monika Biddulph Joe Mangion Duncan Neale2 50 50 38 13 37 46 50 — 44 — 29 — — — — — — 43 — 34 — — — — — — 16 7 12 11 — — — — — 16 — 12 22 — — — — — 282 229 129 — — — — — — — — 114 87 — — — — — 1,115 950 73 77 46 50 411 430 — — — — — — — — — — 241 661 838 — 337 — 105 276 497 — 120 285 — 100 100 — — — — 50 50 38 13 37 46 50 — 346 1,645 1,853 1 Peter Dixon-Clarke was appointed on 1 Dec 2022. 2 Duncan Neale was appointed on 1 August 2023. 3 The long-term incentive award value shown in the Single total figure of remuneration for each Director relates to LTIP share options that vested in the financial year. The stated value is calculated based on the number of shares that vested multiplied by the mid-market closing price for a share on the date of vesting. 4 Jim Gibson resigned on 9 June 2023 and received pay in lieu of holiday. He exercised all 255,136 options that vested during the previous financial year on 5 4 September 2023 realising a gain of £42,302. In June 2023, Gerry Agnew exercised all 900,000 warrants paid in lieu of salary. These were granted without being subject to performance conditions and had vested over the prior three financial years. On exercise, these generated a gain of £86,923. 6 Graeme Lewis resigned with effect 30 November 2022. His pension arrangements pre-date the current policy. Incentive outcomes for the 2023 financial year Annual bonus in respect of performance Bonuses for the year were again based on a blend of 40% financial, 50% operational and 10% ESG objectives. For the financial objectives an overall payout of 26% was determined reflecting an excellent delivery on closed sales during the year and cash balances at the year end. However, the revenue target was not met. For the operational objectives’ scorecard, 37.5% of a maximum 50% bonus pool was paid out. In achieving this determination, the Committee noted excellent performance in cost reduction and improved resilience of fuel cell generator units. At the same time differentiating capability had been demonstrated in modular ammonia cracker implementation and novel cracker product cleanup, extending this to fuel cell standard. Mission critical areas such as health and safety and progress toward CE certification for fuel cell generators were also delivered to full requirement. This is the second year in which an ESG objective grouping was set and the Committee were pleased to see performance in this area achieving full 10% payout. The overall bonus earned across all objective areas came to 73.5% of maximum. 56 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORT REMUNERATION COMMITTEE REPORT Close out of transitional LTIP The final tranche of the legacy transition awards granted and consequently equal 50% weighting was applied to the relative and absolute elements. In choosing a relative in 2021 to address gaps in LTIP grant in previous years metric, the AIM 100 index grouping was retained. The choice reached the end of its performance period in March of 75th percentile performance limit seeks to expressly 2023. The share price targets were not met and the exclude unusual extremes in performance seen in a handful corresponding options lapsed. All remaining LTIP awards of stocks at the top end of the market that are actively have three-year vesting periods. considering moving onto main market listings. The use Scheme Interests awarded in the 2023 financial year For the PSP LTIP grants made in 2022-2023, working in of median performance as the lower measure ensures a continued push for stretch and avoids the risk of rewarding mediocre performance. conjunction with external advice, continued effort was For the absolute TSR, it was felt appropriate to return to given to avoiding windfall outcomes linked to the significant pure CAGR based growth metrics. Further details of these sector specific changes in share price seen throughout the rewards are provided immediately below. AIM index within the year. it was felt appropriate to continue the use of a relative element to assessing TSR improvement Executive Director Adam Bond Peter Dixon-Clarke Nil cost options granted during FY2023 2,142,415 978,042 Performance targets apply to the awards over a three-year period commencing on 01 June 2023 as follows: Performance measure Relative TSR vs FTSE AIM 100 Absolute TSR Weighting 50% 50% Threshold performance (25% vesting) Median 15% p.a. Maximum) performance (100% vesting Upper quartile 30% p.a. Vesting is on a pro-rata basis for performance between the threshold and maximum levels. Directors leaving during the year Jim Gibson resigned as a director on 9 June with Payments to past Directors During the year previous director Graeme Lewis was completion of his employment as Chief Operating Officer compensated in line with his continued employment during at the end of his contractual notice period. No payments handover to the new CFO. No payments were made beyond beyond normal salary and benefits have been made to Jim normal contractual arrangements as reported in the single while he has worked this period. No bonus was payable for figure table. 2023 and all outstanding LTIP awards lapsed on cessation. The board agreed that Jim would be granted a 6 month extension of the window in which to exercise his options. DISPLACING DIESEL 57 Annual Report 2023GOVERNANCEREPORT REMUNERATION COMMITTEE REPORT Directors’ interests in shares and options On 31 October 2023 the Executive Directors’ interests over share options and warrants of the Company were: Adam Bond Adam Bond Adam Bond Adam Bond Adam Bond Adam Bond Date of grant 15 July 2015 15 July 2015 7 September 2021 7 September 2021 12 July 2022 1 June 2023 Peter Dixon-Clarke 28 April 2023 Peter Dixon-Clarke 1 June 2023 At 1 November 2022 5,000,000 1,000,000 1,125,000 620,970 1,697,802 — 9,443,772 — — — 15 August 2018 2,500,000 Jim Gibson Jim Gibson Jim Gibson Jim Gibson Jim Gibson 7 September 2021 7 September 2021 7 September 2021 12 July 2022 Graeme Lewis 31 December 2019 Graeme Lewis 7 September 2021 Gerry Agnew 9 September 2019 And for shares: Executive Directors Adam Bond Peter Dixon-Clarke Non-executive Directors Gary Bullard Gerry Agnew Monika Biddulph Duncan Neale — — — — — 2,142,415 2,142,415 500,000 978,042 1,478,042 — — — — — — — — — — — Number of shares under option Awarded in year Exercised in year Lapsed At 31 October 2023 — 5,000,000 — 1,000,000 Expiry Date 17 May 2025 17 May 2025 (1,125,000) — 6 September 2031 — — — 620,970 6 September 2031 1,697,802 2,142,415 11 July 2032 31 May 2033 (1,125,000) 10,461,187 500,000 978,042 1,478,042 27 April 2033 31 May 2033 2,500,000 8 September 2024 — — — — — — — — — — — — — — — — (255,136) 255,136 492,188 271,968 743,590 4,262,882 2,750,000 206,320 2,956,320 900,000 900,000 — — — (492,188) (271,698) (743,590) — — — — (255,136) (1,507,746) 2,500,000 — (2,750,000) — (206,320) — (2,956,320) (900,000) (900,000) — — — — — — — — — — — — — — 17,562,974 3,620,457 (1,155,136) (5,589,066) 14,439,229 Number of shares at 31 October 2023 % of salary at 31 October 2023 3,583,169 — 500,000 621,684 — — 146 N/A N/A — — Implementation of policy for the 2024 financial year In light of continued changes in economic circumstances, an inflationary rise of 4.03%, effective from 1 November 2023, was applied to all applicable staff and directors. In line with the continued emphasis on applying consistent standards throughout the organisation, this change was applied from the beginning of the financial year for the entire organisation. For the 2024 financial year, the annual bonus will continue to use a blend of 40% financial, 50% operational and 10% ESG objectives, recognising the critical importance of operational delivery in building long-term value while at the same time driving an increasingly active emphasis on ESG improvements. LTIP awards are anticipated to be granted during the year with both relative TSR and absolute TSR conditions, consistent with the awards granted in 2023. However, we are currently reviewing remuneration arrangements for the senior team and will disclose any changes in next year’s Remuneration Report. 58 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTSTATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Annual Report and financial statements in accordance with Statement of disclosure to auditor The Directors confirm that: applicable law and regulations. Company law requires the directors to prepare financial information of which the Company’s auditor is unaware; statements for each financial year. Accordingly, the and So far as each Director is aware, there is no relevant audit directors have prepared the financial statements in accordance with UK-adopted international accounting standards. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the company for that period. In preparing these financial statements, the directors are required to: The Directors have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. To the best of our knowledge: Select suitable accounting policies and then apply them consistently; The financial statements, prepared in accordance with UK-adopted international accounting standards, give a true and fair view of the assets, liabilities, financial position Make judgements and estimates that are reasonable and profit or loss of the Company and the undertakings and prudent; included in the consolidation taken as a whole; and State whether applicable UK-adopted international The Strategic report and Directors’ report include a accounting standards have been followed, subject to fair review of the development and performance of any material departures disclosed and explained in the the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. financial statements; and Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and 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. DISPLACING DIESEL 59 Annual Report 2023GOVERNANCEREPORTINDEPENDENT AUDITORS’ REPORT Opinion Our opinion on the financial statements is unmodified We have audited the financial statements of AFC Energy Plc Material uncertainty related to going concern We draw attention to the going concern note within (the ‘Company’) for the year ended 31 October 2023, which note 2 to the financial statements, which indicates that comprise the Statement of comprehensive income, the additional funding would be required to deliver their Statement of financial position, the Statement of changes plans after considering the forecast for 2025 financial in equity, the Cash flow statement and notes to the financial year, the downside scenarios, to establish the resilience statements, including a summary of significant accounting of the company’s cash reserves, the need to scale up its policies. The financial reporting framework that has been manufacturing output and continue to invest in research applied in their preparation is applicable law and UK- and development. Note 2 also mentions that the additional adopted international accounting standards. funding required has not been sought and secured. As In our opinion, the financial statements: other matters as set forth in note 2, indicate that a material stated in note 2, these events or conditions, along with the give a true and fair view of the state of the Company’s Company’s ability to continue as a going concern. Our affairs as at 31 October 2023 and of its loss for the year opinion is not modified in respect of this matter. uncertainty exists that may cast significant doubt on the then ended; have been properly prepared in accordance with UK- adopted international accounting standards; and In auditing the financial statements, we have concluded that the director’s use of the going concern basis of accounting in the preparation of the financial statements is have been prepared in accordance with the appropriate. requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the ‘Auditor’s responsibilities for the audit of Our evaluation of the directors’ assessment of the Company’s ability to continue to adopt the going concern basis of accounting included: challenging management on their determination of their going concern period; the financial statements’ section of our report. We are assessments of management’s forecasting accuracy by independent of the Company in accordance with the comparing the accuracy of actual financial performance ethical requirements that are relevant to our audit of the to previous forecast information; financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. an assessment of management’s cash flow forecasts to reflect the potential impact of macroeconomic challenges on trading results, and cashflow forecasts throughout the forecast period; sensitivity analysis of management’s cash flows forecasts including the robustness of the scenarios modelled ; discussion with those outside of the finance team to gain a more robust understanding of future expectations and developments of the Company; challenging management on the costs expected to ramp up operations and timeline for that to occur, including outlays and expected inflows of revenues; and challenging management on the sufficiency and appropriateness of the disclosures within the notes to the financial statements. 