Vita Life Sciences Limited Annual Report 2017

FY2017 Annual Report · Vita Life Sciences Limited

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Pivoting to
renewable fuels

Annual report and accounts 2017

Velocys is part of a growing movement to
produce increased volumes of renewable
fuels, in our case primarily from forestry
residues. Our process is one of the few cost
effective ways to meet the economy’s need
for large quantities of sustainable fuels.
Our technology and operational expertise
were pivotal in delivering the world’s first
commercial scale smaller scale gas-to-
liquids plant. Now we are using our unique
capabilities to drive the development of
what will be a series of biorefineries, with
our partners, from concept to full operations.

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Product offtake from ENVIA’s biorefinery in Oklahoma City – the first commercial project incorporating Velocys’ technology.

The challenge

The solution

Market strategy

Petroleum based fuels emit
greenhouse gases and pollution
and are not sustainable or
renewable.

Abundant sustainable and
renewable feedstocks exist.

Identify attractive markets with
scale and optimal locations for
future plants.

Demand for diesel and jet fuel
continues to increase, making the
challenge bigger.

CO2

1st and 2nd generation biofuels
have not maximised sustainable
carbon emissions reductions.

2nd generation advanced
cellulosic biofuels projects are
capital intensive and require
legislative support.

Legislation at the national and
state levels supports advanced
2nd generation biofuels and
momentum is building.

Focus on our priority market:
US biomass residues to renewable
jet and diesel.

Velocys with its commercial scale
technology and new business
model is now entering renewable
fuels markets to grow a material
supply position.

Build consortia of strategic and
financial partners to deliver
investment, scale and pace
to market.

Leverage our engineering,
operational and technology
expertise to optimise future
plant costs and timelines.

www.velocys.com

Velocys plc Annual report and accounts 2017

www.velocys.com
Velocys plc Annual report and accounts 2017

iii

“I believe we will look back at 2017 as the year Velocys
transformed into a renewable fuels company. Although
some of these changes were difficult they have set up the
Company for the future delivery of multiple biorefineries
and long-term sustainable growth. The ENVIA plant has
validated our Fischer-Tropsch technology at commercial
scale and from this platform we plan to grow and be
at the forefront of supplying significant quantities
of cellulosic renewable fuels. We have a demanding
plan to deliver in 2018, but we are well placed to meet
these challenges.”

David Pummell
CEO

Read more on page 14.

www.velocys.com
www.velocys.com

Velocys plc Annual report and accounts 2017 3
Velocys plc Annual report and accounts 2017 3

Our focus markets
Following the Company’s 2016 strategy review Velocys
identified the market for renewable fuels in the United States
as being particularly attractive for the commercialisation of its
technology. This large and rapidly growing market is Velocys’
immediate focus. Our strategy has the objective of creating
sustainable growth.

Market of primary focus

More renewable fuels are urgently
needed in the global fuel market.
Many governments have mandated driving
down greenhouse gas emissions by using
cleaner, renewable fuels – a move widely
supported by environmental agencies
and non-governmental organisations.
More are expected to follow suit. Industry
and consumers also want to drive
down their carbon footprint and reduce
emissions cost-effectively, and swiftly.

In the US, diesel consumption is around
40bn gallons/year with 25% growth
predicted by the EIA to 2040. There is an
urgent and increasing demand for
drop-in renewable fuels in this market
that are fully compatible with existing
infrastructure and engines. In California
alone, the consumption of renewable
diesel in 2016 was an estimated 300m
gallons, but by 2030 the State will need
some 1bn gallons of renewable diesel
to meet its own obligations.

US renewable fuels

The US jet fuel market is around
20bn gallons/year, and the US Energy
Information Administration (EIA) expects
an increase in global air travel by
over 3% per year in the coming years.
The airline industry (ICAO) has committed
to carbon-neutral growth by 2020 and
a 50% reduction in emissions by 2050.
Incremental operational efficiencies will
go a small way towards meeting these
targets but nothing less than a huge
increase in the supply of renewable
jet fuel will be needed if they are to
be met. By 2022 there is expected to
be a worldwide demand of more than
two billion gallons/yr of renewable jet
fuel based on carbon neutral growth,
of which more than 700m gallons per
year will be required in North America.

Using Velocys’ technology, renewable
fuels can be made cost-effectively
from abundant reserves of biomass
feedstock – meaning that scale of
uptake is not restricted by feedstock
availability. There is a plentiful supply
of woody biomass in the US from entirely
sustainable sources that do not compete
with food crops for land. The forestry
industry in the Southeastern United
States has been in decline from falling
demand for newsprint and paper;
the infrastructure servicing the industry
has spare capacity in many locations.
As evidenced by, for example, the US
Department of Energy’s 2016 Billion Ton
report, by 2030 it is estimated that there
will be available over 200m dry tonnes/
year of economically-accessible, non-
federal timberland forestry biomass
in the US – enough to support several
dozen Velocys plants.

UK waste-to-sustainable jet fuel

The changes to the Renewable Transport
Fuel Obligation (RTFO) that passed
through Parliament in March 2018
(post-period end) are encouraging the UK
to become a world leader in sustainable
jet fuel. Millions of tonnes of waste are
exported from the UK every year. The RTFO
development fuel target for 2022 is 100m
gallons/year. No qualifying development
fuels are currently produced in the UK
and a Velocys waste-to-jet fuel project
would produce between 10 and 20% of
the target. A Velocys waste-to-jet fuel
plant could sell Renewable Transport
Fuel Certificates worth up to £1.6/litre
for a portion of the fuel.

4 Velocys plc Annual report and accounts 2017

www.velocys.com

Legislative support in the US

In the US, the Renewable Fuel Standard
(RFS) was enacted by Congress in
2005 under the Energy Policy Act
(and enhanced in 2007 under the Energy
Independence and Security Act) to
move the United States towards greater
energy independence and to increase
the production of clean renewable fuels.
Under the status quo of this long-standing
legislation, the programme continues
indefinitely, with no legislative sunset,
providing a long-term market and an
incentive for renewable fuel production. In
2016 over 18bn gallons of renewable fuels
were produced or imported into the USA
that qualified under the RFS.

Under the RFS, Renewable Identification
Numbers (RINs) are credits used to
track compliance for obligated parties
(oil companies who produce or import
gasoline and/or diesel fuel), and are the
“currency” of the programme. Yearly
volume requirements (Renewable Volume
Obligations, RVOs) are set for the obligated
parties. Renewable fuel producers
generate RINs, market participants trade
the RINs and obligated parties either
produce their own RINs or purchase
RINs and then ultimately retire RINs for
compliance, supplying the renewable fuel
into the wider fuel market for on-highway
use. RINs therefore carry a monetary value
and act as a market-based incentive.

Types of RFS-qualifying fuels

Biom a s

- B ased Die

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i c Biofuel

ellulo

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California

In California in 2006, the Legislature
passed the California Global Warming
Solutions Act, which created a
comprehensive, multi-year programme to
reduce greenhouse gas (GHG) emissions.
Renewable diesel sold in California
also qualifies for State Low Carbon
Fuel Standard (LCFS) credits, traded in
terms of carbon emissions prevented,
and are currently worth around $0.8
- $1.2 per gallon for fuels that have a
60% GHG reduction. In 2016, legislation
was passed that codifies a 2030 GHG
emissions reduction target of 40% below
1990 levels. Requirements similar to
those in California are in place in Oregon,
Washington State and several Canadian
provinces. States in the North Eastern
US, such as Massachusetts, are also
considering an LCFS-type regulation.

Fuels produced by Velocys

The fuels produced at Velocys’
biorefineries using woody biomass as
feedstock are expected to qualify as
Cellulosic Biofuel under the RFS, for
which the highest level of greenhouse
gas reductions must be demonstrated.
An indicative value of these D7 RINs is
currently around $4½ – $5 per gallon.

The 2018 RVO for Cellulosic Biofuel is
288m gallons, yet the supply of D7 RINs
is currently limited. A total of only 400,000
D7 RINs have ever been generated within
the US. ENVIA is expected to generate
around 100,000 D7 RINs per month and
Velocys’ Mississippi biorefinery is being
designed to generate over 30m D3/ D7
RINs per year. Delivering an ongoing
domestic source of Cellulosic Biofuel
will be a significant milestone for the US
renewable fuels industry.

2018 Renewable Volume Obligations (RVOs)

19.29bn gal

Total Renewable Fuel

4.29bn gal

Advanced Biofuel

2.1bn gal

Biomass-Based Diesel

288m gal

Cellulosic Biofuel

Renewable fuel to be produced
at Velocys’ biorefinery

20m gal/yr

From 2023

www.velocys.com
www.velocys.com

Velocys plc Annual report and accounts 2017 5
Velocys plc Annual report and accounts 2017 5

Chairman’s statement

“Velocys is pursuing its new strategy and has completed
its shift to becoming a renewable fuels business. It did so
in mid-2017 after taking decisive action to capitalise on its
achievements at ENVIA. The Company has strengthened
its Executive Committee and adapted its organisational
structure as it continues to build a strong team that has
the long-term aim of delivering repeatable biorefineries.”

Dr. Pierre Jungels, CBE
Chairman

Introduction

Strategy and market

2017 has been a year of considerable
change for Velocys as it has pivoted from
being purely a technology licensor to
setting the foundations for future profit
delivery as a renewable fuels company.
After many years of concerted effort,
encompassing R&D, engineering, project
management and relationship building,
the first commercial scale plant using
Velocys’ technology is in operation in
Oklahoma City. Velocys has also advanced
its new strategy for commercialising its
technology; in 2017 the Company made
considerable progress driving forward
the development of its first biorefinery
using woody biomass as feedstock.
Notwithstanding the progress made
throughout 2017, given the particular
circumstances of the business’ financial
position at year end the Company decided
to make a significant impairment against
a range of, primarily, intangible assets.

The creation of a world-leading technology
that is operating at commercial scale has
been a significant achievement. But now,
as well as seeking opportunities to
license its technology, Velocys is focused
on its commercialisation through the
delivery, with its partners, of repeatable
biorefineries to become a producer
of significant volumes of cellulosic
renewable fuels. We will remember
2017 as the year Velocys transitioned from
technology development to its commercial
roll-out, which has meant the winding
down of R&D programmes both in the UK
and the US. The Company has maintained
its corporate and commercial office in
the UK.

After conducting its detailed strategic
review, Velocys has taken the decision
to focus its resources on the renewable
fuels market. Our analysis shows that
the Velocys route to the production of
renewable fuels can be cost-effective
using the reserves of sustainable biomass
feedstock that are abundant in the US.
Unlike other routes to renewable fuel
production these biorefineries will not be
constrained by the amount of feedstock
available, and will therefore be well
positioned to deliver significant quantities
of renewable fuel to a large and growing
market at a competitive price.

In a move that is consistent with our
renewable fuels strategy of delivering
integrated plants in collaboration with
partners, we are also in the early stages of
developing a UK waste-to-jet fuel project
with world-class partners, which include
British Airways.

Other market opportunities, such as
stranded gas conversion to liquids
or waxes, are still available and their
attractiveness to Velocys will continue to
be reviewed if market conditions change
in the future. These opportunities give the
Company future optionality.

Management and Board

In 2017 and early 2018 there were a
number of changes to the Board. Andrew
Morris was nominated as a Non-Executive
Director and Chair of the Audit and Risk
Committee at the start of June 2017,
in place of Non-Executive Director
Mark Chatterji who left the Board in
April 2017. Ross Allonby and Julian West
left the Board in June 2017 and February
2018 (post-period end) respectively.
On behalf of the Board I thank Mark,
Ross and Julian for their contributions
to the Company. I would like to welcome
Andrew, who brings a wealth of financial
and business experience from companies
similar to Velocys in terms of size, sector
and complexity.

The appointment of Andrew Morris has
helped to align Board competencies to
those needed to guide the delivery of the
Company’s strategy. Board costs have
been reduced through the reduction in the
number of Non-Executive Directors, and
by reducing the fees paid to existing
Non-Executive Directors by 10%.

Susan Robertson stepped down as
Chief Financial Officer in August 2017,
a role she held for nine years. I would
like to thank Susan for her contribution
to Velocys during that time. In the
summer we welcomed John Tunison
as Interim CFO.

6 Velocys plc Annual report and accounts 2017

www.velocys.com

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Introduction to our corporate governance

Our governance principles

Velocys has the ambition to grow
significantly, and to develop into a
multinational business. The Company
is in the process of implementing the
required business level governance that
is both scalable and has the flexibility
to meet the requirements of delivering
the new strategy. This governance covers
the processes required to manage
the route into the renewable fuels
market, with defined critical activities
and key milestones that will drive risk
management and decision making at
both the executive and Board levels.

The composition of the Board has
reflected the development of the
Company, with a shift in emphasis
towards expertise in business,
legal and finance.

Taking a lead

Adopting the corporate governance
practices that the Company will need
in the future.

The Corporate governance report on pages
26 to 29 gives:
A clear and honest view of progress

throughout the year.
The outcome of our Board evaluation.
Disclosure of Board discussions and the

resulting actions.

Our approach to risk and mitigation.
Issues associated with closing the

Company’s UK-based laboratories and
the associated sales of assets.

Managing risk

Assessing the risks facing the business
and overseeing management’s strategies
for mitigating these risks.

Engaging with shareholders

Ensuring shareholders are kept
informed of the Company’s direction and
achievements through regular contact.

Supporting management

Constructively challenging the team on its
plans and delivery.

Fundraising

Outlook

Velocys completed a fundraise of over
£10m (before expenses) in May 2017
primarily through the support of existing
shareholders, who we thank for their
continued support. The proceeds
raised were used primarily to fund
the pre-FEED (FEL-2) engineering
study for the Mississippi biorefinery
project, to undertake a joint technology
demonstration with our partner TRI,
and to extend Velocys’ loan arrangement
with ENVIA to support the plant in
achieving steady state operations.

In January 2018 (post-period end) £18.4m
(before expenses) was raised through
a further fundraise, principally to help
fund the development of our Mississippi
biorefinery project, and to secure strategic
investment into it. We included an open
offer element in this fundraising round
to enable all eligible shareholders an
opportunity to participate. Our existing
major shareholders again demonstrated
their considerable support, but at the
same time we were pleased by our ability
to extend our shareholder base. The Board
recognises that additional funding is
still required to reach final investment
decision (FID) on the Mississippi
biorefinery project; further details are
given in the Financial review and note 2.

Velocys is pursuing its new strategy and
has completed its shift to becoming
a renewable fuels business. It did so
mid-2017 after taking decisive action
to capitalise on its achievements at
ENVIA. The Company has strengthened
its Executive Committee and adapted its
organisational structure as it continues
to build a strong team that has the
long-term aim of delivering repeatable
biorefineries. Velocys has transformed in a
short time and its primary focus is to drive
the delivery of the FID for the Mississippi
biorefinery project, which the Company
is targeting in the second half of 2019.
A key step in this process will be to bring
on board one or more strategic investors
into the Mississippi project consortium
to meet the remaining development
capital requirement.

Dr. Pierre Jungels, CBE
Chairman
22 May 2018

www.velocys.com

Velocys plc Annual report and accounts 2017 7

CEO’s report

Pivoting to renewable fuels

ENVIA’s plant in commercial production and RINs verified.
Strategy pivot to a renewable fuels company.
Sustained progress on Mississippi biorefinery project development.
Fundraising to support plan to achieve final investment decision for

the Mississippi biorefinery.

Partnership formed to develop UK waste-to-renewable jet fuel project.
Significant impairment made against a range of, primarily,

intangible assets.

David Pummell
Chief Executive Officer

Introduction

2017 was a challenging year for Velocys,
but despite this, the Company has made
significant progress towards developing
what we expect will be the first of a
number of repeatable biorefineries. Our
strategy is for Velocys to be at the heart
of building plants that convert forestry
residues into renewable fuels for the US
market. Considerable headway has been
made on the interrelated work streams
required to progress the US Department
of Agriculture (USDA) loan guarantee
programme, including the delivery of the
FEL-2 engineering study, and securing
a 100-acre site in Natchez, Mississippi.
The performance milestones the Velocys
Fischer-Tropsch (FT) system reached at
a commercial scale at ENVIA during 2017
and the first part of 2018 were crucial
milestones on the way to delivering our
future biorefineries.

None of this would be possible without the
efforts of our talented, energetic team that
has stepped up to the challenges we have
faced with great determination, skill and
prior experience. I particularly thank them
for their professionalism during the internal
restructuring process undertaken in the
summer of 2017.

Strategy implementation

With the ENVIA biorefinery in operation,
the Company has the required commercial
and technology springboard from which
it aims to deliver its bold, long-term
vision to place Velocys at the forefront of
production of cellulosic renewable fuels.
With a reorganisation of the senior team
and the appointment of John Tunison as
Interim CFO we now have a strong Executive
Committee to bring decisive leadership
to deliver this goal.

The three pillars of the strategy we have
adopted are outlined on page 3. We are all
focused on the delivery of the next phase on
this journey. We are building a consortium
of strategic and financial partners to deliver
investment, scale and pace to market
and are leveraging the Company’s project
management, commercial, engineering,
operational and technology expertise to
optimise future plant costs and timelines.

In the summer of 2017, after it had
been demonstrated that the Velocys
technology installed at ENVIA’s Oklahoma
City plant was performing as expected
at a commercial scale, we concluded
that the primary phase of our technology
development programme had been
successfully completed. In July 2017 we
ceased certain R&D activities and total
headcount was reduced from 76 at the
end of 2016 to 42 at the end of 2017.
The changes made allowed us to direct
our resources towards those business-
critical areas in which milestone-delivery
is all important in the short and medium
term. They will also reduce the ongoing
operational costs of the business by nearly
£2m per year.

The Company has maintained a corporate
and commercial office in the UK, from
where it will direct the implementation
of its strategy and commercialisation
of its considerable intellectual property
portfolio. These UK-based capabilities
are now located at the Harwell Science
and Innovation Campus, and include the
project management team supporting the
UK waste-to-renewable jet fuel project.
We will continue to expand and develop our
capability to develop our US biorefineries
from our operational base in Houston. In
addition, we will further scale up resources
to support the clients licensing our
technology as well as to ensure protection
of our intellectual property.

Our two fundraises in the last 12 months
have provided us with a runway to
implement our strategy, most notably to
support the plan to achieve final investment
decision (FID) for the Mississippi biorefinery
project. As outlined in the Financial review
(see page 17) further funding is required to
reach this milestone. The Financial review
(and note 17) also outlines the reasons
behind a significant write down in value
of certain assets, mostly Goodwill and
In-process technology made in these
report and accounts.

