Vita Life Sciences Limited Annual Report 2016

FY2016 Annual Report · Vita Life Sciences Limited

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Velocys plc
115e Olympic Avenue
Milton Park
Abingdon
Oxfordshire
OX14 4SA

Company Number: 05712187
www.velocys.com

Annual report and accounts 2016
Developing a platform for growth

3 Velocys Annual report and accounts 2016

Velocys
Velocys is the Company at the forefront of smaller scale gas-to-liquids
(GTL). It has a leadership position in connecting stranded and low value
feedstocks, such as natural gas, landfill gas or biomass, with markets
for premium products, such as renewable diesel, jet fuel and waxes.
With its partners, Velocys is focused on delivering the most economically-
compelling conversion solution; a fully integrated offer that can be
deployed repeatedly to achieve scale.

Developing a platform for growth
2016 has been an immensely important year for us.
Our significantly increased involvement and operational
control in the ENVIA Oklahoma plant has been critical to
achieving first product there. We continue to transform
the Company from being purely a technology provider to
one with solid in-house experience in project governance,
and GTL plant engineering and operations capabilities.

Highlights

ENVIA – involvement
January 2016 onwards

Greater equity stake and management
control in the project for Velocys after a
US$2.6m equity contribution and US$9.3m
secured loan facility were made available
to ENVIA. Key leadership role for Velocys in
the commissioning, start-up and operation
of the plant.

ENVIA – milestones
September 2016

Plant construction complete.

February 2017 (post-period end)

Production of first Fischer-Tropsch product.

Read more on risk
management on page 27

*Resigned 25 April 2017.

This committee reviews, inter-
alia, the performance of Executive
Directors and sets the scale and
structure of their remuneration
and the basis of their service
agreements, having due regard
to the interests of shareholders.
The committee also determines
the allocation of share options to
Executive Directors. No director has
a service agreement exceeding one
year. Under its terms of reference, no
director is permitted to participate
in decisions concerning his or her
own remuneration.

Read the Directors’
remuneration report on pages

The committee meets at least twice a
year, and among its duties it reviews
the composition of the Board and
its succession planning, the Board
evaluation process and the findings
from recent evaluations, director
performance and recommendations
for re-elections at the AGM,
and considerations of director
independence under the Code.

Introduction
Companies whose securities are traded
on the AIM market of The London Stock
Exchange are not required to comply with
the principles and provisions of the UK
Corporate Governance Code 2016 (“Code”).
However, the Board has determined that
Velocys should maintain high standards
of corporate governance and, whilst not
complying fully with the Code including the
full disclosure requirements, has taken
steps to adopt the underlying principles of
the Code in so far as the Board considers
these to be appropriate given the size of
the Company and the nature of its current
operations. The information required under
Disclosure Guidance and Transparency
Rule 7.2.6 is included in this report.

Board of directors
Independence
Pierre Jungels has served more than three
consecutive three year terms of office.
However, the Board considers that he
makes a significant contribution to the
Company and that he has retained his
independence of character and judgement
notwithstanding his long-term relationship
with the Company.

The Board regards each of the other
Non-Executive Directors as being fully
independent. In accordance with Code
Provision B.7.1, resolutions will be proposed
at the forthcoming Annual General Meeting
for the re-appointment of all directors.

Avoidance of conflicts of interest
The Company has a procedure for the
disclosure, review, authorisation and
management of directors’ conflicts of
interest and potential conflicts of interest
in accordance with the provisions of the
Company’s Act 2006. In deciding whether
to authorise a conflict or potential conflict,
the directors must have regard to their
general duties under the Companies Act
2006. The authorisation of any conflict
matter, and the terms of authorisation are
subject to determination by the Board and
regularly reviewed.

The Board and its committees
The Board is responsible to shareholders
for setting the Company’s strategy and
overseeing its execution, and for the overall
management, control and performance of
the Velocys business. It delegates certain
responsibilities to designated committees,
as set out above. The committees’ terms of
reference are reviewed annually against
regulatory requirements and current best
practice. Information on the work of the
three Board committees is set out above.

The Corporate governance
report continues on page

Division of responsibility
The roles of the Chairman and the Chief
Executive are separated, with clear
written guidance to support the division
of responsibilities. The Chairman is
principally responsible for leadership
and effectiveness of the Board, setting
the Board agenda, ensuring adequacy
of information flow to the Board and
adequacy of consideration of strategic
issues, and promoting a culture of
openness of debate at Board level
and between directors and the senior
management team. The Chief Executive is
primarily responsible for the management
of the business and implementation of
the Company’s strategy and policies;
maintaining a close working relationship
with the Chairman; and leading the senior
management team.

Since January 2015, Julian West has acted
as Senior Independent Director, providing
a strong and skilled sounding board for the
Chairman and serving as an intermediary
for the other directors as necessary. In
addition, he is available to shareholders to
air concerns that have not been addressed
through other formal channels.

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22 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 23
Velocys Annual report and accounts 2016 23

Our Board of directors
The Board includes individuals with a deep knowledge of oil
and gas markets and industry contacts at the highest level.

Chairman & Executive Board

Name Dr Pierre Jungels, CBE
Role Chairman
Skills and experience
Pierre is an oil industry veteran, with over
30 years’ experience – 12 of which were spent
at main board level, including appointments
as Chairman of Rockhopper Exploration plc,
Chief Executive of Enterprise Oil plc, Executive
Director of PetroFina, and Managing Director
of British Gas. He also currently holds a non-
executive directorship at Baker Hughes Inc.
Pierre is a certified engineer and has a PhD in
geophysics and hydraulics from the California
Institute of Technology. He was twice President
of the Institute of Petroleum.

Name David Pummell
Role Chief Executive Officer
Skills and experience
With over 30 years of energy and oil industry
experience, David joined Velocys from ACAL
Energy Ltd, a private equity backed fuel cell
technology company, where he was CEO.
Prior to this, David was CEO of MAPS Technology
Ltd, where he successfully commercialised
the technology leading to its subsequent
acquisition by GE, before becoming CEO of
Ceres Power Group plc, a developer of fuel cell
micro combined heat and power (CHP) products.
He began his career at BP as a chemical engineer
before going on to hold a number of executive
positions across the downstream business,
including petrochemical manufacturing,
supply chain, new business start-ups and
a number of senior business and functional
management roles during his 22-year tenure.

Name Susan Robertson
Role Chief Financial Officer
Skills and experience
Susan came to Velocys from the BOC Group
where she had held various senior-level financial
management and business development
positions since 1990. Susan helped to set up and
then, from 2003 to 2006, served as Vice President
and CFO of Japan Air Gases (JAG), a joint venture
between BOC Group and Air Liquide. Prior to
taking up her position with JAG, she held finance
positions with BOC in Japan, the UK and globally,
as well as strategic and business development
roles in the UK. Susan has an honours degree
in economics from Cambridge University and is
a chartered accountant (FCA) having originally
trained with Arthur Andersen in London.

Name Dr Paul F. Schubert
Role Chief Operating Officer
Skills and experience
Paul has 35 years of experience in the
petrochemical and natural gas industry. He has
held various technical and general management
roles with SGS Group, Syntroleum, Catalytica,
Phillips Petroleum, and Engelhard. In these
positions he was responsible for day-to-
day operations, process development and
commercialisation, plant design, and asset
integrity management.

Paul is the inventor or co-inventor of 16 US
patents and is the author of over 40 publications.
He holds a PhD in Inorganic Chemistry from the
University of Illinois, and a BS in Chemistry from
the University of Arkansas.

Non-Executive Board

Committee key

Audit and Risk Committee

Remuneration Committee

Nominations Committee

Chairman of Committee

Sector experience

Oil, gas and petrochemicals
Banking and finance
Energy
Engineering
Chemicals

Name Julian West
Role Senior Independent Director
Skills and experience
Julian brings over forty years’ experience of
energy policy, in both the private and public
sectors, and has broad expertise in international
politics, privatisation, energy economics, and
regulation of energy companies. Until 2008,
he was a Senior Director at Cambridge Energy
Research Associates (CERA), leading the firm's
oil teams. Before joining CERA in 1996, Julian
was an executive and main Board Director at
Enterprise Oil plc, where he was responsible
for the company's planning and business
development. Previously, at the UK Department
of Energy (1974-83), he focused on oil and
energy policy and financial control and, under
different administrations, served as Principal
Private Secretary to a Minister of State and
three Secretaries of State.

Name Sandy Shaw
Role Non-Executive Director
Skills and experience
Sandy has nearly 40 years of experience in
the oil and gas industry. From 2008 until its
take-over in 2013 Sandy was an Executive
Director Corporate & Commercial, and Company
Secretary of Valiant Petroleum PLC, a company
of which she was a founder and initially
a Non-Executive Director. She has held senior
executive positions as group legal counsel and/
or commercial director for numerous companies
including Consort Resources, LASMO PLC
(where she was also inter alia President of
LASMO USA), Esso Petroleum, Marathon Oil
and Mobil. Sandy has extensive oil and gas M&A
experience, has overseen numerous material
private equity subscriptions and led a £200m
trade sale through to final negotiations. She has
worked as a consultant to several oil and gas
companies, as well as two UK law firms.

Name Ross Allonby
Role Non-Executive Director
Skills and experience
Ross brings considerable experience in the
banking and finance sector to Velocys. He is
a Founder, Managing Partner and CEO/CIO of
First River Capital Partners LLP, an integrated
advisory, origination, structuring and investment
management business providing companies in
emerging markets with debt financing solutions.

He was formerly Head of Emerging Markets
(EM) Credit Trading at Bank of America Merrill
Lynch, responsible for EM direct lending, loans,
structured credit trading, EM special situations,
EM distressed/high yield and EM flow trading.
Prior to joining Merrill Lynch, he was a Director
in the Capital Markets Group of Standard
Bank, London, and had previously been a VP
at Goldman Sachs.

24 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 25

Strategic reportGovernanceFinancial statementsCorporate governance (continued)

The Corporate governance
report continues from page

The Board and its committees (continued)
Meetings
The Board meets formally at least six
times a year to set the overall direction
and strategy of the Company, to review
operating and financial performance and to
consider and advise on senior management
appointments. The Board also monitors
and approves financial policy and budgets,
including capital expenditure.

Directors receive briefing papers in
advance of meetings – a consolidated
CEO’s report encompassing all areas
of the business, including health and
safety information, status updates
on project development and special
projects, competitor activity and key
issues facing the Company; and a CFO’s
report, which sets out performance
against budget during the period since
the previous meeting. Open dialogue is
encouraged and all directors have the
opportunity to challenge and seek further
information or clarification as appropriate.
All key operational decisions are subject
to Board approval.

In addition to the scheduled Board
meetings detailed above, a further three
meetings in 2016, which were held at
short notice to consider specific matters,
were attended by all directors, apart from
Ross Allonby who was unable to attend
one meeting.

Reports by committee
The minutes of the Audit & Risk,
Remuneration and Nomination Committees
are circulated to the Board. The committee
chairs also report to the Board on the
outcome of committee meetings at the
subsequent Board meeting.

Performance evaluation
This year’s evaluation of the Board, its
committees and individual directors
has been carried out by the Company
Secretary, taking the form of individual
interviews with each director, and
comprehensive questionnaires, which
provided all directors with an opportunity
to comment on Board and committee
procedures. A performance evaluation of
the Chairman has been carried out, led by
the Senior Independent Director, and taking
into account the views of all directors.
As in the previous year, the results of the
evaluation are being considered by the
Board and each committee in open session
and, where appropriate, actions arising
from such reviews will be implemented
and monitored.

Attendance at scheduled Board and committee meetings

Board

Audit & Risk
Committee

Remuneration
Committee

Nominations
Committee

Number of meetings
held in 2016

Attendance* by:

Pierre Jungels

Ross Allonby

Mark Chatterji

David Pummell

Susan Robertson

Paul Schubert

Sandy Shaw

Julian West

Jan Verloop

100%

86%

100%

–

100%

–

100%

–

75%

–

100%

–

100%

75%

100%

–

100%

* The attendance percentage relates only to applicable meetings. Jan Verloop resigned from the Board in

September 2016.

Re-election
The Company’s Articles of Association
provide that directors are subject to
election by shareholders at the first
opportunity after their appointment,
and that one third of directors are subject
to retirement by rotation at each Annual
General Meeting. At the 2017 meeting,
all directors will once again stand for
re-election, continuing the practice
introduced in 2016.

Company Secretary
The Company Secretary, through the
Chairman, is responsible for advising
the Board on governance matters,
and for ensuring that Board procedures
are followed and that applicable
rules and regulations are complied
with. All directors have access to the
advice and services of the Company
Secretary. An agreed procedure exists
for directors in the furtherance of their
duties to take independent professional
advice. During 2016, no director sought
independent legal advice pursuant to
the policy.

Relations with shareholders
The Board considers effective
communication with shareholders to be
very important, and encourages regular
dialogue with investors. Directors regularly
attend meetings with shareholders and
analysts throughout the year, and the
Board responds promptly to questions
received. Shareholders will be given
at least 21 days’ notice of the Annual
General Meeting, at which they will have
the opportunity to discuss the Company’s
developments and performance.

The Company’s website www.velocys.com
contains full details of the Company’s
business activities, as well as press
releases and other details. It links to the
London Stock Exchange website for share
price details, share trading activities and
graphs, as well as Regulatory News Service
(RNS) announcements.

Maintenance of a system of internal
controls
The directors have overall responsibility
for ensuring that the Company maintains
a system of internal control to provide
them with reasonable assurance that the
assets of the Company are safeguarded
and that shareholders’ investments are
protected. The system includes internal
controls appropriate for a Company of
the size of Velocys, and covers financial,
operational, compliance (including health
and safety) and risk management. Such
systems are designed to manage, rather
than eliminate, the risk of failure to
achieve business objectives; any system
can provide only reasonable, and not
absolute, assurance against material
misstatement or loss. The process in
place for reviewing Velocys’ systems of
internal control includes procedures
designed to identify and evaluate failings
and weaknesses, and, in the case of any
categorised as significant, procedures exist
to ensure that necessary action is taken to
remedy the failings.

The Board has considered its policies with
regard to internal controls as set out in
the Code and undertakes assessments
of the major areas of the business and
methods used to monitor and control them.

In addition to financial risk, the review
covers operational, commercial, regulatory
and health and safety risks. The risk review
is an ongoing process with reviews being
undertaken on a regular basis.

The key procedures designed to provide
an effective system of internal controls
that are operating up to the date of
sign-off of this report are set out below.

Control environment
There is an organisational structure with
clearly defined lines of responsibility and
delegation of accountability and authority.

Risk management
The Company employs directors and senior
personnel with the appropriate knowledge
and experience for a business engaged
in activities in its field of operations, and
undertakes regular risk assessments
and reviews of its activities. During 2016
the committee had two members,
Mark Chatterji and Ross Allonby, who have
recent and relevant financial experience.
The committee keeps under annual
review whether an internal audit function
should be established. Although this is not
considered necessary at the present time
given the size of the Company, this decision
will be reviewed as the operations of the
Company develop.

In its approach to risk management the
committee considers the complexity of
the transaction of building GTL plants,
which involves a large number of possible
stakeholders – asset holder, project
developer, EPC, financing party(ies),
technology licensors and offtake partners.
The risks associated with each of these
parties, and the relationship that Velocys
has with each one, are analysed to identify
areas of potential risk. Additionally the
committee considers risks that are beyond
the Company’s control, but against which
it can take mitigating action. These include
market risk and risk from competitors.

The Audit & Risk Committee reviews all of
the Company’s principal risk management
policies and the ongoing development of a
Company risk register.

Details of risks to the business that the
Board considers to be potentially material
are set out in the Strategic report on pages
18 to 21 and note 28. The risks posed by
the UK Brexit vote and the US presidential
election have been considered in the
risk assessment process and, where
appropriate, their impacts reflected in
other relevant risks, rather than being
presented as a standalone risk.

The risks presented are the principal risks
that the Company believes it currently
faces. However, additional risks, of
which the Company is aware, or risks
the Company currently considers to be
less significant, could have a material
adverse impact. The risks included are
not presented in order of priority.

Financial information
The Company prepares detailed budget
and working capital projections,
which are approved annually by the Board
and are maintained and updated regularly
throughout the year. Detailed management
accounts and working capital cash flows are
prepared on a monthly basis and compared
to budgets and projections to identify any
significant variances.

The Audit & Risk Committee has considered
the integrity of the Company’s 2016
financial statements and reviewed the
appropriateness of its critical accounting
policies and the judgements made in
applying them. The year-end financial
statements were reviewed and discussed
with PwC. In addition, the interim financial
statements were reviewed by the
committee. The committee considered,
among others, the following specific
matters:
Carrying value of Goodwill and other
Intangible assets; and investment
in subsidiaries.
Going concern.
Accounting for ENVIA as an associate.