60 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTOur responsibilities We are responsible for concluding on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify the auditor’s opinion. Our conclusions are based on the audit evidence obtained up to the date of our report. However, future events or conditions may cause the Company to cease or continue as a going concern. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. Our approach to the audit Overview of our audit approach Overall materiality: £742,000, which represents 4.5% of the Company’s average loss before tax from the previous three years.Key audit matters were identified as: Materiality Key audit matters Key audit matters were identified as going concern (new in current year); Scoping risk of incorrect accounting of the open contracts with customers and incomplete recognition of the loss provision in relation to contract accounting (same as previous year). Our auditor’s report for the year ended 31 October 2022 included one key audit matter related to the revenue recognition, and in the current year, we pinpointed the significant risk to the accounting for open contracts with customers. We performed a full-scope audit of the financial statements of the Company. A site visit was completed as part of our audit procedures, as well as attendance at the year-end stock count. DISPLACING DIESEL 61 Annual Report 2023GOVERNANCEREPORTINDEPENDENT AUDITORS’ REPORT Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Description Audit response KAM Disclosures Our results In the graph below, we have presented the key audit matters, significant risks and other risks relevant to the audit. High Overstatement of expenses included in R&D tax credit claim Risk of incorrect accounting of the open contracts with customers and incomplete recognition of the loss provision in relation to contract accounting Accuracy and completeness of intangible assets, including treatment of development costs expensed through the income statement Going concern Potential financial statement impact Risk of fraud in revenue recognition Management override of controls Existence and accuracy of cash Accounting for share based payments Low Low Extent of management judgement High Key audit matter Significant risk Other risk 62 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORT In addition to the matter described in the ‘Material uncertainty related to going concern’ section, we have determined the matter described below to be the key audit matter to be communicated in our report. Key Audit Matter How our scope addressed the matter Risk of incorrect accounting of the open contracts In responding to the key audit matter, we performed the with customers and incomplete recognition of the loss following audit procedures: provision in relation to contract accounting Assessed management’s accounting for revenue from We identified incorrect accounting of the open contracts contracts with customers in line with IFRS15, particularly with customers and incomplete recognition of the loss in relation to the modification in the year, to check if provision in relation to contract accounting as one of the the contract had been correctly recognised as per the most significant assessed risks of material misstatement standard; due to error.As the Company continues to commercialise its products, the more important revenue growth is to stakeholders. Further, the recognition of revenue requires management to make judgements relating to the nature and terms of the contract, such as the identification of Assessed and challenged management’s identification of performance obligations arising from the contract modifications in the period, and how this affected the delivery of goods to customers; performance obligations, allocation of price to those Assessed the transaction price of the contract in the obligations and timing of revenue recognition. context of other consideration paid by the customer Revenue is recognised in accordance with International Financial Reporting Standard (IFRS) 15 ‘Revenue from Contracts with Customers’ and recognition of revenue requires management to make significant judgements. As a result of the company beginning commercialisation of products whilst not having a history of product delivery and establishing consistent costs of delivery on new products, there is a heightened risk of onerous contracts and inappropriate recognition of commercial contracts with customers. against what they received, to determine if the allocation of the price to performance obligations was reasonable based on the terms; Challenged management’s assessment of accounting for the contract performance obligations at a point in time, rather than over time, and when to recognise the revenue and costs from fulfilling these obligation; Assessed whether the loss provision policy is in accordance with the requirements of Internatioanal Accounting Standard (IAS) 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and IFRS 15 and There is a significant level of judgment in assessing whether they were applied appropriately for the performance obligations and allocating contract contracts; and Assessed and challenged the appropriateness and completeness of the financial statement disclosures. transaction prices in order to then assess the onerous nature of a contract. If expected costs outweigh the selling price, a provision must be recorded immediately. The level of judgement involved in determining the estimated costs results in this being a significant risk. From our assessment of contracts, we identified that there was a modification of a key long term contract that resulted in significant judgement around the recognition of the performance obligations, calculation and allocation of the transaction price, as well as challenge on recognising the revenue over time. The accounting treatment under IFRS 15 requires the company to consider whether the modification results in an onerous contract. DISPLACING DIESEL 63 Annual Report 2023GOVERNANCEREPORTINDEPENDENT AUDITORS’ REPORT Key Audit Matter How our scope addressed the matter Relevant disclosures in the Annual Report Our results Financial statements: Note 5, Revenue. Based on our audit work addressing the risk of incorrect accounting of the open contracts with customers and incomplete recognition of the loss provision in relation to contract accounting, we are satisfied that assumptions made by management are appropriate and in accordance with the financial reporting framework, including IAS 37 and IFRS 15. Our application of materiality We apply the concept of materiality both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report. Materiality was determined as follows: Materiality measure Company Materiality for financial statements as a whole We define materiality as the magnitude of misstatement in the financial statements that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of these financial statements. We use materiality in determining the nature, timing and extent of our audit work. Materiality threshold £742,000, which represents 4.5% of the Company’s average loss before tax from the previous three years. Significant judgements made by In determining materiality, we made the following significant judgements: auditor in determining materiality Loss before tax is considered the most appropriate benchmark due to the Company being within the development phase of its lifecycle. We chose to use a three year average given the continued loss position and the potential volatility in earnings due to being a development stage entity. It is also a key performance measure for the Company and therefore of interest to stakeholders. The engagement team selected a measurement percentage of 4.5% of the Company’s loss before tax. This was based on the complexity and the size of the Company and the continuing uncertainties in the macro-economic environment. Materiality for the current year is higher than the level that we determined for the year ended 31 October 2022 to reflect the increase in the Company’s three year average loss before tax for the current year. 64 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTMateriality measure Company Performance materiality used to drive the extent of our testing We set performance materiality at an amount less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Performance materiality threshold £482,000, which is 65% of financial statement materiality. Significant judgements made by In determining performance materiality, we considered all pertinent facts from auditor in determining performance prior period audits, including the level of unadjusted misstatements and the materiality Company’s control environment. Specific materiality We determine specific materiality for one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Specific materiality We determined a lower level of specific materiality for certain areas such as directors’ remuneration and related party transactions. Communication of misstatements to the audit committee We determine a threshold for reporting unadjusted differences to the audit committee. Threshold for communication £37,100 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for potential uncorrected misstatements. Overall materiality Average loss before tax from the previous 3 years £16,487,000 FSM £742,000, 4.5% FSM: Financial statements PM £482,000, 65% materiality PM: Performance materiality TFPUM: Tolerance for potential uncorrected misstatements TFPUM £260,000, 35% DISPLACING DIESEL 65 Annual Report 2023GOVERNANCEREPORT INDEPENDENT AUDITORS’ REPORT An overview of the scope of our audit We performed a risk-based audit that requires an understanding of the Company’s business and in particular matters related to: Changes in approach from previous period the scope of the audit for the current year in broadly consistent with the scope applied in the previous year’s audit. The following scope changes have been made to reflect changes within the Company: Understanding the Company and its environment, including controls the engagement team obtained an understanding of the Company and its environment, including the controls, and assessed the risks of material misstatement. –– Reducing the identified prior year significant risk of fraud in revenue recognition as a result of immaterial nature of revenue amount, our enquiries with management and obtaining an understanding of the revenue relating to significant contracts entered into by the Company. Work to be performed on financial information of the Company (including how it addressed the key audit matters) an audit of the financial information of the Company has been completed to financial statement materiality (full- scope audit), with specific focus on going concern and the risk of incorrect accounting of the open contracts with customers and incomplete recognition of loss provisions in relation to contract accounting, which were identified as key audit matters. Performance of our audit a full-scope audit was performed by the engagement team, including an evaluation of the internal control environment and related management controls over the financial processes linked to the significant risks; Other information The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we the engagement team evaluated the general IT controls, are required to determine whether there is a material the accounts production process and controls over misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. critical accounting matters; the engagement team undertook substantive testing on significant transactions, balances and disclosures, the extend of which was dependant on various factors including our overall assessment of the control environment and the management of specific risks; and the engagement team completed a site visit of the Company’s premises at the planning and fieldwork stages of the audit, as well as observing the client’s stock count. 