Our biorefineries

ENVIA
In 2Q 2018 we announced the disappointing
news that a leak has been detected at the
Oklahoma City plant that is believed to
have originated inside one of the plant’s
two FT reactors. Based on a preliminary
investigation the Company believes the
root cause of the issue originated with the
design of an ancillary system and is not
a result of a flaw in the core Velocys FT
technology. The Company is working with
ENVIA and third party consultants to verify
the root cause of the leak. Velocys remains
committed to the ENVIA plant and will work
with ENVIA to assess the likely repair cost
and consequent funding requirements.

Successive milestones were met at ENVIA
over the course of 2017, as outlined on
page 10. Most recently (post-period end),
we were pleased to report that the RINs
produced at ENVIA were verified under the
Quality Assurance Program approved by
the US Environmental Protection Agency.

ENVIA has achieved significant milestones
in the last 12 months, notwithstanding
a number of other challenges. For example,
in Q2 2017, the Engineering, Procurement
and Construction (EPC) contractor entered
bankruptcy proceedings; the plant was
down or in reduced operation for several

8 Velocys plc Annual report and accounts 2017

www.velocys.com

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Biorefinery being developed
by Red Rock Biofuels

In May 2018 (post-period end) Velocys’
customer, Red Rock Biofuels (RRB),
started constructing the biorefinery it
is developing in Oregon, USA, which will
incorporate Velocys’ technology. The third
party developer has issued a notice to
proceed for the manufacture of Velocys’
FT reactors and catalyst. RRB’s Lakeview
project is expected to deliver around $15m
revenues to Velocys during construction
and early operations of the plant, and
an additional $30m or more over the life
of the biorefinery. Over $6m has already
been invoiced and received from RRB.

The licensing of our technology to Red Rock
Biofuels biorefinery is complementary
to our strategy to develop our own
biorefineries.

Outlook

I believe we will look back at 2017 as the
year Velocys transformed into a renewable
fuels company. Although some of these
changes were difficult they have set up
the Company for the future delivery of
multiple biorefineries and long-term
sustainable growth. The ENVIA plant has
validated our FT technology at commercial
scale and from this platform we plan to
grow and be at the forefront of supplying
significant quantities of cellulosic
renewable fuels. We have a demanding
plan to deliver in 2018, but we are well
placed to meet these challenges.

David Pummell
Chief Executive Officer
22 May 2018

“I believe we will look back at 2017 as the year
Velocys transformed into a renewable
fuels company.”

weeks in early 2018 (post-period end)
while repairs were carried out after
extreme cold weather; and, as part of
normal plant commissioning, a series of
improvements have been made to control
systems and other equipment to minimise
plant downtime and improve reliability.
More details are given on page 10.

After the experiences of the last 12 months,
I have enormous confidence in Velocys’
highly-skilled technical team that are called
on by ENVIA to support the Oklahoma plant.
While ENVIA remedies the present issue,
ENVIA’s aim will be to operate the plant
using one reactor. ENVIA is working with
Velocys, the licensor, to develop a solution
that will return the plant to full operation
with minimal loss of revenue, whilst always
assuring safety and minimising the risk
of adverse impact to the environment.
Working through these obstacles at
the Oklahoma plant has afforded a
number of learning opportunities that
Velocys will apply to future biorefineries,
reducing technology risk and further
optimising operations.

An impairment was made against Velocys’
investment in ENVIA, predominantly driven
by a less ambitious revenue forecast based
on a revision of operational availability and
product and RIN pricing.

Mississippi biorefinery
Throughout 2017 we made encouraging
progress towards the development of our
first biorefinery in the US using woody
biomass as feedstock (see pages 12 and
13 for more details). We welcome the
significant support for the plant at county
and state levels. The local community
has responded positively to the prospect
of the quality jobs that the construction
and operation of the plant would bring
to the area.

Velocys and its partners are making
progress towards completing all the
required work packages to deliver
a successful USDA loan guarantee
application, secure project investment
and deliver the FID. Velocys selected an
engineering partner to carry out a scoping
and optimisation study. Velocys and its
engineering partner are working through
the complex process of cost and value
engineering, to optimise plant capital
cost, operating cost, carbon intensity and
the financial returns from the project.

Reaching FID will be subject to securing
further funding (see further details in the
Financial review on pages 16 and 17). Other
significant risks identified and associated
mitigation actions with the project
development programme are outlined on
pages 20 to 22.

Our target is to secure a conditional
commitment from the USDA in Q3 2018,
and to reach FID in 2H 2019. These, and
other intermediate milestones, are outlined
in the timeline on page 12.

Although our focus is the delivery of
the Mississippi biorefinery project,
we are looking beyond this plant, as our
strategic plan is to put in place strategic
partnerships that will deliver multiple
biorefineries. The site selection process
for the Mississippi biorefinery produced
a list of other highly suitable sites in
a number of other states.

UK waste-to-renewable jet fuel
Consistent with our core strategy of
delivering biorefineries producing
renewable fuels, in Q3 2017 we entered
into an industry partnership to develop
a waste-to-jet fuel plant in the UK.
Our approach to this opportunity
leverages further our technology,
integrated plant design and skills base.

Velocys intends to license its technology
to the plant and provide project
management, engineering, operations
and technical service support to the
project. The other project partners include
British Airways, that intends to offtake
the jet fuel produced. Velocys has led
the initial feasibility stage of the project,
for which all members of the partnership
provided funding.

Velocys believes that there is an
opportunity to develop a series of waste-
to-jet fuel plants in the UK and recognises
that there is a larger non-UK market to be
exploited. The changes to the Renewable
Transport Fuels Obligation (RTFO),
recently passed through Parliament, have
provided the commercial platform for
this opportunity; for the first time, jet fuel
is to qualify for credits under the RTFO.
These changes to the RTFO are designed
to promote sustainable aviation and
heavy goods transport and are expected
to provide long-term policy support for
this market.

www.velocys.com
www.velocys.com

Velocys plc Annual report and accounts 2017 9
Velocys plc Annual report and accounts 2017 9

Project overview – ENVIA
ENVIA Energy, LLC (ENVIA) is a joint venture, of which
Velocys is an equity partner, formed to produce renewable
diesel, naphtha and wax from landfill gas and natural gas.
The Velocys reactors and catalyst that are at the heart
of the plant are performing at commercial scale in line
with performance requirements. The same core Velocys
technology will be deployed in future biorefineries that we
and our partners are developing.

Operational milestones achieved

ENVIA, with significant financial,
operational and commercial support
from Velocys, achieved a number of key
milestones at the Oklahoma City site
over the course of 2017. In February 2017
the first Fischer-Tropsch (FT) products
were successfully produced. The first
finished, saleable products (waxes,
diesel and naphtha in the approximate
proportion 45%:45%:10%) were produced
in June 2017, and from September, ENVIA
commenced delivery of product to its
offtakers. In October, the key capacity
milestone of 200 barrels per day (bpd) was
successfully reached. This enabled the
impairment on the loan note recorded in
the 2017 interim statement to be reversed
(see note 20 for more details).

A large proportion of the products made
at the plant is manufactured using landfill
gas – a renewable resource. At the end
of December 2017, the fuel produced
at the Oklahoma City plant met the
necessary requirements to be submitted
for qualification under the Renewable
Fuel Standard (RFS), and as a result
ENVIA submitted a number of Renewable
Identification Number (RIN) credits to the
registration system.

In March 2018 (post-period end), the RINs
produced at ENVIA were verified under
the Quality Assurance Program approved
by the US Environmental Protection
Agency. In the same month, ENVIA signed
a RIN purchase and sale agreement with
TransMontaigne Product Services, LLC,
which will purchase, at a fixed price, all
of the available RINs generated for a six-
month term beginning in April 2018. This
was an important milestone for ENVIA as
a significant proportion of the revenues
of the plant could be derived from the
ongoing sale of RINs. Financial modelling
shows that RIN revenues are required for
the plant to be cash flow positive.

The RINs produced at ENVIA are the first
RINs generated by Velocys technology
and the first generated anywhere in
the US associated with a FT process
on landfill gas. This landmark in itself
represents a further validation step for
Velocys’ strategy to build biorefineries that
convert forestry residues to renewable

fuels. It also demonstrates that Velocys
has acquired the knowledge of the RIN
qualification system to enable it to secure
income from this revenue stream from its
future biorefineries.

The ENVIA plant management team has
implemented a strong Health, Safety
and Environment (HSE) culture that has
delivered over 600 days without lost time
injuries on site as of the end of March
2018 (post-period end).

Operational involvement for Velocys

Under a secondment agreement with
ENVIA, from July 2016 the Velocys
operations team brought essential
support to ENVIA during commissioning,
start-up and the early stage operational
optimisation. As planned, the majority of
the Velocys operational and engineering
team was demobilised in Q1 2017 as the
permanent ENVIA operations team was
phased in and fully trained. However, a
small number of key Velocys operational
management staff were seconded to
ENVIA under contract over a longer
transition period. The Velocys team
continues to support ENVIA operations.

Challenges and learnings

As part of the commissioning process,
throughout 2017 the ENVIA team,
supported by Velocys’ technical advisors,
implemented improvements to the
plant’s control system. This has removed
a number of single point failures of the
plant and has significantly decreased the
number of spurious trips associated with
the non-FT units, leading to improved
operational reliability.

Next operational steps

In the first few months of 2018 the
ENVIA team has continued to deliver
the plant improvements needed to
optimise production and increase plant
productivity. Until the leak reported
earlier this month has been remedied,
ENVIA’s aim will be to operate the plant
using one FT reactor. ENVIA’s priority is
to develop a solution that will return the
plant to full operation with minimal loss
of revenue, whilst always assuring safety
and minimising the risk of impact to
the environment.

ENVIA and Velocys are continuing to
accumulate performance data from the
ENVIA plant which will be shared with
potential industry and financial partners
for the Mississippi biorefinery.

In 2017 the commissioning and operation
of the ENVIA plant by the ENVIA team
brought many challenges and additional
learning points that Velocys, as licensor,
will be able to use in future projects. These
operational challenges required additional
funding of ENVIA from Velocys, and that
is discussed in the Financial review on
pages 16 to 17.

Capital expenditure and financing

The ENVIA plant reached mechanical
completion in September 2016. The plant
capex to that date was around $80m.
The capacity of the ENVIA plant was
designed to be 250 bpd, to match the
amount of landfill gas available from the
neighbouring landfill site.

At year end the Company’s investment
in ENVIA was impaired by £2.7m
predominantly to reflect a revision of the
expected income from RINs. ENVIA plant
finances and the increased equity stake
for Velocys are discussed in the Financial
review (pages 16 to 17).

The EPC for the ENVIA project, Ventech
Engineers International, LLC, entered
bankruptcy proceedings in April 2017,
during the commissioning of the plant.
(VPI LF-GTL, who is a part owner of
ENVIA Energy LLC, was not subject to
the bankruptcy proceedings). During
this period, Velocys was called upon to
leverage its experienced team of technical
advisors to support the ENVIA team on
site, which allowed work to proceed close
to the original plan, as well as supporting
the delivery of the subsequent operational
milestones.

10 Velocys plc Annual report and accounts 2017

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Product offtake from the Oklahoma City plant.

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Velocys plc Annual report and accounts 2017 11

Project overview – Mississippi biorefinery
Velocys’ first biorefinery using forestry residues as
feedstock is being developed in Mississippi, USA.
The Company has made considerable progress in 2017
towards the aim of achieving final investment decision
and construction. This is the first of an expected series
of biorefineries with standardised design. We have the aim
of developing a material supply position of renewable fuels.

Multiple
strategic
partners
selected

Mississippi
site announced

FEED
preparation
scoping and
optimising
study starts

SMBC preliminary credit

Plant
commissioning starts

USDA
conditional
loan guarantee

FID and sign feed/
offtake agreements

2017

2018

2019

2020

2021

Plant construction

USDA loan
guarantee
phase II
invitation

Integrated demo
unit start

Pre-FEED
complete

Introduction

Feedstock costs and plant revenues

Technology partners and suppliers

The first Velocys biorefinery using
forestry residues as feedstock will be
sited in Natchez, Mississippi. It is being
designed to produce approximately
20m gallons/yr of renewable fuels and
30m D3/D7 RINs/yr (from 2023) from
approximately 900 tonnes/day of dry
woody biomass residues.

Loan guarantee

A key milestone was reached in June 2017
when the US Department of Agriculture
(USDA) invited Velocys to submit a Phase
II Application to obtain a loan guarantee
for the biorefinery. The loan guarantee
could apply to up to $200m of debt as part
of the total installed cost of the project.
This would be one of the components
of the overall financing package for
the project and, if successful, would
financially de-risk the project. Velocys
has engaged the leading global project
finance bank Sumitomo Mitsui Banking
Corporation (SMBC) as the lender of
record. SMBC is also Velocys’ financial
advisor for the project.

~$1 per gal
Feedstock costs

22%

$6.90 per gal
Total revenues

70%

Federal
credits

State
credits

Product
revenue

The Company began the process of
selecting technology partners for its
biorefinery in early 2017 and continues to
assess and refine its choice of partners.
ThermoChem Recovery International
(TRI) is the Company’s partner for the
gasification of woody biomass. TRI is
an innovative leader in its field and has
committed significant resources to a joint
work programme. The Company is also
engaging with other technology licensors
in key areas of the process design,
integrating with Velocys’ Fischer-Tropsch
(FT) technology. The Company has signed
a supply contract for the fabrication of
its reactor cores with Alabama Specialty
Products, which has previously worked
with Velocys in the development of its
reactor cores and built the cores for its
demonstration reactors.

12 Velocys plc Annual report and accounts 2017

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Integrated technology demonstration

Early in 2017 the skid-mounted FT
section of the Velocys pilot plant was
relocated from Ohio to TRI’s facility
in Durham, North Carolina, where it
was combined with TRI’s gasification
technology to form an integrated
gasification/FT technology demonstration.
An initial run has been completed at
this integrated demonstration unit.

Site selection

In October 2017 Velocys signed a site
option agreement with Adams County
in the State of Mississippi to locate
a biorefinery in Natchez, Mississippi.
Velocys has been offered economic
development incentives from Adams
County estimated to be worth the
equivalent of $42m. The project expects
to qualify for additional incentives worth
up to $15m, provided via Mississippi’s
Advantage Jobs Act and other statutory
tax incentives. These incentive
packages would reduce the Company’s
future tax liabilities and are subject
to Velocys meeting certain minimum
requirements for capital investment
and local employment opportunities.

Velocys has also received commitments
from Adams County worth approximately
$4m, relating to the land and upgrades
to the site, and a further $1m site
upgrade commitments from local
utility suppliers.

The site and local area have many
advantages:
Excellent transportation

infrastructure options including
barge, rail and road.
Accessible utilities.

The availability of an abundant local
supply of low cost RFS-qualifying
forestry residues.

A local workforce skilled in servicing

the forestry industry.

Land that meets all the required
criteria including space and terrain to
support an industrial development.

A local community with facilities
and amenities that will attract
additional skilled personnel
during construction and ongoing
plant operations.

An attractive regulatory and

tax regime.

The 100-acre Natchez site was
confirmed after the Company analysed
a broad set of operational and tax
considerations at twelve possible sites
in four states in the Southeastern
United States. Due diligence was
completed at each of these sites and
incentive offers were received from
each state in question. This process
has laid the foundation for the potential
locations of future biorefineries.

Site permitting and environmental
review activities are ongoing and will
continue through to FID and beyond.
In the short term, review activities are
focused on finalising the Environmental
Assessment. Velocys has the aim of
being a responsible member of the
local community in Mississippi and
is engaging with the community and
local authorities to ensure that key
stakeholders are on board to create
a platform of success for the project.

Natchez Adams Port

Mississippi river

Bio-
refinery
site

Key

Proposed water wells & well header

Effluent piping & outfall

Railroad

Water mains

Electrical substations,
transmissions & distribution lines

Engineering

The pre-FEED engineering study was
successfully completed in Q4 2017 by
IHI E&C. In Q1 2018, after a competitive
process, Velocys selected an engineering
partner to carry out a scoping and
optimisation study. Velocys and its
engineering partner are continuing to work
through the process of cost and value
engineering to optimise plant capital cost,
operating costs, carbon intensity and the
total returns from the project. The phasing
of the FEED work is expected to allow FID
to be reached in 2H 2019.

Feedstock and offtake

The Company has agreed term sheets
with several potential offtakers for the
renewable fuels and the RINs and Low
Carbon Fuel Standard (LCFS) credits to be
produced by the Mississippi biorefinery.
Draft product offtake agreements are being
negotiated, and as such Velocys is well
placed to sign final offtake agreements
shortly prior to FID. After discussions
with a number of potential suppliers of
feedstocks to the biorefinery, the Company
has confidence that it can source sufficient
local RFS-qualifying feedstock that meets
the Company’s target overall feedstock
price. Feedstock agreements have been
prepared, and supply logistics are being
tested as part of the IDU process in order
to reduce operational risk. Velocys is a
member of the Roundtable on Sustainable
Biomaterials to ensure that it has all the
appropriate sustainability policies in place
supporting feedstock supply.

The programme delivering FID

The project continues to move forward
as planned but there remain a number of
risks that require mitigation as the project
advances (see pages 20 to 22). For example,
it is uncertain whether all the permits
will be secured to build and operate a
biorefinery on the site selected. There
remain a number of key milestones still
to be delivered, and in particular, project
equity funding has not yet been secured.
The immediate focus is to complete all the
work packages required by the USDA loan
guarantee programme. The Company is
in detailed discussions with a number of
potential strategic partners and is planning
to secure the investment to fund the
remaining project development activities in
the second half of 2018. The aim is to reach
FID during 2H 2019.

www.velocys.com

Velocys plc Annual report and accounts 2017 13

Project overview – UK waste-to-jet fuel

A partnership, including British Airways, Suez and Velocys,
has been formed to prepare the business case for the UK’s first
commercial scale waste-to-renewable fuels plant. This plant
would take hundreds of thousands of tonnes per year of post-
recycled waste, destined for landfill or incineration, and convert
it into clean-burning, sustainable fuels.

The market and project

The changes to the Renewable Transport
Fuels Obligation (RTFO), recently passed
through Parliament, provide the required
commercial platform for this project;
for the first time, jet fuel is to qualify for
credits under the RTFO. These changes
to the RTFO are designed to promote
sustainable aviation and heavy goods
transport; once implemented, they are
expected to provide long-term policy
support for this market.