Audit review
The Audit & Risk Committee has discussed
PwC’s audit process, and the findings from
the audit of the 2015 financial year were
reviewed, along with feedback from the CFO
on the effectiveness of the external audit
process. The committee reviewed the quality
and cost effectiveness of the external audit,
and the independence and objectivity of
the auditors. It obtained confirmation from
PwC that their independence and ethics
policies complied with FRC requirements,
and that they remain independent and
maintain internal safeguards to ensure
their objectivity. No contractual obligations
exist that restrict the Company’s choice
of external auditor and the committee
is satisfied that the external auditor
remains independent.

The committee has established policies
determining the non-audit services that
the external auditors can provide and
the procedures required for approval of
any such engagement. Further details of
fees paid to PwC for both audit and non-
audit work can be found in note 11 to the
financial statements.

Management of liquid resources
The Board is risk averse when investing the
Company’s surplus cash. The Company’s
treasury management policy is reviewed
periodically, and sets out strict procedures
and limits on how surplus funds
are invested.

Review of corporate governance
disclosures
The Board has voluntarily complied with
those key principles of the Code in so far as
they are considered appropriate given the
size of the Company and the nature of its
operations. These have not been formally
reviewed by the Company’s auditors.
The auditors’ responsibility extends only to
reading this report as a part of the Annual
report and accounts and considering
whether it is materially consistent with
the audited financial statements.

26 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 27

Strategic reportGovernanceFinancial statementsDirectors’ report
The directors present their report and the audited consolidated
financial statements for the year ended 31 December 2016

Company
Velocys plc is the parent of the Company. It is a public limited company incorporated and registered in England and Wales. The registered
office address is given on the information page inside the back cover of this document.

Directors’ qualifying third-party indemnity provision
The Company maintains directors’ qualifying third-party indemnity insurance to provide cover for legal action against its directors.
This has been in place throughout the year and remains in place at the date of this report.

Future developments
The Board aims to pursue its corporate strategies as detailed in the Strategic report on pages 1 to 21.

Dividends
The Directors do not recommend any dividend for the year ended 31 December 2016 (2015: nil).

Research and development
The Company’s R&D activity will extend to joint development programmes with technology partners (such as TRI). Details of R&D expense
and capitalised R&D are in notes 10 and 17.

Donations
The Company made no political donations during 2016.

Post-balance sheet events
Additional funding by the Company to ENVIA Energy, which was announced in February 2016, is described in the Strategic report on page 17,
and in note 20 along with other post-balance sheet events.

Directors
The directors of Velocys plc as at 31 December 2016, who served throughout the year and up to the date of approval of the financial
statements, unless otherwise stated, were as follows.
Pierre Jungels (Non-Executive Chairman)
David Pummell (Chief Executive Officer) – appointed 6 January 2017
Susan Robertson (Chief Financial Officer)
Paul Schubert (Chief Operating Officer)

Julian West (Senior Independent Director)
Jan Verloop (Non-Executive Director) – resigned 21 September 2016

Sandy Shaw (Non-Executive Director)
Mark Chatterji (Non-Executive Director) – resigned 25 April 2017
Ross Allonby (Non-Executive Director)

Whilst the Company’s Articles of Association require that all directors are subject to election by shareholders at the first opportunity after
their appointment, and to re-election thereafter at intervals of not more than three years, the directors have decided that, in line with best
corporate governance practice, at the 2017 Annual General Meeting all of the directors will again retire and offer themselves for re-election,
as they did in 2016.

Directors’ interests
The directors who held office at 31 December 2016 had the following interests in the shares of parent company undertakings (as recorded
in the Register of Directors’ Interests and including those of the spouse or civil partner and children under 18).

Financial instruments
The Company’s financial instruments are detailed in note 28. Financial risks, and exposure and risk management policies and objectives
are detailed in the Strategic report on page 21, and in note 28.

Substantial shareholdings
The Company was notified of the following holdings of 3% or more of the issued share capital of Velocys plc as at 1 May 2017.

Ervington Investments Limited
Lansdowne Partners
Invesco Asset Management
Henderson Global Investors
Hargreaves Lansdown Asset Management

Number of
shares held

42,442,443
26,631,808
23,600,000
17,593,137
5,472,676

Percentage
of issued
share capital

29.48%
18.50%
16.39%
12.22%
3.80%

Greenhouse gas emissions
Details of the Company’s greenhouse gas emissions are included in the Strategic report on page 17.

Annual General Meeting
The Annual General Meeting of the Company will be held at Milton Park Innovation Centre, 99 Park Drive, Milton Park,
Oxfordshire OX14 4RY on Thursday 22 June 2017.

Auditors and disclosure of information to auditors
Each of the persons who is a director at the date of approval of this report confirms that:
So far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware.

The Director has taken all the steps that he / she ought to have taken as a director in order to make himself / herself aware of any
relevant audit information and to establish that the Company’s auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.

Corporate governance
The Company’s statement on corporate governance is available on pages 22 to 27.

Approved by the Board and signed on its behalf by:

Susan Robertson
Pierre Jungels
Julian West
Sandy Shaw
David Pummell
Paul Schubert
Mark Chatterji
Ross Allonby

Directors’ share options and service contracts are detailed in the Directors’ remuneration report.

Velocys plc Ordinary shares

31 December
2016

31 December
2015

304,874
223,031
75,000
17,758
–
–
–
–

David Pummell
Chief Executive Officer
15 May 2017

28 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 29

Strategic reportGovernanceFinancial statements

Directors’ remuneration report

Introduction
The Remuneration Committee is resolute in maintaining high standards of corporate governance and has taken steps to comply with
the principles of best practice in so far as it can be applied practically given the size of the Company. The Company is listed on AIM and is
therefore not required to comply with the following regulations: disclosure requirements of the Directors’ Remuneration Report Regulations
2013; the UKLA Listing Rules; the disclosure provisions under schedule 8 to SI 2008/410 of the large and medium-sized companies and
groups (accounts and reports) regulations 2008. Consequently, certain disclosures contained in these regulations are not included below.

Unaudited information
Remuneration Committee
The following served as members of the Committee throughout the year ended 31 December 2016.
Sandy Shaw (Chair)
Julian West
Ross Allonby

The Committee’s constitution and operation is compliant with the provisions of the Code on Corporate Governance. In determining
remuneration policy for Executive Directors, the Committee takes into consideration both the Code and the guidelines published
by The Investment Association (formerly the Association of British Insurers).

Remuneration policy for Executive Directors
The remuneration policy has been designed to ensure that Executive Directors receive incentives and rewards appropriate to their
performance, responsibility and experience. In making its assessment, the Remuneration Committee seeks to align the policy with
the interests of the shareholders.

Key features of the policy are:
Setting salaries to be competitive relative to the experience of the individual and the nature, complexity and responsibilities of their

work in order to attract and retain management of the required quality.

Linking individual remuneration packages to the Company’s performance through bonus schemes and long-term share-based plans.
Providing employment and post-retirement benefits in accordance with standard policies of the Company.

The following chart illustrates the proportion of fixed and variable elements in the remuneration package, assuming target and stretch
performance is achieved.

Maximum

Target

Minimum

Base

Bonus

LTIP

100

150

200

250

300

350

400

450

As % of base salary

30 Velocys Annual report and accounts 2016

Remuneration of Executive Directors
Executive Directors’ remuneration is considered annually. In addition, the Remuneration Committee undertakes periodically
a comprehensive review using external advisors. At the start of 2016, the arrival of the new CEO necessitated a review of the overall
remuneration package for the Executive Directors. Current remuneration is based on the following principles.

Base salary
The base salary is reviewed annually at the beginning of each year. The review process undertaken by the Remuneration Committee
considers the ongoing development of the Company, the contribution of the individual, the need to retain and motivate employees,
and benchmark remuneration information from comparable organisations.

Annual performance incentive
All Executive Directors are eligible, at the discretion of the Remuneration Committee, for an annual bonus. The target bonus award for each
individual is based on a percentage of base salary, which, for the year commencing 1 January 2016, was 75%. The maximum award for
stretch target performance is twice the target amount. The Remuneration Committee sets performance targets for bonus awards at the
beginning of each year. Awards are determined by both the performance of the individual and the Company as a whole at the end of each
year. The performance targets for the Company comprise measures of financial, technical and business development goals. For 2016,
the Remuneration Committee decided that no bonus would be awarded.

Long-term Incentive Plan (LTIP)
The committee believes that the LTIP scheme should provide to Executive Directors appropriate incentivisation, focus and reward for
achievement, that is aligned with shareholder interests, and that includes relevant, demanding performance targets. The last LTIP scheme
that the Company put in place was in 2014 and, due to the change in CEO and the intention to review the Company strategy, the committee
decided not to make an award under this scheme during 2016. Instead, the committee intends to introduce a new equity-based incentive
scheme in 2017. It may, in the allocation of such awards, take into consideration the fact that no 2016 awards were made.

Pensions and other benefits
The Company contributes to individuals’ defined contribution pension plans in line with the Company-wide schemes in place.
For UK-based employees, the Company contributions are 7% of base salary. For US-based employees, the contributions are 3%
of pensionable pay (which includes bonus) up to the maximum allowable under US pensions law.

Other benefits provided are life insurance, private medical insurance and relocation allowances where applicable, in line with the
Company’s standard policies.

Directors’ service contracts
Each of the Executive Directors has a service contract with a notice period of six months.

Remuneration policy for Non-Executive Directors
The remuneration of Non-Executive Directors is determined by the executive members of the Board in consultation with the Chairman,
based on a benchmark review of current practices in similar companies. The Non-Executive Directors are paid a fixed fee and do not
receive any pension payments, bonus or other benefits.

Non-Executive Directors are appointed for an initial three-year term and are typically expected to serve for two three-year terms.
Either the Non-Executive Director or the Company can terminate the contract with three months’ written notice; the Chairman’s notice
period is also three months. The Company may invite a Non-Executive Director to serve for further periods after the expiry of two three-
year terms subject to a particularly rigorous review of performance, and taking into account the need for progressive refreshing of the
Board. Under the Company’s Articles of Association, all directors are required to stand for re-election by shareholders on appointment
and thereafter at least once every three years. However, in line with best practice, the Company decided in 2016 to put all Non-Executive
Directors up for re-election at its Annual General Meeting (AGM) and intends to do the same at the 2017 AGM.

Proposed ratification of breach of Article 92
During the three financial years ended 31 December 2016, fees were paid to the Chairman and other Non-Executive Directors in excess
of the aggregate limit of £250,000 specified in Article 92 of the Articles adopted on 22 June 2011. This amount was set at the formation
of the Company in 2006 and although the Articles allow this amount to be amended by ordinary resolution, and despite the growth of the
Company since this point, no subsequent amendment has been made. The aggregate amount of these fees, as set out in the Company’s
Annual report and accounts for the years ended 31 December 2016 and 2015 is as follows.

Aggregate fees paid to Chairman and Non-Executive Directors

2016
£

2015
£

268,500

271,853

At the Board meeting in September 2016, in light of the breach of Article 92, the Non-Executive Directors voluntarily agreed that they
would each accept a cut in fees to reduce the annual cost of fees to within the limit of £250,000. In addition, a resolution will be proposed
at the 2017 AGM to approve and ratify any payments to the Chairman and other Non-Executive Directors out of the funds of the Company
by way of fees for their services in excess of the amount specified in Article 92 of the Articles as though the directors had been authorised
pursuant to Article 92 of the Articles to make payments of such amounts.

Further information is set out in the Notice of Annual General Meeting, which is being published together with this Annual report
and accounts.

Velocys Annual report and accounts 2016 31

Strategic reportGovernanceFinancial statements

Directors’ remuneration report (continued)

Audited information
Directors’ remuneration
Aggregate emoluments for current and former directors in 2016 totalled £1,085,137 (2015: £1,645,154), and Company pension contributions
were £41,760 (2015: £31,734).

The directors who held office at 31 December 2016 received the following remuneration in relation to the year ended 31 December 2016.

Name of director

Executive
David Pummell
Susan Robertson
Paul Schubert
Non-Executive
Pierre Jungels
Julian West
Mark Chatterji
Ross Allonby
Sandy Shaw

Salary and
fees1
£

Other
benefits2
£

2016
Total
£

2016
Pension
£

2015
Total
£

2015
Pension
£

261,263
218,000
238,778

78,000
43,875
43,875
43,875
43,875

27,332
770
28,237

–
–
23,076
–
–

288,595
218,770
267,015

78,000
43,875
66,951
43,875
43,875

18,550
15,260
7,950

–
–
–
–
–

–
377,878
330,757

80,000
45,000
12,188
3,750
45,000

–
15,071
5,201

–
–
–
–
–

Aggregate emoluments and pension contributions

971,541

79,415

1,050,956

41,760

894,573

20,272

All salaries and fees are denominated in pounds sterling except for that of Paul Schubert, who is based in the US and paid in dollars. His remuneration has been
converted from dollars to pounds at the exchange rate on the date of recognition of the cost. The average rate used for translation of his 2016 salary was £1= $1.36
compared to £1= $1.53 in 2015.

2 Other benefits include medical cover for Executive Directors and, in the case David Pummell, a joining allowance in lieu of car allowance. In the case of Paul Schubert,
benefits include costs related to his relocation to Houston. In the case of Mark Chatterji, who is located in the US, other benefits include the cost of his travel from the
US to the UK for Board meetings along with associated expenses that are paid by the Company.

Directors’ share options
Aggregate emoluments disclosed above include amounts paid through the employee benefit trust (EBT) in relation to share options
exercised. In 2016 no payments were made to serving directors (2015: none) and a payment of £13,300 was made in respect of an
exercise by the former CEO under his 2015 settlement agreement.

Details of all directors’ shareholdings are disclosed on page 28 in the Directors’ report.

Details of options held by the directors at 31 December 2016 are as follows.

Name of director

Susan Robertson
EMI
Bonus 2008
Bonus 2010
ELTIP 2009
ELTIP 2011
ELTIP 2012
ELTIP 2012
ELTIP 2013
ELTIP 2013
ELTIP 2014
ELTIP 2014
ELTIP 2015
ELTIP 2015
ELTIP 2015
ELTIP 2015

At 31
December
2015

62,893
42,105
37,655
105,000
390,625
365,000
273,803
502,930
125,732
440,316
110,079
56,742
189,139
47,425
158,083

Total

2,907,527

Granted

Exercised

Lapsed

At 31
December
2016

Exercise
price (£)

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

–

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

–

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

–

62,893
42,105
37,655
105,000
390,625
365,000
273,803
502,930
125,732
440,316
110,079
56,742
189,139
47,425
158,083

2,907,527

1.59
0.01
0.01
0.01
0.01
0.49
0.49
1.59
1.59
1.64
1.64
Nil
Nil
Nil
Nil

Earliest
date of
exercise

29/10/10
31/03/09
20/03/11
31/01/12
20/09/11
01/01/15
01/01/12
01/01/16
12/04/13
01/01/17
01/04/14
01/01/17
01/01/17
01/01/18
01/01/18

Exercisable
at 31
December
2016

Date of
expiry

01/04/18
31/03/19
20/03/21
21/11/19
20/09/21
01/02/22
01/02/22
12/04/23
12/04/23
01/04/24
01/04/24
26/02/25
26/02/25
26/02/25
26/02/25

62,893
42,105
37,655
105,000
390,625
365,000
273,803
502,930
125,732
–
110,079
–
–
–
–

2,015,822

Name of director

Paul Schubert
EMI
ELTIP 2012
ELTIP 2013
ELTIP 2013
ELTIP 2014
ELTIP 2014
ELTIP 2015
ELTIP 2015
ELTIP 2015
ELTIP 2015

At 31
December
2015

207,894
119,000
502,930
41,911
336,711
56,119
43,344
144,482
36,227
120,758

Total

1,609,376

Granted

Exercised

At 31
December
2016

Lapsed

Exercise
price (£)

–
–
–
–
–
–
–
–
–
–

–

–
–
–
–
–
–
–
–
–
–

–

–
–
–
–
–
–
–
–
–
–

–

207,894
119,000
502,930
41,911
336,711
56,119
43,344
144,482
36,227
120,758

1,609,376

0.92
0.49
1.59
1.59
1.64
1.64
Nil
Nil
Nil
Nil

Earliest
date of
exercise

04/10/14
01/01/15
01/01/16
01/01/15
01/01/17
01/01/15
01/01/17
01/01/17
01/01/18
01/01/18

Exercisable
at 31
December
2016

Date of
expiry

04/10/21
01/02/22
12/04/23
12/04/23
01/04/24
01/04/24
26/02/25
26/02/25
26/02/25
26/02/25

207,894
119,000
502,930
41,911
–
56,119
–
–
–
–

927,854

No options were exercised by acting directors during 2016. The total charge for share-based payments during the year in respect of
directors was £357,000.

Shareholding requirements
The Company has not previously had in place guidelines covering shareholdings of Executive Directors. It is intended that the new
equity-based incentive scheme, to be introduced in 2017, will include such guidelines designed to ensure that Executive Directors
retain an interest in the Company.

Former directors
Jan Verloop, who was a member of the Board at 1 January 2016 and resigned during the year, received the following remuneration.