66 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTOur opinions on other matters prescribed by the Companies Act 2006 are unmodified In our opinion, the part of the directors’ remuneration report Responsibilities of directors As explained more fully in the directors’ responsibilities statement on page 59, the directors are responsible for the preparation of the financial statements and for being to be audited has been properly prepared in accordance satisfied that they give a true and fair view, and for such with the Companies Act 2006. internal control as the directors determine is necessary to In our opinion, based on the work undertaken in the course from material misstatement, whether due to fraud or error. enable the preparation of financial statements that are free of the audit: the information given in the strategic report and the responsible for assessing the Company’s ability to continue directors’ report for the financial year for which the as a going concern, disclosing, as applicable, matters financial statements are prepared is consistent with the related to going concern and using the going concern basis financial statements; and of accounting unless the directors either intend to liquidate In preparing the financial statements, the directors are the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matter on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters in relation to which 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 Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Irregularities, including fraud, are instances of non- compliance with laws and regulations. The extent to which the financial statements and the part of the directors’ our procedures are capable of detecting irregularities, remuneration report to be audited are not in agreement including fraud is detailed below: with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or We obtained an understanding of the legal and regulatory frameworks applicable to the Company and the industry in which it operates. We determined that the we have not received all the information and explanations following laws and regulations were the most significant: we require for our audit. the Companies Act 2006, UK-adopted international accounting standards, the AIM Rules for Companies, tax legislation and the QCA Corporate Governance Code; DISPLACING DIESEL 67 Annual Report 2023GOVERNANCEREPORTINDEPENDENT AUDITORS’ REPORT In addition, we concluded that there are certain specific regulations is from events and transactions reflected in laws and regulations that may have an effect on the the financial statements, the less likely we would become determination of amounts and disclosures in the financial aware of it; statements and we identified those laws and regulations as those relating to health and safety, employee matters, environmental matters and bribery and corruption matters; We enquired of management and those charged with governance concerning the Company’s policies and procedures relating to the identification, evaluation and compliance with laws and regulations and the detection The engagement partner’s assessment of the appropriateness of the collective competence and capabilities of the engagement team including consideration of the engagement team’s: –– understanding of, and practical experience with, audit engagements of a similar nature and complexity through appropriate training and participation; and response to the risks of fraud. We also enquired of –– knowledge of the industry in which the Company management and those charged with governance as operates; and to whether they were aware of any instances of non- compliance with laws and regulations and whether they had any knowledge of actual, suspected or alleged fraud. –– understanding of the legal and regulatory requirements specific to the Company. We corroborated the results of our enquiries to relevant We communicated relevant laws and regulations and supporting documentation; potential fraud risks to all engagement team members We assessed the susceptibility of the financial statements to material misstatement, including how fraud might occur by evaluating management’s incentives and remained alert to any indications of fraud or non- compliance with laws and regulations throughout the audit. and opportunities for manipulation of the financial A further description of our responsibilities for the statements. Audit procedures performed included: audit of the financial statements is located on the –– identifying and assessing the design and implementation of controls management has in place to prevent and detect fraud; Financial Reporting Council’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report. –– obtaining an understanding how those charged with governance considered and addressed the potential Use of our report This report is made solely to the Company’s members, for override of controls or other inappropriate influence as a body, in accordance with Chapter 3 of Part 16 of the over the financial reporting process; Companies Act 2006. Our audit work has been undertaken –– challenging assumptions and judgements made by management in its significant accounting estimates; and 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 –– identifying and testing journal entries posted in the to anyone other than the Company and the Company’s year and post year-end which were deemed to be members as a body, for our audit work, for this report, or for unusual the opinions we have formed. These audit procedures were designed to provide reasonable assurance that the financial statements were free from fraud or error. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error and detecting irregularities that result from fraud is inherently more difficult than detecting those that result from error, as fraud may involve collusion, deliberate concealment, forgery or intentional misrepresentations. Also, the further removed non-compliance with laws and Christopher Raab, ACA Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants London 25 March 2024 68 DISPLACING DIESEL AFC Energy PLCGOVERNANCEREPORTSTATEMENT OF COMPREHENSIVE INCOME For the year ended 31 October 2023 Revenue from customer contracts Cost of sales Gross (loss)/profit Other income Operating costs Operating loss Finance income Finance costs Loss before tax Taxation Loss for the financial year and total comprehensive loss attributable to the owners of the Company Basic loss per share (pence) Diluted loss per share (pence) Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 227 (294) (67) 41 (19,994) (20,020) 512 (53) (19,561) 2,086 582 (467) 115 22 (19,749) (19,612) 143 (19) (19,488) 3,042 (17,475) (16,446) (2.36) (2.36) (2.24) (2.24) Note 5 6 11 11 12 13 13 All amounts relate to continuing operations. There was no other comprehensive income in the year (2022: £nil). The notes on pages 73 to 97 form part of these financial statements. DISPLACING DIESEL 69 FINANCIAL STATEMENTSAnnual Report 2023STATEMENT OF FINANCIAL POSITION As at 31 October 2023 Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 Note Assets Non-current assets Intangible assets Right-of-use assets Tangible fixed assets Current assets Inventory Trade and other receivables Income tax receivable Cash and cash equivalents Restricted cash Total assets Current liabilities Payables Lease liabilities Non-current liabilities Lease liabilities Provisions Total liabilities Capital and reserves attributable to the owners of the Company Share capital Share premium Other reserve Retained loss Total equity attributable to shareholders Total equity and liabilities 14 15 16 17 18 12 19 19 20 21 21 22 23 23 The notes on pages 73 to 97 form part of these financial statements. These financial statements were approved and authorised by the Board on 25 March 2024. Adam Bond Peter Dixon-Clarke Chief Executive Officer Chief Financial Officer 264 1,097 3,756 5,117 178 1,231 2,088 27,366 258 31,121 36,238 3,728 477 4,205 647 301 948 5,153 746 118,520 3,779 (91,960) 31,085 36,238 311 976 3,282 4,569 43 1,160 4,075 40,220 612 46,110 50,679 3,644 298 3,942 698 301 999 4,941 735 116,487 4,073 (75,557) 45,738 50,679 AFC Energy plc Registered number: 05668788 70 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLC STATEMENT OF CHANGES IN EQUITY For the year ended 31 October 2023 Balance at 1 November 2021 Loss after tax for the year Issue of equity shares Equity settled share-based payments - Lapsed or exercised in the year - Charged in the year Fair value of warrants accounted for as equity Share Capital £000 734 Share Premium £000 116,448 Other Reserve £000 2,456 Retained Loss £000 Total £000 (59,752) 59,886 — 1 — — — — 39 — — — — — (641) 1,682 576 (16,446) (16,446) — 641 — — 40 — 1,682 576 Balance at 31 October 2022 735 116,487 4,073 (75,557) 45,738 Loss after tax for the year Issue of equity shares Equity settled share-based payments - Lapsed or exercised in the year - Charged in the year Fair value of warrants accounted for as equity — 10 1 — — — 1,990 43 — — — — (17,475) (17,475) — 2,000 (1,072) 778 — 1,072 — — 44 778 — Balance at 31 October 2023 746 118,520 3,779 (91,960) 31,085 Share capital is the amount subscribed for shares at the 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 unexercised equity-settled share-based payments and warrants granted. Retained deficit represents the cumulative loss of the Company attributable to equity shareholders. The notes on pages 73 to 97 form part of these financial statements. DISPLACING DIESEL 71 FINANCIAL STATEMENTSAnnual Report 2023 CASH FLOW STATEMENT For the year ended 31 October 2023 Cash flows from operating activities Loss before tax for the year Adjustments for: Amortisation of intangible assets Impairment of intangible assets Loss on disposal of intangible assets Depreciation of right-of-use assets Depreciation of tangible fixed assets Impairment of tangible fixed assets Loss on disposal of property and equipment Depreciation of decommissioning asset Equity-settled payments Interest receivable Lease finance charges Cash flows from operations R&D tax credits received Decrease in restricted cash (Increase)/decrease in inventory (Increase) in receivables Increase in payable (Decrease) in provisions Cash absorbed by operating activities Purchase of plant and equipment Additions to intangible assets Interest received Net cash absorbed by investing activities Proceeds from the issue of share capital Proceeds from the exercise of options Proceeds from the grant of warrants Lease interest paid Lease payments Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the start of the year Cash and cash equivalents at the end of the year The notes on pages 73 to 97 form part of these financial statements. Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 Note (19,561) (19,488) 14 14 14 15 16 16 16 24 16 14 11 25 21 21 19 110 — 1 455 1,084 — 34 15 778 (428) 69 (17,443) 4,073 354 (135) (109) 121 — (13,139) (1,607) (63) 428 (1,242) 2,000 45 — (69) (449) 1,527 (12,854) 40,220 27,366 473 294 — 379 974 255 126 20 1,682 (143) 33 (15,395) 546 — 618 (145) 1,948 (353) (12,781) (2,388) (334) 151 (2,571) — 40 576 (38) (381) 197 (15,155) 55,375 40,220 72 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLC NOTES FORMING PART OF THE FINANCIAL STATEMENTS 1. Corporate information AFC Energy Plc (the Company) is a public limited company incorporated in England & Wales. The address of the registered office is Unit 71.4, Dunsfold Park, Cranleigh, Surrey, GU6 8TB. The Company is quoted on the AIM Market of the London Stock Exchange with the ticker symbol LSE:AFC. The principal activity of the Company is the development of fuel cell and fuel processing technology and equipment. 2. Basis of preparation Going concern The financial statements of AFC Energy plc have been prepared in accordance with UK Adopted International Accounting Standards (IASs). The financial statements have been prepared on a going concern basis notwithstanding the trading losses being carried forward and the expectation that the trading losses will continue for the near to medium future as the Company transitions from predominantly undertaking research and development to a more commercial basis. In line with normal practice, and prior to signing this report, the Directors are required to assess whether it is appropriate to prepare the financial statements on a going concern basis. In making this assessment the Directors need to be satisfied that the Company can meet its obligations as they fall due for at least 12 months from the date of this report. As part of this assessment, the Directors reviewed the Company’s forecast cash position through to the end of the 2025 financial year. This was based on the agreed budget for the 2024 financial year and the forecast for the 2025 financial year. As the period goes beyond the 12 months required it provides additional information when making the assessment. To reach the end of 2025 with positive cash would require at least £7 million of additional funding, however this amount would not be enough for the Company to scale up at its preferred rate. In addition, the Board reviewed possible downside scenarios to establish the resilience of the Company’s cash reserves and identified the impact of continuing high levels of cost inflation, particularly on employee remuneration and supply chain, combined with delays of sales receipts as a particular risk. Based on this assessment, and the Company’s intention to capitalise on its growing market opportunities by scaling up its manufacturing output and continuing to invest in research and development, the Board has concluded that additional funding will be required to deliver on these plans. Whilst the Company is a going concern, the fact that the additional funding required has not yet been sought and secured indicates the existence of a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern. Whilst the Board recognises the challenges of fundraising in the current economic climate, it is confident that when the Company does choose to seek additional funding that it will be available. This view is based primarily on the: recent technical successes of both the fuel cell and fuel processing teams; UK Government requirements for construction tenders to include a non-diesel solution for onsite electricity generation; growing levels of interest expressed by the construction market in the recent joint venture with Speedy Hire plc; positive feedback from external advisors; and growing levels of institutional engagement, in both the fuel cell and fuel processing value streams, particularly following recent site visits. Based on the above, the Directors have concluded that the Company remains a going concern and these financial statements have therefore been prepared on that basis. The accounting policies set out below have, unless otherwise stated, been applied consistently in these financial statements. DISPLACING DIESEL 73 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS Judgments 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. Standards, amendments and interpretations to published standards not yet effective The following amendments to the accounting standards, issued by the IASB and endorsed by the UK, were adopted by the Company from 1 November 2022 with no material impact on the Company’s results, financial position or disclosures: Amendments to IFRS 3 Updating a Reference to the Conceptual Framework. Amendments to IAS 16 Property, Plant and Equipment: Proceeds before Intended Use. Amendments to IAS 37 Onerous Contracts – Cost of Fulfilling a Contract. Amendments to Annual improvements 2018-2020 – IFRS 9 – Fees in the ‘10 per cent’ Test and IFRS 16 – Lease incentives. Amendments to IAS 12 International Tax Reform – Pillar Two Model Rules. The following standard and amendments issued by the IASB have been endorsed by the UK and have not been adopted by the Company: IFRS 17 – Insurance contracts (effective from the year ending 30 June 2024) is ultimately intended to replace IFRS 4. Based on a preliminary assessment, management believes that the adoption of IFRS 17 will not have a significant impact on the Company’s results or financial position. Amendments to IAS 12 – Income taxes (effective from the year ending 30 June 2024) requires an entity to recognise deferred tax on initial recognition of particular transactions to the extent that the transaction gives rise to equal amounts of deferred tax assets and liabilities. The proposed amendments would apply to transactions such as leases and decommissioning obligations for which an entity recognises both an asset and a liability. Management believes that the adoption of these amendments will not have a significant impact on the Company’s results and financial position. There are a number of other amendments and clarifications to IFRSs, effective in future years, which are not expected to significantly impact the Company’s results or financial position. 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 2006. Revenue recognition To determine whether to recognise revenue, a five-step process is followed: Identifying the contract with a customer; Identifying the performance obligations; Determining the transaction price; Allocating the transaction price to the performance obligations; and Recognising revenue as the performance obligations are satisfied. Complex contracts include competing priorities such as financial targets, support capabilities, and delivery schedules. A complex contract will have multiple independent issues which must all be negotiated individually. Revenue is generated from complex contracts covering the: Sale of goods and parts, Sale of services and maintenance, and Short-term rental contracts which may be either single or multiple contracts. Multiple contracts are accounted for as a single contract where one or more of the following criteria are met: • The contracts were negotiated as a single commercial package, • Consideration of one contract depends upon the other contract, or • Some or all the goods and services comprise a single performance obligation. The promises in each contract are analysed to determine if these represent performance obligations individually, or in 74 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLCcombination with other promises. Performance obligations in the contracts are analysed between either distinct physical goods and services delivered or service level agreements. The transaction price of the performance obligations is based upon the contract terms considering both cash and non-cash consideration. Non-cash consideration is valued at fair value taking into consideration contract terms and known arm’s length pricing where available. In the event there are multiple performance obligations in a contract, the price is allocated to the performance obligations based on the relative costs of fulfilling each obligation plus a margin. Revenue is recognised either at a point in time or over time, as the performance obligations are satisfied by transferring the promised goods or services to its customers. Deferred revenue is recognised for consideration received in respect of unsatisfied performance obligations and the Company reports these amounts as payables in the statement of financial position. Similarly, if a performance obligation is satisfied in advance of any consideration, a receivable is recognised in the statement of financial position. Rental as service and long-term service contracts Revenue is recognised over time based on outputs provided to the customer, because this is the most accurate measurement of the satisfaction of the performance obligation as it matches the consumption of the benefits obtained by the customer. The customer is simultaneously receiving and consuming the benefits as the Company performs its obligations. Revenue can comprise a fixed rental charge and a variable charge related to the usage of assets or other services including pass-through costs where pass-through refers to the variable charge, for example Hydrogen. Sale (standard products) contracts Revenue from standard products will be recognised at a point of time only when the performance obligation has been fulfilled and ownership of the goods has transferred, which is typically factory or site acceptance test, which is the official handover of control of the goods to the customer. As the products are not deemed to be bespoke, there are alternative uses to the Company as the products would be able to be resold to other customers. During the product build, deposits and progress payments will be reflected in the balance sheet as deferred revenue. Costs incurred on projects to date will not be included in the statement of comprehensive income but will be accumulated on the balance sheet as work in progress (as they are considered recoverable) and transferred to cost of sales once the revenue applicable to those costs can be recognised in the accounts. Should anticipated costs exceed anticipated revenues, a provision will be recognised and the surplus costs expensed with immediate effect. Sale (customised products) contracts Revenues for customised contracts will be recognised over time according to how much of the performance obligation has been satisfied. This is measured using the input method, comparing the extent of inputs towards satisfying the performance obligation with the expected total inputs required. Any changes in expectation are reflected in the total inputs figure as they become known. The progress percentage obtained is then applied to the revenue associated with that performance obligation. The revenue should be recognised over a point in time as the products under these contracts would be bespoke and therefore not have an alternative use. These contracts would have an enforceable right to payment for performance completed to date. Other income Other income represents sales of waste materials and government contracts, and the accounting policy follows IFRS 15 for point-in-time revenue recognition. Development costs Identifiable non-recurring engineering and design costs and other prototype costs incurred to develop a technically and commercially feasible product are assessed. In accordance with IAS 38 Development costs and capitalised if they meet all of the criteria required as below: technical feasibility of completing the asset for use or sale; intention to complete the asset for use or sale; ability to use or sell the asset; generation of probable future economic benefits; DISPLACING DIESEL 75 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS availability of adequate technical and financial resources; and ability to measure the attributable expenditure reliably. 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 Statement of Financial Position date, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the date of the Statement of Financial Position. Inventory Inventory is recorded at the lower of actual cost and net realisable value, applying the average cost methodology. Work in progress comprises direct labour, direct materials and direct overheads. Direct Labour will be allocated on an input basis that reflects the consumption of those resources in the production process. Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise cash balances and bank overdrafts that form an integral part of the Company’s cash management process. They are recorded in the statement of financial position and valued at amortised cost. Restricted cash represents bank deposit accounts where disbursement is dependent upon certain contractual performance conditions. Other receivables These assets are initially recognised at fair value and are subsequently measured at amortised cost less any provision for impairment. Tangible fixed assets 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/or operating expenses on a straight-line basis over the estimated useful lives of each part of an item of plant, machinery and equipment. The estimated useful lives are as follows: Decommissioning asset Plant, machinery and equipment Computer equipment Manufacturing and test stands Motor vehicles Demonstration equipment Rental fleet Life of the lease 1 to 3 years 3 years 3 years 3 to 4 years 3 to 10 years 3 to 10 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 tangible fixed assets are reviewed annually, and any revision is accounted for as a change in 76 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLCaccounting estimate and the net book value of the asset, at the time of the revision, is depreciated over the remaining revised economic life of the asset. Right-of-use assets At inception each contract is assessed as to whether it conveys the right to control the use of an identified asset and obtain substantially all the economic benefits from the use of that asset, for a period in exchange for consideration. If so, the contract should be accounted for as a lease and the Company should recognise a right-of-use asset, and related lease liability, at the lease commencement date. The right-of-use asset comprises the corresponding lease liability, lease payments made before the commencement date, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. The lease liability is initially measured at the present value of the lease payments and discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the incremental borrowing rate is used. The lease liability continues to be measured at amortised cost using the effective interest method. It is remeasured when there is a change in the future lease payments. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset. At lease commencement date, a right-of-use and lease liability are recognised on the statement of financial position. The right-of-use asset is measured at cost, which comprises the initial measurement of the lease liability, any initial direct costs incurred, an estimate of costs to dismantle and remove the asset at the end of the lease term and any lease payments made in advance of the lease commencement date. Lease payments included in the measurement of the lease liability are made up of fixed payments (including in-substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised. After initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes to in-substance payments. When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero. Short-term leases and low value assets are accounted for using the practical expedients set out in IFRS 16 and the payments are recognised as an expense in profit or loss on a straight-line basis over the lease term. The Company has elected not to recognise right-of-use assets and lease liabilities for leases of less than 12-months and leases of low value assets. These largely relate to short-term rentals of equipment. The lease payments associated with these leases are expensed on a straight-line basis over the lease term. Intangible assets The useful economic lives of intangible fixed assets are reviewed annually, and any revision is accounted for as a change in accounting estimate and the net book value of the asset, at the time of the revision, is amortised over the remaining revised economic life of the asset. 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 operating expenses over the following periods: Development costs Patents Commercial rights 5 years 10 to 20 years 5 years Impairment testing of intangible assets and property, plant and equipment At each statement of financial position date, the carrying amounts of the assets are reviewed to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of the impairment loss (if any). In assessing whether an impairment is required, the carrying value of the asset is compared with its recoverable amount. The recoverable amount is the higher of the fair value less costs of disposal (FVLCD) and value in use (VIU). DISPLACING DIESEL 77 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS Financial instruments Financial instruments are measured on initial recognition at fair value, plus, in the case of financial instruments other than those classified as fair value through profit or loss (FVTPL), directly attributable transaction costs. Receivables are initially recognised at transaction price. Financial instruments are recognised when the Company becomes a party to the contracts that give rise to them and are classified as amortised cost, fair value through profit or loss or fair value through other comprehensive income, as appropriate. The Company considers whether a contract contains an embedded derivative when the entity first becomes a party to it. The embedded derivatives are separated from the host contract if the host contract is not measured at fair value through profit or loss and when the economic characteristics and risks are not closely related to those of the host contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. In the periods presented the Company does not have any financial assets categorised as FVTPL or FVOCI. Financial assets at amortised cost A financial asset is measured at amortised cost if it is held within a business model whose objective is to hold assets to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding and is not designated as FVTPL. Financial assets classified as amortised cost are measured after initial recognition at amortised cost using the effective interest method. Cash, restricted cash, trade receivables and certain other assets are classified as, and measured at, amortised cost. Financial liabilities Financial liabilities are classified as measured at amortised cost or FVTPL. A financial liability is classified as at FVTPL if it is classified as held-for-trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognised in profit or loss. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in net earnings when the liabilities are derecognised as well as through the amortisation process. Borrowing liabilities are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the statement of financial position date. Accounts payable and accrued liabilities and lease liabilities are classified as, and measured at, amortised cost. Impairment of financial assets A loss allowance for expected credit losses is recognised in the Statement of Comprehensive Income for financial assets measured at amortised cost. At each balance sheet date, on a forward-looking basis, the Company assesses the expected credit losses associated with its financial assets (such as trade receivables) carried at amortised cost. The expected loss rates are based on the historical credit losses adjusted to reflect current and forward-looking information on economic factors affecting the ability of the customers to settle the receivables. The impairment methodology applied depends on whether there has been a significant increase in credit risk. The expected credit losses are required to be measured through a loss allowance at an amount equal to the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date), or full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument). A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial instrument has increased significantly since initial recognition. Derecognition of financial assets and liabilities A financial asset is derecognised when either the rights to receive cash flows from the asset have expired or the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party. If neither the rights to receive cash flows from the asset have expired nor the Company has transferred its rights to receive cash flows from the asset, the Company will assess whether it has relinquished control of the asset or not. If the Company does not control the asset, then derecognition is appropriate. A financial liability is derecognised when the associated obligation is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of Comprehensive Income. 78 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLCShare-based payment transactions The fair value of options granted under the Employee Share Option Plan, the Employee Performance Share Plan and the Save-As-You-Earn scheme are recognised as an employee benefits expense, with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options granted: Including any market performance conditions (e.g., the Company’s share price) Excluding the impact of any service and non-market performance vesting conditions (e.g., profitability, sales growth targets and remaining an employee for a specified time) Including the impact of any non-vesting conditions (e.g., the requirement for employees to save or hold shares for a specific period) The total expense is recognised over the vesting period, which is the period over which all the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of options that are expected to vest based on the non-market vesting and service conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. Modifications after the vesting date to terms and conditions of equity-based payments which increase the fair value are recognised over the remaining vesting period. If the fair value of the revised equity-based payments is less than the original valuation, then the original valuation is expensed as if the modification never occurred. The fair value of warrants issued is also recognised as a share-based payment expense with a corresponding increase in equity. 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 Statement of Financial Position date and are discounted to present value where the effect is material. Provisions include onerous contracts (see later under note 3) where, if unavoidable costs of meeting a contract exceed the expected revenue, a provision is recognised immediately through profit and loss. 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. Tax due for the current and prior periods is recognised as a liability, to the extent that it has not yet been settled, and as an asset if the amounts already paid exceed the amount due. The benefit of a tax loss which can be carried back to recover current tax of a prior period is recognised as an asset. Current tax assets and liabilities are measured at the amount expected to be paid to/ recovered from taxation authorities, using the rates/laws that have been enacted or substantively enacted by the balance sheet date. A deferred tax asset is recognised for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability other than in a business combination which, at the time of the transaction, does not affect accounting profit or taxable profit. The carrying amount of deferred tax assets are reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction is subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available. A deferred tax asset is recognised for an unused tax loss carry forward or unused tax credit if, and only if, it is considered probable that there will be sufficient future taxable profit against which the loss or credit carry forward can be utilised. The Company does not currently recognise a deferred tax asset, as near-term taxable profits, against which to offset the asset, are not considered probable. DISPLACING DIESEL 79 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS 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 the taxation line. 