All members of the partnership are
providing funding for the initial feasibility
stage of the project that began in
September 2017. The plant is being
designed to have a capacity of around
30,000 tonnes of fuel/year (10m gal/ yr).
The project is at an early stage and
therefore there remains uncertainty with
regards to: project economics, whether
the partners will be willing to fund the
project through successive development
phases to FID, and whether the

combination of risk and return will make
the project attractive to other investors
and lenders. However, the Company is
optimistic that the project will progress
to the next development stage and the
overall plan is that FID will be delivered
in 1H 2020.

The partners

Project benefits

Members of the partnership include:

CO2

Operation of the plant would lead to
significant reduction of the amount
of waste going to landfill.

The process is fundamentally different
to incineration. There are no toxic
emissions, no fly ash or bottom ash
and a greater proportion of the energy
content in the waste is reused.

The jet fuel produced is expected
to deliver over 70% greenhouse
gas reduction and 90% reduction
in particulate matter emissions
compared with conventional jet fuel,
thereby contributing to both carbon
emissions reductions and local air
quality improvements around
major airports.

Each 10,000 tonnes of renewable road
fuels produced would result in a net
reduction of CO2 equivalent to taking
7,600 cars off the road.

The planned plant would produce
enough fuel to power all BA’s flights
on the Boeing 787 Dreamliner from
London to San Jose, California and
New Orleans, Louisiana.

Velocys intends to supply its technology
to the plant and provide project
management, engineering, operations
and technical service support to the
project going forward. Velocys is leading
the initial feasibility stage of the project.

British Airways, the UK’s largest
international airline, which intends to fly
with the renewable jet fuel produced by
the plant.

Suez, a world leading expert in recycling
and waste management, which intends
to provide technical and operational
expertise and manage the supply of
feedstock to the project.

NORMA Investments

Norma Investments, an affiliate of
Ervington Investments, Velocys’ largest
investor, which is a potential investor in
the project.

14 Velocys plc Annual report and accounts 2017
14 Velocys plc Annual report and accounts 2017

www.velocys.com
www.velocys.com

Our process
Our proven Fischer-Tropsch
technology is one of a very
small number of economic,
sustainable routes to
produce renewable fuels
that can be blended at high
percentages with petroleum-
based products, and that
are compatible with existing
infrastructure and engines.

Processes

The gas-to-liquids and biomass-to-
liquids processes for which our proven
technology can be used have three main
steps: production of syngas; the Fischer-
Tropsch (FT) conversion process; and
upgrading to produce finished products.
The biorefinery can be “tuned” to produce
either high quality, clean jet fuel or diesel
with a small volume of naphtha as a co-
product. With a variation to the upgrading
unit operations, other products can
be generated, such as waxes. The
Company’s Mississippi biorefinery will
use forestry residues as feedstock, but
it is possible to use other feedstocks in
plants deploying Velocys’ technology. For
example, landfill gas and natural gas are
used as feedstock at ENVIA.

Fuels produced

With the demand for diesel and jet fuel
increasing, plants using FT technology
and biomass as feedstock could provide
a significant supply of renewable fuels
that the US market demands. There is
considerable legislative support for
these renewable fuels at both the US
federal and state level. FT fuels are fully
compatible with existing infrastructure
and engines, which is not the case
for other methods of producing fuels
from biomass (such as ethanol or fatty
acid esters).

Renewable fuels produced by the
FT process are highly paraffinic and
do not contain aromatics or sulphur.
These fuels burn cleaner than
petroleum-derived fuels, resulting
in lower emissions of NOx, SOx and
particulates. Therefore they contribute
to local air quality improvements as well
as reduced greenhouse gas emissions.
FT fuels are often blended to improve
the performance characteristics of
lower quality petroleum-derived fuels
(e.g. to increase Cetane number).

Biomass-to-liquids
(as at the Mississippi biorefinery)

Gas-to-liquids
(as at ENVIA)

Biomass

Natural
gas

Landfill
gas

Gasifier

Reformer

Syngas

The Velocys Fischer-Tropsch
process

Raw FT
product

Upgrading

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Diesel

Jet fuel

Waxes

Syngas generation

Key

The production of synthesis gas (syngas),
an optimised mixture of carbon monoxide
and hydrogen, by reforming natural gas or
landfill gas, or by gasification of biomass
or waste.

Process to be used at the
Mississippi biorefinery.
Other inputs/outputs possible using
Velocys’ technology (for example,
at ENVIA).

The Fischer-Tropsch process

The FT process converts the syngas into
paraffinic hydrocarbons.

Upgrading

Upgrading to produce finished products
such as high quality diesel, jet fuel,
waxes, as well as naphtha.

www.velocys.com
www.velocys.com

Velocys plc Annual report and accounts 2017 15
Velocys plc Annual report and accounts 2017 15

Financial review

“The fundraises in Q2 2017 and Q1 2018 (post-period
end) provide Velocys with the funds to help take
forward the development of the Mississippi biorefinery
whilst we engage with potential strategic project
development capital investors.”

Andrew Morris
Non-Executive Director & Chair of the Audit & Risk Committee

Revenues

Revenue in 2017 was £0.8m (2016: £1.4m),
which was made up of lease of catalyst
to ENVIA, engineering support for ENVIA
and revenues from feasibility studies,
predominantly for the UK waste-to-jet
fuel project. Gross profit was £0.4m
(2016: £0.4m).

There was one key contract, with ENVIA.
Revenue from the lease of catalyst to
ENVIA was recognised in the financial
results throughout 2017 on a monthly
basis, in line with the lease terms.
Revenue for reactor sales to ENVIA
was recognised in 2015.

Expenses and income

Total administrative expenses increased
to £21.9m before exceptional items
and £53.4m after exceptional items
(2016: £17.4m before/£20.2m after
exceptional items). £1.6m of this increase
before exceptional items was due to
a change in methodology used in the
amortisation of intangible assets from
the units-of-production to the straight-
line method (see note 17) and does not
represent an increase in the cost base
of the Company. The remaining increase
before exceptionals reflected increased
spending on project development,
predominantly for the Mississippi project,
including the pre-FEED engineering study
and the joint technology demonstration
with TRI.

The savings that arose during 2017 from
the reduction in the number of employees
and the closing of the Company’s UK R&D
facility in the summer of 2017 offset the
costs of closure during the year. Full year
savings will be realised in 2018 and are
likely to be just less than £2m.

The increase in administrative expenses
after exceptional items is discussed in
the section Impairment on assets and
investments below.

Other income of £0.2m/£1.9m before/
after exceptional items (2016:
£0.3m/£2.8m before/after exceptional
items) was from the sale of assets, mostly
associated with the closure of the UK
R&D facility (see note 9). In September
2017 Velocys increased its equity share
and voting rights in ENVIA following
the exit of NRG from the joint venture
for no consideration. The Company has
recorded an exceptional item being a
gain on bargain purchase of £1,750,000
in respect of this step acquisition (see
note 4 and note 19 for more information).
The disposal of assets from the facility is
discussed in the Corporate governance
report on page 29.

Assets and cash

Net assets of the Company were £14.7m,
down from £63.7m in 2016. £34.6m of
this decrease is due to the impairment
of assets (see below) and £16.6m is due
to the reduction in cash balance. Velocys
retained a cash balance (cash and
cash equivalents) at year end totalling
£2.1m (excluding restricted cash) (2016:
£18.7m), which has been subsequently
increased with the addition of £17.0m
from the fundraise in January 2018
(after expenses).

Cash outflow in 2017 was £16.6m (2016:
£19.4m) comprising £16.3m consumed
by operations, less an R&D tax credit
received of £1.0m, and a £9.8m increase in
the loan to ENVIA, offset by cash received
through the May 2017 fundraise of £9.7m
(after expenses). The net cash used in
operating activities was reduced from

£19.3m to £15.3m. The profile of the cash
spend changed significantly in 2017 as
the Company reduced its traditional R&D
overheads and increased initial spending
on project development activities that
supported the new strategy.

Compared to 2016, movement in foreign
exchange had relatively little impact.

Impairment on assets and investments

For the impairment assessment the
recoverable amount has been determined
based on its fair value less costs of
disposal (‘fair value’), by reference to
the total value of the parent company’s
equity, using the discounted share issue
price at the January 2018 fundraise of
10p per share. As a result an impairment
of £31.5m was recorded against a range
of assets, including Goodwill and mainly
In-process technology, as described in
note 17. As described below there were
additional impairments to ENVIA (£2.7m)
and other minor asset impairments
(£0.4m). There has been no change in
the Board’s assessment of the long-
term potential of these assets. This
impairment (excluding that in respect
of Goodwill) could be reversed in the
future should there be a change in the
estimates used to determine the asset’s
recoverable amount.

ENVIA finances and increased equity
stake for Velocys

From the proceeds of Velocys’ May 2017
fundraise (see below), $3.4m (£2.7m) was
allocated to increase the loan facility
the Company made available to ENVIA in
January 2016 in order to bridge ENVIA to
becoming cash flow positive. In October
2017 in order to meet the key operational
milestone of achieving 200 bpd and to

16 Velocys plc Annual report and accounts 2017

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To fund the Company's working capital
and central operating costs.
To provide working capital to ENVIA in
order to bridge the asset to sustainable
cash generation.

Future funding

The financial statements have been
prepared on the going concern basis,
which assumes the Company will
have sufficient funds available to
enable it to continue to trade for the
foreseeable future. The cash forecast
includes the following assumptions:
(i) securing strategic development
capital investment into the Mississippi
biorefinery project during the second
half of 2018; and (ii) subject to (i), the
Company assessing its cash requirements
and determining whether it needs to
raise additional funding during 2018 or
2019. These assumptions are discussed
further in note 2.

In January 2018 the Company estimated
that its total remaining operating
costs and the Mississippi biorefinery
project costs, as of year-end 2017, to
get to FID (assumed at the time to be
mid- year 2019), would be £40-50m. The
Company’s plan is to secure investment
by one or more strategic partners in to
the Mississippi biorefinery project in 2H
2018. Should the Company not secure
strategic investment, it will need to
seek further funding in order to cover
development costs and working capital
requirements. This funding may be
achieved from one or a combination of,
a capital raising (including the possibility
of a placement of ordinary shares within
the next 12 months) or the realisation
of certain assets for example: selling its
stake or security in the ENVIA project;
selling additional technology licences
(such as the licence recently sold to Red
Rock Biofuels); and selling non-core
intellectual property.

Following FID in 2019 the Company’s
funding requirements will depend on
the final structure of the Mississippi
biorefinery project consortium and on the
Company’s strategy to develop and fund
other projects. Risks and uncertainties
regarding the Mississippi project are
detailed on pages 20 to 22.

Andrew Morris
Non-Executive Director & Chair of the
Audit & Risk Committee
22 May 2018

support continued operations, Velocys
increased the loan arrangement by
a further $0.7m to $13.4m (£0.6m to
£10.6m). This was necessitated after
a lower revenue forecast, based on a
revision of product and RIN pricing, was
produced. The loan facility was increased
by $0.4m (£0.3m) in December 2017 and
$2.1m (£1.7m) in Q1 2018 (post-period
end) – the additional support being
required to enable ENVIA to progress its
operational ramp-up and RIN qualification
programmes. At each date, all other terms
of the loan, which has a 10% coupon,
remained unchanged. As of 31 December
2017, $13.0m (£9.6m) of the loan note had
been drawn down.

At the end of September 2017, the
Company increased its voting rights in
ENVIA after one of the members of the
joint venture, NRG Energy, exited the joint
venture (JV). NRG Energy transferred
its ownership units and all associated
economic rights associated with them to
the other JV partners. The voting rights
for the three remaining JV members,
including Velocys, were accordingly
increased to 33% each. There was no
consideration paid in respect of this
transaction, nor will there be in the future.
This was reflected as a gain on bargain
purchase as an exceptional item in the
income statement, see notes 4 and 19.
This change in voting rights has not
impacted operations at the Oklahoma
City plant.

At year end the Company’s investment
in ENVIA was impaired by £2.7m to
predominantly reflect a revision of the
expected income from RINs. Because
the key capacity milestone of 200 bpd
was successfully achieved at the plant
in October 2017, the impairment to
the ENVIA loan note made in the 2017
interims statement was reversed
(see note 20). There are no remaining

contractual milestones within the ENVIA
joint venture agreement of the nature that
gave rise to the impairment of the ENVIA
loan note facility at 2017 interims.

Fundraises

In May 2017 Velocys secured additional
funding of over £10m (before expenses).
This included convertible loan notes as
well as a placing of new ordinary shares.
Proceeds from this fundraise were used
to fund working capital during the first
phase of the renewable fuels strategy
implementation, as well as the following
activities supporting the development of
the Mississippi biorefinery project:
Pre-FEED engineering study.

The Integrated Demonstration Unit
programme.

Site selection and permitting.
Consultants and financing.

As noted above, the proceeds of the
May 2017 fundraise were also used to
extend the loan note facility the Company
made available to ENVIA to support the
pre-cash generative phase of operation.

In January 2018 (post-period end)
Velocys raised a total of £18.4m (before
expenses) via a firm placing and open
offer. Both funding elements were strongly
supported by existing major shareholders.
Over half of the firm placing shares were
placed with the Company's existing
shareholders and the rest with a number
of significant new shareholders.

Net proceeds of the capital raising will
be used predominantly:

To fund development costs for the
Mississippi biorefinery project to
bridge to the on-boarding of one or
more strategic investors.
To progress the Company's UK waste-
to-renewable jet fuel project.

www.velocys.com

Velocys plc Annual report and accounts 2017 17

18 Velocys plc Annual report and accounts 2017

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Key performance indicators (KPIs)
and milestones

As a result of the strategy review carried
out in 2016, the Company’s KPIs and
milestones have changed significantly over
the last two years. A new set of KPIs are
in the process of being developed. In 2017
the key milestones for the Company were
as follows:
1. Capitalise the business to progress
the strategy throughout the year.

2. Complete construction,

commissioning, start-up and RIN
qualification at ENVIA.
3. Execute the Company-wide
restructuring programme.

4. Secure entry to Phase II of the USDA

Loan Guarantee Program.

5. Secure early stage consortium funding

for the UK waste-to-jet-project
feasibility study.

Financial results were reviewed on
a regular basis by directors. As the
Company’s remaining cash was reduced
at the end of the year, a careful monitoring
of the cash and cash commitments was
undertaken to ensure that all the fiduciary
responsibilities and commitments of the
directors were met.

The performance of the Company against
these milestones is expanded upon in the
CEO’s report on pages 8 to 9. The financial
results are outlined on pages 16 to 17.

Corporate social responsibility and KPIs

Employees

Gender diversity

Scientific & engineering

26%

23%

74%

2016

77%

2017

Sales, finance, HR & admin

56%

44%

2016

44%

2017

Women

Men

Environment

Velocys recognises that as a renewable
fuels company it has a duty to limit
the environmental impact of its own
operations. As such, the Company is
careful to monitor the environmental
impact of its operations. Air travel and
buildings operation have been identified as
two of the major factors in the Company’s
CO2 emissions.

In 2017 air travel on the Company’s
behalf contributed 464t of CO2 (2016:
467t). This equates to 7.7t per employee
(2016: 5.2t). The proportion of air travel
that was between the Company’s offices
in Oxfordshire, Ohio and Texas was 38%
(2016: 54%); 16% of the emissions arose
from travel to the site of ENVIA’s plant
in Oklahoma and 14% of the emissions
arose from travel to the site of the
Integrated Technology Demonstration in
North Carolina.

Emissions attributable to operation
of its three sites included 430t from
consumption of electricity (2016: 769t).
Emissions attributable to the consumption
of gas were 143t (2016: 436t). These
reductions were due to the ceasing of
certain R&D operations in July 2017
including the closing down of the UK
R&D facility.

Velocys is committed to being a good
employer and endeavours to train staff
well, to pay them fair market value and
to maintain a safe environment in which
they can work. Velocys is committed to
equal opportunities for all its employees.
Of the 42 people working for Velocys at
31 December 2017, 33% were female
(2016: 33%). At the end of 2017, one
of the six members of the Board was
female (2016: two of eight members).
The percentage of female employees
broken down by areas of the business
was as shown to the right.

The restructuring of the Company in
mid-2017 reduced the seven senior
managers of the Senior Management
Team to four members of the Executive
Committee. This partially accounted for
the difference in the percentage of female
senior managers between 2016 and 2017
(2017: 0%, 2016: 29%).

Velocys takes the safety and well-being
of its employees very seriously. As an
example, in October 2016 the Columbus,
Ohio site successfully renewed for an
additional three years its Safety and Health
Achievement Recognition Program (SHARP)
certification with the US Department of
Labor’s Occupational Safety and Health
Administration. SHARP certification
recognises Velocys’ exemplary injury and
illness prevention programme. Velocys
has created a culture of safety, health,
and environmental responsibility and
continuous improvement that extends from
the CEO to all employees. Each employee
is encouraged to actively participate in,
and take responsibility for, their own safety
and health through various opportunities,
such as by providing suggestions for
improvement, participating in safety and
environmental training and site meetings.
Holding leadership positions on the
site’s Safety Committee, or serving on
an investigation team that performs root
cause analysis of potential hazards or near
misses at the site is actively encouraged.

Velocys maintains detailed records that
are required for regulatory compliance,
and also ensures safety policy, programme,
and hazard communication documents
are available to all staff. As a result of the
proactive culture adopted throughout
Velocys, during 2017, there were no
Lost-Time Accidents (LTA) across the
Company’s sites. This takes the total
number of operating labour hours without
an LTA to over 2.5m in the United States
and over 350,000 in the United Kingdom.

www.velocys.com

Velocys plc Annual report and accounts 2017 19

Risks and mitigation
The principal risks and uncertainties that are considered to have a potentially
material impact on the Company’s long-term performance and delivery of its
strategy are set out in the following table.

Risk description and impact

Risks specific to ENVIA

As one of three members of the ENVIA joint venture
(JV), the Company relies on the continued support of
the other members to keep the plant in operation. If
the plant ceases to operate due to withdrawal of one
or more JV members, this would reduce the amount of
operating data available to Velocys, which might affect
the design of the Mississippi biorefinery. Cessation of
plant operations could also jeopardise ENVIA’s ability
to pay back amounts loaned to ENVIA by Velocys.