Name of director

Jan Verloop

Salary
and fees
£

34,181

Other
benefits
£

2016
Total
£

2016
pension
£

2015
Total
£

2015
pension
£

–

34,181

–

44,666

–

Share price
The market price of the parent company’s shares as at 31 December 2016 was 37p (2015: 42p) and the range during the year was 25p to
44p (2015: 34p to 169p). Details of options and the cost of share-based payments are given in note 15.

32 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 33

Strategic reportGovernanceFinancial statements

Statement of directors’ responsibilities
in respect of the financial statements

Independent auditors’ report
to the members of Velocys plc

The directors are responsible for preparing the Annual report and the financial statements in accordance with applicable law
and regulation.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared
the financial statements for the parent company (Velocys plc) and the Company (Velocys plc and its subsidiaries) in accordance with
International Financial Reporting Standards (IFRSs) as adopted by the European Union. 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 of the Company and of the parent
company, and of the profit or loss of the Company for that period. In preparing the financial statements, the directors are required to:
Select suitable accounting policies and then apply them consistently.
State whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and

explained in the financial statements.

Make judgements and accounting estimates that are reasonable and prudent.
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 of Velocys plc and enable them to ensure
that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006 and, as regards the Company
financial statements, Article 4 of the IAS Regulation.

The directors are also responsible for safeguarding the assets of the Company and of Velocys plc and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors consider that the Annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company’s performance, business model and strategy.

Each of the directors, whose names and functions are listed in the Directors’ report confirm that, to the best of their knowledge:

The financial statements of the Company and of Velocys plc, which have been prepared in accordance with IFRSs as adopted by the
European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company.
The Strategic report includes a fair review of the development and performance of the business and the position of the Company and
parent company, together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

David Pummell
Chief Executive Officer
15 May 2017

Report on the financial statements
Our opinion
In our opinion:
Velocys plc’s consolidated financial statements (“Velocys”) and parent company financial statements (the “financial statements”) give
a true and fair view of the state of Velocys’ and of the parent company’s affairs as at 31 December 2016 and of Velocys’ loss and Velocys’
and the parent company’s cash flows for the year then ended;

Velocys’ financial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”)

as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union
and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Emphasis of matter – Velocys and parent company - going concern
In forming our opinion on Velocys’ financial statements and the parent company financial statements, which is not modified, we have
considered the adequacy of the disclosure made in note 2 to the financial statements concerning Velocys’ and the parent company’s
ability to continue as a going concern. As outlined in note 2 to the financial statements, the directors' forecasts are dependent on key
assumptions in relation to the ENVIA Oklahoma project startup reaching full operational capacity within 2017, the costs of ongoing
development projects, coupled with Velocys reducing certain existing overhead costs, and Velocys raising additional funding by the
second quarter of 2018. These conditions, along with the other matters explained in note 2 to the financial statements, indicate the
existence of a material uncertainty which may cast significant doubt about Velocys’ and the parent company’s ability to continue as
a going concern. Velocys’ financial statements and the parent company financial statements do not include the adjustments that
would result if Velocys and parent company were unable to continue as a going concern.

What we have audited
The financial statements, included within the Annual report and accounts (the “Annual Report”), comprise:

the Consolidated statement of financial position and Velocys plc statement of financial position as at 31 December 2016;
the Consolidated income statement and Consolidated statement of comprehensive income for the year then ended;
the Consolidated statement of cash flows and Velocys plc statement of cash flows for the year then ended;
the Consolidated statement of changes in equity and Velocys plc statement of changes in equity for the year then ended; and
the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.

Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements.
These are cross-referenced from the financial statements and are identified as audited.

The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the
European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the
Companies Act 2006, and applicable law.

In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect
of significant accounting estimates. In making such estimates, they have made assumptions and considered future events.

Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:

the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.

In addition, in light of the knowledge and understanding of Velocys, the parent company and their environment obtained in the course
of the audit, we are required to report if we have identified any material misstatements in the Strategic report and the Directors’ report.
We have nothing to report in this respect.

Opinion on additional disclosures
Directors’ remuneration report
The parent company voluntarily prepares a Directors’ remuneration report in accordance with the provisions of the Companies Act
2006. The directors have requested that we audit the part of the Directors’ remuneration report specified by the Companies Act 2006 to
be audited as if the parent company were a quoted company.

In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies
Act 2006.

Other matters on which we are required to report by exception
Adequacy of accounting records and information and explanations received
Under the Companies Act 2006 we are required to report to you if, in our opinion:
we have not received all the information and explanations we require for our audit; or

adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received
from branches not visited by us; or
the parent company financial statements are not in agreement with the accounting records and returns.

34 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 35

We have no exceptions to report arising from this responsibility.

Strategic reportGovernanceFinancial statementsIndependent auditors’ report (continued)
to the members of Velocys plc

Consolidated income statement
for the year ended 31 December 2016

2016
£’000

2015
£’000

Before Exceptional
items
(note 4)

exceptional
items

Before Exceptional
items
(note 4)

exceptional
items

2,002
(1,275)

727
(25,483)
2,009

–
–

–
(1,204)
1,763

Total

1,445
(1,060)

385
(20,238)
2,768

Total

2,002
(1,275)

727
(26,687)
3,772

–
–

–
(2,809)
2,496

(313)

(17,085)

(22,747)

559

(22,188)

–

(313)
–
–

–

(313)
–

(306)

(17,391)
3,344
(26)

–

(22,747)
1,155
(53)

3,318

1,102

(14,073)
1,404

(21,645)
1,035

–

559
–
–

–

559
–

–

(22,188)
1,155
(53)

1,102

(21,086)
1,035

1,445
(1,060)

385
(17,429)
272

(16,722)

(306)

(17,078)
3,344
(26)

3,318

(13,760)
1,404

(12,356)

(313)

(12,669)

(20,610)

559

(20,051)

Note

7
8

Revenue
Cost of sales

Gross profit
Administrative expenses
Other income

Operating (loss) income
Share of loss of investments accounted for

using the equity method

(Loss) income before finance income
Finance income
Finance costs

Finance income, net

(Loss) income before income tax
Income tax credit

(Loss) income for the financial year attributable

to the owners of Velocys plc

Loss per share attributable

to the owners of Velocys plc

Basic and diluted loss per share (pence)

(8.62)

(8.84)

(14.52)

(14.13)

The notes on pages 45 to 74 are part of these consolidated financial statements.

Directors’ remuneration
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified
by law are not made. We have no exceptions to report arising from this responsibility.

Responsibilities for the financial statements and the audit
Our responsibilities and those of the directors
As explained more fully in the Statement of directors' responsibilities set out on page 34, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International
Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). Those standards require us to comply with the Auditing Practices Board’s
Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the parent company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.

What an audit of financial statements involves
We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures
in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement,
whether caused by fraud or error. This includes an assessment of:
whether the accounting policies are appropriate to Velocys’ and the parent company’s circumstances and have been consistently applied

and adequately disclosed;
the reasonableness of significant accounting estimates made by the directors; and
the overall presentation of the financial statements.

We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own
judgements, and evaluating the disclosures in the financial statements.

We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide
a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive
procedures or a combination of both.

In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report. With respect to the Strategic report and Directors’ report, we consider whether
those reports include the disclosures required by applicable legal requirements.

Sam Taylor (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Reading
15 May 2017

36 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 37

Strategic reportGovernanceFinancial statements

Consolidated statement of comprehensive income
for the year ended 31 December 2016

Consolidated statement of financial position
as at 31 December 2016

(Loss) income for the year

Other comprehensive income

Items that may be reclassified subsequently

to profit or loss if certain conditions are met

Foreign currency translation differences

Total comprehensive (expense) income for the year

2016
£’000

2015
£’000

Before Exceptional

exceptional
items

items
(note 4)

Before Exceptional
items
(note 4)

exceptional
items

Total

(12,356)

(313)

(12,669)

(20,610)

559

(20,051)

7,347

(5,009)

–

7,347

1,869

(313)

(5,322)

(18,741)

–

559

1,869

(18,182)

The notes on pages 45 to 74 are part of these consolidated financial statements.

Assets
Non-current assets
Intangible assets
Property, plant and equipment
Trade and other receivables
Available-for-sale investment
Investment in associate

Current assets
Inventories
Trade and other receivables
Current income tax asset
Derivative financial instruments
Short term investments – funds held on deposit
Cash and cash equivalents

Total assets

Liabilities
Current liabilities
Trade and other payables
Borrowings

Non-current liabilities
Trade and other payables
Borrowings

Total liabilities

Net assets

Capital and reserves attributable to owners of Velocys plc
Called up share capital
Share premium account
Merger reserve
Share-based payments reserve
Foreign exchange reserve
Accumulated losses

Total equity

Note

17
18
21
20
20

22
21

27
23
23

24
26

25
26

29
29

2016
£’000

34,035
5,637
325
–
5,865

45,862

1,461
811
854
537
–
18,744

22,407

68,269

(2,272)
(323)

(2,595)

(1,343)
(593)

(1,936)

(4,531)

63,738

1,438
149,275
369
15,843
7,065
(110,252)

63,738

2015
£’000

28,378
5,507
–
3,375
–

37,260

1,393
911
780
156
3,000
34,736

40,976

78,236

(7,380)
(288)

(7,668)

(1,327)
(759)

(2,086)

(9,754)

68,482

1,419
149,197
369
15,362
(282)
(97,583)

68,482

The notes on pages 45 to 74 are part of these consolidated financial statements.

The financial statements on pages 37 to 74 were approved by the Board of directors and authorised for issue on 15 May 2017.
They were signed on its behalf by:

Susan Robertson
Chief Financial Officer

Company number 05712187

38 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 39

Strategic reportGovernanceFinancial statements

Velocys plc statement of financial position
as at 31 December 2016

Consolidated statement of changes in equity
for the year ended 31 December 2016

Assets
Non-current assets
Investments in subsidiaries

Current assets
Trade and other receivables
Current income tax asset

Total assets

Current liabilities
Trade and other payables

Total liabilities

Net assets

Capital and reserves attributable to owners of Velocys plc
Called up share capital
Share premium account
Share-based payment reserve
Accumulated losses

Total equity

Note

29
29

2016
£’000

66,831

31
650

67,512

(72)

67,440

1,438
149,275
15,843
(99,116)

67,440

2015
£’000

126,289

32
600

126,921

(140)

126,781

1,419
149,197
15,362
(39,197)

126,781

The notes on pages 45 to 74 are part of these consolidated financial statements.

The Company has elected to take the exemption under Section 408 of the Companies Act 2006 not to present the parent company Income
statement and Statement of comprehensive income. The comprehensive loss for the parent company for the year was £59,919,000
(2015: loss £5,433,000), which included a £65,716,000 impairment of investment in subsidiary in 2016 (2015: £nil) see note 19.

The financial statements on pages 37 to 74 were approved by the Board of directors and authorised for issue on 15 May 2017.
They were signed on its behalf by:

Called up
share
capital
£’000

Share
premium
account
£’000

Share-based
payment
reserve
£’000

Merger
reserve
£’000

Foreign

exchange Accumulated
losses
£’000

reserve
£’000

Total
equity
£’000

Balance at 1 January 2015

1,419

149,225

369

13,220

(2,151)

(77,532)

84,550

Comprehensive income
Loss for the year
Other comprehensive income
Foreign currency translation differences

Total comprehensive expense

Transactions with owners
Share-based payments – value of employee services
Employee benefit trust reimbursement

Total transactions with owners

–

–
–

–

–
(28)

(28)

–

–
–

–

2,142
–

2,142

–

(20,051)

1,869

–

1,869

(20,051)

(18,182)

–
–

–

–
–

–

2,142
(28)

2,114

Balance at 1 January 2016

1,419

149,197

369

15,362

(282)

(97,583)

68,482

Comprehensive income
Loss for the year
Other comprehensive income
Foreign currency translation differences

Total comprehensive expense

Transactions with owners
Share-based payments – value of employee services
Proceeds from share issues
Employee option tax liability settled by the Company

Total transactions with owners

–

–
19
–

–

–
78
–

–

–
–
–

–

793
–
(312)

481

–

(12,669)

7,347

–

(12,669)

7,347

(5,322)

–
–
–

–

–
–
–

–

793
97
(312)

578

Balance at 31 December 2016

1,438

149,275

369

15,843

7,065

(110,252)

63,738

The notes on pages 45 to 74 are part of these consolidated financial statements.

Susan Robertson
Chief Financial Officer

Company number 05712187

40 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 41

Strategic reportGovernanceFinancial statements

Velocys plc statement of changes in equity
for the year ended at 31 December 2016

Consolidated statement of cash flows
for the year ended 31 December 2016

Balance at 1 January 2015

Comprehensive income
Loss for the year

Total comprehensive expense

Transactions with owners
Share-based payments – value of employee services
Employee benefit trust reimbursement

Total transactions with owners

Balance at 1 January 2016

Comprehensive income
Loss for the year

Total comprehensive income

Transactions with owners
Share-based payments – value of employee services
Proceeds from share issues
Employee option tax liability settled by the Company

Total transactions with owners

Balance at 31 December 2016

Share Share-based

Called up
share capital
£’000

premium
account
£’000

payment Accumulated
losses
£’000

reserve
£’000

Total
equity
£’000

1,419

149,225

13,220

(33,764)

130,100

–

–
–

–

–
(28)

(28)

–

2,142
–

2,142

(5,433)

–
–

–

(5,433)

2,142
(28)

2,114

1,419

149,197

15,362

(39,197)

126,781

–

–
19
–

–

–
78
–

–

793
–
(312)

481

(59,919)

–
–
–

–

793
97
(312)

578

1,438

149,275

15,843

(99,116)

67,440

The notes on pages 45 to 74 are part of these consolidated financial statements.

Note

Cash flows from operating activities
Operating loss before taxation
Depreciation and amortisation
Loss on disposal of property, plant and equipment
Loss on disposal of intangible assets
Impairment of intangible assets
Write-down of deferred consideration and deferred tax liability
Share-based payments
Loss on derivative financial instruments
Employee option tax liability settled by the Company
Changes in working capital (excluding the effects of exchange differences on consolidation)
– Trade and other receivables
– Trade and other payables
– Inventory

Cash consumed by operations
Tax credits received

Net cash used in operating activities

Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Equity investment in ENVIA
Loan to ENVIA
Interest received
Decrease in funds placed on deposit

Net cash generated from investing activities

Cash flows from financing activities
(Employee benefit trust reimbursement) net proceeds of issuance of ordinary shares
Proceeds from share issues
Interest paid
Decrease in borrowings

Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Exchange gains on cash and cash equivalents

Cash and cash equivalents at end of year

The notes on pages 45 to 74 are part of these consolidated financial statements.

2016
£’000

(17,085)
1,323
1
233
–
–
793
–
(312)

234
(6,004)
138

(20,679)
1,330

(19,349)

(291)
(356)
(1,903)
(295)
136
3,000

291

–
6
(26)
(314)

(334)

(19,392)
34,736
3,400

18,744

2015
£’000

(22,188)
1,277
5
383
1,473
(2,032)
2,142
279
–

(301)
(975)
(1,066)

(21,003)
2,031

(18,972)

(2,262)
(395)
(1,535)
–
401
25,083

21,292

(28)
–
(33)
(271)

(332)

1,988
31,693
1,055

34,736

42 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 43

Strategic reportGovernanceFinancial statements

Velocys plc statement of cash flows
for the year ended 31 December 2016

Notes to the financial statements

Cash flows from operating activities
Operating loss before taxation
Impairment of subsidiaries
Employee option tax liability settled by the Company
Changes in working capital (excluding the effects of exchange differences on consolidation)
– Trade and other receivables
– Intercompany balances
– Trade and other payables

Cash consumed by operations
Tax credit received

Net cash generated from operating activities

Cash flow from investing activities
Interest received

Net cash generated from investing activities

Cash flows from financing activities
(Employee benefit trust reimbursement) net proceeds of issuance of ordinary shares
Proceeds from share issues

Net cash used in financing activities

Net movement in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

The notes on pages 45 to 74 are part of these consolidated financial statements.

2016
£’000

(72,485)
65,716
(312)

(68)
6,066
1

(1,082)
1,070

(12)

–
6

–
–

–

2015
£’000

(8,956)
–
–

55
7,310
46

(1,545)
1,573

–

(28)
–

(28)

–
–

–

1. General information
Velocys plc is a company incorporated in England and Wales and domiciled in England. It operates through a number of subsidiaries
in the UK and the US, and collectively they are referred to in the financial statements as the “Company” or “Velocys”, with Velocys plc
as “Velocys plc” or the “parent company”. The nature of the Company’s operations and its principal activities are set out in the Strategic
report on pages 1 to 21 and the Directors’ report on pages 28 and 29.

The parent company is a public limited company listed on AIM.

2. Accounting policies
The principal accounting policies applied in the preparation of these consolidated and parent company financial statements are
summarised below. The policies have been consistently applied to each year presented unless otherwise stated.