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 capped at 5% of the employee’s salary and are reflected in the statement of comprehensive income in the period for which they are made. The amount recognised in the period is the contribution payable in exchange for services rendered by employees during the period. 3. Critical accounting judgments and key sources of estimation uncertainty In the preparation of the financial statements, management makes certain judgments and estimates that impact the financial statements. While these judgments are continually reviewed, the facts and circumstances underlying these judgments may change, resulting in a change to the estimates that could impact the results of the Company. In particular: Critical accounting judgments The following are the judgments made by management in applying the accounting policies of the Company that have the most significant effect on the financial statements: Customer contracts and revenue recognition Customer contracts typically include the provision of goods or services related to the provision of off-grid power generated from the conversion by fuel cells of hydrogen to electricity. Customer agreements can be complex, involve multiple legal documents and have a duration covering multiple accounting periods including different performance obligations and payment terms designed to manage cash flow rather than the underlying arm’s length transaction price. Management uses judgment to identify the specific performance obligations and allocate the total expected revenue to the identified performance obligations. These judgments are made based on the interpretation of key clauses and conditions within each customer contract. Project reviews covering cost forecasts and technical progress are monitored periodically to ensure that any potential losses are recognised immediately in the accounts in accordance with IAS 37. Capitalisation of development expenditure The Company uses the criteria of IAS 38 to determine whether development expenditure should be capitalised. Management identifies separately non-recurring engineering, design costs and prototype costs incurred to develop demonstration units used in marketing activities and customer trials. Management believes that the Development Expenditure will continue to support marketing and customer trials for the foreseeable future. This assessment relies upon judgments about future customer behaviour taking in to account the feedback received from prospective customers and future product improvements which influence the economic useful life and residual value of said assets. For the current year, all development costs have been expensed as they do not yet meet all six of the criteria set out within the policy (see note 2) on development costs. Following the end of the financial year, the Company’s Technical Advisory Board (TAB) reviewed the 38 technical and commercial projects that had incurred expenses during the financial year. Of these, 17 were classified as research projects and therefore unable to be capitalised under IAS 38. Eight projects were commercial in nature and expenses were therefore treated as cost of sales. Two projects were discontinued and thus did not qualify for capitalisation. Four projects did not demonstrate future economic benefits. One project was not completed due to lack of budget, one project was out-of-scope for intangible assets and to be assessed under IAS 16 Tangible Assets and one project was deemed not to be below the threshold to warrant capitalisation. There was an inability to accurately measure the cost reliably for four projects. Key source of estimation uncertainty Share-based payments Certain employees (including Directors and senior Executives) of the Company receive remuneration in the form of share- based payment, whereby employees render services as consideration for equity instruments (equity-settled transactions). 80 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLCThe fair value is determined using either the Black-Scholes valuation model or a Monte Carlo model for market-based conditions. Both are appropriate for considering the effects of the vesting conditions, expected exercise period and the dividend policy of the Company. The cost of equity-settled transactions is accrued, together with a corresponding increase in equity over the period the Directors expect the performance criteria will be fulfilled. For market performance criteria this estimate is made at the time of grant considering historic share price performance and volatility. For non-market-based performance criteria, an estimate is made at the time of grant and reviewed annually thereafter considering progress on the operational objectives set, plans and budgets. The estimation uncertainty relating to share-based payments is not at risk of material change in future years other than in relation to management’s estimate of the extent to which the non-market-based performance criteria will be met. Onerous contracts Throughout the year, the performance of each open contract is reviewed and expected cost of delivering that contract is compared to the expected revenue from doing so. Where the expected costs suggest a loss the contract is treated as an onerous contract and a provision is recognised immediately through the profit and loss. No such provisions were made. 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 2023, the Company operated mainly in the United Kingdom. All non-current assets are in the United Kingdom. Revenue for the period was all generated from fuel cell systems. 5. Revenue Revenue from contracts with customers Rental revenue Other revenue Being: Cash consideration Consideration in kind Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 137 90 227 161 66 227 225 357 582 367 215 582 One customer (FY22: one customer) accounted for more than 10% of revenue: Customer A Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 £000 130 % 57.1 £000 475 % 81.6 The majority of the other revenue relates to sales of hydrogen to the rentee of the fuel cell generators. Unsatisfied performance obligations were: 31 October 2022 31 October 2023 Total £000 96 — Within one year £000 Within 2 to 5 years £000 96 — — — The aggregate amount of the transaction price allocated to contracts that are fully unsatisfied as of 31 October 2023 was £Nil (2022: £96,000). The consideration in kind relates to marketing services received from the customer and fair valued in accordance with the contract. DISPLACING DIESEL 81 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS 6. Operating costs Year ended 31 October 2023 Year ended 31 October 2022 Qualifying R&D spend £000 Note Indirect £000 Total £000 Qualifying R&D spend £000 Indirect £000 Total £000 Product development costs Materials Payroll costs Payroll (excluding directors) Directors’ costs Other employment costs Other administrative expenses Occupancy costs Other administrative expenses Non-cash costs Amortisation of intangible assets Depreciation of right-of-use assets Depreciation of tangible fixed assets Less depreciation of rental asset charged to cost of sales Consideration in kind Share-based payments charge 3,349 3,349 4,361 151 220 1,330 1,330 2,329 1,744 813 4,732 4,886 214 192 670 2,178 406 2,848 4,679 4,679 6,690 1,895 1,033 9,618 884 2,370 3,254 110 455 — — — — — — — 110 455 1,099 1,099 (65) 66 778 (65) 66 778 2,443 2,443 4,654 4,654 3,660 — 251 451 451 1,247 1,642 796 5,105 5,105 4,907 1,642 1,047 3,911 3,685 7,596 — 440 440 772 772 2,310 3,082 2,750 3,522 — — — — — — — 474 379 474 379 994 994 (218) 215 1,682 3,526 (218) 215 1,682 3,526 8,487 11,507 19,994 9,005 10,744 19,749 82 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLC7. Other employment costs External consultants Recruitment costs Private Healthcare and Life Insurance Other 8. Other administrative expenses Professional fees Audit and tax costs Information technology Travel & entertainment Insurance Other Fees paid to the auditors included within the operating costs were: Audit Other assurance services 9. Employee numbers and costs, including directors The average number of employees in the year were: Support, operations and technical Directors The aggregate payroll costs for directors and employees were: Wages and salaries Social security Employers’ pension contributions Equity-settled share-based payment expense DISPLACING DIESEL Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 521 375 108 29 161 704 101 81 1,033 1,047 Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 619 237 750 177 417 170 889 312 753 486 260 50 2,370 2,750 Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 218 17 244 9 Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 113 7 120 77 7 84 Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 7,290 1,000 295 8,585 778 9,363 5,961 392 196 6,549 1,682 8,231 83 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS 10. Directors’ costs Directors’ emoluments Short-term employee benefits: Wages and salaries including bonuses Accrual for untaken holiday Other compensation Social security Post-employment benefits: Defined contribution pension plans Share-based payments Total remuneration Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 1,526 1 73 278 1,878 46 1,924 629 2,553 1,380 37 77 98 1,592 50 1,642 1,474 3,116 Social security and accrued holiday pay are included in the table above and reconcile to note 9. Aggregate gains made by directors on the exercise of share options and warrants was £129,225. Highest paid director Wages and salaries Other compensation Employers’ pension contributions 11. Net finance income/(cost) Lease interest Exchange rate differences Bank charges Total finance cost Bank interest receivable Net finance income Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 601 44 645 16 661 538 43 581 16 597 Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 (69) 22 (6) (53) 512 459 (38) 21 (2) (19) 143 124 84 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLC12. 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 at 22.52% (2022: 19%) Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 2,088 (2) 2,086 3,050 (8) 3,042 (19,561) 4,405 (19,488) 3,703 Effect of: Change in unrecognised deferred tax resulting from tax losses (2,443) (1,767) Non-deductible items Depreciation in excess of capital allowances R&D enhanced deduction on qualifying R&D expenditure R&D rate adjustment on surrendered losses R&D tax credit – prior year Total tax credit Potential deferred tax assets have not been recognised but are set out below: Property, plant and equipment and intangible assets Share-based payments Other differences Losses carried forward Unrecognised deferred tax assets (43) (6) 1,959 (1,784) (2) 2,086 101 (299) 2,259 (947) (8) 3,042 Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 431 57 11 14,389 14,888 (187) 477 — 12,037 12,327 The cumulative tax losses in the amount of £57.6 million (2022: £47.6 million) that are available indefinitely for offsetting against future taxable profits have not been recognised as the Directors consider that it is unlikely that they will be realised in the foreseeable future. The 2021 Finance Act increased the UK corporation tax rate to 25% from 1 April 2023, which will affect any future tax charges. 