No ENVIA EPC recourse
Due to the bankruptcy filing of Ventech Engineers
International, LLC, there may be no financial recourse
to the EPC of the ENVIA plant for problems that would
normally be the responsibility of the EPC. The inability to
recover damages against the EPC could result in ENVIA’s
having to shoulder liabilities that should otherwise be
allocated to the EPC, resulting in additional expense for
Velocys and other JV members.

Product offtake and acceptance
There can be no guarantee that contracts with offtakers
of product – wax, diesel and naphtha – will be adhered to,
or renewed, or that product specifications will reliably be
met. Failure to have reliable, long-term offtakers or active
spot sales of products could affect revenue forecasts and
ongoing operations.

Revenues from sale of RINs
RINs generated by ENVIA have been verified and now have
Q-RIN status, but there are no guarantees that the plant
will run within the required operational parameters that
allow RINs to be generated and maximise revenues. This
may hinder ENVIA in its efforts to become sustainably
net cash generative and this would adversely affect the
members of the JV, including Velocys.

Business
influences

Risk management strategy

The on-site team has been building a comprehensive
data set of operational performance. Prior to the leak
at ENVIA in May 2018 economic projections showed
positive cash flow for the ENVIA plant during 2Q 2018,
which will now be delayed. A solution is being developed
to return the plant to full operation with minimal loss of
revenue.

ENVIA, with support from Velocys, is continuing to identify
and mitigate ongoing EPC legacy issues at the plant in
a timely and cost-effective way. The impact of this risk
is significantly reduced as the operational life of ENVIA
increases.

ENVIA is in frequent dialogue with multiple product
offtakers (current and potential) to ensure that the
revenues from sales of products will continue with
new offtakers should current offtakers default on their
obligations. Products are being accepted and sold in the
market.

The on-site ENVIA team will continue to deliver the
plant improvements needed to optimise operations to
maximise production of on-specification products and
Q-RINs.

Risks specific to Mississippi biorefinery project
Any risk or combination of risks listed here has the potential of preventing the project from reaching FID, which would prevent
Velocys from extracting value from its development activities.

USDA loan guarantee
The Company is applying for a USDA loan guarantee of up
to $200m as part of the total installed cost of the project.

If other companies exhaust the capacity of the programme
or if Velocys does not complete the necessary work
programmes to achieve conditional commitment before
the end of September 2018 and if the programme is
no longer authorised in the 2019 Congressional Fiscal
Year then Velocys will need to seek alternative forms of
financing and/or underwriting, and it is not guaranteed
that it could do so.

Project finance
Velocys will need to secure strategic project investment
for development capital costs to progress the Mississippi
biorefinery project to FID. If this is not secured or is
delayed this would adversely affect the project timeline
and may impact the financial status of the Company.

Velocys has engaged advisers in Washington DC to
ensure it understands the requirements of the USDA
loan guarantee programme. Velocys and its advisors
continuously monitor the USDA programme and any
potential changes. The Company is prioritising the delivery
of the work packages required by the USDA programme to
maximise the probability of securing the loan guarantee
for the full $200m.

Velocys is actively engaging with strategic investors
and financial advisers to support the financing plans
and manage the associated financing risks for the
Mississippi project.

The Company has commenced a process to select
and on-board one or more strategic and/or financial
investors to support financing the remaining project
development capital requirements for the Mississippi
project. A financial advisor, appointed by Velocys, will
manage the process of due diligence, deal construction
and closure.

20 Velocys plc Annual report and accounts 2017

www.velocys.com

Business influences

1. Technical expertise
2. ENVIA – our commercial springboard
3. Development of biorefineries
4. Focus market

Further details on our business influences, see page 2.

Risk description and impact

Business
influences

Risk management strategy

Risks specific to Mississippi biorefinery project (continued)

Independent Engineer’s report
Successful completion of the USDA loan guarantee
application requires a review by an Independent
Engineer. The IE’s report will require successful and
timely extended runs at both ENVIA and the Integrated
Technology Demonstration.

SMBC underwriting of the USDA loan guarantee
The global leading project finance bank, Sumitomo Mitsui
Banking Corporation (SMBC), is Velocys’ lender of record
for the USDA loan guarantee programme. In this role
SMBC will be required to hold 15% of the project debt for
the USDA loan guarantee. Failure to pass SMBC credit
committee preliminary and final approval in the currently
anticipated timeframe could materially impact the
financing options for the project.

Capital expenditure and operational
expenditure required
There remains uncertainty regarding the expenditure
required to build and operate the biorefinery as well as
the scope and strength of the EPC wrap and the credit
worthiness of the EPC. Capex or opex could be higher than
desired, which could negatively impact plant economics
and financing.

Performance of and integration with other licensors’
technology
Syngas production, syngas clean-up or product upgrading
technology, supplied by other licensors, may not function
as hoped or may not integrate as envisaged with Velocys
technology, which could cause the plant to operate
sub-optimally.

Carbon intensity threshold
Due to process constraints Velocys may not be able
to meet cost-effectively the required carbon intensity
threshold needed to maximise the LCFS credits it could
obtain in California. Failure to do so would limit revenues
from plant operations.

Velocys has engaged the Independent Engineer early in
the process to ensure it understands their requirements
and provides the information needed by them at the time
required. The performance at ENVIA and the Integrated
Technology Demonstration is monitored closely. See
page 23 for a discussion of technology integration risks.

Velocys and SMBC are working closely together to ensure
the requirements of the SMBC credit committee are
clearly understood. Both SMBC and Velocys are working
closely with the USDA to ensure the USDA-required
deliverables are being used to drive the combined
Velocys and SMBC activities.

Velocys has chosen an engineering partner for FEED.
Completion of the FEED package will reduce the
uncertainty surrounding plant capital expenditure. The
project will optimise plant capital cost, operating costs,
carbon intensity and the total returns from the project.
Velocys has engaged an estimating advisor to validate
the FEED package provided by the EPC. These risks are
normal for this stage of the project. Going forward, risks
will be mitigated and reduced as the project continues.

Velocys works with technology companies that have
proven track records of commercial operation. Velocys
and its technology partner TRI are collaborating on a
joint technology demonstration, which is currently in
operation. Although the demonstration is not complete,
initial performance indicates good performance of the
FT system operating on biomass-generated syngas.
A successful outcome will significantly reduce but not
eliminate the technology integration risks associated
with the development of the biorefinery.

Velocys is actively factoring into the engineering design
the carbon intensity impacts to provide the maximum
product revenue that is economically viable.

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Velocys plc Annual report and accounts 2017 21

Risks and mitigation (continued)

Risk description and impact

Business
influences

Risk management strategy

Risks specific to Mississippi biorefinery project (continued)

Site considerations
The site is adjacent to the Mississippi River and a
catastrophic flooding event could impact the site and
plant itself. If the levee constructions were not completed
by the local economic development agency, project delays
and additional costs could arise.

During construction, start-up/commissioning and
operations of the biorefinery, hurricanes, tornadoes
and forest fires could also adversely affect timelines,
operability or costs.

The Company must issue a comprehensive Environmental
Assessment, which needs to be endorsed by the relevant
state and federal authorities. If the Company does not
receive a Finding of No Significant Issues (FONSI) it could
lead to delays, additional costs or the requirement to find
an alternative site.

Changes to the local demand for woody biomass or ability
of the existing forestry industry infrastructure to transport
RFS qualifying feedstock to the plant could increase the
cost of supply or increase complexity by increasing the
distance over which feedstock has to be sourced.

Risks specific to UK waste-to-jet fuel project

UK policy
There could continue to be a lack of clarity on future waste
policy, including maintaining the UK landfill tax and/or
policy uncertainty around waste for large scale capital
intensive schemes.

Project partnership and economics
There are no guarantees that the project will proceed
through successive development phases. Existing
project partners may not be willing to fund the project
to FID. Capex, opex and revenue estimates derived
during engineering studies, combined with views on risk,
may make the project unattractive to other investors
and lenders.

The biorefinery will be protected by a levee, currently
under construction, which puts the site outside the
100-year flood plain. Construction of the level and
biorefinery will run concurrently. Velocys will monitor
the levee construction progress and take appropriate
action for mitigation if required. During the build of
the biorefinery Velocys intends to ensure it has the
necessary flood insurance in place.

The design of the facility is incorporating the relevant
codes for the potential weather conditions for the safe
start-up and shutdown in adverse weather situations.
The team will also put in place an emergency response
plan prior to start of construction and start-up that will
align with local and state emergency plans for emergency
situations that includes adverse weather conditions.

The Company performed thorough due diligence of the
Natchez site prior to confirming it as the biorefinery’s
location. This included site visits and analysis of a
broad set of operational considerations, including
environmental considerations. Velocys is working with
a local environmental consultant to work through
the Environmental Assessment, ensuring the early
identification of any potential issues. The assessment
is integrated in the overall project planning process and
is monitored closely.

Velocys has engaged a consultant with experience
of the forestry industry around Natchez and has
had preliminary discussions with multiple potential
suppliers. The Company is currently confident that it
can cost-effectively source RFS-qualifying feedstock.

The project partners are engaging with the UK
government to provide input to policy decisions related
to the project.

The experienced Velocys project team is managing
the completion of the engineering feasibility study,
reducing uncertainty on project economics, and is
validating all the key economic assumptions. Regular
meetings with the partners have driven alignment
on project requirements and timeline to making
investment decisions.

22 Velocys plc Annual report and accounts 2017

www.velocys.com

Risk description and impact

Other operational risks

Performance of Velocys’ technology

Velocys’ core technology may not produce the quantity
and/or quality of product expected.

Supporting technologies at a biorefinery may not operate
according to specification, preventing the Fischer-Tropsch
(FT) section of a plant from functioning optimally. This
could introduce costs and delays to the project inducing
delays or reductions in the revenues possible from sales of
product or RINs.

Inexpert operation of the plant may produce poorer than
predicted performance.

Health, safety and/or environmental issues at a plant
An accident or other incident might occur at a plant
incorporating Velocys’ technology, resulting in injury to
personnel or their exposure to hazardous conditions.

An environmental incident might occur at a plant;
emissions could exceed the permitted level.

Loss of intellectual property (IP) protection
Velocys’ IP could be stolen, copied or infringed.

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Business influences

1. Technical expertise
2. ENVIA – our commercial springboard
3. Development of biorefineries
4. Focus market

Business
influences

Risk management strategy

The Company has rigorously tested its technology in
the lab, at pilot plant scale, and at commercial scale at
the ENVIA plant. It has modelled steady state and upset
operations under conditions that will be experienced at
future commercial plants.

At ENVIA Velocys’ core technology has performed
during start up and steady state operations in line with
requirements at a commercial scale and meets the
performance expectations according to models based
on lab and pilot studies. Indications are that Velocys’
technology will be able to meet both quantity and quality
expectations for finished products.

Velocys works closely with other technology licensors
and EPC companies on plant integration requirements,
including the protection of Velocys’ FT technology from
potential malfunctions in process units other than the
central FT units. Velocys’ strategy is to de-risk its future
projects by selecting commercially-proven technologies
and piloting significant components of the flowsheet.

Velocys’ team includes qualified employees and
management with significant expertise in the operation of
petrochemical and gas-to-liquids plants. For its projects,
Velocys is focused on engaging operators who are fully
qualified and well-trained in the operation of such plants.
Velocys’ predictions of performance are conservatively
based on the personnel and management resources that
it has on hand and plans to obtain as its projects proceed
to implementation.

The Company has an excellent in-house safety
record. All employees are trained according to OSHA
requirements for handling hazardous substances
and the Company’s HSE procedures and practices
are outlined on page 19. Velocys intends to provide
significant input into training materials and operating
manuals for its future plants. Velocys will provide
operational management services to support future
biorefineries that the Company, as well as third party
developers, develop.

Plants such as ENVIA and the plants Velocys intends
to develop are carefully designed from inception to
account for expected upset conditions and to continue
to operate within the environmental and regulatory
framework even if problems arise. Plant personnel
are trained in procedures that identify issues that
could lead to adverse environmental effects and to act
accordingly.

Velocys actively manages and invests in its intellectual
property and currently holds several hundred
patents in around 30 countries. It has a track record
of successfully defending its IP portfolio through
the courts.

www.velocys.com

Velocys plc Annual report and accounts 2017 23

Risks and mitigation (continued)

Risk description and impact

Other operational risks (continued)

Supply chain
The supply chain may not be able to deliver reactors
and catalyst on a timescale to meet required plant
build timescales.

Employee retention and recruitment

Velocys may not be able to scale the organisation to deliver
its biorefinery projects.

Market risks

Low oil prices
Oil prices could track the US Energy Information
Administration’s (EIA’s) Annual Energy Outlook 2018 low oil
price case (that assumes a price of Brent crude in 2017 of
$52 per barrel by 2050).

Future of renewable fuels credits
Renewable fuels credits (such as RINs under the
Renewable Fuel Standard, RFS) could be withdrawn
(or their value reduced) at a Federal level in the US.
Further details on the RFS are given on page 4.

Renewable fuels credits (such as those issued under
the Low Carbon Fuel Standard in California) could
be withdrawn.

The economics of Velocys’ biorefineries are dependent
on the receipt of these RFS and LCFS credits to maintain
revenues above operational costs.

Competing technology
Existing technologies that are economically-competitive
with Velocys technology in specific niche applications
could be fully commercialised. Competing technologies
are indeed approaching commercialisation. However,
the Company believes that the market is large enough to
support multiple suppliers.

Brexit
There is uncertainty around the impact of the UK leaving
the European Union.

Business
influences

Risk management strategy

A robust quality assurance programme is followed
for the supply of commercial catalyst and reactors.
The manufacturing methodologies are part of Velocys’ IP
and therefore transferable.

Velocys provides competitive compensation to attract
and retain staff.

The Company has been restructured over the last 12
months to focus its activities on project development,
engineering and commercial management. The
Company is putting in place the required governance
and processes within key functions that will be
operational when the Company needs to scale up its
activities. In addition, Velocys has co-located its project
management, engineering and commercial teams in
Houston, which has a readily-available talent pool.

Velocys’ target market is renewable fuels in the US.
This market involves using low cost feedstocks and
producing premium products eligible for valuable RIN
and LCFS credits. These credits provide a significant
financial hedge to the impact of a low oil price on the
price of diesel and jet fuel.

The RFS is important to many states with large
agricultural economies, to energy security, and to jobs.
Velocys engages actively with law makers in Washington
and works with industry bodies to ensure its voice is
heard. The RFS continues to see strong support from
a wide range of stakeholders.

California is proposing to expand the LCFS programme
to include jet fuel. Carbon pricing is stable in California
and the state is considering extension of the mandate
for carbon reductions. Velocys engages actively with
California regulators, through industry groups, to
ensure its voice is heard. Similar LCFS requirements
are in place in Oregon, Washington State and several
Canadian provinces.

Velocys and its partners continue to invest in plant
integration optimisation and modularisation, with the
aim of significant reductions in cost on a per barrel
basis. Such advances take time to develop and provide
Velocys with a significant competitive advantage
beyond its core Fischer-Tropsch technology capability.

Velocys does not expect to have significant exposure to
the European market in the short and medium terms.

24 Velocys plc Annual report and accounts 2017

www.velocys.com

Business influences

1. Technical expertise
2. ENVIA – our commercial springboard
3. Development of biorefineries
4. Focus market

Risk description and impact

Business
influences

Risk management strategy

Financial risks
The potentially material financial risks associated with a multinational business, including foreign exchange are presented below.
All other financial risks assessed by the Company are included in note 25.

The Board recognises that further funding will be
needed to reach FID for the Mississippi biorefinery
project. Note 2 to the financial statements 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. Velocys continues to take
measures to preserve cash in order to protect against
unforeseen events.

Based on regularly updated cash flow forecasts the
required currency mix is identified and foreign exchange
contracts taken out accordingly. A number of brokers
are used to give a balanced market view. Financial risks
are expanded upon in note 25.

Company financing
The Company’s cash usage is significant versus
prospective future cash flows (particularly in the short
term) and Velocys is reliant on the support of a small
group of major shareholders.

Exchange rates
As the Company operates in US dollars and pounds
sterling it may be impacted by fluctuations in
exchange rates.

Approved by the Board and signed on its behalf by:

David Pummell
Chief Executive Officer
22 May 2018

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Velocys plc Annual report and accounts 2017 25

Corporate governance report

“Velocys has the long-term ambition to grow
significantly and to develop into an established
multinational business. The Company needs to
have the right governance, processes and culture
to support and nurture this growth. It also needs
to have the ability to attract and retain members of
the team with the capability to deliver its strategy.”

Dr. Pierre Jungels, CBE
Chairman

Introduction

Board of directors

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”).
For example, the Company does not
comply with:
FCA Listing Rule 9.8.6R (which includes
the ‘comply or explain’ requirement);

FCA Disclosure Guidance and

Transparency Rules (DTR) Section
7.2 (which set out certain mandatory
disclosures);

Competition and Markets Authority’s
Final Order 1 (for UK incorporated
FTSE 350 companies only).

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.

Independence
In accordance with the Code provision
A.3.1, at the time of Pierre Jungels’
appointment as Chairman, he met the
independence criteria set out in this
provision. While thereafter the test of
independence is not appropriate in relation
to the chairman, 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.

Pierre Jungels has served more than
three consecutive three year terms of
office. 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.

The Board is in the process of reviewing its
succession plan for all Board members.

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 Companies 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.

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, that due
consideration is given to strategic issues,
and promotion of a culture of openness
of debate at Board level, and between
directors and the executive committee.
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
executive committee. From January
2015 to February 2018, Julian West
acted as Senior Independent Director.

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
on page 27.

26 Velocys plc Annual report and accounts 2017

www.velocys.com

Velocys Board

Chairman: Pierre Jungels

Audit & Risk Committee

Remuneration Committee

Nominations Committee

Chair: Andrew Morris*
Members: Sandy Shaw

Chair: Sandy Shaw
Members: Andrew Morris

Chair: Pierre Jungels
Members: Andrew Morris, Sandy Shaw

Under its revised terms of reference,
the Audit & Risk Committee meets
at least four times a year. Among
its duties it reviews the Company’s
audit planning, risk management
systems and processes and
effectiveness of internal controls,
accounting policies and financial
reporting, provides a forum through
which the external auditors
report, and reviews and monitors
their independence and the
provision of additional services.
At least once a year it meets with
the external auditors without
Executive Directors present.

Read more on risk management
on page 29.

All committee memberships are as
of date of 2017 preliminary results.

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 and other senior
managers under the LTIP scheme.
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 32 to 35.

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.