Basis of preparation
The consolidated and parent company financial statements have been prepared in accordance with International Financial Reporting
Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRS Interpretations Committee (IFRS IC) Interpretations and
the Companies Act 2006 applicable to companies reporting under IFRS. The statements have been prepared under the historical cost
convention as modified by the revaluation of certain financial assets and liabilities (including derivative instruments) at fair value.

The preparation of financial statements to conform to IFRS requires the use of certain critical accounting estimates and the exercise
of management’s estimate in the application of the Company’s accounting policies. Areas involving a higher degree of judgement or
complexity, and areas where assumptions and estimates are significant to the financial statements are referenced in note 3.

Going concern
The financial statements have been prepared on the going concern basis, which assumes that the Company will have sufficient funds
available to enable it to continue to trade for the foreseeable future. The nature of the Company’s nascent strategy means that the timing of
milestones and funds generated from developments are difficult to predict at this stage. Management has prepared financial forecasts to
estimate the likely cash requirements of the Company over the next 12 months.

The forecasts include certain assumptions with regard to the following:
(a) successful completion of the ENVIA Oklahoma project start up reaching full operational capacity within 2017 leading to sustainable

stable operations and the subsequent operating cash flows arising from its interest in and commitments to this project.
(b) the costs of ongoing development projects coupled with the Company's ability to reduce certain existing overhead costs.
(c) the Company raising additional funding during 2018, without which the Company will have a funding shortfall by the second quarter

of 2018. The directors continue to review possible sources of additional funding which may include Company level equity, project level
funding and third party licence sales, although at the time of the approval of the financial statements there are no agreements in place
beyond the £10 million fund raise announced in May 2017.

Based on these assumptions, the forecasts show that there is sufficient funding in the Company to continue their activities for the
foreseeable future being not less than 12 months from the date of approval of these financial statements and the directors have
therefore prepared the financial statements on a going concern basis.

However, there are uncertainties in these assumptions, including the costs and timing of completion of the ENVIA start up, the amount of
costs of ongoing development projects, the ability to reduce certain overheads, the ability to raise additional funding, and adverse variations
in these assumptions would mean that the Company may be unable to realise its assets and discharge its liabilities in the normal course of
business. These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Company’s ability to
continue as a going concern. The financial statements do not include the adjustments that may be required if the Company was unable to
continue as a going concern.

Accounting developments
No new standards, amendments or interpretations, effective for the first time for the financial year beginning on or after 1 January 2016
have had a material impact on the Company or Velocys plc.

The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year
beginning 1 January 2017. The Company has not chosen to early adopt these standards, but they are considered relevant for future
accounting periods.
Amendment to IAS 7, ‘Statement of cash flows’ on disclosure initiative. These amendments to IAS 7 introduce an additional disclosure that
will enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendment is part of the
IASB’s Disclosure Initiative, which continues to explore how financial statement disclosure can be improved.

The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year
beginning 1 January 2018. The Company has not chosen to early adopt these standards, but they are considered relevant for future
accounting periods.

IFRS 9, ‘Financial instruments’. The Company is continuing to assess the impact of IFRS 9; it is not anticipated that adoption of the standard
will have a significant impact on the financial statements.
IFRS 15, ‘Revenue from contracts with customers’. This converged standard will improve the financial reporting of revenue and improve
comparability of the top line in financial statements globally. Companies using IFRS will be required to apply the revenue standard for
reporting periods beginning on or after 1 January 2018. The Company continues to review the requirements of IFRS 15 Revenue from
contracts with customers. It has identified the revenue streams expected to be impacted and the performance obligations due under
their respective contracts. It does not believe that allocating the contract prices across these performance obligations will have a material
impact to the Income statement. In respect of 2016 revenue, which was all from engineering services, it would not result in any adjustment.
The Company has not chosen to early adopt the standard.

44 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 45

Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

2. Accounting policies (continued)
Accounting developments (continued)
The following new standard is mandatory for the first time for the financial year beginning 1 January 2019. This standard is subject to
endorsement by the European Union.

IFRS 16 ‘Leases’. This standard will replace IAS 17 ‘Leases’ and sets out the principles for the recognition, measurement, presentation
and disclosure of leases. Lessees will be required to recognise a lease liability reflecting future lease payments and a right-of-use asset
for lease contracts. The IASB has included an optional exemption that can be applied by lessees for certain short-term leases and leases
of low-value assets. A key change arising from IFRS 16 is that most operating leases will be accounted for on the balance sheet for lessees.
As outlined in note 30, at 31 December 2016 the Company has £1,829,000 of operating lease commitments and these are likely to be
recognised on the balance sheet as at transition. The standard replaces IAS 17 ‘Leases’, and related interpretations.

Financial risk management policies
Financial risk management policies are set out in the Strategic report on page 21, and in note 28.

Capital management policies
Capital management policies are set out in note 28.

Significant accounting policies
Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic
environment in which the entity operates (the functional currency). The consolidated financial statements are presented in sterling (£),
which is Velocys plc’s functional and the Company’s presentation currency.

Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of
monetary assets and liabilities denominated in foreign currencies are recognised in the Income statement. Foreign exchange gains and losses
that relate to borrowings and cash and cash equivalents are presented in the Income statement within Finance income or Finance costs.

The net investment that the Company has in its subsidiary undertakings is its interest in the net assets of that subsidiary. The inclusion of
long-term loans and receivables ("Loans to subsidiaries") as part of the net investment in the subsidiary undertaking is determined where
settlement is neither planned nor likely to occur in the foreseeable future. All loans to subsidiaries by the parent company meet these criteria.

On this basis the loans to subsidiaries, being monetary items that are receivable from a foreign subsidiary undertaking, are regarded
as an extension of the Company's net investment in that foreign subsidiary undertaking. Exchange differences, arising on a monetary item that
forms part of the Company's net investment in a foreign operation that is a subsidiary or associate, are recorded as follows.

In the consolidated financial statements that include the foreign operation and the reporting entity, exchange differences are recognised
initially in a separate component of Other comprehensive income and, on disposal of the net investment, in profit or loss.
In the parent company financial statements, exchange differences are recognised in the Income statement.

Entities within Velocys
The results and financial position of all Velocys entities that have a functional currency different from the presentation currency
(none of which is of a hyper-inflationary economy) are translated into the presentation currency as follows:
1. assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
2.
3. all resulting exchange differences are recognised as a movement within other comprehensive income.

income and expenses for each income statement are translated at average exchange rates; and

3. Critical accounting estimates and judgements
The preparation of financial information in conformity with IFRS requires the use of estimates and judgements that affect the reported
amounts of assets and liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period.
Although these estimates and judgements are based on management’s best knowledge of the amount, event or action, actual results
ultimately may differ. Estimates and judgements that have a significant risk of causing material adjustment to the carrying amounts of
assets and liabilities within the next financial period are discussed in the relevant note and listed below.

Item of critical estimate and/or judgement
Note

Exceptional items – recognition of previously deferred income
Intangible assets – impairment assessment
Investment in subsidiaries – impairment assessment
Recognition of investment in associate

4
17
19
20

4. Exceptional items
Items that are significant by virtue of their size or nature, which are considered non-recurring and which are excluded from the underlying
profit measures used by the Board to monitor and measure the underlying performance of the Company are classified as exceptional
operating items. They include, for instance, costs directly attributable to the integration of an acquired business, significant site
consolidation costs and other significant restructuring costs. Exceptional operating items are included within the appropriate
Consolidated income statement category but are highlighted separately in the notes to the financial statements.

The following exceptional items have been included in the Consolidated income statement.

Costs of unsuccessful acquisition
Recognition of previously deferred income
Impairment of intangible assets
Deferred tax liability write down
Deferred consideration release

Total

2016
£’000

(2,809)
2,496
–
–
–

(313)

2015
£’000

–
–
(1,473)
269
1,763

559

In 2016, the Company sought to acquire certain assets of a US-based GTL company that had gone into administration but did not
complete the acquisition. The Company received a partial reimbursement by the acquirer of the plant. This transaction was judged to be
exceptional by its nature as a potential business combination. Costs of the unsuccessful acquisition in the table above represent amounts
spent net of the related reimbursement.

The Company recognised £2,496,000 of previously deferred income in respect of the cancellation of a contract with Ventech for reactors.
The deferred income arose on receipt of upfront payments. The full amount was recognised as Other income. It has been included
in exceptional items as it was a significant, one-off change to a material contract.

The impairment of intangible assets in 2015 related to customer contracts, and was the discounted value of future income, which the
Company had expected to receive in 2015 upon obtaining a final investment decision (FID) by outside investors in the Ashtabula project.
As FID was not reached in 2015, this balance and the related deferred tax liability were written down to £nil.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations are taken to
shareholders’ equity.

The deferred consideration arrangement required the Company to issue shares in Velocys plc to the former owners of Velocys Project
Solutions, also contingent upon the achievement of FID at Ashtabula. It was written down to £nil in 2015 and no shares were issued.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity
and translated at the closing rate.

Other significant accounting policies are incorporated in the note to which they apply.

Critical estimates and judgements
The recognition as income in 2016 of non-refundable amounts from Ventech previously recorded in deferred income is based on an
assessment of the contractual position, taking into account both the terms of the original contract and subsequent amendments.
The Company believes that all obligations under this contract have been fulfilled and therefore that it is probable that the economic
benefits associated with the transaction have flowed to the Company and that recognition of the related income is appropriate.
This is a binary judgement, and, therefore, the Company has recognised revenue at the point at which the probability criterion was met.

46 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 47

Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

5. Segmental information
The Company’s chief operating decision-making unit is the Senior Management Team (SMT). The SMT reviews the Company’s internal
reporting in order to assess performance and allocate resources, and has determined the operating segments based on these reports.

The SMT considers that the business comprises a single activity, which is the design, development, marketing and sale of technology
for the production of synthetic fuels (and speciality products). The newly announced strategy extends this activity to facilitating project
development by putting together partnerships with technology licensors, engineers, feedstock suppliers, off-takers and financing entities.
However, this is still considered to be part of the same synthetic fuels activity. The SMT reviews the Company’s profit or loss and its cash
flows, assets and liabilities on a Company-wide basis. In carrying out these reviews, the SMT considers all material items of income and
expenditure that are directly attributable to individual commercial projects and development programmes. The internal management
reports do not allocate assets and liabilities or shared overheads to individual products or projects.

The business has one segment on the basis that the key end use market is that of synthetic fuels production. At this stage, the synthetic
fuels segment represents 100% of the business and therefore represents the only material segment. Based on management’s judgement,
all products and services offered within the operating segment have similar economic characteristics.

Internal and external reporting is on a consolidated basis, with purchases and sales between subsidiaries eliminated on consolidation.
Therefore, the segmental and financial information is the same as that set out in the Consolidated income statement, Consolidated
statement of comprehensive income, the Consolidated statement of financial position, the Consolidated statement of cash flows and
the Consolidated statement of changes in equity.

The SMT assesses the performance of the operating segment based on a measure of operating loss.

The Company’s operating segment operates in three main geographical areas. Revenue is allocated based on the country in which the
customer is located.

Europe
Americas
Asia Pacific

Total revenue

2016
£’000

273
1,163
9

1,445

Revenues during the year originated in the United Kingdom and United States.

The total amount of revenue recognised from customers where revenue comprises 10% or more of Company revenue is as follows:

Customer 1
Customer 2*
Customer 3
Customers less than 10%

Total revenue

* Relates to different customers in 2016 and 2015.

Non-current assets held in the United States are as follows:

Intangible assets
Property, plant and equipment
Trade and other receivable
Available-for-sale investment
Investment in associate

Total

2016
£’000

619
444
163
219

1,445

2016
£’000

33,590
5,355
325
–
5,865

45,135

All other non-current assets were held in the United Kingdom and amounted to £727,000 (2015: £854,000).

2015
£’000

400
1,589
13

2,002

2015
£’000

1,480
400
–
122

2,002

2015
£’000

27,956
5,075
–
3,375
–

36,406

6. Revenue
Revenue is measured as the fair value of consideration received or receivable for goods and services provided in the normal course of
business, net of trade discounts, value added tax and other sales-related taxes after eliminating sales within the Company. Revenue is
recognised only when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the
Company. When uncertainty subsequently arises, any resulting provision is recognised as an expense and not a reduction in revenue.

Revenue related to Fischer-Tropsch (FT) reactors, catalyst and licence
The purchase of an FT reactor is part of an integrated package consisting of the three revenue streams for the Company; the sale of the
FT reactor, the use of the FT catalyst for a certain term and revenue from the licence fee that grants rights to use the related intellectual
property (IP) for the length of the licence term. The IP is not transferred at the end of the licence term.

In order to recognise revenue, each component of the FT process is identified, which includes the sale of the reactor, an initial licence fee,
the sale of catalyst and ongoing engineering services. Values are based on the terms of the sales contract. Once the fair value
of the components has been determined, revenue is recognised in line with the underlying nature of the contract.

FT reactor revenue and costs are recognised when substantially all risk and reward associated with the reactor has passed to the
customer. Under the Company’s standard terms this is on delivery of the reactor, where “delivery” means available for shipping to the
customer’s site, although this term may vary as contracts are negotiated.

Catalyst sales income will be recognised monthly over the term of the arrangement.

Licence fee revenue will be recognised on commencement of the contract provided that the fair value of the licence fee can be
determined. However, if no reliable fair value can be determined, any revenue associated with the licence fee will be deferred and
recognised in line with the reactor sales. Where a proportion of the licence fee is at risk until the successful completion of a performance
test, this proportion is not recognised as revenue until the test is passed; any payments received are held in deferred income until that
time.

Where the underlying costs associated with any component cannot be estimated, any profit element identified is deferred until such time
as the costs can be reliably estimated.

Revenue related to engineering services
Revenue from engineering services is earned on a time and materials basis, and is recognised as the work is performed.

As engineering services were the source of all 2016 revenue, no critical estimates were required.

The majority of the Company’s revenue is derived from a small number of significant commercial customers and development partners,
who are not related parties.

FT reactor, catalyst and licence
Engineering services

Total

7. Finance income

Interest income on bank deposits
Net fair value gains on forward foreign exchange contracts
Foreign exchange gains

Total Finance income

2016
£’000

–
1,445

1,445

2016
£’000

129
668
2,547

3,344

Interest income is accrued on a time basis by reference to the principal outstanding and the applicable interest rate.

8. Finance costs

Unwinding of discount on deferred licence payments payable
Interest on finance leases
Interest on borrowings

Total Finance costs

2016
£’000

–
5
21

2015
£’000

1,820
182

2,002

2015
£’000

329
381
445

1,155

2015
£’000

20
9
24

48 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 49

Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

9. Other income
Other income consists of items such as sales of fixed assets, contractual and legal settlements and any other operating income
recognised outside of commercial activities. Other income derived from sales of fixed assets and non-commercial activities is recognised
on an accruals basis. Legal settlements are recognised as income when a final judgement is received.

12. Employee benefit expense
Short term employee benefits
Accruals are included to reflect the cost of short term compensation to employees for absences such as paid leave.

Before exceptional items:
Contractual and legal settlements
Sale of fixed assets

Total other income before exceptional items

Exceptional items (see note 4):
Recognition of deferred income
Deferred consideration release

Total other income exceptional items

Total other income

2016
£’000

252
20

272

2,496
–

2,496

2,768

2015
£’000

1,996
13

2,009

–
1,763

1,763

3,772

In 2016 Other income included receipts from settlements with Toyo and MODEC, which offset costs previously recorded in Administrative
expenses, and the recognition of deferred income in respect of cancellation of the Ventech contract (see note 4).

In 2015 Other income included receipt of settlements arising from two legal disputes, with CompactGTL and Johnson Matthey,
which offset previously recorded Administrative expenses and the release of deferred consideration that would have been due
to the former owners of Velocys Project Solutions if FID been achieved at Ashtabula in 2015 (see note 4).

10. Expenses by nature

Employee benefit expense (see note 12)
Sub-contractor and consultant costs
Depreciation of property, plant and equipment: owned (note 18)
Depreciation of property, plant and equipment: leased (note 18)
Amortisation of intangible assets (note 17)
Operating lease expense – plant and machinery
Operating lease expense – other
Patent and other IP costs
Materials expense
Services
Inventories write-down
Other expenses

Total cost of sales and administrative expenses before exceptional items

2016
£’000

10,212
1,837
1,077
55
191
72
517
313
642
677
148
2,748

18,489

Included in administrative expenses were research and development costs of £10,075,000 (2015: £13,199,000).

11. Auditor’s remuneration

Fees payable to Company’s auditor and its associates for the audit of parent company

and consolidated financial statements

Fees payable to Company’s auditor and its associates for other services:
– The audit of Company’s subsidiaries
– Taxation compliance service

Total

2016
£’000

39
25

142

2015
£’000

13,480
2,385
975
50
252
31
475
579
3,924
738
218
3,651

26,758

2015
£’000

31
13

106

Pensions
The Company operates various defined contribution pension schemes for its employees. The Company has no legal or constructive
obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefit derived from the
current and prior periods.