13. Loss per share The calculation of the basic loss per share is based upon the net loss after tax attributable to ordinary shareholders 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 £000 Weighted average number of shares in issue Diluted earnings per share Year ended 31 October 2023 Year ended 31 October 2022 (2.36) (2.36) (2.24) (2.24) (£17,475) (£16,446) 741,451 734,745 As set out in note 24, there are share options and warrants (accounted for under IFRS 2: Share based payments) outstanding as at 31 October 2023 which, if exercised, would increase the number of shares in issue. Given the losses for the year, there is no dilution of losses per share in the year ended 31 October 2023 nor the previous year. DISPLACING DIESEL 85 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS 14. Intangible assets Cost At 1 November 2021 Additions At 31 October 2022 Additions Disposals At 31 October 2023 Amortisation At 1 November 2021 Charge for the year Impairment charge At 31 October 2022 Charge for the year Disposals At 31 October 2023 Net book value At 31 October 2022 At 31 October 2023 Development costs £000 229 — 229 — (229) — 74 34 121 229 — (229) — — — Patents £000 886 334 1,220 63 — 1,283 384 422 173 979 70 — 1,049 241 234 Commercial rights £000 Total intangible assets £000 121 — 121 — — 121 33 18 — 51 40 — 91 70 30 1,236 334 1,570 63 (229) 1,404 491 474 294 1,259 110 (229) 1,140 311 264 86 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLC15. Right-of-use assets Cost At 1 November 2021 Additions At 31 October 2022 Additions Disposals At 31 October 2023 Depreciation At 1 November 2021 Charge for the year At 31 October 2022 Charge for the year Disposals At 31 October 2023 Net book value At 31 October 2022 At 31 October 2023 Buildings £000 1,415 470 1,885 576 (476) 1,985 530 379 909 455 (476) 888 976 1,097 16. Tangible fixed assets Leasehold improvements £000 Decommissioning Asset £000 Plant, machinery and equipment £000 Assets under construction £000 Total tangible fixed assets £000 Cost At 1 November 2021 Additions Disposals At 31 October 2022 Additions Disposals At 31 October 2023 Depreciation At 1 November 2021 Charge for the year Impairment charge At 31 October 2022 Charge for the year Disposals At 31 October 2023 Net book value At 31 October 2022 At 31 October 2023 DISPLACING DIESEL 958 1,620 (8) 2,570 985 (9) 3,546 302 444 — 746 648 — 1,394 1,824 2,152 300 — — 300 — — 300 265 20 — 285 15 — 300 15 — 3,318 362 (118) 3,562 334 (25) 3,871 1,740 530 255 2,525 436 — 2,961 1,037 910 — 406 — 406 288 — 694 — — — — — — — 406 694 4,576 2,388 (126) 6,838 1,607 (34) 8,411 2,307 994 255 3,556 1,099 — 4,655 3,282 3,756 87 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS 17. Inventory Raw materials Work-in-progress Provision Inventory 31 October 2023 £000 31 October 2022 £000 185 405 (412) 178 173 — (130) 43 Inventory expensed as cost of sales during the year was £nil (2022 £nil). During the year, £412,000 (2022: £488,000) of brought forward inventory was written off as research and development costs on projects that did not subsequently meet the anticipated level of commerciality. 18. Receivables Trade receivables VAT receivables Other receivables Prepayments 31 October 2023 £000 31 October 2022 £000 107 383 217 524 1,231 142 401 303 314 1,160 There is no significant difference between the fair value of the receivables and the values stated above. 19. Cash and cash equivalents Cash at bank Bank deposits 31 October 2023 £000 31 October 2022 £000 303 27,063 27,366 285 39,935 40,220 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 of £258,000 (2022: £612,000) is not included within cash and cash equivalents and is held in escrow to support bank guarantees provided under contractual obligations to suppliers and customers. 20. Payables Trade payables Deferred revenue Other payables Accruals 31 October 2023 £000 31 October 2022 £000 931 1,423 416 958 3,728 445 1,600 349 1,250 3,644 Included in Accruals as of 31 October 2023 is an amount of £690,000 in relation to bonuses (2022: £514,000). Deferred revenue under the ABB contract is reduced by the fair value of the warrants granted on the same day, 15 November 2021, as the two contracts are considered to be linked. 88 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLC21. Lease liabilities Changes in liabilities arising from financing activities: Opening position Cash flows Repayment Non-cash Additions Interest expense Lease liabilities less than 12 months Lease liabilities more than 12 months Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 996 906 (516) (419) 575 69 1,124 471 38 996 31 October 2023 £000 31 October 2022 £000 477 647 1,124 298 698 996 All of the Company’s leases are for the occupancy of the campus at Dunsfold Park and are disclosed as ‘Buildings’ in note 15. A number of buildings are occupied under licences and these have not been recognised as right-of-use assets. Of the leases recognised as right-of-use assets, the Company has a commitment on one lease until February 2027 with a break clause in February 2025. The Company has a commitment on one lease until November 2025 with no break clauses. Two leases were renewed in January 2023 until January 2026 with no break clauses. Leases are renewed as opposed to being extended and are granted outside of the 1954 Act. They therefore do not have security of tenure. 22. Provisions Balance at 1 November 2021 Utilisation Balance at 31 October 2022 Additions Utilisation Balance at 31 October 2023 National insurance on unapproved share options £000 Decommissioning provision £000 353 (353) — — — — 301 — 301 — — 301 Total £000 654 (353) 301 — — 301 DISPLACING DIESEL 89 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS 23. Issued share capital At 1 November 2021 734,484,668 Ordinary shares Share capital £000 Share premium before costs of issue £000 Costs of issue £000 Share premium net of costs of issue £000 734 119,718 (3,269) 116,448 Price £ — Exercise of options 14 March 2022 Exercise of options 5 July 2022 Exercise of PSP award 21 July 2022 Exercise of options 26 July 2022 Exercise of options 7 September 2022 At 1 November 2022 Issue of shares 5 April 2023 Exercise of options 1 June 2023 Exercise of warrants 14 June 2023 Exercise of PSP award 22 September 2023 60,000 9,240 110,000 12,320 583,169 583 60,000 9,240 53,334 735,351,171 8,213 — 10,000,000 2,000,000 10,000 — 900,000 44,325 255,136 746,516,307 255 — — — 1 — — 9 12 — 9 8 — — — — — 9 12 1 9 9 735 119,756 (3,269) 116,487 10 — 1 – 1,990 — 43 — — — — — 1,990 — 43 — 746 121,789 (3,269) 118,520 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 to maintain a sufficient funding base to enable the Company to meet its working capital needs. The Company has no debt, other than property leases, and therefore a target debt to equity ratio is not relevant at the time. Share premium is shown before the permitted deduction of costs of issue. After such deduction the value equals £118,520,000. 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. 24. Share-based payments Share-based payment charge: Employee Share Option Plan Employee Performance Share Plan Warrants SAYE 31 October 2023 £000 31 October 2022 £000 48 612 — 118 778 193 1,400 70 19 1,682 90 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLCEmployee Share Option Plan The establishment of the Employee Share Option Plan was approved by the Board on 1 August 2018 and amended on 10 October 2018. The Plan is designed to attract, retain and motivate employees. Under the Plan, participants can be granted options which vest unconditionally or conditionally upon achieving certain performance targets. Participation in the Plan is solely at the Board’s discretion and no employee has a contractual right to participate in the Plan or to receive any guaranteed benefits. Options are granted under the Plan for no consideration and carry no dividend nor voting rights. When exercisable, each option is convertible into one ordinary share. Further details are discussed within the Remuneration Committee Report. Set out below are summaries of options granted under the Plan: At 1 November Granted during the year Exercised during the year Lapsed during the year Amended during the year: Options at original exercise price Options at rebased exercise price At 31 October Vested and exercisable at 31 October Average exercise price per share option 2023 £ 0.35 0.16 0.09 0.17 0.62 0.11 0.32 Number of options 2023 13,717,167 2,125,000 (10,000) (2,861,667) (1,000,000) 1,000,000 12,970,500 9,630,500 Average exercise price per share option 2022 0.35 0.19 0.14 0.35 — — Number of options 2022 14,952,167 215,000 (283,334) (1,166,666) — — 0.35 13,717,167 11,700,637 Share options outstanding at the end of the year have the following expiry dates and exercise prices: Grant date Expiry date 7 November 2012 07 November 2022 2 December 2013 01 December 2023 17 July 2015 17 July 2025 10 September 2018 01 August 2024 15 October 2018 15 October 2024 31 December 2019 20 April 2020 24 June 2021* 9 June 2023* 9 June 2023* 9 June 2023 4 July 2022 27 April 2023 20 April 2030 20 April 2030 28 June 2031 28 June 2031 28 June 2031 28 June 2031 04 July 2032 27 April 2033 * Award amended by Deed of Variation in 2023. Exercise price £ 0.3575 0.3400 0.2200 0.0880 0.0880 0.1635 0.1540 0.6170 0.1000 0.1250 0.1526 0.1900 0.0188 Share options 2023 — 120,000 6,000,000 190,000 2,500,000 — 820,500 — 500,000 500,000 1,500,000 215,000 625,000 12,970,500 Share options 2022 95,000 120,000 6,000,000 216,667 2,500,000 2,750,000 820,500 1,000,000 — — — 215,000 — 13,717,167 DISPLACING DIESEL 91 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS The table below sets out the inputs used in determining the fair value of the grants of options per the previous table as well as the expense recognised in the accounts in the current year. The grants in the previous table are linked below based on the exercise price and grant date. Average grant date share price £ Exercise price £ Average expected volatility per annum Average risk- free interest rate per annum Average dividend yield per annum Average implied option life in years Average fair value per option £ Amount expenses in 2023 £000 Grant date 31 December 2019 0.1635 0.1635 95.50% 0.54% 0.00% 4 July 2022 0.1900 0.1900 95.00% 1.83% 0.00% 27 April 2023 0.1880 0.1882 78.00% 3.82% 0.00% 09 June 2023 0.1000 0.1682 72.00% 4.51% 0.00% 09 June 2023 0.1000 0.1682 72.00% 4.51% 0.00% 09 June 2023 0.1250 0.1682 72.00% 4.51% 0.00% 09 June 2023 0.1250 0.1682 72.00% 4.51% 0.00% 09 June 2023 0.1530 0.1682 72.00% 4.51% 0.00% 09 June 2023 0.1530 0.1682 72.00% 4.51% 0.00% Total charge for the year (2022: £193,000) 2.0 3.0 3.0 0.7 0.9 1.7 1.9 2.7 2.9 0.8100 0.1140 0.0990 0.0791 0.0825 0.0817 0.0847 0.0856 0.0883 — 8 11 3 3 9 3 3 8 48 Employee Performance Share Plan The establishment of the Employee Performance Share Plan was approved by the Board on 1 September 2021. The Plan is designed to attract, retain and motivate employees. Under the Plan, participants can be granted options which vest unconditionally or conditionally upon achieving certain performance targets. Participation in the Plan is solely at the Board’s discretion and no employee has a contractual right to participate in the Plan or to receive any guaranteed benefits. Award holders are not required to make payment for the grant of an award unless the board determines otherwise. Options are granted under the Plan for no consideration and carry no dividend nor voting rights. When exercisable, each option is convertible into one ordinary share. Set out below are summaries of options granted under the Plan: At 1 November Granted during the year Exercised during the year Lapsed during the year At 31 October Vested and exercisable at 31 October Average exercise price per share option 2023 £ 0.001 0.001 0.001 0.001 0.001 Average exercise price per share option 2022 — 0.001 0.001 0.001 0.001 Number of options 2023 6,131,266 4,664,000 (255,136) (2,939,226) 7,600,904 — Number of options 2022 — 7,493,317 (583,169) (778,882) 6,131,266 — 92 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLCShare options outstanding at the end of the year have the following expiry dates and exercise prices: Grant date 19 November 2021 12 July 2022 1 June 2023 Expiry date 19 November 2031 12 July 2032 1 June 2033 Exercise price £ 0.001 0.001 0.001 Share options 2023 620,970 2,315,934 4,664,000 Share options 2022 2,971,582 3,159,684 — 7,600,904 6,131,266 The table below sets out the inputs used in determining the fair value of the grants of options per the previous table as well as the expense recognised in the accounts in the current year. The grants in the previous table are linked below based on the exercise price and grant date. Average grant date share price Pence 53.80 53.80 53.80 20.70 20.70 17.91 17.91 Exercise price Pence 