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Attendance at Board and committee meetings

Number of meetings held in 2017
Attendance* by:
Pierre Jungels

David Pummell

Susan Robertson

Paul Schubert

Sandy Shaw

Julian West

Andrew Morris

Ross Allonby

Mark Chatterji
*

Scheduled
Board
meetings
7

Special

Board Audit & Risk
Committee
6

meetings
11

Remuneration
Committee
5

Nominations
Committee
4

100%

91%

82%

100%

82%

91%

100%

43%

100%

–

100%

–

100%

–

100%

–

100%

The attendance percentage relates only to applicable meetings (for example, percentages do not include meetings held prior to appointment or following the
resignation of particular directors).

www.velocys.com

Velocys plc Annual report and accounts 2017 27

Corporate governance report (continued)

Skills and experience of the Board
of directors
The Board includes individuals with a
deep knowledge of markets worldwide
and relationships at the highest level
of industry.

Name Dr. Pierre Jungels, CBE
Role Chairman
Skills and experience
Pierre is an oil industry veteran, with over
40 years’ experience – over 25 of which
were spent at main Board level, which
included appointments as Chairman of
Rockhopper Exploration plc, Chief Executive
of Enterprise Oil plc, Executive Director
of PetroFina, and Managing Director of
British Gas. 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 executive
business and functional management roles
in the London corporate head-office during
his 22-year tenure.

Name Dr. Paul F. Schubert
Role Chief Operating Officer
Skills and experience
Paul has over 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.

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 Andrew Morris
Role Non-Executive Director
Skills and experience
Andrew has extensive experience as
Chairman, CEO, CFO and Group Finance
Director with significant involvement in
financing and business development
for AIM companies, SMEs and private
equity backed organisations. He has
considerable experience in the power
and renewable energy, energy from waste
and biofuels sectors. For five years he
acted as Commercial & Finance Director
for Advanced Plasma Power Limited,
a privately funded company that owns
gasification and plasma waste treatment
technology. He is currently CEO of
Envirofusion, a company with nascent
technology in the waste-to-energy and
biomass-to-power sector. He began his
career at Price Waterhouse in London and
is a qualified accountant.

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 Executive
Committee 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. All key operational decisions are
subject to Board approval.

In addition to the scheduled Board
meetings detailed on page 27, a further
11 meetings in 2017 were held at short
notice to consider specific matters.

Reports by committee
The minutes of the Audit & Risk,
Remuneration and Nominations Committee
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 and
its committees has been carried out by
the Company Secretary, taking the form
of comprehensive questionnaires, which
provided all directors with an opportunity
to comment on Board and committee
procedures. A performance evaluation
of the Chairman was carried out, led by
the Non-Executive Directors, and taking
into account the views of all directors.
As in the previous year, the results of the
evaluation have been considered by the
Board and each committee in open session
and, where appropriate, actions arising
from such reviews will be implemented
and monitored.

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 2018 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
2017, 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,

28 Velocys plc Annual report and accounts 2017

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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.

Disposal of assets
As part of the closure of the Milton Park
site, a large number of assets were taken
out of the business. A comprehensive
survey was undertaken of all fixed assets,
lower value assets, spares and inventory
parts at the site. Management signed off
on the process for disposal of these assets,
and the process was carefully documented.
Assets that could be sold were targeted
at potential end users, dealers, clearance
agents and scrap merchants. A price
covering the carrying net book value of each
asset was targeted. All sales were invoiced.

Risk management
The Company employs directors and senior
personnel with the appropriate knowledge
and experience for a business active in
its field of operations, and undertakes
regular risk assessments and reviews of
its activities. During 2017 the members
of the Audit & Risk Committee were
Andrew Morris (appointed as Chairman
on 1 June 2017), Mark Chatterji (resigned
as Chairman on 25 April 2017) and Ross
Allonby (resigned 15 June 2017), all of
whom had recent and relevant financial
experience. Julian West was also a member
throughout 2017 and Sandy Shaw was
appointed to the committee in February
2018. 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 process of developing and building
biorefineries, which involves a large
number of stakeholders – asset holder,
project developer, EPC, financing party(ies),
technology licensors, offtake partners and
investors. The risks associated with each
of these parties, and the relationship that
Velocys has with each one, are individually
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 20 to 25 and note 25. The risks posed
by the UK’s vote to leave the European
Union have been considered in the risk
assessment process.

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
2017 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:
Going concern.

Intangible assets – impairment
assessment.

Gain on bargain purchase arising from

step acquisition of associate.
Investment in associate – impairment
assessment.

Share of profit and loss of associate.
Equity instrument – convertible

loan note.

Audit review
The Audit & Risk Committee has discussed
PwC’s audit process, and has reviewed the
findings from the audit of the 2017 financial
year as well as 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 consolidated financial statements.

www.velocys.com

Velocys plc Annual report and accounts 2017 29

Directors’ report
The directors present their report and the audited consolidated
financial statements for the year ended 31 December 2017

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

Future developments
The Board aims to pursue its corporate strategies as detailed in the Strategic report on pages 1 to 25.

Dividends
The Directors do not recommend any dividend for the year ended 31 December 2017 (2016: nil).

Research and development
The Company’s R&D activity now includes 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 2017 (2016: nil).

Post-balance sheet events
Additional fundraising by the Company was announced on 15 January 2018. This is described in the Strategic report on page 17 and
in note 28 along with other post-balance sheet events.

Directors
The directors of Velocys plc who were in office during the year and up to the date of signing the financial statements, unless otherwise
stated, were as follows.
Pierre Jungels (Non-Executive Chairman)
David Pummell (Chief Executive Officer)
Susan Robertson (Chief Financial Officer) – resigned as director 21 July 2017
Paul Schubert (Chief Operating Officer)

Sandy Shaw (Non-Executive Director)
Mark Chatterji (Non-Executive Director) – resigned 25 April 2017
Ross Allonby (Non-Executive Director) – resigned 15 June 2017
Andrew Morris (Non-Executive Director) – appointed 1 June 2017

Julian West (Senior Independent Director) – resigned 6 February 2018

While 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 2018 Annual General Meeting all of the directors will again retire and offer
themselves for re-election, as they did in 2017.

Directors’ interests
The directors who held office at 31 December 2017 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).

Pierre Jungels
Julian West
Sandy Shaw
David Pummell
Paul Schubert
Andrew Morris

Velocys plc ordinary shares

31 December
2017

31 December
2016

223,031
75,000
17,758
–
–
–

The following Board members purchased shares as part of the January 2018 fundraise (as recorded in the Register of Directors’
Interests and including those of the spouse or civil partner and children under 18): Pierre Jungels (200,000), David Pummell (50,000),
Sandy Shaw (100,000) and Andrew Morris (100,000).

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

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.

Financial instruments
The Company’s financial instruments are detailed in note 25. Financial risks, and exposure and risk management policies and
objectives are detailed in the Strategic report on page 25, and in note 25.

Substantial shareholdings
The Company has been notified of the following holdings of 3% or more of the issued share capital of Velocys plc as at 8 May 2018.

30 Velocys plc Annual report and accounts 2017

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Ervington Investments Limited
Lansdowne Partners
Janus Henderson Investors
CQS Asset Management Limited
Invesco Asset Management
Hargreaves Lansdown Asset Mgt

Number of
shares held

82,642,443
75,913,020
39,221,271
30,000,000
23,600,000
13,719,680

Percentage
of issued
share capital

25.02%
22.98%
11.87%
9.08%
7.14%
4.15%

Going concern
The financial statements have been prepared on the going concern basis, which assumes that the Company and Velocys plc will have
sufficient funds available to enable them to continue to trade for the foreseeable future.

The Company expects to develop its projects, in particular, providing additional financial support to ENVIA until it reaches cash flow
breakeven forecast later in 2018 and progressing the Mississippi biorefinery and UK waste-to-renewable jet fuel projects, which will
require significant development and capital expenditure.

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. The directors have prepared financial forecasts to estimate the likely cash requirements of the
Company and Velocys plc over the next 12 months from the date of approval of the financial statements.

The forecasts show that the Company and Velocys plc require additional external funding within the 12-month forecast period to be
able to continue as a going concern. The directors anticipate that this will come from one, or a combination of, the following three
sources, with agreements being actively sought from third parties:
Strategic investment of development capital into the Mississippi biorefinery project, which is expected during 2H 2018.
Placement of Company ordinary shares, which may occur within the next twelve (12) months.
Additional third party licence sales, such as the recently announced Red Rock Biofuels project.

The directors are confident that the funding required for the Company and Velocys plc to continue as a going concern will be secured
within a period of 12 months from the date of approval of the financial statements, and have therefore prepared the financial
statements on a going concern basis.

However, as at the date of approval of the financial statements no additional funding is committed beyond the £18.4m fundraise
announced in January 2018 (as explained in the Financial review on pages 16 to 17). Should additional funding not be secured within
the 12 months from the date of approval of these financial statements, the Company and Velocys plc would not be a going concern.
As such, these conditions indicate the existence of a material uncertainty that may cast significant doubt on the Company and
Velocys plc’s ability to continue as a going concern.

The financial statements do not include the adjustments that would arise if the Company and Velocys plc were unable to continue
as a going concern.

Greenhouse gas emissions
Details of the Company’s greenhouse gas emissions are included in the Strategic report on page 19.

Annual General Meeting
The Annual General Meeting of the Company will be held at the offices of Mayer Brown International LLP, 201 Bishopsgate, London,
EC2M 3AF on Friday 29 June 2018.

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 26 to 29.

Approved by the Board and signed on its behalf by:

David Pummell
Chief Executive Officer
22 May 2018

www.velocys.com

Velocys plc Annual report and accounts 2017 31

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 2017 (unless otherwise specified):
Sandy Shaw (Chair)

Julian West – resigned 6 February 2018

Ross Allonby – resigned 15 June 2017
Andrew Morris – appointed 1 June 2017

The Committee’s constitution and operation is compliant with the provisions of the UK Corporate Governance Code. 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

Remuneration of Executive Directors
Executive Directors’ remuneration is considered annually. In addition, the Remuneration Committee undertakes periodically
a comprehensive review using external advisors. No such advice was taken in 2017. 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.

32 Velocys plc Annual report and accounts 2017

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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 2017, 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 2017 performance, paid in 2018 (post-period end), the Remuneration Committee decided that bonus
payments to the Executive Directors would be awarded at the target level of 75%, of which half has been paid in cash (and half will
be settled by the award, in due course, of market value share options that will be subject to a specific performance condition).

Long-term Incentive Plan (LTIP)
The committee believes that the LTIP scheme should provide to Executive Directors and other senior managers the appropriate
incentivisation, focus and reward for achievement, that is aligned with shareholder interests. The last LTIP scheme that the Company
put in place was in 2014 and, due to other changes in the business during 2017, the committee decided not to make an award under
this scheme during the year. Instead, the committee intends to make a new equity-based incentive award in 2018. It will, in the
allocation of such awards, take into consideration the fact that no 2016 or 2017 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 2018 AGM.

Fees paid to Non-Executive Directors
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.

In 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. The aggregate amount of these fees, as set out in the Company’s
Annual report and accounts for the years ended 31 December 2017 and 2016 is as follows.

Aggregate fees paid to Chairman and Non-Executive Directors

2017
£

2016
£

225,125

268,500

Audited information
Directors’ remuneration
Aggregate emoluments for current and former directors in 2017 totalled £1,056,867 (2016: £1,052,619), and Company pension
contributions were £24,837 (2016: £40,097).

The directors who held office at 31 December 2017 received the following remuneration in relation to the year ended 31 December 2017.

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Velocys plc Annual report and accounts 2017 33

Directors’ remuneration report (continued)

Audited information (continued)
Directors’ remuneration (continued)

Salary
& fees1
£

Other
benefits2
£

Bonus
£

Pension
£

2017

Total
£

Salary
& fees1
£

Other
benefits2
£

Bonus
£

Pension
£

2016

Total
£

265,000

850

99,375

18,550

383,775

261,263

27,332

252,257

42,375

85,809

6,287

386,728

238,778

28,237

72,000

40,500

23,625

40,500

–

72,000

78,000

40,500

43,875

23,625

40,500

43,875

–

18,550 307,145

7,950 274,965

– 78,000

– 43,875

–

– 43,875

Name of
director

Executive
David
Pummell
Paul
Schubert
Non-
Executive
Pierre
Jungels
Julian
West
Andrew
Morris
Sandy
Shaw

Aggregate
emoluments
and pension
contributions 693,882
1.

43,225

185,184

24,837

947,128

665,791

55,569

–

26,500 747,860

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 2017 salary was
£1= $1.29 compared to £1= $1.36 in 2016.
Other benefits include medical cover for Executive Directors and, in the case David Pummell, a joining allowance in 2016 in lieu of car allowance. In the case
of Paul Schubert, benefits include costs related to his relocation to Houston.

Directors’ share options
Aggregate emoluments disclosed above include amounts paid through the employee benefit trust (EBT) in relation to share options
exercised. In 2017 no payments were made to serving or former directors (2016: none).

Details of all directors’ shareholdings are disclosed on page 30 in the Directors’ report.

Details of options held by the directors at 31 December 2017 are as follows.

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
2016

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
2017

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
Date of December
2017
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
336,711
56,119
43,344
–
–
–

1,307,909

No options were exercised by acting directors during 2017. The total charge for share-based payments during the year in respect
of directors was £46,000.

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 award, to be made in 2018, will include such guidelines designed to ensure that Executive Directors retain
an interest in the Company.

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Former directors
The directors listed below, who were members of the Board at 1 January 2017 and resigned during the year, received the
following remuneration.

Name of director

Executive
Susan Robertson
Non-Executive
Mark Chatterji
Ross Allonby

Salary &
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£

Other
benefits1
£

Pension
£

271,259

–

13,500
18,563

16,438
–

–

–
–

2017

Total
£

Salary &
fees
£

Other
benefits1
£

Pension
£

2016

Total
£

271,259

218,000

770

15,260

234,030

29,938
18,563

43,875
43,875

23,076
–

–
–

66,951
43,875

344,856
–
In the case of Mark Chatterji, who was located in the US, other benefits included the cost of his travel from the US to the UK for Board meetings along with associated
expenses paid by the Company.

303,322

305,750

319,760

23,846

16,438

15,260

Susan Robertson resigned on 21 July 2017, Mark Chatterji on 25 April 2017 and Ross Allonby on 15 June 2017.

During her employment Susan Robertson was entitled to a target bonus of 75% of her salary, and to life insurance and private
medical insurance in line with the Company’s standard policies.

At the time that Mrs Robertson left the Company, she held options over the Company’s shares 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
2016

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

At 31
December
2017

Lapsed

Exercise
price (£)

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

–

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

–

–
–
–
–
–
–
–
–
–
–
–
–
189,139
6,587
158,083

62,893
42,105
37,655
105,000
390,625
365,000
273,803
502,930
125,732
440,316
110,079
56,742
–
40,838
–

353,809

2,533,718

1.59
0.01
0.01
0.01
0.01
0.49
0.49
1.59
1.59
1.64
1.64
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
–
01/01/18
–

Exercisable
at 31
Date of December
2017
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
–

62,893
42,105
37,655
105,000
390,625
365,000
273,803
502,930
125,732
440,316
110,079
56,742
–
–
–

2,512,880

In addition to EMI, bonus and ELTIP awards above, following her departure from the Company, Susan Robertson was awarded 100,000
options with a fair value of £47,000 (calculated using an average share price of 47p based on a period of one year prior to the date of
grant), to vest over a three-year period and to be exercised between 17 August 2020 and 17 August 2027.

Share price
The market price of the parent company’s shares as at 31 December 2017 was 32p (2016: 37p) and the range during the year was
31p to 92p (2016: 25p to 44p). Details of options and the cost of share-based payments are given in note 15.

Approved by the Board and signed on its behalf by:

Sandra Shaw
Non-Executive Director and Chair of the Remuneration Committee
22 May 2018

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Velocys plc Annual report and accounts 2017 35

Statement of directors’ responsibilities
in respect of the financial statements

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 Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted
by the European Union and parent company financial statements 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 parent company and of the profit or loss of
the Company and parent 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 for the Company financial statements and
IFRSs as adopted by the European Union have been followed for the parent company financial statements, subject to any material
departures disclosed and explained in the financial statements;

make judgements and accounting estimates that are reasonable and prudent; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and parent

company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company and
parent company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and parent
company and enable them to ensure that the financial statements 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 parent company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the parent 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 and parent company’s performance, business model and strategy.

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

the parent company financial statements, 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 loss of the company;
the Company financial statements, 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 loss of the Company; and
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
22 May 2018

36 Velocys plc Annual report and accounts 2017

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Independent auditors’ report
to the members of Velocys plc

Report on the audit of the financial statements
Opinion
In our opinion, the Company’s consolidated financial statements and Velocys plc’s financial statements (the “financial statements”):
give a true and fair view of the state of the Company’s and of Velocys plc’s affairs as at 31 December 2017 and of the Company’s loss

and the Company’s and Velocys plc’s cash flows for the year then ended;

have been properly prepared in accordance with IFRSs as adopted by the European Union and, as regards Velocys plc’s financial

statements, as applied in accordance with the provisions of the Companies Act 2006; and

have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements, included within the Annual report and accounts 2017 (the “Annual Report”), which
comprise: the Consolidated and Velocys plc statements of financial position as at 31 December 2017; the Consolidated income
statement and Consolidated statement of comprehensive income, the Consolidated and Velocys plc statements of cash flows, and
the Consolidated and Velocys plc statements of changes in equity for the year then ended; and the notes to the financial statements,
which include a description of the significant accounting policies.

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section
of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence
We remained independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed entities, and we have fulfilled our other
ethical responsibilities in accordance with these requirements.

Material uncertainty relating to going concern – Company and Velocys plc
In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure made
in note 2 to the financial statements concerning the Company’s and Velocys plc’s ability to continue as a going concern. In order to
continue as a going concern the Company and Velocys plc need to secure additional external funding within 12 months from the
date of approval of the financial statements. At the time of the approval of the financial statements no such funding is committed.
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 the Company’s and Velocys plc’s ability to continue as a going concern. The
financial statements do not include the adjustments that would result if the Company and Velocys plc were unable to continue as a
going concern.

Explanation of material uncertainty
The Directors' report included in the Annual Report and note 2 to the financial statements details the directors’ disclosures of the
material uncertainties relating to going concern.