The amount charged to the Income statement in respect of pension costs and other post-retirement benefits is the contributions payable
in the year. Differences between contributions payable and contributions actually paid are shown as accruals in the balance sheet.
The Company has no further payment obligations once the contributions have been paid.

The average monthly number of Company employees (including Executive Directors) was as follows.

Research, design and development
Administration

Total average headcount

Their aggregate remuneration comprised the following items.

Wages and salaries
Social security costs
Other pension costs
Severance expense
Share-based payments granted to directors and employees (note 15)

Total remuneration

The parent company has no employees and no remuneration.

2016
number

65
25

2016
£’000

8,312
673
314
120
793

10,212

2015
number

79
29

108

2015
£’000

9,822
679
326
511
2,142

13,480

Details of directors’ remuneration are given in the audited information in the Directors’ remuneration report on pages 30 to 33, which forms
part of these financial statements.

Included in wages and salaries were costs for research and development employees of £5,256,000 (2015: £6,011,000).

13. Income tax
Current tax, including UK corporation tax and foreign tax, is provided for at the amount expected to be paid (or recovered) based on the tax
rates and laws that have been enacted or substantively enacted by the balance sheet date.

Company

Current tax:
R&D tax credit relating to prior years
R&D tax credit relating to current year

Current tax total

Deferred tax:
Write off of intangible assets

Income tax total

2016
£’000

(550)
(854)

(1,404)

–

(1,404)

2015
£’000

(255)
(780)

(1,035)

269

(766)

Due to the availability of losses incurred in the year, there is no charge to corporation tax. The Company recognised £1,404,000 for R&D tax
credits (2015: £1,035,000). The credit relating to the current year is on an accruals basis, which is an estimate of the amount to be claimed
from HMRC based on the activity level and significant R&D costs of the current year compared to previous years. The credit relating to
prior years is the difference between the brought forward accrual and the settlement from HMRC.

The accrual for the current year, which is the majority of the credit, is based on an assessment of the Company’s projects, to determine
which ones qualify under the HMRC’s rules, and to estimate the level of allowable cost within each, based on the nature of costs.

50 Velocys Annual report and accounts 2016

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Notes to the financial statements (continued)

13. Income tax (continued)
The actual tax credit for the current and previous year is higher (2015: higher) than the theoretical amount that would arise using the
weighted average tax rate applicable to the results of the consolidated entities, for the reasons set out in the following reconciliation.

Company

Loss before income tax

Tax calculated at domestic tax rates applicable to losses in the respective countries

Tax effects of:
− Expenses not deductible for tax purposes
− Unutilised tax losses
− R&D tax credit

Current tax total

2016
£’000

(14,073)

(4,147)

51
4,096
(1,404)

(1,404)

2015
£’000

(21,086)

(5,594)

468
5,126
(1,035)

(1,035)

The weighted average applicable tax rate was 29.5% (2015: 26.5%).

The standard rate of corporation tax in the United Kingdom changed from 21% to 20% with effect from 1 April 2015. Accordingly,
profits in the United Kingdom for 2016 were taxed at 20%. Legislation to reduce the main rate of corporation tax to 19% from 1 April 2017
was enacted on 18 November 2015. Legislation to further reduce the rate to 17% from 1 April 2020 was enacted on 15 September 2016.
Unrecognised UK deferred tax balances have been measured at 17% (recognised: £nil).

US corporate income tax is based on a graduated scale ranging from 15% to 35% tax rate depending on the level of taxable income.
Most US companies with taxable income under $10,000,000 have an effective rate of 34%. Unrecognised US deferred tax balances have
been measured at 34% (recognised: £nil).

14. Deferred tax
Deferred tax is recognised, using the liability method, on temporary differences arising between the tax basis of assets and liabilities
and their carrying amounts in the consolidated financial statements. Deferred tax is not accounted for if it arises from initial recognition
of an asset or liability in a transaction other than a business combination that at the time of the transaction affected neither accounting
nor taxable profit or loss. Tax amounts are determined using tax rates (and laws) that have been enacted or substantively enacted by the
balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability
is settled.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the
temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries
except where the timing of the reversal of the temporary difference is controlled by the parent company and it is probable that the
temporary difference will not reverse in the foreseeable future.

The movement in deferred tax in the year was as follows.

Company

Recognised
Deferred tax liability
Write off of intangible assets

Deferred tax carried forward

Company

Unrecognised
Deferred tax assets
− Trading losses
− Equity settled options

Total

2016
£’000

–
–

–

2016
£’000

(27,366)
(195)

(27,561)

2015
£’000

269
(269)

–

2015
£’000

(22,918)
(605)

(23,523)

15. Share-based payments
Velocys plc issues share options to employees of its subsidiaries that are accounted for as equity settled. There are a number of schemes
covering employees, executives and external consultants; most are based on a service period but some include performance conditions,
both market based and non-market based.

Options are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. For executive
options with market performance conditions attached the Monte Carlo pricing model is used, all other options apply the Black-Scholes
model.

The basic assumptions that feed into both models are volatility of the share price, annual risk free rate and dividend yield. Volatility
is estimated using the average daily share price from the previous five years, the risk free rate is based on the Bank of England’s yield
curve tables, and it is assumed no dividend will be paid over the life of the option. Additionally, for the Monte Carlo model, expected life is
assumed to be the earliest point at which the shares may vest. This has been adjusted, using management’s best estimate, for the effects
of non-transferability, exercise restrictions, and behavioural considerations.

At the end of each reporting period, the Company revises its estimates of the number of options that are expected to vest, based on
non-market vesting conditions and service calculations. It recognises the impact of the revision to original estimates in the Income
statement, recorded in Administrative expenses, with a corresponding adjustment to equity.

When options are exercised the Company issues new shares; proceeds received, net of attributable transaction costs, are credited to
share capital and premium.

For the parent company, grants of options are treated as a capital contribution to the subsidiary of which the option holder is an employee.
The share based payment expense is recognised as an additional investment in the subsidiary with a corresponding credit to equity.

The number of options outstanding at 31 December 2016 and the expense recognised in the profit or loss for these schemes, along with
bonus shares and other schemes, are as follows.

Scheme

Employees UK/US
ELTIP (Executives)
Velocys, Inc.
Bonus shares
Other

Total

Options
outstanding

3,228,556
8,166,548
83,248
79,760
253,879

11,811,991

2016

Income
statement
£’000

275
496
–
–
22

793

Options
outstanding

4,188,283
10,912,628
95,978
421,760
253,879

15,872,528

2015

Income
statement
£’000

281
1,843
–
–
18

2,142

Employees UK/US
This scheme covers all employees of the Company, and was previously referred to as the EMI scheme; however, the Company ceased
to qualify for EMI status due to the value of its gross assets.

Options are granted to employees when they join the Company, they vest three, four or five years from the date of joining, subject to the
employee completing a corresponding service period, and expire after ten years. The exercise price is the mid-market value of Velocys plc’s
ordinary shares on the day prior to grant. Options are fair valued at grant date using the Black-Scholes model, and expensed over
the vesting period.

During 2015 options were granted to certain employees that will vest in January 2017 subject to meeting certain non-market performance
conditions; other conditions are per the main employee scheme. The fair value assessment of these options included a review of the likely
fulfilment of the performance conditions.

Movements in the number of options outstanding and their related weighted average exercise prices are as follows.

Weighted
average
exercise price

109.60p
28.86p
131.47p
81.29p

121.26p

2016

Number of
options

4,188,283
104,615
(1,062,332)
(2,000)

3,228,566

Weighted
average
exercise price

119.33p
107.09p
161.30p
59.16p

109.60p

2015

Number of
options

4,179,111
1,159,173
(1,138,335)
(11,666)

4,188,283

At 31 December 2016 the Company had a net unrecognised deferred tax asset of £27,366,000 (2015: £22,918,000) arising from trading
losses since incorporation. No recognition (2015: £nil) of the net deferred tax asset has been made at 31 December 2016 on the grounds
of uncertainty over its recoverability in light of the Company’s nascent revenue streams and commitment to continued investment in
research and development and therefore there is no impact on the current or prior year income statement.

Of this unrecognised deferred tax asset, £11,775,000 (2015: £16,580,000 reported, £11,733,000 restated) is anticipated to remain
available indefinitely to offset against future taxable trading profits of the entities in which the losses arose. The remainder has expiry
dates between 2023 and 2036 (2015: 2023 and 2035).

At 1 January
Granted
Forfeited
Exercised

At 31 December

The amount of the above net unrecognised deferred tax asset attributable to the parent company was £8,381,000 (2015: £8,278,000),
all of which is anticipated to remain available indefinitely (2015: all).

Of the 3,228,566 options outstanding at 31 December 2016, 1,875,442 were exercisable (2015: 1,371,533). The weighted average exercise
price of the exercisable shares was 57.88p (2015: 71.38p).

52 Velocys Annual report and accounts 2016

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Notes to the financial statements (continued)

15. Share-based payments (continued)
Options outstanding at the end of the year have the following expiry dates and exercise prices.

Movements in the number of options outstanding and their related weighted average exercise prices are as follows.

Year of expiry

Range of
exercise price

Number of
options

2017
2018
2020
2021
2022
2023
2024
2025
2026

Total

124.00p
159.00p
57.50 – 70.72p
51.00 – 74.79p
48.00 – 117.06p
129.88 – 213.79p
146.00 – 303.54p
62.50 – 182.90p
29.75 – 40.65p

16,129
62,893
42,616
1,024,140
425,000
494,000
293,334
775,839
94,615

29.75– 303.54p

3,228,566

2016

Weighted
average
exercise price

124.00p
159.00p
68.83p
68.09p
93.08p
200.73p
227.39p
126.83p
31.91p

121.26p

2015

Weighted
average
exercise price

124.00p
159.00p
58.55p
59.72p
79.19p
168.18p
196.17p
106.88p
–

109.60p

Number of
options

16,129
62,893
51,748
1,316,140
468,200
514,000
603,334
1,155,839
–

4,188,283

The weighted average fair value of options granted during the year was13.65p (2015: 29.32p) per option. The significant inputs into the
model were as follows.

Weighted average share price at grant date
Weighted average exercise price
Expected volatility
Weighted average annual risk free rate
Dividend yield
Weighted average expected life

2016

28.86
28.86
54%
0.4%
0%
4.0 years

2015

107.09
107.09
44%
0.8%
0%
2.9 years

Total expense recognised in the income statement for share options granted to directors and employees was £275,000 (2015: £281,000).

Executive options
Executive options (also referred to as “ELTIP” in the Directors’ remuneration report, and “ELTIP” and “NELTIP” in the 2015 Annual report and
accounts) are awarded to Executive Directors and senior managers of the Company.

The fair value of options is recognised from the start of the relevant service period to the end of the vesting period.

Executive options granted up to and including 2014, are exercisable at a price of 1p or at a price equal to the mid-market value of the
parent company’s ordinary shares on the day prior to the grant. Options vest immediately or after a period of one, two or three years
from grant, they expire after ten years and are forfeited if the employee leaves the Company before the options vest.

Options, including Restricted Stock Units (RSUs), awarded after 2014 were divided into those with a service period and those with market
performance conditions. Except for the former CEO, service period options represented 23% of the award; they vest two years after
the conclusion of the period over which performance is measured; the market performance conditions on which the rest of the award
was based pertain to the compound annual growth rate of the Company’s market capitalisation excluding fund raising subsequent to
1 January 2015; market performance options are measurable after three years from the start of the service period, with possible
re-measurements one, and two years later; options are subject to the discretion of the Board if the employee leaves the Company
before the options vest.

For the former CEO, a five-year award was made in 2015, for which service period options represented 30% of the RSUs. Market
performance options were measurable after five years from the start of the service period, with a possible re-measurement one year later.
Under the terms of the 2015 Settlement Agreement between the Company and the former CEO, 2,216,666 RSUs from this award were
deemed to have vested; the remainder was forfeited. In 2016 it was agreed that only 1,330,000 of these RSUs would be transferred to the
former CEO, and in respect of the balance, the Company would settle the expected associated tax liability.

No options have been granted in 2016 (2015: 8,364,386 options). However, the Remuneration Committee intends to introduce a new
equity-based incentive scheme for executives in 2017, and, in the allocation of such awards, may take into consideration the fact that
no 2016 awards were made.

At 1 January
Granted
Forfeited
Exercised
At 31 December

Weighted
average
exercise price

64.23p
–
Nil
0.15p
84.92p

2016

Number of
options

10,912,627
–
(1,176,079)
(1,570,000)
8,166,548

Weighted
average
exercise price

110.71p
98.10p
Nil
–
69.70p

2015

Number of
options

9,526,635
8,364,386
(6,978,394)
–
10,912,627

Of the 8,166,548 options outstanding at 31 December 2016, 6,022,848 were exercisable (2015: 7,051,571). The weighted average exercise
price of the exercisable shares was 115.14p (2015: 42.90p).

Share options and RSUs outstanding at the end of the year have the following expiry dates (RSU latest exercise dates) and exercise prices.

Year of expiry

2016
2017
2018
2019
2020
2021
2022
2023
2024

Total

Range of
exercise price

Nil
Nil
Nil
Nil – 1.00p
Nil
1.00p – 58.00p
49.00p
159.00p
153.00p – 163.50p

Nil – 163.50p

Number of
options

–
135,558
213,883
524,680
352,852
1,175,000
2,498,503
1,841,837
1,424,235

8,166,548

2016

Weighted
average
exercise price

Nil
Nil
Nil
0.20p
Nil
39.05p
49.00p
159.00p
163.04p

84.92p

2015

Weighted
average
exercise price

Nil
Nil
0.29p
0.35p
Nil
39.05p
49.00p
159.00p
162.72p

64.23p

Number of
options

2,216,667
135,834
343,639
697,779
532,134
1,175,000
2,498,503
1,841,837
1,471,235

10,912,628

No options have been granted in respect of 2016; the weighted average fair value of the market performance options and the service
period options granted in 2015 was 108.13p per option. The significant inputs into the model were as follows.

Weighted average share price at grant date
Weighted average exercise price
Weighted average expected volatility
Weighted average annual risk free rate
Dividend yield
Weighted average expected life

2016

–
–
–
–
–
–

2015

155.00p
Nil
51%
0.79%
0%
2.68 years

Total expense recognised in the income statement for executive options granted to directors and employees was £496,000 in 2016 (2015:
£1,843,000). No further expense was accrued within the share-based payments charge (2015: £nil).

At the time of exercising share options, executives of the Company may apply to an employee benefit trust managed by Oxford Catalysts
Trustees Limited for a distribution in respect of the exercise value of their options. The trustees then request a contribution from the
Company in respect of the grant made. The total value of funds distributed to executives by Oxford Catalysts Trustees Limited during the
year in respect of executive options was £13,300 (2015: £nil).

54 Velocys Annual report and accounts 2016

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Notes to the financial statements (continued)

15. Share-based payments (continued)
Velocys, Inc. scheme
The Velocys, Inc. Stock Compensation Plan (“Pre-Acquisition Scheme”) was acquired as part of the acquisition of Velocys, Inc. by Velocys
plc, formerly Oxford Catalysts Group PLC, on 20 November 2008. The scheme was started in 2001 and covers all US-based employees.
Prior to the acquisition, Velocys, Inc.’s Board of directors granted non-qualified share options to employees with expiry 10 years from grant
date. The options’ exercise price was equal to the stock’s fair market value at the date of grant. Options are forfeited if an employee leaves
the Company. Generally, options vest as follows.

After one year of service from vest start date:
Each month subsequent to one year of service: 1/48th of grant

25% of grant

Pursuant to the terms and conditions of the acquisition of Velocys, Inc., each vested and unvested Pre-Acquisition Scheme option existing
on the acquisition date was converted into 0.3659 of a Velocys plc, formerly Oxford Catalyst Group PLC, option (the ratio of the value of
one share of Velocys, Inc. stock to one share of Velocys plc, formerly Oxford Catalyst Group PLC stock) with a corresponding increase to the
exercise price. Share options are exercisable in US dollars.

During 2011, the Company reviewed employee incentives and concluded that the Pre-Acquisition Scheme options did not provide the
intended incentive or retention value for its employees due to significant shifts in the market price since the original grants. Consequently,
holders of these options were offered the opportunity to forfeit their options and have new options issued. All such new issues vest in
three years and expire ten years from date of grant.

Details of the share options outstanding under the Velocys, Inc. scheme are as follows.

At 1 January
Forfeited
Exercised

At 31 December

Weighted
average
exercise price

$1.08
$0.93
$0.00

$1.10

2016

Number of
options

95,978
(12,730)
–

83,248

Weighted
average
exercise price

$1.00
$0.82
$0.77

$1.08

2015

Number of
options

130,062
(21,503)
(12,581)

95,978

Of the options outstanding presented above, 83,248 (2015: 95,978) were exercisable as of 31 December 2016. The weighted average share
price of the exercisable shares was $1.10 (2015: $1.08).

Share options outstanding at the end of the year have the following expiry dates and exercise prices.