0.001 0.001 0.001 0.001 0.001 0.001 0.001 Average expected volatility per annum Average risk- free interest rate per annum Average dividend yield per annum 76.00% 76.00% 76.00% 95.00% 95.00% 74.00% 74.00% 0.05% 0.00% 0.35% 0.00% 0.05% 0.00% 1.76% 0.00% 1.76% 0.00% 4.29% 0.00% 4.29% 0.00% Average implied option life in years 0.40 1.40 3.00 3.00 3.00 3.00 3.00 Grant date 19 November 2021 19 November 2021 19 November 2021 15 July 2022 15 July 2022 01 June 2023 01 June 2023 Total charge for the year (2022: £1,400,000) Average fair value per option Pence Amount expenses in 2023 £000 0.43 0.42 0.45 12.70 16.60 8.79 10.92 — 205 133 91 119 29 35 612 Three grants were made on 19 November 2021. The first two, of the three disclosed above, related to the Transitional LTIP, and was made in two tranches. The first tranche had a risk free rate of 0.05% whilst the second tranche had a risk-free rate of 0.35%. The third, of the three above, related to the PSP LTIP and had a risk free rate of 0.05%. DISPLACING DIESEL 93 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS SAYE Save-as-you-earn (SAYE) ‘ Sharesave’ schemes are open to all eligible employees. The SAYE schemes allows eligible employees to commit to making a deduction from salary on a monthly basis over three years. At the end of the three-year period, employees can purchase the Company’s ordinary shares of 0.1 pence each (“Ordinary Shares”) using the funds saved. The first AFC Energy SAYE scheme was launched in August 2022 at an exercise price of 20.48 pence per Ordinary Share, representing a 20% discount to the closing market price of the Ordinary Shares prior to the scheme being launched on 3 August 2022. The second AFC Energy SAYE scheme was launched in September 2023 at an exercise price of 14.304 pence per Ordinary Share, representing a 20% discount to the closing market price of the Ordinary Shares prior to the scheme being launched on 6 September 2022. The discounts to the closing market prices are in line with the limits of the SAYE scheme as defined by HMRC. Average exercise price per option 2023 Pence 20.48 14.30 17.44 — Number of options 2023 2,007,400 1,937,201 3,944,601 — Expiry date Exercise price Average exercise price per option 2022 £ — 20.48 20.48 — Share options 2023 Number of options 2022 — 2,007,400 2,007,400 — Share options 2022 31 March 2026 20.480 (2,007,400) 2,007,400 30 April 2027 14.304 1,937,201 — 1 November Granted during the year 31 October Vested and exercisable at 31 October Grant date 3 August 2022 19 October 2023 Grant date Average grant date share price Pence Exercise price Pence Average expected volatility per annum Average risk-free interest rate per annum Average dividend yield per annum 3 August 2022 20.480 25.60 95.00% 2.93% 0.00% 19 October 2023 14.304 13.97 73.00% 4.72% 0.00% Total charge for the year (2022: £19,000) Average implied option life in years 3.08 3.03 Average fair value per option Pence 17.700 7.060 Amount expenses in 2023 £000 115 3 118 25. Financial instruments Warrants While the Board issues share options to employees, the Board has the discretion to award warrants from time to time to non-employees, such as non-executive directors and third parties. Typically, warrants are granted and vest upon certain performance targets. Grant of warrants is solely at the Board’s discretion. Warrants are granted for no consideration and carry no dividend nor voting rights. When exercisable, each warrant is convertible into one ordinary share. 94 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLCSet out below are summaries of warrants granted under the Plan: 1 November Granted during the year Exercised during the year* Lapsed during the year 31 October Average exercise price per warrant 2023 £ Number of warrants 2023 Average exercise price per warrant 2022 £ 0.540 15,702,720 — — 0.049 (900,000) 0.210 (3,000,000) 0.51 0.59 — — Number of warrants 2022 8,900,000 6,802,720 — — 0.670 11,802,720 0.54 15,702,720 Vested and exercisable at 31 October 3,101,300 4,001,300 The warrants exercised during the year all relate to a serving non-executive director and are discussed further within the Remuneration Committee Report. Average grant date share price Pence Warrant price Pence Average expected volatility per annum Average risk-free interest rate per annum Average dividend yield per annum Average implied warrant life in years Average fair value per warrant Pence Amount expenses in 2023 £’000 Grant date 13 October 2020 19.5 18.56 102.76% (0.02)% 0.00% 1 7.01 — Total charge for the year (2022: £70,000) Average grant date share price Pence 58.8 58.8 58.8 Warrant price Pence 58.8 58.8 58.8 Average expected volatility per annum 59.1% 59.1% 59.1% Average risk-free interest rate per annum Average dividend yield per annum 0.65% 0.00% 0.65% 0.00% 0.65% 0.00% Average implied warrant life in years Average fair value per warrant Pence Accounted as equity in 2023 £000 2 2 2 6.3 11.3 9.9 — — — Grant date 15 November 2021 15 November 2021 15 November 2021 Accounted as equity (2022: £576,000) In the case of the ABB warrants, the warrant life is two years from the date of vesting. The first tranche of 3.4 million warrants have fully vested and expired on 4 February 2024 without having been exercised. Under the revised agreement signed on 28 March 2023, ABB will invest the £2.0 million balance into newly issued share capital, which means that the original milestones 1 and 2 will no longer apply and so the related warrants will not vest and therefore expire in due course. Warrants outstanding at the end of the year have the following expiry dates and exercise prices. Grant date 9 September 2019 19 October 2020 19 October 2020 19 October 2020 13 January 2021 15 November 2021 15 November 2021 15 November 2021 Expiry date 9 September 2029 13 October 2021 13 April 2021 13 October 2022 13 March 2025 4 February 2024 24 months after vesting 24 months after vesting Exercise price 0.050 0.195 0.210 0.230 0.770 0.590 0.590 0.590 Warrants 2023 Warrants 2022 — — — — 900,000* 1,000,000* 1,000,000* 1,000,000* 5,000,000 5,000,000* 3,401,360 3,401,360 1,700,680 1,700,680 1,700,680 1,700,680 11,802,720 15,702,720 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. * These warrants represent share-based payments which have been accounted for under IFRS 2 and disclosures have been made which are required for share based payments and can be found in note 24. DISPLACING DIESEL 95 FINANCIAL STATEMENTSAnnual Report 2023NOTES FORMING PART OF THE FINANCIAL STATEMENTS Principal financial instruments The principal financial instruments used by the Company, from which financial instrument risk arises, are as follows: Financial instruments held at amortised cost: Cash and cash equivalents Receivables Total financial assets held at amortised cost Payables Leases Total financial liabilities held at amortised cost Note 19 18 20 21 Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 27,366 324 27,690 2,304 1,124 3,428 40,220 445 41,380 2,044 996 3,040 There is no difference between the fair value and book value of financial instruments. The Company does not enter 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. VAT receivables and prepayments have been removed from financial assets and deferred revenue from financial liabilities. 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. Other than the ABB warrants, granted on 15 November 2021, which also incorporate managements inputs to the fair valuation, all financial instruments are Level 1 and none 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 below. Credit risk Credit risk arises principally from the Company’s 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: Cash and cash equivalents Receivables The Company’s principal other receivables arose from: a) customers, and b) trade and other receivables Year ended 31 October 2023 £000 Year ended 31 October 2022 £000 27,366 324 40,220 445 96 DISPLACING DIESEL FINANCIAL STATEMENTSAFC Energy PLCCredit risk with cash and cash equivalents is reduced by placing funds with 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 were temporarily held on short-term deposit. The credit risk provision is estimated on a case by case basis taking into account public information of the counterparty and payment history and no loss is expected. No expected credit loss accrual has been made as at 31 October 2023 and 2022 as they are estimated to be de minimis. 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 payables are all payable within two months. The Board receives cash flow projections on a regular basis as well as information on cash balances. The following table shows the Company’s financial liabilities by relevant maturity grouping based on contractual maturities. The amounts included in the analysis are contractual, undiscounted cashflows. 31 October 2023 Trade payables Lease liabilities Total financial liabilities 31 October 2022 Trade payables Lease liabilities Total financial liabilities Less than one year £000 2,304 518 2,822 Less than one year £000 2,044 328 2,372 One to two years £000 — 518 518 One to two years £000 — 308 308 Tow to five years £000 Total contracted cash flows £000 — 151 151 2,304 1,187 3,491 Tow to five years £000 Total contracted cash flows £000 — 423 423 2,044 1,059 3,103 Carrying amount £000 2,304 1,124 3,428 Carrying amount £000 2,044 996 3,040 See also note 21, which sets out the lease liabilities for less than 12 months and more than 12 months. Interest rate risk The Company is exposed to interest rate risk in respect of surplus funds held on deposit and, where appropriate, uses fixed interest term deposits to mitigate this risk. 26. Related party transactions There were no transactions with any related parties during the year ended 31 October 2023 (2022: £Nil) other than key management compensation, details of which can be found in note 10. 27. Ultimate controlling party There is no ultimate controlling party. 28. Events occurring after the end of the reporting period See within the Directors’ Report on page 41. DISPLACING DIESEL 97 FINANCIAL STATEMENTSAnnual Report 2023COMPANY INFORMATION Executive directors BOND, Adam Steven DIXON-CLARKE, Peter GIBSON, James Hay LEWIS, Graeme Appointed 1-Jun-12 1-Dec-22 6-Feb-17 27-Feb-20 Non-executive directors AGNEW, Gerald Daniel, Dr Appointed 9-Sep-19 BIDDULPH, Monika, Dr BULLARD, Gary Bruce MANGION, Joseph Bernard NEALE, Duncan John 3-Dec-21 15-Apr-21 5-Dec-17 1-Aug-23 Company Secretary LEWIS, Graeme Robert DIXON-CLARKE, Peter KEANE, Brendan James Appointed 2-Apr-19 1-Dec-22 9-Oct-23 Registered Office Unit 71.4 Dunsfold Park, CRANLEIGH, GU6 8TB Resigned 9-Jun-23 30-Nov-22 Resigned 31-Jul-23 Resigned 1-Dec-22 9-Oct-23 Bankers Barclays Bank Plc, 40/41 High Street, CHELMSFORD, CM1 1BE Joint Broker Zeus Capital Limited, 82 King Street, MANCHESTER, M2 4QW RBC Capital Markets, 100 Bishopsgate, LONDON, EC2N 4AA AIM Nominated Adviser and Joint Broker Peel Hunt LLP, 100 Liverpool Street, LONDON, EC2M 2AT Solicitors to the Company Memery Crystal LLP 165 Fleet Street London EC4A 2DY Auditors and reporting accountants Grant Thornton UK LLP, 30 Finsbury Square, LONDON, EC2A 1AG Financial PR Advisers FTI Consulting, 200 Aldersgate Street, LONDON, EC1A 4HD Registrars Computershare Limited, The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ 98 DISPLACING DIESEL AFC Energy PLCOTHER INFORMATION This report was printed in the UK by Pureprint Group, a CarbonNeutral® company. This document was printed utilising pureprint® environmental printing technology and 100% vegetable-based inks. 99% of the dry waste and 95% of cleaning solvents associated with the production were recycled. Both Pureprint Group and the paper manufacturer are certified with the environmental standard ISO 14001 and have Forestry Stewardship Council (FSC®) certification. Photos by Andy Wilson Design by JacksonBone Ltd A F C E n e r g y P L C A n n u a l R e p o r t 2 0 2 3 AFC Energy PLC Unit 71.4 Dunsfold Park Stovolds Hill Cranleigh Surrey GU6 8TB United Kingdom www.afcenergy.com 

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