The directors have prepared financial forecasts to estimate the likely cash requirements of the Company and Velocys plc over a period
of 12 months from the date of approval of the financial statements. The forecasts show that the Company and Velocys plc require
additional external funding within the 12 month forecast period to be able to continue as a going concern. The directors anticipate
that this will come from one or more of three potential sources, as set out in note 2 to the financial statements. Given the risks
associated with raising additional funding, the directors have drawn attention to this in disclosing a material uncertainty relating to
going concern in the basis of preparation to the financial statements.

What audit procedures we performed
In concluding there is a material uncertainty, we examined the Company’s and Velocys plc’s cash flow forecast for the 12 month
period to 30 April 2019 and agreed that these are based on Board approved budgets. We also requested the directors to extend their
forecast to June 2019. The forecast included certain assumptions as set out in note 2 to the financial statements. We tested these
assumptions by performing the following audit procedures:
We tested the mathematical accuracy of the cash flow forecast and we did not identify any material exceptions in these tests.
We compared the planned cash outflow to historical actual results and considered management’s assumptions to be supportable.
We examined documentation supporting the mitigating actions identified by management to extend the Company’s and Velocys

plc’s cash position, should additional funding not be achieved in line with forecast. We considered management’s assumptions to be
reasonable.

We held discussions with management to understand the nature of downside risks, to obtain an update on the current status of the
sources of funding options being sought, as set out in note 2 to the financial statements, including the plan to bring them to fruition,
and we considered whether there were additional risks that needed to be reflected in the forecasts. We used our understanding of
the Company and industry to assess the possibility of such risks arising and their potential impact. We considered management’s
assumptions to be reasonable, however, at the time of the approval of the financial statements, we determined that there are no
agreements for additional funding in place.

Additionally we considered the adequacy of the disclosure in note 2 to the financial statements and found it to be sufficient to inform
members about the directors’ conclusions on the appropriateness of using the going concern basis being adopted.

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Velocys plc Annual report and accounts 2017 37

Independent auditors’ report (continued)
to the members of Velocys plc

Our audit approach
Overview

Materiality

Overall Company materiality: £1.0 million (2016: £1.1 million), equivalent to 4.4% of loss

before income tax, before exceptional items.

Overall Velocys plc materiality: £150,000 (2016: £1,000,000), based on 1% of

total assets.

Audit scope

We identified two financially significant components which were subject to full

scope audits.

We performed a full scope audit of Velocys plc.
We performed specified audit procedures at two further components to address
specific risk characteristics or to provide sufficient overall coverage of particular
financial statement line items.

All audit work was performed by the Company engagement team.
Components where we performed audit procedures accounted for 93% of Company

loss before tax and 98% of Company total assets.

Valuation of Intangible assets (Company) and Investments in subsidiaries (Velocys plc).
Valuation of Investment in associate (Company).
Classification and measurement of convertible loan note instrument

(Company and Velocys plc).

Key audit matters

The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial
statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and considering future events that are inherently uncertain.

As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was
evidence of bias by the directors that represented a risk of material misstatement due to fraud.

Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of
resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of
our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.

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Key audit matter
Valuation of Intangible assets (Company) and Investments
in subsidiaries (Velocys plc).

Refer also to note 17 of the consolidated financial statements
(pages 62 to 64) and note 7 of the Velocys plc financial
statements (pages 82 to 83).

The carrying value of the Company’s intangible assets is
£0.8m, following an impairment loss of £28.8m recorded in
the current year.

The carrying value of Velocys plc’s investments in subsidiaries is
£14.4m following an impairment loss of £57.3m recorded in the
current year.

The Company’s intangible assets and Velocys plc’s
investments in subsidiaries are subject to impairment testing
at least annually or more frequently if events or changes
in circumstances indicate the carrying value may not be
recoverable. In assessing whether there was any indication of
impairment, management identified that the carrying amount
of the Company’s and Velocys plc’s net assets was more than
Velocys plc’s market capitalisation.

For the assessment of the recoverable amount of the Company’s
intangible assets and Velocys plc’s investments in subsidiaries,
the recoverable amount was determined for the cash-
generating unit (‘CGU’) to which the these assets belong. The
Company has one CGU, being synthetic fuels production.

The recoverable amount of the CGU was determined based on
its fair value less costs of disposal (‘fair value’), using Velocys
plc’s market capitalisation, by applying the share price of 10
pence from the equity issued on 15 January 2018 to the number
of shares in issue at 31 December 2017. This provided a fair
value of £14.7m, resulting in an impairment loss:
£31.5m has been recorded against the Company’s assets, of

which £28.8m related to intangible assets; and

£57.3m has been recorded against Velocys plc’s investments

in subsidiaries.

Our audit focused on the risk that the carrying value of the
Company’s intangible assets and Velocys plc’s investments in
subsidiaries could be overstated and further impairments could
be necessary. We also considered whether the amount and
allocation of the impairment loss recorded was appropriate.

How our audit addressed the key audit matter
We assessed the level at which impairment testing was
performed. Based on our knowledge of the business, including
the use of assets and internal reporting, we agreed with
management’s judgement that, for the assessment of the
recoverable amount of the Company’s intangible assets and
Velocys plc’s investments in subsidiaries, the Company has
one CGU.

We evaluated management’s approach to calculate the CGU’s
recoverable amount, based on its fair value, using Velocys plc’s
market capitalisation. Management’s assessment applied the
share price of 10 pence from the equity issued on 15 January
2018 to the enlarged share capital, resulting in a fair value
of £33.1m. We concluded that the application of this market
approach was appropriate and that this represents an orderly
transaction between market participants under current
market conditions and was based on the same information
as that which existed at 31 December 2017. However, we did
not consider that including the increase in the value of the
business resulting from the injection of additional capital was
appropriate. On this basis management recalculated the fair
value as £14.7m by applying the share price of 10 pence from
the equity issued on 15 January 2018 to the number of shares
in issue at 31 December 2017. We recalculated the fair value
derived from applying this methodology and we did not identify
a material exception.

We tested the accuracy of the impairment loss calculated and
the allocation of the impairment loss assets within the CGU, by
comparing the carrying value of assets with their recoverable
amount. We did not identify any material exceptions in
these tests.

We also assessed the Company’s and Velocys plc’s disclosures
regarding the significant accounting judgements in calculating
the impairment recorded. We consider that these disclosures
appropriately draw attention to the significant areas of
judgement that support management’s conclusion.

www.velocys.com

Velocys plc Annual report and accounts 2017 39

Independent auditors’ report (continued)
to the members of Velocys plc

Key audit matter
Valuation of Investment in associate (Company).
Refer also to note 19 of the consolidated financial statements
(pages 66 to 68).

The Company holds an investment in its associate, ENVIA
Energy, LLC (‘ENVIA’). The investment is subject to impairment
testing at least annually or more frequently if events or
changes in circumstances indicate the carrying value may
not be recoverable. The carrying value of this investment is
£2.6m, following an impairment loss of £2.7m recorded in the
current year.

The recoverable amount of the Company’s investment in ENVIA
was determined based on ENVIA’s value in use multiplied by
the Company’s interest in the investment, based on a value
distribution model as defined by the joint venture agreement.
ENVIA’s value in use was calculated by the estimated future
cash flows for the period from 2018 to 2019 and subsequently
extrapolating these cash flows to 2037, to reflect the expected
economic life of the asset, by applying an estimated long-term
growth rate. Management assessed a number of potential
outcomes and assigned a probability of the likelihood of each of
these outcomes occurring. The estimated future cash flows were
discounted to their present value.

Certain assumptions used in calculating ENVIA’s value in use are
subjective and require estimates to be made. The key estimates
and assumptions assessed were:

The future cash flow growth assumptions used in the
discounted cash flow model. In particular:

The operational capacity and production yield of the plant;
The sales price for the product (waxes, diesel and
naphtha) produced; and
The sales price for the Renewable Identification Numbers
(‘RIN’) produced.

The growth rate used beyond the period covered by the
forecast; and
The discount rate applied to future cash flows.

Our audit focused on the risk that the carrying value of this
asset could be overstated. We also considered whether the
amount of the impairment recorded was appropriate.

Classification and measurement of convertible loan note
instrument (Company and Velocys plc).
Refer also to note 26 of the consolidated financial statements
(pages 75 to 76).

On 15 May 2017 Velocys plc issued £9.0m of unsecured
convertible loan note instruments to existing shareholders.

The final maturity date of the loan notes is 18 months from
the date of issue, after which Velocys has the right but not the
obligation to convert the outstanding principal and interest into
a fixed number of ordinary shares, at a conversion price of £0.50
per share. The fixed annual interest rate is 8.0%, with accrued
interest also being convertible into additional ordinary shares.

Our audit focussed on assessing whether the financial
instrument met the relevant criteria to be classified as an
equity instrument.

How our audit addressed the key audit matter
We tested the integrity of the underlying discounted cash flow
model. We did not identify any material exceptions.

We obtained corroborating evidence to support growth
assumptions. We found that the assumptions used by the
directors were supported by the evidence that we obtained.

We evaluated the long-term growth rate by comparing it to the
Gross Domestic Product growth rate in the United States, the
country in which ENVIA operates. We observed it to be within our
expected range.

We evaluated the discount rate, by comparing key inputs,
where relevant, to externally derived data for comparable listed
organisations. We engaged our internal specialists in assessing
the overall discount rate used, and observed it to be within our
expected range.

We performed sensitivity analysis in respect of the key
assumptions. We determined that a reasonably possible
change in a number of the key assumptions, either individually
or collectively, would result in the carrying amount of the
Company’s investment in ENVIA exceeding its recoverable
amount. We consider that management have taken reasonable
steps to address this by assessing a number of potential
outcomes and assigning a probability of the likelihood of each
of these outcomes occurring.

We obtained the joint venture agreement and recalculated the
Company’s interest in the investment, based on the defined
value distribution model. We observed it to have been accurately
calculated and applied to ENVIA’s value in use.

We also assessed the Company’s disclosures regarding the
significant accounting estimates in calculating recoverable
amount of the Company’s investment in ENVIA. We determined
that the disclosures appropriately draw attention to the
significant areas of estimation uncertainty.

We obtained and read the convertible loan note instrument
contract and management’s accounting assessment, which was
prepared in conjunction with their advisors, to assess whether
the financial instrument met the relevant criteria to be classified
as an equity instrument. In particular we:
Agreed the inputs included in management’s assessment to

the contractual terms; and

Evaluated whether all of the relevant terms and conditions
of the contract had been considered in management’s
assessment.

Our procedures confirmed that the convertible loan notes are
appropriately classified as an equity instrument. In particular
our assessment confirmed that Velocys plc does not have a
contractual obligation to deliver cash to the loan note holders,
and the loan notes convert into a fixed number of shares at a
fixed price.

We also assessed the Company’s disclosures regarding this
significant accounting judgement and consider that these
disclosures appropriately draw attention to the significant areas
of judgement that support management’s conclusion.

40 Velocys plc Annual report and accounts 2017

www.velocys.com

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How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a
whole, taking into account the structure of the Company and Velocys plc, the accounting processes and controls, and the industry in which
they operate.

The Company’s accounting process is structured around a local finance function in each of the Company's operating territories in the
United Kingdom (‘UK’) and United States (‘US’). These functions maintain their own accounting records and controls. In establishing the
overall Company audit strategy and plan, we determined the type of work that needed to be performed at the legal entities ('entities') in
the Company.

For each entity we determined whether we required an audit of their complete reported financial information (“full scope”) or whether
specified procedures addressing specific risk characteristics or particular financial statement line items would be sufficient. Velocys, Inc.
and Velocys Technologies Limited were determined as individually financially significant because they contributed more than 15% of the
Company’s loss before income tax, before exceptional items. In addition we performed a statutory audit for Velocys plc. We also performed
specified procedures on VMH Assets LLC and Velocys (USA Holdings) LLC to address specific risk characteristics or to provide sufficient
overall coverage. Velocys (USA Holdings) LLC holds the Company’s investment in its associate, ENVIA. The Company engagement team
conducted all necessary audit procedures.

In aggregate, the components where we performed audit procedures accounted for 93% of Company loss before tax and 98% of Company
total assets. This gave us the evidence we needed for our opinion on the financial statements as a whole.

Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These,
together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit
procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Risk description and impact

Company consolidated financial
statements

Velocys plc financial statements

Overall materiality

£1.0 million (2016: £1.1 million).

£150,000 (2016: £1.0 million).

How we determined it

4.4% of loss before income tax before
exceptional items.

1% of total assets.

Rationale for benchmark applied

Based on the benchmarks used in the
Annual Report, we believe that loss
before income tax before exceptional
items is the primary measure used by
the members in assessing the financial
performance of the Company. We
consider it appropriate to eliminate
exceptional items, which are considered
non-recurring, to preserve the link
between materiality and the underlying
performance of the Company.

We believe that total assets is the
primary measure used by the members
in assessing the performance and
position of the entity and reflects
Velocys plc’s principal activity as a
holding company.

For each component in the scope of our Company audit, we allocated a materiality that is less than our overall Company materiality. The
range of materiality allocated across components was between £390,000 and £900,000. Certain components were audited to a local
statutory audit materiality that was also less than our overall Company materiality.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £50,000 (Company
audit) (2016: £60,000) and £7,500 (Velocys plc audit) (2016: £51,000) as well as misstatements below those amounts that, in our view,
warranted reporting for qualitative reasons.

Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’
report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form
of assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required
to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement
of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report based on these responsibilities.

www.velocys.com

Velocys plc Annual report and accounts 2017 41

Independent auditors’ report (continued)
to the members of Velocys plc

Reporting on other information (continued)
With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies Act
2006 have been included.

Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report
certain opinions and matters as described below.

Strategic report and Directors’ report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ report
for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with applicable
legal requirements.

In light of the knowledge and understanding of the Company and Velocys plc and their environment obtained in the course of the audit,
we did not identify any material misstatements in the Strategic report and Directors’ report.

Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of directors’ responsibilities set out on page 36, the directors are responsible for the preparation
of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The
directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Company’s and Velocys plc’s ability to continue as
a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Company or Velocys plc or to cease operations, or have no realistic alternative but to do so.

Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’ report.

Use of this report
This report, including the opinions, has been prepared for and only for Velocys plc’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.

Other required reporting
Companies Act 2006 exception reporting
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 Velocys plc, or returns adequate for our audit have not been received from branches
not visited by us; or
certain disclosures of directors’ remuneration specified by law are not made; or

Velocys plc’s financial statements are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Other voluntary reporting
Directors’ remuneration
Velocys plc voluntarily prepares a Directors’ remuneration report in accordance with the provisions of the Companies Act 2006. The
directors requested that we audit the part of the Directors’ remuneration report specified by the Companies Act 2006 to be audited as if
Velocys plc 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.

Sam Taylor (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors
Reading
22 May 2018

42 Velocys plc Annual report and accounts 2017

www.velocys.com

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Consolidated income statement
for the year ended 31 December 2017

2017
£’000

2016
£’000

Note

7
8

Before Exceptional
items
(note 4)

exceptional
items

Before Exceptional
items
(note 4)

exceptional
items

Total

759
(409)

350
(21,930)
163

–
–

–
(31,486)
1,750

759
(409)

350
(53,416)
1,913

1,445
(1,060)

385
(17,429)
272

–
–

–
(2,809)
2,496

Total

1,445
(1,060)

385
(20,238)
2,768

(21,417)

(29,736)

(51,153)

(16,722)

(313)

(17,085)

(1,784)

(2,736)

(4,520)

(306)

(23,201)
730
(399)

331

(22,870)
739

(32,472)
–
–

(55,673)
730
(399)

(17,078)
3,344
(26)

–

331

3,318

(32,472)
–

(55,342)
739

(13,760)
1,404

–

(313)
–
–

–

(313)
–

(306)

(17,391)
3,344
(26)

3,318

(14,073)
1,404

(22,131)

(32,472)

(54,603)

(12,356)

(313)

(12,669)

Revenue
Cost of sales

Gross profit
Administrative expenses
Other income

Operating loss
Share of loss of investments accounted

for using the equity method

Loss before finance net finance (costs)/income
Finance income
Finance costs

Net finance (costs)/income

Loss before income tax
Income tax credit

Loss 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)

(15.19)

(37.47)

(8.62)

(8.84)

The notes on pages 48 to 76 are part of these consolidated financial statements.

www.velocys.com

Velocys plc Annual report and accounts 2017 43

Consolidated statement of comprehensive income
for the year ended 31 December 2017

2017
£’000

2016
£’000

Before Exceptional
items
(note 4)

exceptional
items

Before Exceptional
items
(note 4)

exceptional
items

Total

Loss for the year

(22,131)

(32,472)

(54,603)

(12,356)

(313)

(12,669)

Other comprehensive (expense)/income
Items that may be reclassified

to the income statement in subsequent periods

Foreign currency translation differences

(4,411)

–

(4,411)

7,347

–

7,347

Total comprehensive (expense)/income for the year

attributable to the owners of Velocys plc

(26,542)

(32,472)

(59,014)

(5,009)

(313)

(5,322)

The notes on pages 48 to 76 are part of these consolidated financial statements.

44 Velocys plc Annual report and accounts 2017

www.velocys.com

Consolidated statement of financial position
as at 31 December 2017

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

Current assets
Inventories
Trade and other receivables
Current income tax asset
Derivative financial instruments
Restricted cash
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
20
19

22
22

26
26

2017
£’000

755
1,801
10,284
2,580

15,420

388
416
546
–
620
2,070

4,040

19,460

(3,516)
(268)

(3,784)

(718)
(273)

(991)

(4,775)

14,685

1,468
159,385
369
16,085
2,654
(165,276)

14,685

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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

The notes on pages 48 to 76 are part of these consolidated financial statements.

The financial statements on pages 43 to 76 were approved by the Board of directors and authorised for issue on 22 May 2018.
They were signed on its behalf by:

David Pummell
Chief Executive Officer

Company number 05712187

www.velocys.com

Velocys plc Annual report and accounts 2017 45

Consolidated statement of changes in equity
for the year ended 31 December 2017

Called up
share
capital
£’000

Share
premium
account
£’000

Share-based

Foreign

Merger
reserve
£’000

payment exchange Accumulated
losses
reserve
£’000
£’000

reserve
£’000

Total
equity
£’000

Balance at 1 January 2016

1,419

149,197

369

15,362

(282)

(97,583)

68,482

Loss for the year
Other comprehensive income
Foreign currency translation differences

Total comprehensive income/(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

–

7,347

(12,669)

(5,322)

–
–
–

–

–
–
–

–

793
97
(312)

578

Balance at 1 January 2017

1,438

149,275

369

15,843

7,065

(110,252)

63,738

Loss for the year
Other comprehensive expense
Foreign currency translation differences

Total comprehensive expense

Transactions with owners
Share-based payments – value of employee services
Proceeds from share issues
Convertible loan notes
Interest on convertible loan note

Total transactions with owners

–

–
30
–
–

–

–
689
9,000
421

10,110

–

–
–
–
–

–

242
–
–
–

242

–

(54,603)

(4,411)

–

(4,411)

(54,603)

(59,014)

–
–
–
–

–

–
–
–
(421)

(421)

242
719
9,000
–

9,961

Balance at 31 December 2017

1,468

159,385

369

16,085

2,654

(165,276)

14,685

The notes on pages 48 to 76 are part of these consolidated financial statements.