Year of expiry

2017
2021

Total

Range of
exercise price
per share

$2.21 – $2.54
$0.93

$0.77 – $2.54

Number of
options

9,218
74,030

83,248

2016

Weighted
average
exercise price

$2.45
$0.93

$1.10

2015

Weighted
average
exercise price

$2.45
$0.93

$1.08

Number of
options

9,218
86,760

95,978

Total expense recognised in the income statement for share options granted under the Velocys, Inc. plan was £nil (2015: £nil).

Bonus shares
The Company previously maintained two bonus share schemes for certain executives: one in respect of employees of Velocys Technologies
Limited and one in respect of employees of Velocys, Inc. Under both schemes, the value of the bonus was based upon the executive’s salary
as well as the Company and the executive achieving certain targets throughout the year. No awards were, or will be, made under these
schemes during, or in respect of, 2016.

The Velocys Technologies Limited bonus share scheme awarded nominal value share options (1p) that were issued subsequent to the end
of previous financial years. The awards vested on the date of grant and expire 10 years thereafter. Details of the bonus shares outstanding
under the Velocys Technologies Limited bonus share scheme are as follows.

At 1 January

Exercised

At 31 December

Exercise
price

1.00p

2016

Number of
options

421,760

(342,000)

79,760

Exercise
price

1.00p

–

1.00p

Velocys Technologies Limited bonus share options outstanding at the end of the year have the following expiry dates.

Year of expiry

2019
2020
2021

Total

Exercise
price

1.00p
1.00p
1.00p

1.00p

2016

Number of
options

42,105
–
37,655

79,760

2015

Number of
options

421,760

–

421,760

2015

Number of
options

42,105
342,000
37,655

421,760

The Velocys, Inc. bonus share scheme consists of deferred shares awarded subsequent to year end at a nominal price of 1p. 20% of the
award is due to be granted on each anniversary of the date of award. Shares remaining to be granted in future years totalled 16,418.

No bonus share grants were made for either scheme in 2016 (2015: nil). All expense has been recognised prior to 2015.

Other share options
The Board has approved the granting of share options to a small number of consultants (non-employees) who provide a strategic service
to the business.

Options are granted either in respect of a completed service period, in which case they vest immediately, or in respect of a future service
period, in which case they vest over periods of up to three years. They expire after 10 years. Exercise prices range from £nil to the mid-
market value of Velocys plc’s ordinary shares on the day prior to grant. Options are fair valued at grant date using the Black-Scholes model
(which is not the fair value of goods and services received). For a completed service period, fair value is expensed over the service period
plus the vesting period, for a future service period, fair value is expensed over the vesting period.

Movements in the number of consultants’ share options outstanding and their related weighted average exercise prices are as follows.

At 1 January
Granted
Forfeited
Exercised

At 31 December

Weighted
average
exercise price

87.39p
–
–
–

87.39p

2016

Number of
options

253,879
–
–
–

253,879

Weighted
average
exercise price

51.15p
108.03p
–
–

87.39p

2015

Number of
options

92,129
161,750
–
–

253,879

Of the 253,879 options outstanding at 31 December 2016, 163,879 were exercisable (2015: 103,879). The weighted average exercise price
of the exercisable shares was 77.58p (2015: 51.88p).

56 Velocys Annual report and accounts 2016

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Notes to the financial statements (continued)

15. Share-based payments (continued)
Share options outstanding at the end of the year have the following expiry dates and exercise prices.

Year of expiry

2021
2022
2023
2024
2025

Total

Range of
exercise price

1.00p
1.00p
1.00 – 53.10p
145.25p
105.25 – 143.5p

1.00 – 145.25p

Number of
options

6,500
10,204
54,050
21,375
161,750

253,879

2016

Weighted
average
exercise price

1.00p
1.00p
29.44p
145.25p
108.03p

87.39p

2015

Weighted
average
exercise price

1.00p
1.00p
29.44p
145.25p
108.03p

84.67p

Number of
options

6,500
10,204
54,050
21,375
161,750

253,879

No options were granted during 2016. In 2016 an award was made to Jan Verloop, who resigned from the Board of Velocys plc
in September 2016, in respect of consultancy services thereafter performed in 2016; these options will be granted in 2017. The number
of options is determined by the average share price in the quarter prior to the service period, and the options will vest immediately.

The weighted average fair value of options granted in 2015 using the Black-Scholes valuation model was 22.51p per option. The significant
inputs into the model were as follows.

Weighted average share price at grant date
Weighted average exercise price
Weighted average expected volatility
Weighted average annual risk free rate
Dividend yield
Weighted average expected life

2016

–
–
–
–
–
–

2015

108.03p
108.03p
43%
0.8%
0%
1.66 years

The share-based payment expense for the year includes a cost of £22,000 (2015: £18,000) relating to options granted to consultants.

Share-based payments charge
The total charge for share-based payments during the year was £793,000 (2015: £2,142,000) of which £357,000 (2015: £1,544,000) relates
to options granted to directors and the remainder to other employees.

16. Loss per share
The basic loss per share is calculated by dividing the loss attributable to owners of the parent company by the weighted average number
of ordinary shares in issue during the year.

Loss attributable to owners of Velocys plc (£’000s)
Weighted average number of ordinary shares in issue

Basic and diluted loss per share (pence)

2016

(12,669)
143,282,963

(8.84)

2015

(20,051)
141,915,307

(14.13)

Diluted loss per share is calculated by adjusting the weighted average number of shares in issue to assume conversion of all potential
dilutive shares. Share options have not been included in the number of shares used for the purpose of calculating diluted loss per share
since these would be anti-dilutive for the period presented. At the end of 2016 there were no other potentially dilutive instruments
(see note 33). Details of share options are given in note 15.

17. Intangible assets
Significant accounting policies
Cost or valuation and amortisation
Goodwill
Of the total Goodwill of £8,113,000, £5,445,000 (2015: £4,519,000) originates from the acquisition of Velocys, Inc. in 2008 and £2,668,000
(2015: £2,214,000) from the acquisition of VPS in 2014. Goodwill represents the excess of the cost of an acquisition over the fair value
of the Company’s share of the identifiable assets acquired and liabilities and contingent liabilities assumed at the date of acquisition.
Goodwill is not amortised.

In-process technology
In-process technology consists of purchased intangibles and capitalised development costs and is carried at cost less accumulated
amortisation and impairment losses.

Purchased intangibles arose from the acquisition of Velocys, Inc. and Velocys Project Solutions, LLC (VPS).

In respect of intangible assets acquired as part of a business combination, the Company recognises these as distinct from goodwill
provided they are separable or arise from contractual or other legal rights, and their fair value can be measured reliably.

Intangible assets are initially recognised at fair value, which is regarded as their cost. They are subsequently held at cost less
accumulated amortisation and impairment losses. Amortisation is charged when assets are brought into use. The Company uses the
units-of-production method of amortisation with the measured unit being reactors produced. The number of units used in the model
is approximately 1,400 (2015: 1,400) four-core reactors based on projections of future sales. Amortisation began in 2015 based on the
manufacture of the first commercial reactors. It is charged to Administrative expenses in the Income statement.

Research costs are recognised as an expense in the Income statement as they are incurred.

Development costs, where the related expenditure is separately identifiable and measurable, and management are satisfied as to the
ultimate technical and commercial viability of the project and that the asset will generate future economic benefit based on all relevant
available information, are recognised as an intangible asset. Costs arising from funded projects are also recognised to the extent that
they meet the relevant criteria, net of any amounts reimbursed by research partners. Capitalised development costs are carried at cost
less accumulated amortisation and impairment losses. They are amortised, from the point the asset is available for use in the manner
intended by management, on the units of production basis, over the period of the assets’ expected benefit. Development costs not
meeting the criteria for capitalisation are expensed as incurred.

Patents, licences and trademarks
Patents and trademarks are recorded at cost less accumulated amortisation and impairment losses. Amortisation is charged
on a straight line basis over a period of 20 years, which is their estimated useful economic life. Residual values and useful lives
are reviewed annually and adjusted if appropriate. The Company decided to abandon certain non-core patents in 2016 and 2015.
This resulted in a loss on disposal of patents of £213,000 (2015: £375,000).

Licences are recorded at the present value of minimum licence payments. Amortisation is charged when related revenue starts to be
earned and will be charged on a straight line basis over the life of the licences. Residual values and useful lives are reviewed annually
and adjusted if appropriate.

Customer contracts
Customer contracts are carried at cost less impairment losses. The customer contract value that was written off in 2015 related
to an expected project development fee negotiated in the acquisition of VPS in 2014. Its value was contingent on achieving a final
investment decision on the Ashtabula project in 2015, which did not happen.

Software
Purchased software is recorded at cost less accumulated amortisation and impairment losses. Amortisation is charged on a straight-line
basis over its estimated useful life of three years.

Impairment
Goodwill is tested annually for impairment, and also whenever events or changes in circumstance indicate the carrying value may
not be recoverable. Goodwill is allocated to cash-generating units for the purpose of impairment testing; however, since 2015 just a single
cash-generating unit, synthetic fuels, has been recognised. This reflected the fact that, although the Company has several technology
streams, it measures progress and performance using one business segment (see note 5).

The Company has no indefinite-life intangible assets other than goodwill. For intangible assets that are not yet available for use,
impairment testing is performed annually. The carrying amounts of the Company’s available-for-use intangible assets (excluding
goodwill) are reviewed at each balance sheet date or when events or changes in circumstance indicate their carrying value may not be
recoverable to determine whether there is any indication of impairment. If such an indication exists, the asset’s recoverable amount
is estimated.

58 Velocys Annual report and accounts 2016

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Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

17. Intangible assets (continued)
To the extent the carrying amount exceeds the recoverable amount, the difference is recorded as an expense in the Income statement.
The recoverable amount used is the higher of the value in use and fair value less costs of disposal. For the purpose of impairment testing,
assets are generally assessed individually or at a CGU level, which represents the lowest level for which there are separately identifiable
cash inflows that are largely independent of cash inflows from other assets or groups of assets. The determination of CGUs is consistent
with that detailed for goodwill.

An impairment loss in respect of goodwill is not reversed. An impairment loss in respect of intangible assets (excluding goodwill) is
reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the loss was recognised,
or if there has been a change in the estimate used to determine the recoverable amount. A loss is reversed only to the extent that the
asset’s carrying amount does not exceed that which would have been determined, net of depreciation or amortisation, if no impairment
loss had been recognised.

An impairment has not been recorded for 2016. The impairment of a customer contract in 2015 related to the failure of the Ashtabula
project to achieve final investment decision within a specified timeframe after the acquisition of VPS. The remainder of Intangibles,
(Patents, licence and trademarks, and Software) are internally generated.

Critical estimates and judgements
In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, a number of indicators
of potential impairment. The Company identified that, at the annual impairment assessment date (being the balance sheet date), the
carrying amount of the net assets of the Company of £63.9m was greater than its market capitalisation of £53.4m.

The CGU’s recoverable amount has historically been determined by its value in use, assessed by the estimated future cash flows
discounted to their present value using an appropriate pre-tax discount rate model. Due to the recent launch of the Company’s new
strategy, which involves a much more pro-active approach to market development and a focus on a few key markets, an assessment of
future cash flows based on reaching final investment decision on new GTL or BTL plants involved a particularly high level of judgement.
Consequently, a fair value less costs of disposal basis was adopted for the 31 December 2016 assessment.

The value for market capitalisation has been obtained by calculating the total value of the parent company’s equity based on the
AIM-listed shares of the parent company, adjusted for a control premium. This premium is an amount that a buyer is willing to pay
over the current market price of a publicly traded company in order to acquire a controlling share in that company. The control premium
estimate applied is a key assumption. Management have estimated a premium of 25%. A reduction in this assumption to 18% would
result in a material impairment of goodwill. In concluding on the impairment assessment, management have also considered information
from after the reporting period. This does not indicate that an impairment at the end of the reporting period was required. A review of
the market capitalisation after the reporting date was considered to be important in assessing the relative importance of the share
price at 31 December 2016. The market cap has increased in 2017, particularly in light of several Company announcements with respect
to achieving first product at the ENVIA GTL plant and the signing of a number of strategic partnership agreements. The current market
capitalisation of the Company is significantly in excess of the carrying amount of the net assets of the Company.

2015

Cost
At 1 January 2015
Additions
Disposals
Foreign exchange movement

At 31 December 2015

Accumulated amortisation
At 1 January 2015
Charge for the year
Disposals
Impairment
Foreign exchange movement

At 31 December 2015

Net book amount
At 31 December 2015

Goodwill
£’000

In-process
technology
£’000

Patents,
licence and
trademarks
£’000

Customer
contracts
£’000

Software
£’000

Total
£’000

5,958
–
–
775

6,733

–
–
–
–
–

–

20,610
–
–
919

21,529

1,328
28
–
–
–

1,356

1,995
393
(523)
62

1,927

528
152
(148)
–
15

547

1,473
–
–
–

1,473

–
–
–
1,473
–

1,473

6,733

20,173

1,380

–

328
2
(208)
6

128

161
72
(200)
–
3

30,364
395
(731)
1,762

31,790

2,017
252
(348)
1,473
18

3,412

28,378

18. Property, plant and equipment
Property, plant and equipment is stated at historical cost, net of depreciation and any provision for impairment. Cost includes the original
purchase price of the asset and the costs attributable to bringing the asset to working condition for its intended use. Depreciation is
provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value, of each asset on
a straight-line basis over its expected useful life, which for plant and machinery is three to ten years. No depreciation is provided on
land or assets under construction.

Residual values and useful lives are reviewed annually. Values are estimated using benchmark prices at the balance sheet date; useful
lives are estimated based on management expectations of future project requirements and operational assessment of the state of
assets.

Assets are reviewed for impairment annually and also whenever events or changes in circumstances indicate their carrying value may not
be recoverable. To the extent the carrying value exceeds the recoverable amount, the difference is recorded as an expense in the Income
statement. The recoverable amount used for impairment testing is the higher of the value in use and fair value less costs of disposal.
For the purpose of impairment testing, assets are generally tested individually or at a CGU level which represents the lowest level for
which there are separately identifiable cash inflows which are largely independent of cash inflows from other assets or groups of assets.

Based on this assessment the recoverable amount was in excess of the carrying amount of intangible assets, and therefore an
impairment was not recorded (2015: £nil).

Expenditure funded by research partners is only capitalised where there are no significant rights acquired by the third party over the
asset and the asset has a clear enduring use beyond the specific funding project, these are regularly reviewed.

2016

Cost
At 1 January 2016
Additions
Disposals
Foreign exchange movement

At 31 December 2016

Accumulated amortisation
At 1 January 2016
Charge for the year
Disposals
Impairment
Foreign exchange movement

At 31 December 2016

Net book amount
At 31 December 2016

Goodwill
£’000

In-process
technology
£’000

Patents,
licence and
trademarks
£’000

Customer
contracts
£’000

Software
£’000

6,733
–
–
1,380

8,113

–
–
–
–
–

–

21,529
–
–
4,413

25,942

1,356
–
–
–
272

1,628

1,927
356
(301)
266

2,248

547
145
(88)
–
74

678

1,473
–
–
–

1,473

1,473
–
–
–
–

1,473

128
1
(40)
12

101

36
46
(20)
–
1

Total
£’000

31,790
357
(341)
6,071

37,877

3,412
191
(108)
–
347

3,842

8,113

24,314

1,570

–

34,035

2016

Cost
At 1 January 2016
Additions
Disposals
Transfers to plant and machinery
Foreign exchange

At 31 December 2016

Accumulated depreciation
At 1 January 2016
Charge for the year
Disposals
Foreign exchange

At 31 December 2016

Net book amount
At 31 December 2016

Assets under
construction
£’000

63
246
–
(222)
17

104

–
–
–
–

–

Land
£’000

1,104
–
–
–
226

1,330

–
–
–
–

–

Plant and
machinery
£’000

10,118
45
(95)
222
1,910

12,200

5,778
1,132
(94)
1,181

7,997

104

1,330

4,203

Total
£’000

11,285
291
(95)
–
2,153

13,634

5,778
1,132
(94)
1,181

7,997

5,637

60 Velocys Annual report and accounts 2016

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Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

18. Property, plant and equipment (continued)

2015

Cost
At 1 January 2015
Additions
Disposals
Transfers to plant and machinery
Foreign exchange

At 31 December 2015

Accumulated depreciation
At 1 January 2015
Charge for the year
Disposals
Foreign exchange

At 31 December 2015

Net book amount
At 31 December 2015

Assets under
construction
£’000

778
224
–
(954)
15

–
–
–
–

–

Land
£’000

1,053
–
–
–
51

1,104

–
–
–
–

–

Plant and
machinery
£’000

7,827
2,038
(1,082)
954
381

10,118

5,593
1,025
(1,077)
237

5,778

1,104

4,340

Total
£’000

9,658
2,262
(1,082)
–
447

11,285

5,593
1,025
(1,077)
237

5,778

5,507

As at 31 December 2016, the Company had entered into contractual commitments for the acquisition of property, plant and equipment
amounting to £12,000 (2015: £23,000).