46 Velocys plc Annual report and accounts 2017

www.velocys.com

Consolidated statement of cash flows
for the year ended 31 December 2017

Cash flows from operating activities
Operating loss before taxation
Depreciation and amortisation
Gain on bargain purchase for ENVIA
Loss on disposal of property, plant and equipment
Loss on disposal of intangible assets
Impairment of assets
Impairment of inventory
Impairment of assets under construction
Amortisation of leased inventory
Share-based payments
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
Cash moved to restricted cash
Decrease in funds placed on deposit for longer than 3 months

Net cash (used in)/generated from investing activities

Cash flows from financing activities
Proceeds from issues of shares and convertible loan notes
Costs of issuing shares and convertible loan notes
Interest paid
Repayment of borrowings

Net cash generated from/(used in) financing activities

Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Exchange movements on cash and cash equivalents

Cash and cash equivalents at end of year

Note

The notes on pages 48 to 76 are part of these consolidated financial statements.

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£’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

2017
£’000

(51,153)
2,893
(1,750)
83
152
31,486
340
31
92
242
–

358
914
–

(16,312)
1,047

(15,265)

(34)
(335)
–
(9,788)
62
(620)
–

(10,715)

10,160
(443)
(17)
(308)

9,392

(16,588)
18,744
(86)

2,070

www.velocys.com

Velocys plc Annual report and accounts 2017 47

Notes to the consolidated financial statements

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 25. The parent company financial statements are included on pages 77 to 85. The parent company’s
securities are traded on the Alternative Investment Market (AIM) of The London Stock Exchange under the symbol “VLS”.

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

Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU, hereafter referred to as “IFRS”), 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, where relevant.

The preparation of financial statements to conform to IFRS requires the use of certain critical accounting estimates and the exercise
of management’s judgement 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.

The financial statements do not include the adjustments that would arise if the Company and Velocys plc were unable to continue as
a going concern.

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.

48 Velocys plc Annual report and accounts 2017

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IFRS 9 Financial instruments
The Company is continuing to assess the full impact of IFRS 9, which becomes effective for accounting periods beginning on or after
1 January 2018. The main changes are expected to relate to:

The standard removes the category of assets, loan and receivables, which in 2017 included cash and cash equivalents, trade
receivables and the loan to the Company’s associate investment, ENVIA. These will be reclassified under the new standard as
financial assets held at amortised cost, on the basis that the business model under which they are held is to collect repayment of the
asset or loan and interest accrued thereon, with a fixed date for repayment.
The standard requires any amortisation of these assets to be calculated on an expected future credit losses basis, rather than on
incurred losses.

The Company regularly uses forward foreign exchange contracts to manage its foreign exchange risk although at the end of 2017
it had none outstanding. Under IFRS 9 these will continue to be classified as derivative financial instruments and measured at fair
value through profit and loss.

IFRS 15 Revenue from contracts with customers
The Company has reviewed the requirements of the standard and 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 any impact on the opening 2018 balance sheet. Revenue in 2017 was derived from engineering
services and the lease of catalyst. Service revenue is recognised, and in most cases invoiced, on a monthly basis in line with service
performance. Catalyst lease revenue is recognised monthly over the life of the catalyst; revenue in 2017 was immaterial.

Receipt of Red Rock Biofuels revenue is material, and the impacts of adoption of the new standard are currently being assessed.

The following new standard is mandatory for the first time for the financial year beginning 1 January 2019. The Company has not
chosen to early adopt this standard in 2018.

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 27, at 31 December 2017 the Company had £1,662,000 of operating lease commitments and on transition the
Company will recognise a right-of-use asset and a lease liability in respect of these commitments. Thereafter the nature of the lease
expense will change from rent to depreciation and interest charges. The Company’s operating lease expense in 2017 was £879,000,
although this included £375,000 in respect of the vacated Milton Park premises. It is not expected that the change in the profile
of the remaining expense will have a material impact on the Company’s loss before tax.

Financial risk management policies
Financial risk management policies are set out in the Strategic report on page 25, and in note 25.

Capital management policies
Capital management policies are set out in note 25.

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 (£).

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.

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Velocys plc Annual report and accounts 2017 49

Notes to the consolidated financial statements (continued)

2. Accounting policies (continued)
Transactions and balances (continued)
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 in the consolidated financial statements, with exchange differences being recognised initially in a separate component
of Other comprehensive income and, on disposal of the net investment, in profit or loss.

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

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

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.

3. Critical accounting estimates and judgements
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of applying the Company’s accounting policies. Although these
estimates and judgements are based on management’s best knowledge of the amount and/or timing, actual results ultimately may
differ. These estimates and judgements are regularly reviewed and revised as necessary. The areas that involve a higher degree of
judgement or complexity, or that have the most significant effect on the amounts included in these consolidated financial statements
are listed below and described in the relevant note.

Items involving a critical estimate
Gain on bargain purchase arising from step acquisition of associate
Investment in associate – impairment assessment
Items involving a judgement
Intangible assets – impairment assessment
Share of profit and loss of associate
Equity instrument – convertible loan note

Note

19
19

17
19
26

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. 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.

Administrative expenses
Intangible assets impairment
Property, plant and equipment impairment
Inventories impairment
Unsuccessful acquisition costs

Share of loss of investments
Other income
Recognition of deferred income
Gain on bargain purchase

Total

2017
£’000

(28,760)
(2,185)
(541)
–

(31,486)
(2,736)

–
1,750

986

(32,472)

2016
£’000

–
–
–
(2,809)

(2,809)
–

2,496
–

2,496

(313)

50 Velocys plc Annual report and accounts 2017

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Administrative expenses
At varying points during 2017, the carrying value of the Company’s net assets exceeded the market capitalisation indicating a
potential impairment at year end. This conclusion was supported by the fundraise in January 2018, which was discounted to 10p per
share, and which prompted the share price to drop to 10p immediately afterwards. As a result, an impairment of £31.5m was recorded
against a range of assets, as described in note 17. The assets impacted by the impairment were Intangible assets, Inventories and
Property, plant and equipment. Critical estimates and judgements are included in note 17.

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, recorded as an exceptional
item of £2,809,000, represent amounts spent net of the related reimbursement.

Share of loss of investments
The Company is required to assess, at the end of each reporting period, whether there is any indication that an asset may be impaired.
If any such indication exists, the entity shall estimate the recoverable amount of the asset. During 2017 the first saleable products
using Velocys’ reactors and catalyst (waxes, diesel and naphtha) have been produced to customer specification and the offtakers have
begun taking delivery. Despite these milestones, ENVIA’s recoverable amount, based on its value in use, calculated using a discounted
cash flow model, has decreased significantly, to reflect a revision of the expected income from RINs and a small risk associated with
the expiry of a clause in the JV agreement preventing a majority vote requiring unanimous consent to halt operations at the plant. The
Company has recorded an impairment of its investment in ENVIA of £2,736,000 (2016: £nil).

–

Other income
In 2016 the Company recognised £2,496,000 as Other income. This relates to non-refundable amounts from Ventech previously
recorded in deferred income in respect of the cancellation of a contract with Ventech for reactors. The judgment to recognise this
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.

In September 2017 Velocys increased its equity share and voting rights at ENVIA following the exit of NRG from the joint venture, for
no consideration. The voting rights for the three remaining joint venture members, including Velocys, were accordingly increased to
33% each. The increased interest in the associate has been acquired through an increase in an existing stake. Velocys applied the
‘cost approach’, whereby there is a requirement to assess the fair value of both the consideration and the net assets being acquired.
The fair value of the net assets being acquired was 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. The Company has recorded a gain on bargain
purchase of £1,750,000 in respect of this step acquisition. See note 19 for more information.

5. Segmental information
The Company’s chief operating decision-making unit is the Executive Committee (ExCo). The ExCo 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 ExCo considers that the business comprises a single activity, which is the design, development, marketing and sale of technology
for the production of synthetic fuels. This includes facilitating project development by putting together partnerships with technology
licensors, engineers, feedstock suppliers, offtakers and financing entities. The ExCo 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 ExCo 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 financial statements.

The ExCo 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.

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Velocys plc Annual report and accounts 2017 51

Notes to the consolidated financial statements (continued)

5. Segmental information (continued)

Europe
Americas
Asia Pacific

Total revenue

2017
£’000

142
591
26

759

2016
£’000

273
1,163
9

1,445

Revenues during the year originated in the United Kingdom and United States, with immaterial revenue from feasibility studies
elsewhere in the world.

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

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

Intangible assets
Property, plant and equipment
Trade and other receivable
Investment in associate

Total

2017
£’000

484
–
–
275

759

2017
£’000

415
1,782
10,284
2,580

15,061

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 £359,000 (2016: £727,000).

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 contracts. Once the fair value of the
components has been determined, revenue is recognised in line with the underlying nature of the contract.

In 2017 there was no reactor or licence fee revenue. Catalyst sales income is recognised monthly over the term of the arrangement.

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.

The majority of the Company’s revenue is derived from a small number of significant commercial customers and development partners.

FT reactor, catalyst and licence
Engineering services

Total

2017
£’000

484
275

759

2016
£’000

–
1,445

1,445

52 Velocys plc Annual report and accounts 2017

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7. Finance income

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

Total

8. Finance costs

Interest on finance leases
Interest on borrowings
Net fair value losses on forward foreign exchange contracts
Foreign exchange losses

Total

2017
£’000

61
669
–
–

730

2017
£’000

1
16
61
321

399

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.

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

Total other income before exceptional items

Exceptional items (see note 4):
Gain on bargain purchase
Recognition of deferred income

Total other income exceptional items

Total

2017
£’000

–
163

163

1,750
–

1,750

1,913

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£’000

129
–
668
2,547

3,344

2016
£’000

5
21
–
–

2016
£’000

252
20

272

–
2,496

2,496

2,768

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Velocys plc Annual report and accounts 2017 53

Notes to the consolidated financial statements (continued)

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)
Impairment of inventory
Impairment of assets under construction
Operating lease expense – plant and machinery
Operating lease expense – other
Patent and other IP costs
Materials expense
Services
Legal
Travel
Other expenses

Total cost of sales and administrative expenses before exceptional items

Exceptional items - impairment of assets (note 4)

Total cost of sales and administrative expenses

2017
£’000

9,022
2,364
1,101
35
1,757
340
31
71
808
225
972
2,181
872
942
1,618

22,339

31,486

53,825

Included in administrative expenses were research and development costs of £11,064,000 (2016: £10,075,000).

11. Auditor’s remuneration

Payable to PricewaterhouseCoopers LLP and its associates:
For the audit of the parent company and consolidated
financial statements in respect of the current year
For the audit of the parent company and consolidated
financial statements in respect of the prior year

For the audit of the financial statements of subsidiaries
of the parent company in respect of the current year

Other services:
Audit-related assurance services
Taxation advisory services in respect of the current year

Total

2017
£’000

7
10

171

2016
£’000

10,212
1,837
1,077
55
191
148
–
72
517
313
642
677
318
853
1,577

18,489

2,809

21,298

2016
£’000

–

–
25

142

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.

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 accrued. The Company has no
further payment obligations once the contributions have been paid.

54 Velocys plc Annual report and accounts 2017

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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

2017
number

37
23

2017
£’000

7,787
519
232
242
242

9,022

2016
number

65
25

2016
£’000

8,312
673
314
120
793

10,212

Details of directors’ remuneration are given in the audited information in the Directors’ remuneration report on pages 32 to 35, which
forms part of these financial statements.

During the year a number of employees were made redundant due to the scaling down of R&D activities. Redundancy payments,
including payments in lieu of notice and holiday totalled £242,000.

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.

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

Current tax total

Income tax total

2017
£’000

(193)
(546)

(739)

2016
£’000

(550)
(854)

(1,404)

Due to the availability of losses incurred in the year, there is no charge to corporation tax. The Company recognised £739,000 for
R&D tax credits (2016: £1,404,000). 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 HMRC’s rules, and to estimate the level of allowable cost within each, based on the
nature of costs.

The actual tax credit for the current and previous year is lower (2016: lower) 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.

Loss before income tax after exceptional items

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

Tax effects of:

Expenses not deductible for tax purposes
Impairment loss not deductible for tax purposes
Unutilised tax losses for which no deferred tax asset is recognised
R&D tax credit

Income tax total

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2017
£’000

(55,342)

(18,004)

20
8,696
9,288
(739)

(739)

2016
£’000

(14,073)

(4,147)

51
–
4,096
(1,404)

(1,404)

Velocys plc Annual report and accounts 2017 55

Notes to the consolidated financial statements (continued)

13. Income tax (continued)
In the table Impairment loss not deductible for tax purposes removes the tax impact of the In-process technology and Goodwill
impairments (see note 17). Goodwill created from a stock purchase such as that of Velocys Inc.is not deductible for US tax purposes.
Goodwill created from purchasing the assets of the company (such as Velocys Projects Solutions LLC) is tax deductible.

The weighted average applicable tax rate was 32.5% (2016: 29.5%).

The standard rate of corporation tax in the United Kingdom changed from 20% to 19% with effect from 1 April 2017. The applicable
tax rate for 2017 is therefore 19.25%. Legislation to 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 has been 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 had an effective rate of 34%. In December 2017 the US Congress
voted to reduce the tax rate to 21%. Unrecognised US deferred tax balances have been measured at 21% (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.

There was no movement in recognised deferred tax in the year or the comparative period.

Unrecognised
Deferred tax assets
Trading losses
Equity settled options

Total

2017
£’000

(24,720)
(54)

(24,774)

2016
£’000

(27,366)
(195)

(27,561)

At 31 December 2017 the Company had a net unrecognised deferred tax asset of £24,720,000 (2016: £27,366,000) arising from
trading losses since incorporation. No recognition (2016: £nil) of the net deferred tax asset has been made at 31 December 2017 on
the grounds of uncertainty over its recoverability in light of the Company’s nascent revenue streams and commitment to continued
investment in the development of its biorefineries, and therefore there is no impact on the current or prior year income statement.

Of this unrecognised deferred tax asset £12,035,000 (2016: £11,775,000) 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
2037 (2016: 2023 and 2036).

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 historical satisfaction of non-market vesting and service conditions. 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. The Company does not hold any treasury shares.

56 Velocys plc Annual report and accounts 2017

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The number of options outstanding at 31 December 2017 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

2017

Income
statement
£’000

105
91
–
–
46

242

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

2,036,100
7,597,733
63,570
79,760
212,625

9,989,788

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, which 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.

Non-market performance options that were granted to certain employees in 2015 did not meet the target conditions and did not
vest in 2017.

Movements in the number of 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

121.26p
48.97p
67.90p
–

117.95p

2017

Number of
options

3,228,566
160,000
(1,352,466)
–

2,036,100

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

Of the 2,036,100 options outstanding at 31 December 2017, 1,484,764 were exercisable (2016: 1,875,442). The weighted average
exercise price of the exercisable shares was 43.88p (2016: 57.88p).

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

Year of expiry

Range of
exercise price

Number of
options

2017
2018
2020
2021
2022
2023
2024
2025
2026
2027

Total

–
159.00p
57.50 – 64.49p
51.00 – 68.19p
48.00 – 81.53p
129.88 – 194.94p
Nil – 276.77p
57.07 – 180.00p
27.60 – 37.06p
43.73p

–
62,893
24,352
774,855
80,000
484,000
200,000
240,000
70,000
100,000

Nil – 276.77p

2,036,100

2017

Weighted
average
exercise price

–
159.00p
64.49p
62.57p
73.32p
184.38p
218.38p
145.53p
28.95p
43.73p

117.95p

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

Number of
options

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

3,228,566

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Velocys plc Annual report and accounts 2017 57

Notes to the consolidated financial statements (continued)

15. Share-based payments (continued)
The weighted average fair value of options granted during the year was 22.49p (2016: 13.65p) 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

2017

48.97p
48.97p
61%
0.3%
0%
4.0 years

2016

28.86p
28.86p
54%
0.4%
0%
4.0 years

Total expense recognised in the income statement for share options granted to directors and employees was £105,000 (2016: £275,000).

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.

The only options granted in 2017 were to Susan Robertson, who was leaving the Company (2016: no options granted). However, the
Remuneration Committee intends to introduce a new equity-based incentive scheme for executives in 2018, and, in the allocation
of such awards, may take into consideration the fact that no 2016 or 2017 awards were made.

Movements in the number of 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

84.92p
46.01p
4.76p
32.03p

89.85p

2017

Number of
options

8,166,548
100,000
(385,310)
(283,506)

7,597,732

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

Of the 7,597,732 options outstanding at 31 December 2017, 7,244,534 were exercisable (2016: 6,022,848). The weighted average
exercise price of the exercisable shares was 94.22p (2016: 115.14p).

58 Velocys plc Annual report and accounts 2017

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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

Range of
exercise price

Number of
options

2017
2018
2019
2020
2021
2022
2023
2024
2027

Total

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

Nil – 163.50p

–
225,172
335,541
194,769
1,175,000
2,313,178
1,841,837
1,412,235
100,000

7,597,732

2017

Weighted
average
exercise price

–
Nil
0.31p
Nil
39.05p
49.00p
159.00p
163.13p
1.00p

89.85p

2016

Weighted
average
exercise price

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

84.92p

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

The weighted average fair value of options granted during the year was 47.00p (2016: no options) 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

2017

47.00p
47.00p
61%
0.3%
0%
3.0 years

2016

–
–
–
–
–
–

Total expense recognised in the income statement for executive options granted to directors and employees was £91,000 in 2017
(2016: £496,000). No further expense was accrued within the share-based payments charge (2016: £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 £nil (2016: £13,300).