19. Investments in subsidiaries
On acquisition, subsidiaries are accounted for in the consolidated accounts using the purchase method. The cost is measured as the
fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed at the date of exchange, irrespective of
minority interest. For acquisitions completed prior to 1 January 2010, costs directly attributable to the acquisition are included in this
calculation, for subsequent acquisitions they are expensed. The excess of cost over fair value is recorded as goodwill. If cost is less than
fair value, the difference is recognised in the Income statement. Subsidiaries are consolidated from the date on which control is
transferred to the Company.

Investments in subsidiaries are held by the parent company at historical cost less impairment. The net investment that the parent
company has in its subsidiary undertakings is its interest in the net assets of that subsidiary. The inclusion of long-term loans and
receivables (Loans to subsidiaries) as part of the net investment in the subsidiary undertaking (Investment in subsidiaries) is determined
by the fact that settlement is neither planned nor likely to occur in the foreseeable future. All loans to subsidiaries by the parent company
meet this criterion.

The carrying amounts of the parent company’s Investments in subsidiaries are reviewed at each balance sheet date, or when events or
changes in circumstance indicate their carrying value may not be recoverable, to determine whether there is any indication of impairment.
If such an indication exists, the asset’s recoverable amount is estimated. To the extent the carrying amount exceeds the recoverable
amount, the difference is recorded as an expense in the Income statement. The recoverable amount used for impairment testing is the
higher of the value in use and fair value less costs of disposal. For the purpose of impairment testing, assets are generally assessed
individually or at a CGU level, which represents the lowest level for which there are separately identifiable cash inflows that are largely
independent of cash inflows from other assets or groups of assets.

As set out in note 17, an impairment assessment was carried out on the Company’s intangible assets and no impairment was indicated.
The parent company used the same basis for calculating the recoverable amount to determine the total value of the three subsidiaries
held by the parent company, based on the judgement that there is limited value attributable to the parent company, as a non-trading
holding company. The parent company has both equity and debt investments in the three subsidiaries, which are compared to the
recoverable amount. On this basis, the impairment assessment indicated that the carrying value of the investments in subsidiaries was
higher than the recoverable amount, determined by fair value less costs of disposal. As a result, an impairment of £65,716,000 (2015: £nil)
was recognised. This impairment eliminated on consolidation.

An impairment loss in respect of Investments in subsidiaries is reversed if the subsequent increase in recoverable amount can be related
objectively to an event occurring after the impairment loss was recognised or if there has been a change in the estimate used to determine
the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed that which
would have been determined if no impairment loss had been recognised.

Intercompany transactions, balances and unrealised gains and losses on transactions are eliminated in the consolidated accounts.
Accounting policies of subsidiaries have been changed where necessary to ensure consistency with Company policies.

Critical estimates and judgements
In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, a number of indicators
of potential impairment. The parent company identified that at the annual impairment assessment date, being the balance sheet date,
the carrying amount of the net assets of the parent company of £67.4m was more than its market capitalisation of £53.5m. The critical
estimates and judgements applied in calculating the recoverable amount are set out in note 17.

Loan to
subsidiaries
£’000

Capital
contributions to
subsidiaries
£’000

89,369
(2,792)
–
(46,973)
8,166

47,770

36,920
–
884
(18,743)
–

19,061

2016

Total
investment in
subsidiaries
£’000

126,289
(2,792)
884
(65,716)
8,166

66,831

Loan to
subsidiaries
£’000

Capital
contributions to
subsidiaries
£’000

93,820
(3,655)
–
–
(796)

89,369

34,932
–
1,988
–
–

36,920

Velocys plc

Investments in subsidiaries
At 1 January
Movement in loans
Capital contributions
Impairment of subsidiaries
Foreign exchange

At 31 December

The parent company has direct investments in the following subsidiary undertakings.

Subsidiary undertakings

Velocys Technologies Limited*

Country of
incorporation or principal
business address

England and Wales

Principal activity

Design and development
of catalysts, and exploitation of
platform catalyst technologies

Velocys (USA Holdings) LLC**

Ohio, USA

Holding company for US subsidiaries

Oxford Catalysts Trustees Limited*

England and Wales

Holds assets and makes distributions
in respect of employee remuneration

The following companies are subsidiaries of the Company whose immediate parent is not Velocys plc.

Subsidiary undertakings

Velocys, Inc.**

Velocys Project Solutions, LLC***

Ashtabula Energy, LLC***

Country of
incorporation or principal
business address

Delaware, USA

Principal activity

Design, development and exploitation
of its microchannel technologies

Project development of
smaller scale GTL plants

Project development of smaller scale
GTL plant in Ashtabula, Ohio

YellowRock GTL Services, LLC**

Delaware, USA

Secondment of employees to plants

VMH Assets LLC**

JAB Land-Ashtabula**

Ohio, USA

Ohio USA

Holds manufacturing assets in Ohio

Holds land for smaller scale GTL plant
in Ashtabula Ohio

Westlake GTL, LLC**

Delaware, USA

Project development of smaller
scale GTL plant

2015

Total
investment in
subsidiaries
£’000

128,752
(3,655)
1,988
–
(796)

126,289

% Holding
(all ordinary
share capital)

100

% Holding
(all ordinary
share capital)

100

The following are dormant subsidiaries.

Dormant subsidiaries

Oxford Catalysts UK Limited*

Bradford GTL LLC***

Susquehanna GTL LLC***

Incorporated

England and Wales

Delaware, USA

Immediate parent

% Holding

Velocys plc

Velocys Project Solutions, LLC

100

Located at 115e Olympic Avenue, Milton Park, Abingdon, Oxfordshire OX14 4SA, UK.

*
** Located at 7950 Corporate Boulevard, Plain City, OH 43064, USA.
*** Located at 2603 Augusta Drive, Suite 1175, Houston, TX 77057, USA.

62 Velocys Annual report and accounts 2016

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Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

20. Investments
Investments consist solely of Velocys’ holding in ENVIA Energy, LLC (ENVIA) located at 1021 Main Street, Suite 1000 Houston, TX 77002.
ENVIA is a US company and is the holding company for the project located in Oklahoma (the ENVIA project). The Company first invested
in ENVIA in 2014 as entry into a joint venture to develop GTL plants in the US using a combination of renewable biogas (including landfill
gas) and natural gas. The first of these plants, ENVIA Oklahoma City produced its first product in 2017. A description of the ENVIA project
is available in the Strategic report on pages 8-11.

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other
categories of financial instruments – see note 28 for a description of these classes and the accounting policy for available-for-sale
financial assets. At 31 December 2015, the investment was recorded at cost, which was also considered to be fair value.

At the end of January 2016, Velocys entered into a financing arrangement with ENVIA under which it contributed additional equity finance
of $2,587,000 and committed to provide loan finance of up to $9,310,000. This senior loan note bears interest at 10%, and is repayable on
31 December 2019 with an option to extend to 31 December 2020. As at 31 December 2016, one draw down on this facility had been
made by ENVIA in the amount of $400,000 (see note 21). As a result of the new funding arrangement, Velocys increased its ownership
share and was awarded additional voting rights, taking its share of voting rights to 28%.

Associates are all entities over which the Company has significant influence but not control, generally accompanying a shareholding of
between 20% and 50% of the voting rights. From this point the investment has been recognised as an Investment in associate, accounted
for under the equity method. This judgement was based on the level of influence Velocys holds in ENVIA, including voting rights exceeding
20% and a seat on ENVIA’s board. Investments in associates are accounted for using the equity method of accounting from the date on
which it becomes an associate. Under the equity method, a cost approach is followed whereby the cost of all purchases are accumulated
(including transaction costs) to determine the amount of the investment. The notional purchase price allocation (including goodwill
arising on the purchase of the additional stake) is calculated using fair value information at the date when the additional interest
is acquired. Goodwill is calculated as the excess of the cost of the investment over the Company’s share of the net fair value of the
investee’s identifiable assets and liabilities and included in the carrying amount of the investment. The allocation was fair valued, which
gave rise to goodwill of £320,000; this has been included in Investment in the Investment in associate table below. Velocys’ share of losses
since the end of January 2016, arising from administration costs incurred by ENVIA ahead of the start-up of its first GTL plant, has been
reflected in the Income statement. The carrying amount of the investment is adjusted to recognise the investor’s share of the change in
net assets of the investee after the date of acquisition.

The Company’s share of post-acquisition profit or loss is recognised in the Income statement. There are no post-acquisition movements
in Other comprehensive income in the Company’s investments in associates. Distributions received from an associate reduce the carrying
amount of the investment.

The Company determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired.
If this is the case, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate
and its carrying value and recognises the amount adjacent to share of profit/(loss) of associates in the income statement. See note 17
for impairment of non-financial assets.

Gains and losses resulting from upstream and downstream transactions between the Company and its associate are recognised in the
financial statements only to the extent of unrelated investors’ interests in the associates. Unrealised losses are eliminated unless the
transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where
necessary to ensure consistency with the policies adopted by the Company. There have been no dilution gains and losses arising in
investments in associates.

Critical estimates and judgements
On acquisition of significant influence, the Company has recognised 9.7% of the net fair value of ENVIA’s identifiable assets and
liabilities in its investment in ENVIA and, for the period from such acquisition to 31 December 2016, recognised 9.8% as its share of
post-acquisition losses in ENVIA. These percentages differ to both the Company’s proportion of ownership units held in ENVIA and its
proportion of voting units, which are outlined above. They are considered more appropriate measures of the Company’s economic interest
in ENVIA at both acquisition and for the period ending 31 December 2016, where the distribution of both ENVIA’s identifiable assets and
liabilities and its net losses is defined by the LLC agreement agreed with each of the other parties that hold ownership units in ENVIA.
The investment is denominated in US dollars; in 2015 it was considered to be an available-for-sale asset.

Company

Available-for-sale investment
At 1 January
Investment
Foreign exchange
Movement to associate

At 31 December

Company

Investment in associate
At 1 January
Movement from available-for-sale
Investment
Share of loss
Foreign exchange

At 31 December

2016
£’000

3,375
–
–
(3,375)

–

2016
£’000

–
3,375
1,938
(306)
858

5,865

2015
£’000

1,711
1,535
129
–

3,375

2015
£’000

–
–
–
–
–

–

Summarised financial information for ENVIA
Set out below is the unaudited summarised financial information for ENVIA. The information below reflects the amounts presented in
the financial statements of ENVIA adjusted for differences in accounting policies between the Company and ENVIA. ENVIA financial
statements are not prepared under IFRS but management does not consider US GAAP to be materially different from IFRS for this
purpose.

ENVIA Energy, LLC

Summarised balance sheet
Current assets
Non-current assets
Current liabilities
Non-current liabilities

Summarised statement of comprehensive income
Revenue
Loss from continuing operations
Other comprehensive income

Total comprehensive income

The Company’s interest in associate was calculated as follows.

Fair value as at recognition of investment as associate
Investment (9.7%)
Loss for the period
Investment (9.8%)
Goodwill
Foreign exchange

Carrying value

2016
(unaudited)
£’000

5,066
63,303
(5,716)
(381)

–
(3,155)
–

(3,155)

2016
£’000

51,643
4,993
(3,155)
(306)
320
858

5,865

64 Velocys Annual report and accounts 2016

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Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

21. Trade and other receivables
Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method,
less provision for impairment. A provision is established when there is objective evidence that the Company will not be able to collect
all amounts due according to the original terms. Significant financial difficulties of the debtor, probability that the debtor will enter
bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators
that the trade receivable is impaired.

The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows,
discounted at the original effective interest rate. The carrying amount of the asset is reduced through an allowance account, and the
amount of the loss is recognised in Cost of sales in the Income statement. When a receivable is uncollectible, it is written off against the
allowance account. Subsequent recoveries of amounts previously written off are credited against Cost of sales.

Company

Non-current
Loan receivable

Total

2016
£’000

325

2015
£’000

–

Velocys has committed to provide up to US$9,310,000 to ENVIA through a senior loan note due on 31 December 2019 and bearing a 10%
interest rate, with an optional extension to 31 December 2020 with prior notice. As at 31 December 2016, one draw down on this facility
had been made by ENVIA in the amount of £325,000 ($400,000). See note 20.

Company

Current
Trade receivables
Prepayments and accrued income
Other receivables

Total

Parent company

Current
Prepayments and accrued income
Other receivables

Total

2016
£’000

397
371
43

811

2016
£’000

31
–

2015
£’000

4
324
583

911

2015
£’000

15
17

The fair value of trade and other receivables is not materially different to the book value above (2015: not materially different). The trade
receivables hold a low credit risk. The maximum exposure to credit risk at the reporting date is the carrying value of each class of
receivable plus cash balances held. The Company does not hold any collateral as security (2015: £nil).

As at 31 December 2016 Company trade receivables of £249,000 (2015: £4,000) were past due but not impaired. The aging analysis for the
2016 amounts past the due date, which were received in full in 2017, is as follows.

Company

Up to three months

Total

2016
£’000

249

2015
£’000

The Company’s trade receivables outstanding at year end represent approximately 102 days’ sales (2015: 1 day). These are existing
customers with no history of default. The parent company had no trade receivables at 31 December 2016 (2015: £nil).

The Company believes that the full amount of trade receivables recognised is recoverable. At 31 December 2016, the parent company had
no overdue trade receivables (2015: £nil). The other classes within trade and other receivables do not contain impaired assets (2015: £nil).

Trade and other receivables are denominated in the following currencies:

Company

UK sterling
US dollars

Total

2016
£’000

224
587

811

2015
£’000

233
678

911

22. Inventories
Inventories are stated at the lower of cost or net realisable value less provision for impairment. Cost is determined on a first-in, first-out
basis and includes transport and handling costs. In the case of manufactured products, cost includes all direct expenditure including
production overheads. Where necessary, provision is made for obsolete, slow-moving and defective inventories. Items purchased for use
in externally funded research and development projects are expensed to that contract immediately. Items held for the Company’s own
development are also expensed when acquired. Items purchased for ongoing commercial sale are held in inventory and expensed when
used or sold.

Company

Raw materials and consumables
Finished goods

Total

2016
£’000

95
1,366

1,461

2015
£’000

77
1,316

1,393

In 2016, the Company wrote off £104,000 of the value of an inventoried reactor as a reflection of the fact that its selling price is below cost.
The book value of the inventoried reactor is £311,000.

23. Short term investments, cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with
original maturities of three months or less. Bank accounts held which have an original maturity of more than three months, or which are
subject to significant restrictions over access are shown as short term investments or other financial assets with appropriate disclosure
of the related terms. See note 28.

Company

Short term bank deposits
Cash at bank and in hand

Total cash and cash equivalents

2016
£’000

–
18,744

18,744

Both short term investments, and cash and cash equivalents, are denominated in UK sterling and in US dollars, as follows:

UK sterling denominated

Company

Short term bank deposits
Cash at bank and in hand

Total UK sterling denominated

US dollar denominated

Company

Short term bank deposits
Cash at bank and in hand

Total US dollar denominated

The parent company has no cash or cash equivalents (2015: £nil).

2016
£’000

–
7,114

7,114

2016
£’000

–
11,630

11,630

2015
£’000

3,000
34,736

37,736

2015
£’000

3,000
23,570

26,570

2015
£’000

–
11,166

11,166

66 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 67

Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

24. Trade and other payables: current
Provisions for claims are recognised when the Company has a present constructive or legal obligation as a result of past events, and it is
probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. See note 28.

Company

Trade payables
Other taxation and social security
Accruals
Deferred income
Deferred consideration

Total

2016
£’000

722
51
991
508
–

2,272

2015
£’000

1,372
14
3,265
2,638
91

7,380

The parent company has trade and other payables of £72,000 (2015: £140,000), all of which are accruals.

Due to their short maturity, the fair value of trade and other payables are not considered to be materially different to their carrying values,
based on discounted cash flows.

All trade payables are due in 60 days or less (2015: 60 days or less).

Deferred consideration relates to the acquisition of VPS in 2014, under which a number of ‘holdback’ shares were designated to cover
post-acquisition adjustments; these shares were issued during 2016.

25. Trade and other payables: non-current

Company

Accruals
Deferred income

Total

2016
£’000

110
1,233

1,343

2015
£’000

65
1,262

1,327

The fair values of trade and other payables are not considered to be materially different to their carrying values.

Deferred income for 2016 includes funds received for catalyst to be earned over a two-year period commencing at the start-up of the
ENVIA reactors.

26. Borrowings
Maturity of borrowings for the Company is as follows.

Company

Within one year
Within two to five years

Total

2016
£’000

323
593

916

2015
£’000

288
759

1,047

The majority of Borrowings relates to a loan entered into on 1 December 2009 by Velocys plc’s wholly owned subsidiary, Velocys, Inc. with
the State of Ohio (the State) allowing Velocys, Inc. to borrow up to $2.25m to fund qualified capital projects for research and development
projects. All such projects were required to be completed by 31 August 2012 and have 25% of costs funded by Velocys Inc. The interest rate
for the loan is 2.00% per annum with a service fee of 0.25% on the principal balance. The Company’s fixed rate borrowings are carried at
amortised cost. They are therefore not subject to interest rate risk as defined in IFRS 7, since neither the carrying amount nor the future
cash flows will fluctuate because of a change in market interest rates. The loan is repaid to the State using a blended payment schedule
as follows.
For the first five years of the loan, the principal is paid in consecutive monthly instalments based upon an original amortisation over

20 years with any interest accrued during that particular month.

For the remaining term of the loan, the principal is paid in consecutive monthly instalments based upon the remaining term of the loan

(five years) with any interest accrued during that particular month.

The loan is secured by all plant and machinery acquired using the loan proceeds as well as a guarantee of payment provided by the parent
company. The gross book value of the capital projects secured is £2,672,000 (2015: £2,217,000). The loan was fully drawn down in 2012.
After repayments of principal, the amount outstanding on the loan as at 31 December 2016 is £880,000 (2015: £964,000).

All remaining Borrowings of £36,000 (2015: £83,000) arise from finance lease obligations. The fair values of Borrowings are not considered
to be materially different to their carrying values based on discounted cash flows.

27. Derivative financial instruments
The Company is funded in sterling but buys US dollars to fund its operations in the United States, which exposes it to foreign exchange
risk. This is mitigated through the use of forward contracts at fixed rates of exchange with fixed maturity dates. Derivative financial
instruments are initially recognised at fair value on the date the derivative contract is entered into and are subsequently remeasured at
fair value at each balance sheet date using values determined indirectly from quoted prices that are observable for the asset or liability.
This is a level 2 fair value measurement. Gains and losses against the US dollar exchange rate as at 31 December 2016 are recognised
in Finance income in the Income statement. At 31 December 2016 the notional principal amounts of the outstanding forward foreign
exchange contracts were £2,714,000 (2015: £3,217,000), and the revalued amounts were £3,251,000 (2015: £3,373,000). The unrealised
foreign exchange gain on these contracts as at 31 December 2016 was £537,000 (2015: £156,000). All the outstanding contracts will
mature during 2017.

28. Financial instruments
Financial assets
The Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables
and available-for sale. The classification depends on the nature of the asset and the purpose for which the assets were acquired.
Financial assets are classified upon initial recognition.

Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.

The Company’s principal financial asset is Cash and cash equivalents. In 2015 it also held short-term investments, which are cash
deposits on fixed terms of interest for more than three months (see note 23).

Loans and receivables also includes Trade receivables and Other receivables (see note 21), which are classified as current assets, and
the loan to ENVIA (see notes 19 and 20), which is classified as non-current as its maturity is more than 12 months from the balance
sheet date. Loans and receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective
interest method, less provision for impairment.

Assets at fair value through profit and loss
Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed
in the Consolidated income statement.

For Velocys, this category includes only derivative financial instruments (see note 27). The Company enters into forward contracts
to mitigate the risk of needing to fund its US operations in dollars. An asset is recognised when there is a foreign exchange gain upon
re-measurement of the contract. The Company hasn’t taken a forward position further than 12 months from the reporting date.
Therefore all assets have been recognised as current. The gain or loss on re-measurement to fair value is recognised immediately
in the Income statement, in Net finance income.

Available for sale
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other
categories. They are included in non-current assets unless the investment matures or management intends to dispose of the assets
within 12 months after the balance sheet date. Available for sale financial assets are subsequently carried at fair value; movements
are recorded in the Statement of comprehensive income.

In 2015 the Company’s investment in ENVIA was recognised as an Available for sale financial asset. At the end of January 2016
the investment and voting interest were increased and was subsequently recognised as an Investment in associate (see note 20).
Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit
or loss.

Financial liabilities
Financial liabilities are classified according to the substance of the contractual arrangements entered into. In 2015 and 2016 the
Company had only one category of liability.

Financial liabilities at amortised cost
Financial liabilities at amortised cost includes Trade payables, all of which are current liabilities (see note 25), Borrowings and Finance
leases (see note 26). Trade payables are stated at fair value and subsequently held at amortised cost using the effective interest
method. Under Borrowings, interest bearing loans and overdrafts are initially recorded at the fair value of proceeds received net of direct
issue costs, and thereafter at amortised cost. Finance charges, including premiums payable on settlement or redemption and direct
issue costs, are recognised in the income statement using the effective interest method and are added to the carrying amount of the
instrument to the extent that they are not settled in the period in which they arise.

All of the above financial assets and liabilities are level 2 fair value measurements.

68 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 69

Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

28. Financial instruments (continued)
Financial risks
The activities of Velocys expose it to a number of financial risks, which are dealt with specifically below.

Interest rates
Variations in interest rates affect only Velocys’ cash holdings, as its borrowing is payable at a fixed rate. As far as the cash flow forecast
allows for certainty, funds are placed on fixed rate deposits. The effect of interest rates on exchange rates is not anticipated.

Financing
The Company’s cash usage is significant versus prospective future cashflows (particularly in the short term) and Velocys is reliant on
the support of a small group of major shareholders. The timing of cashflows is difficult to predict given the Company’s nascent strategy.
The Board recognises that further funding will be needed. Note 2 discusses uncertainties surrounding the extent and composition of
future funding. The Company believes that equity remains the preferred structure to support the business as a going concern in the near
term, but will keep this under review. The recently announced fundraise included the issue of loan notes that are convertible into equity.
As such, in management’s view, they have the key characteristics of equity. Velocys continues to take measures to preserve cash in order
to protect against unforeseen events.

Equity forms the basis of the Company’s capital. Its objectives when managing this capital are:

To secure its ability to continue as a going concern.
To keep its cost of capital low through an optimised capital structure.
To preserve sufficient funds to protect it against unforeseen events and risks.
To be in a position to take advantage of opportunities that can deliver a return to shareholders.

The Company’s revenue stream relies on projects incorporating its technology securing project finance. The Company’s strategy is to take
a pro-active role in this process. It is actively engaging with banks and financial advisors with high levels of expertise in project financing
to support the financing plans for the types of projects it is developing.

Exchange rates
A significant proportion of commercial activity and R&D costs are US-dollar denominated. Where possible, revenue is receipted in
US dollars to act as a natural hedge against this exposure. Additionally, a proportion of liquid assets is held in US dollars, and future
exchange rate uncertainty is managed through the use of forward contracts at fixed rates of exchange.

The use of financial derivatives is governed by Company policies, which are approved by the Board of directors, and which provide a set
of written principles for the management of these risks. At present Velocys makes use of financial derivatives only in the management
of the foreign exchange exposure arising from funding its US operations.

The consolidated financial statements contain significant US-dollar denominated intangible assets relating to the acquisition of Velocys,
Inc., which give rise to movements in reserves when exchange rates fluctuate. These movements are not hedged as they do not impact the
cash position.

Financial assets are as follows.

Company

Assets as per balance sheet
Derivative financial instruments
Trade and other receivables excluding non-financial assets
Short term investments – funds held on deposit
Cash and cash equivalents

Total

Company

Assets as per balance sheet
Available-for-sale financial assets
Derivative financial instruments
Trade and other receivables excluding non-financial assets
Short term investments – funds held on deposit
Cash and cash equivalents

Total

The credit risk of short term investments and cash and cash equivalents is summarised in the following table.

The table below illustrates the Company’s sensitivity to changes in the US dollar exchange rate at the balance sheet date. The analysis
covers only financial assets and liabilities.

Short-term bank deposits, cash at bank and in hand

GBP:USD exchange rate +/- 10%

Income
statement
£’000

1,421

2016

Equity
£’000

1,421

Income
statement
£’000

1,157

2015

Equity
£’000

1,157

Aa2
Aa3
A1
A2
A3

Total

2016

3
47
47
–
3

£’000

663
8,817
8,747
–
517

18,744

Liquidity
The Company maintains sufficient cash balances to meet anticipated requirements. Cash flow forecasts are regularly reviewed,
cash balances are held immediately available as necessary, and surplus funds are placed on time deposits of varying duration.

Credit
The Company’s credit risk is primarily attributable to its trade receivables, which are concentrated in a small number of high value
customer accounts. This risk is managed by carrying out relevant financial checks on customers, and where necessary, requiring letters
of credit or advance payments.

The credit risk of liquid funds is limited through a Company treasury policy, maintained to ensure that liquid assets are only placed with
highly-rated institutions, and that the spread of such assets restricts exposure to any one counterparty. Risk is assessed using an external
credit rating agency’s long-term ratings.

31 December 2016

Loans and
receivables
£’000

Assets at fair
value through
profit and loss
£’000

Available
for sale
£’000

–
765
–
18,744

19,509

537
–
–
–

537

–
–
–
–

–

Total
£’000

537
765
–
18,744

20,046

31 December 2015

Loans and
receivables
£’000

Assets at fair
value through
profit and loss
£’000

–
–
587
3,000
34,736

38,323

–
156
–
–
–

156

Available
for sale
£’000

3,375
–
–
–
–

3,375

£’000

3,447
5,698
15,044
12,034
1,513

37,736

Total
£’000

3,375
156
587
3,000
34,736

41,854

2015

9
15
40
32
4

70 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 71

Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

28. Financial instruments (continued)
Financial liabilities are as follows.

Company

Liabilities as per balance sheet
Borrowings
Trade and other payables excluding non-financial liabilities
Finance lease liabilities

Total

Company

Liabilities as per balance sheet
Borrowings
Trade and other payables excluding non-financial liabilities
Finance lease liabilities

Total

The aging of financial liabilities is as follows.

Company

Within one year
Within two to five years

Total

Financial assets of the parent company are as follows. The parent company has no financial liabilities.

Parent company

Assets as per balance sheet
Trade and other receivables excluding non-financial assets

Parent company

Assets as per balance sheet
Trade and other receivables excluding non-financial assets

Parent company loans and receivables are all intercompany loans.

31 December 2016

Financial liabilities
at amortised cost
£’000

880
722
36

1,638

31 December 2015

Financial liabilities
at amortised cost
£’000

964
1,372
83

2,419

2015
£’000

1,660
759

2,419

31 December 2016

Loans and receivables
£’000

47,770

31 December 2015

Loans and receivables
£’000

89,369

2016
£’000

1,045
593

1,638

29. Called up share capital and reserves
Called up share capital

Company and parent company

At 1 January 2015
Employee share options scheme: Shares issued

including 1p exercise price options

At 31 December 2015
Employee share options scheme: Shares issued

including 1p exercise price options

Holdback shares

At 31 December 2016

All shares have been issued, authorised and fully paid.

Number of
shares*
(thousands)

141,896

141,923

1,912
41

143,876

Ordinary
shares
£’000

1,419

–

1,419

19
–

1,438

Share
premium
£’000

149,225

(28)

149,197

(13)
91

149,275

A total of 11,811,991 (2015: 15,613,701) options to subscribe for ordinary shares of Velocys plc have been granted and are outstanding
at 31 December 2016 under the employee options schemes operated within the Company and contracts for options granted to a limited
number of consultants. Details are given in note 15.

On 25 June 2014 the Company acquired Velocys Project Solutions, LLC. A number of holdback shares was designated to cover
adjustments in the period after acquisition. The remaining balance of 41,644 shares was issued during 2016.

Reserves
Foreign exchange reserve relates to the exchange differences arising from the retranslation of the results and opening net assets of
foreign subsidiaries. Changes in the reserve are included in other comprehensive income. The Company’s foreign exchange reserve
was a credit balance of £7,051,000 (2015: a debit balance of £282,000).

The share based payment reserve records the IFRS 2 charge for equity settled share based payment awards. At 31 December 2016 the
Company’s and parent company’s share-based payment reserves were both £15,843,000 (2015: £15,362,000).

30. Commitments
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement
on a straight-line basis over the period of the lease.

The Company leases certain property, plant and equipment. Leases under which the Company incurs substantially all the risks and
rewards of ownership are classified as finance leases. Finance leases are capitalised on commencement of the lease at the lower of
the fair value of the leased property and the present value of the minimum lease payments.

Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance
outstanding. The corresponding rental obligations, net of finance charges, are included in other long-term payables. The interest element
of the finance cost is also charged to the income statement in Finance costs over the lease period so as to produce a constant periodic
rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases
is depreciated over the shorter of the useful life of the asset and the lease term.

Operating lease commitments
The Company leases various offices under non-cancellable operating lease agreements. The lease terms are between two and five years
and the majority of lease agreements are renewable at the end of the lease period at market rate.

Company

Future aggregate minimum lease payments under non-cancellable property leases:
– Within one year
– Between one and five years
– After more than five years

Total

2016
£’000

489
1,312
194

1,995

2015
£’000

408
1,217
415

2,040

72 Velocys Annual report and accounts 2016

Velocys Annual report and accounts 2016 73

Strategic reportGovernanceFinancial statements

Notes to the financial statements (continued)

Company

Future commitments under non-cancellable operating plant and equipment leases:
– Within one year
– Between one and five years

Total

Capital commitments are disclosed in note 18.

2016
£’000

2
7

2015
£’000

2
3

The Company is committed to make available additional loan funding to ENVIA of £7.2m ($9.3m), which is repayable by 31 December 2020.

The parent company does not have any commitments (2015: £nil).

31. Pension arrangements
The Company operates a number of defined contribution schemes for which the pension cost charge for the year amounted to £314,000
(2015: £326,000).

32. Related party transactions
The parent company has the following amounts due from its subsidiaries:

Balances with subsidiary companies

Velocys Technologies Limited
Velocys (USA Holdings) LLC
Velocys, Inc.

Total due from subsidiaries

2016
£’000

21,170
5,205
21,395

47,770

2015
£’000

58,637
6,191
24,541

89,369

All amounts are unsecured and have no fixed date of repayment. All intercompany loans are charged at 5%.

For 2016 the Company provided engineering services totalling £619,000 to ENVIA, an associate in which the Company has ownership and
voting rights as detailed in note 20. At 31 December 2016 the Company had a receivable due from ENVIA of £145,000. During 2016 Velocys
committed to provide up to $9,310,000 to ENVIA through a senior loan note, which bears interest of 10%, and is due for repayment on 31
December 2019 with an optional extension to 31 December 2020. As at 31 December 2016, one draw down on this facility had been made
by ENVIA in the amount of £325,000 ($400,000 - see note 20). In 2015 ENVIA was not a related party.

The Company provided engineering services of £110,000 to Norma Investments Limited, which is the parent company of Ervington
Investments, the largest shareholder in Velocys plc with a holding of 29.5% at 31 December 2016.

Oxford Catalysts Trustees Limited
At the time of exercising their share options, executives of the Company may apply to the employee benefit trust managed by Oxford
Catalysts Trustees Limited for a distribution in respect of the exercise value of their options. The trustees then request a contribution
from the Company in respect of the grant made. The total value of funds contributed by the Company to Oxford Catalysts Trustees Limited
during the year was £13,300 (2015: £nil).

33. Post-financial position events
The following events occurred after 31 December 2016.

On 17 January 2017 the Company announced that it had signed a memorandum of understanding with Morimatsu, the Company’s
preferred supplier of module fabrication and engineering. Velocys proceeded, on 3 March, to confirm that it had reached a definitive
agreement with Morimatsu.

On 26 January 2017 a strategic alliance was announced with TRI, the Company’s preferred supplier of gasification systems for its
biomass-to-liquids (BTL) plants.

On 6 February 2017 it was announced that first product had been made at ENVIA Energy’s GTL plant in Oklahoma City.

Velocys announced on 26 April 2017 that Mark Chatterji had stepped down from his position as Non-Executive Director.

The Company announced on 15 May 2017 that it had secured £10m of additional funding.

In May 2017 Velocys agreed to provide further loan finance to ENVIA of $3.4 million; this did not affect the Company’s share of ownership
or voting rights.

74 Velocys Annual report and accounts 2016

Design & production
www.carrkamasa.co.uk

Directors, secretary and advisors to the Company

Registered office
115e Olympic Avenue
Milton Park
Abingdon
Oxfordshire
OX14 4SA

Velocys plc registration no.
05712187

Directors
Pierre Jungels (Non-Executive Chairman)
David Pummell (Chief Executive Officer)
Susan Robertson (Chief Financial Officer)
Paul Schubert (Chief Operating Officer)
Julian West (Senior Independent Director)
Ross Allonby (Non-Executive Director)
Sandy Shaw (Non-Executive Director)

Company secretary
Jeremy Gorman

Nominated advisors and joint brokers
Numis Securities Limited
The London Stock Exchange Building
10 Paternoster Square
St Pauls
London
EC4M 7LT

Joint brokers
Canaccord Genuity Limited
88 Wood Street
London
EC2V 7QR

Registrars
Capita Registrars Ltd
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU

Bankers
Barclays Bank Plc
Wytham Court
11 West Way
Oxford
OX2 0JB

Public relations
Camarco
107 Cheapside
London
EC2V 6DN

Independent auditors
PricewaterhouseCoopers LLP
3 Forbury Place
23 Forbury Road
Reading
Berkshire
RG1 3JH