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
ten 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:

25% of grant
1/48th 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.

www.velocys.com

Velocys plc Annual report and accounts 2017 59

Notes to the consolidated financial statements (continued)

15. Share-based payments (continued)
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

$1.10
$0.93
–

$0.93

2017

Number of
options

83,248
(19,678)
–

63,570

Weighted
average
exercise price

$1.08
$0.93
–

$1.10

2016

Number of
options

95,978
(12,730)
–

83,248

Of the options outstanding presented above, 63,570 (2016: 83,248) were exercisable as of 31 December 2016. The weighted average
share price of the exercisable shares was $0.93 (2016: $1.10).

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

Year of expiry

2017
2021

Total

Exercise price
per share

Number of
options

–
$0.93

$0.93

–
63,570

63,570

2017

Weighted
average
exercise price

–
$0.93

$0.93

2016

Weighted
average
exercise price

$2.45
$0.93

$1.10

Number of
options

9,218
74,030

83,248

Total expense recognised in the income statement for share options granted under the Velocys, Inc. plan was £nil (2016: £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, 2017.

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

–

1.00p

2017

Number of
options

79,760

–

79,760

Exercise
price

1.00p

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

Year of expiry

2019
2021

Total

Exercise
price

1.00p
1.00p

1.00p

2017

Number of
options

42,105
37,655

79,760

2016

Number of
options

421,760

(342,000)

79,760

2016

Number of
options

42,105
37,655

79,760

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 2017 (2016: nil). All expense has been recognised prior to 2016.

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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 ten 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
Exercised

At 31 December

Weighted
average
exercise price

87.39p
1.00p
1.00p

104.15p

2017

Number of
options

253,879
81,000
(122,254)

212,625

Weighted
average
exercise price

87.39p
–
–

87.39p

2016

Number of
options

253,879
–
–

253,879

Of the options outstanding at 31 December 2017, 172,625 were exercisable (2016: 163,879). The weighted average exercise price of
the exercisable shares was 103.89p (2016: 77.58p).

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

Number of
options

–
–
1.00 – 53.10p
145.25p
105.25 – 143.50p

1.00 – 145.25p

–
–
29,500
21,375
161,750

212,625

2017

Weighted
average
exercise price

–
–
53.10p
145.25p
108.03p

104.15p

2016

Weighted
average
exercise price

1.00p
1.00p
29.44p
145.25p
108.03p

87.39p

Number of
options

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

253,879

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 were granted in 2017. Two further awards were made in 2017 and subsequently
granted. The number of options was determined by the average share price in the quarter prior to the service period, and the options
vested immediately.

The weighted average fair value of options granted during the year using the Black-Scholes valuation model was 57.59p per option
(2016: no options granted). 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

2017

48.88p
1.00p
61%
0.0%
0%
0 years

2016

–
–
–
–
–
–

The share-based payment expense for the year includes a cost of £46,000 (2016: £22,000) relating to options granted to consultants.

Share-based payments charge
The total charge for share-based payments during the year was £242,000 (2016: £793,000) of which £46,000 (2016: £357,000) relates
to options granted to directors and the remainder to other employees.

www.velocys.com

Velocys plc Annual report and accounts 2017 61

Notes to the consolidated financial statements (continued)

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)

2017

(54,603)
145,729,727

(37.47)

2016

(12,669)
143,282,963

(8.84)

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 2017 there were no other potentially dilutive
instruments (see note 26). Details of share options are given in note 15.

17. Intangible assets
Significant accounting policies
Cost or valuation and amortisation
Goodwill
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 the opening
balance sheet, £5,445,000 of the Goodwill balance related to the acquisition of Velocys, Inc. in 2008 and £2,668,000 to the acquisition
of Velocys Project Solutions, LLC (VPS) in 2014. In 2017 the Goodwill balance was written down to nil (see Impairment below).

In-process technology
In-process technology consists of purchased intangibles and capitalised development costs and 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.

Prior to 2017, amortisation was charged using the units-of-production method based on useful economic lives of the assets projected
over future sales of 1,400 four-core reactors. Amortisation began in 2015 based on the manufacture of the first commercial reactors.
From 1 January 2017, following an update to the Company’s business model, whereby it is concentrating on the development of
biorefineries rather than the licensing of technology to third parties, the expected pattern of consumption of the future economic
benefits has been revised. The Company estimates that the total useful economic life of the asset is 20 years, from the completion of
the first two reactors in August 2015. Amortisation is charged on a straight-line basis over the remaining estimated useful economic
life of the asset, being 18.7 years from 1 January 2017 resulting in an increase of the amortisation charge for the year of £1,577,000.
Subsequently, it was decided to impair the In-process technology asset (see below).

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. Capitalised development costs are carried at cost less
accumulated amortisation and impairment losses. Amortisation is charged over periods expected to benefit, typically up to 20 years,
commencing with launch of the product. 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 2017 and 2016.
This resulted in a loss on disposal of patents of £152,000 (2016: loss of £213,000).

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.

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Customer contracts
Customer contracts are carried at cost less impairment losses. The customer contract value that had been fully impaired in 2015
related to an expected project development fee negotiated during 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
Intangible 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 carrying value exceeds recoverable amount, the difference is recognised as an expense
in the income statement. The recoverable amount used for impairment testing is the higher of 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 that are largely independent of cash inflows from other assets
or groups of assets. The Company has one CGU 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.

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.

Were the fair value of the business to change in the coming 12 months, due to an increase or further decrease in the market
capitalisation of Velocys plc, the impairment disclosed in this note would be reversed or the Company’s assets would be further
impaired accordingly.

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 varying points during 2017, the carrying amount of the Company’s net assets exceeded Velocys plc’s market capitalisation;

The fundraise, completed in January 2018, was discounted to 10p per share, and which prompted the share price to drop to 10p
immediately afterwards, further reducing the Velocys plc’s market capitalisation.

To assess the recoverability of the intangible assets, the recoverable amount is calculated 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 detailed in the accounting policy set out above, the Company is considered to operate as a single CGU. Due to the early
stage of the Company's strategy, its biorefinery development plans are still at too early a stage to provide reliable revenue forecasts
for long-term discounted cash flow analysis. Consequently, the CGU's recoverable amount has been determined based on its fair
value less costs of disposal (fair value), by reference to the total value of the parent company’s equity based on the AIM-listed shares
of the parent company, consistent with the impairment assessment performed in the prior year.

The fair value should reflect the assets and liabilities of the existing business at 31 December 2017. The Company considers that using
a fair value less cost of disposal value of £33.1m, based on the share price of 10 pence from the equity raised on 15 January 2018 to the
enlarged share capital, for the 31 December 2017 impairment assessment would imply that the combined business would be in excess
of this at the date of the fundraise in January 2018, following the cash injection. The assessment has taken account of the decrease in
the share price resulting from the January 2018 fundraise, and applied a per share value of 10p to the number of shares in issue at 31
December 2017. This gave a valuation of £14.7m and, unlike the December 2016 assessment, a control premium was not applied, as most
of the Company’s significant investors were participating in the January 2018 fundraise at the discounted price. As a result of this fair value
assessment, the Company has recorded an impairment charge of £31.5m (2016: £nil).

The method of allocation of the impairment was as follows:
Write down Goodwill to nil, resulting in an impairment of £7,398,000.

The other assets in the CGU on a pro rata basis, based on the carrying amount of each asset in the CGU. However, within this
allocation framework, each asset is reduced only to the highest of:
(i) Its fair value less costs of disposal, if measurable.
(ii) Its value in use, if this can be determined.
(iii) Nil.

This resulted in the following impairment allocation:

In-process technology £20,610,000.

Patents, licence and trademarks £752,000.
Property, plant and equipment £2,185,000.

Inventories £541,000.

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Velocys plc Annual report and accounts 2017 63

Notes to the consolidated financial statements (continued)

17. Intangible assets (continued)

2017

Cost
At 1 January 2017
Additions
Disposals
Write-off of customer contracts
Foreign exchange movement

At 31 December 2017

Accumulated amortisation and impairment
At 1 January 2017
Charge for the year
Disposals
Write-off of customer contracts
Impairment
Foreign exchange movement

At 31 December 2017

Net book amount
At 31 December 2017

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
Foreign exchange movement

At 31 December 2016

Net book amount
At 31 December 2016

Patents,
In-process
licence and
technology trademarks
£’000

£’000

Customer
contracts
£’000

Goodwill
£’000

Software
£’000

Total
£’000

8,113
–
–
–
(715)

25,942
–
–
–
(2,261)

7,398

23,681

–
–
–
–
7,398
–

7,398

1,628
1,577
–
–
20,610
(134)

2,248
335
(282)
–
(142)

2,159

678
144
(130)
–
752
(40)

23,681

1,404

–

755

1,473
–
–
(1,473)
–

–

1,473
–
–
(1,473)
–
–

–

101
–
–
–
(5)

63
36
–
–
–
(3)

37,877
335
(282)
(1,473)
(3,123)

33,334

3,842
1,757
(130)
(1,473)
28,760
(177)

32,579

–

755

Patents,
In-process
licence and
technology trademarks
£’000

£’000

Customer
contracts
£’000

Goodwill
£’000

Software
£’000

Total
£’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

31,790
357
(341)
6,071

37,877

3,412
191
(108)
347

3,842

8,113

24,314

1,570

–

34,035

64 Velocys plc Annual report and accounts 2017

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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. Property, plant and equipment were included in the list of items to which an impairment was applied subsequent
to the impairment review (see note 17). The value of the impairment was £2,185,000 (2016: £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.

2017

Cost
At 1 January 2017
Additions
Disposals
Transfers to plant and machinery
Foreign exchange

At 31 December 2017

Accumulated depreciation and impairment
At 1 January 2017
Charge for the year
Disposals
Impairment
Foreign exchange

At 31 December 2017

Net book amount
At 31 December 2017

Assets under
construction
£’000

104
18
–
(64)
(7)

–
–
–
31
–

Land
£’000

1,330
–
–
–
(118)

1,212

–
–
–
666
–

666

546

Plant and
machinery
£’000

12,200
16
(2,545)
64
(1,004)

8,731

7,997
1,136
(2,462)
1,519
(694)

7,496

Total
£’000

13,634
34
(2,545)
–
(1,129)

9,994

7,997
1,136
(2,462)
2,216
(694)

8,193

1,235

1,801

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Velocys plc Annual report and accounts 2017 65

Notes to the consolidated financial statements (continued)

18. Property, plant and equipment (continued)

2016

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

At 31 December 2016

Accumulated depreciation and impairment
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

Total
£’000

11,285
291
(95)
–
2,153

13,634

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

7,997

104

1,330

4,203

5,637

As at 31 December 2017, the Company had entered into contractual commitments for the acquisition of property, plant and
equipment amounting to £2,000 (2016: £12,000).

19. Investment in associate
This investment relates solely to 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. An update
on the ENVIA project is available in the Strategic report on pages 10 to 11.

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. In January 2016, Velocys entered into a financing arrangement with ENVIA under
which it contributed additional equity finance of $2.6m and committed to provide loan finance of up to $9.3m. 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 from 9% to 28%. The investment has since been recognised as an Investment in associate, reflecting the significant
influence that Velocys holds in ENVIA, including voting rights exceeding 20% and a seat on ENVIA’s board. The Company recorded
the transaction as a step acquisition under the equity method in 2016.

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. During 2017 Velocys committed to a series of extensions to the loan,
which increased the facility to $13.8m (£10.3m) (see note 20), however these extensions did not result in a change in the Company’s
ownership interest or voting rights. In September 2017, one of the joint venture partners, NRG, withdrew its interest and assigned its
ownership and voting units to the remaining partners such that each was left with voting rights of 33%. No consideration was given in
respect of this transfer. The Company recorded the transaction as a step acquisition under the equity method in 2017.

The Company’s share of post-acquisition profit or loss is recognised in the Income statement based on its economic interest.
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 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.

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.

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.

66 Velocys plc Annual report and accounts 2017

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Critical estimates and judgements
Change in ownership rights – fair value assessment of ENVIA’s net assets
In September 2017 Velocys increased its equity share and voting rights at ENVIA following the exit of NRG from the joint venture, for
no consideration. The voting rights for the three remaining joint venture members, including Velocys, were accordingly increased to
33% each. The increased interest in the associate has been acquired through an increase in an existing stake. There is an accounting
policy choice available for the acquisition of an associate in stages (step acquisition). Velocys applied the ‘cost approach’, whereby
there is a requirement to assess the fair value of both the consideration and the net assets being acquired. The fair value of the net
assets being acquired was 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, which requires the use of a number of key assumptions.

The calculations use projections derived from cash flow forecasts developed by Velocys, covering the two-year period from 2018 to
2019, and subsequently extrapolated to 2037, which is considered to be the economic life of the asset, using the estimated long-term
growth rate. The cash flow forecast relies on the intimate working knowledge of the plant that Velocys has gained since the beginning
of the start-up process. Ongoing uncertainties, for example, with the availability and price of RINs, are taken into account by using a
number of different scenarios in the model. IAS 36 requires that when performing an impairment review that risk is incorporated into
the impairment model. This can be done either in the cash flows or through the discount rate. The Company has incorporated risk
through the cash flow forecasts by assessing a number of potential outcomes and assigning a probability of the likelihood of each
of these outcomes occurring. The range of the value in use based on these potential outcomes is significant, which reflects the early
stage nature of the venture. The Company has recorded a gain on bargain purchase of £1,750,000 in respect of this step acquisition.
The key assumptions included in calculating the recoverable amount are set out below.

(i) Sales volume
The plant capacity is 250 bpd production and the model assumes 200 bpd average actual production at the plant due to varied
reduction in availability due to time out for catalyst regeneration, catalyst change out or other maintenance. It assumes that a large
majority of the product will qualify for RINs. There are offtake agreements in place for all products that exceed five years for 100% of
products produced and there is a six-month contract in place for all of the available RIN credits generated; therefore the sales volume
risk is solely based on operational availability. As indicated above, sensitivity analysis reveals that a decrease to 186 bpd from the
200 bpd modelled availability (which is over 25 bpd below operating plan) would be required in order to generate a material change in
the cash flows. The impact of aggressive sensitivity modelling of RIN availability does not have a material impact on cash flows.

(ii) Sales price/RIN credits
The model is based on an oil price (WTI) of $57.50 per barrel and a RIN price of $2.40 per gallon until October 2018 and then $3.05 per
gallon, with scenarios looking at an increase or reduction in these prices of 10%. The prices of diesel, naphtha and wax are all indexed
to the oil price and/or rack pricing that is highly correlated to the price of oil. Although volatility of oil price could significantly vary
revenues, the price has been relatively stable for the past 12 months and, based on current WTI futures, is projected to trade in this
range for the remainder of 2018. There is a possibility within the range of modelled scenarios for RIN pricing to result in a material
impact on cash flows, but not on a risk-adjusted basis, as the current forward outlook shows price recovery.

(iii) Long-term growth rates
A long-term growth rate of 2% was used to extrapolate the cash flows for the period from 2020 to 2037. This is based on the US long-
term GDP growth rates, the principal country in which ENVIA operates, and in preference to an industry average rate, given the early
stage of development in the industry and resulting uncertainty. A reduction in the growth rate to 0% would not result in a material
reduction in the gain on bargain recorded, or to the impairment recognised.

(iv) Discount rate
The discount rate is based on an estimate of ENVIA's weighted average cost of capital (WACC) being the average rate of return ENVIA
expects to compensate all its investors. ENVIA has both equity and debt capital in the form of the loan from Velocys. At September
2017 (step acquisition) and December 2017 (impairment assessment) a post-tax discount rate ('discount rate') of 10.95% (2016:
8.45%) was applied to the model. It is a reasonable assumption that the discount rate might vary in a range up to 12.7%; this would
not result in a material change to the value of ENVIA’s net assets.

Impairment assessment as at 31 December 2017
The Company is required to assess, at the end of each reporting period, whether there is any indication that an asset may be impaired.
If any such indication exists, the entity shall estimate the recoverable amount of the asset. During 2017 the first saleable products
using Velocys’ reactors and catalyst have been produced to customer specification and the offtakers have begun taking delivery of
the waxes, diesel and naphtha. Despite these milestones, ENVIA’s recoverable amount, based on its value in use, calculated using
a discounted cash flow model, has decreased significantly, predominantly driven by a lower revenue forecast based on a revision of
product and RIN pricing produced by the Company. The recoverable amount of the investment was 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,
which requires the use of a number of key assumptions. These are included in the 'Change in ownership rights - fair value assessment
of ENVIA’s net assets’ section above. The Company has recorded an impairment of £2,736,000 (2016: £nil).

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Velocys plc Annual report and accounts 2017 67

Notes to the consolidated financial statements (continued)

19. Investment in associate (continued)
Critical judgements
Share of ENVIA’s identifiable assets and liabilities and its share of profit and loss
Under the equity method the profit or loss of the investor includes its share of the profit or loss of the investee. The Company bases
the calculation of its share of ENVIA’s identifiable assets and liabilities and its net losses on a value distribution model developed by
ENVIA that uses the LLC agreement agreed with each of the other parties that hold ownership units. The resulting percentage share
differs to both the Company’s proportion of ownership units held in ENVIA and its proportion of voting units. This value distribution is
considered a more appropriate measure of the Company’s economic interest in ENVIA.

Investment in associate
At 1 January
Movement from available-for-sale
Investment
Gain on bargain purchase
Share of loss
Impairment
Foreign exchange

At 31 December

2017
£’000

5,865
–
–
1,750
(1,784)
(2,736)
(515)

2,580

2016
£’000

–
3,375
1,938
–
(306)
–
858

5,865

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
Non-current assets
Current assets
Current liabilities
Non-current liabilities

Net assets

Summarised statement of comprehensive loss
Revenue
Loss from continuing operations

Total comprehensive loss

2017
(unaudited)
£’000

2016
(unaudited)
£’000

57,667
2,978
(435)
(10,966)

49,244

409
(7,851)

(7,851)

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

62,272

–
(3,155)

(3,155)

68 Velocys plc Annual report and accounts 2017

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20. Trade and other 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 Finance costs 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 Finance costs.

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

Non-current
Loan receivable

Total

2017
£’000

10,284

2016
£’000

325

At the end of 2017 Velocys had committed to provide up to $13.8m (£10.3m) 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 subject to prior notice. As at 31 December
2017, draw downs on this facility had been made by ENVIA in the amount of $13.0m (£9.6m) (2016: $0.4m (£0.3m)).

In the interim accounts for 30 June 2017, the Company recorded an impairment of £701,000 to the loan to ENVIA, reflecting the risk
to the operation of the plant of not meeting an operational milestone. The milestone was achieved after the interim accounts were
published and the impairment has been reversed.

21. 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.

Raw materials and consumables
Finished goods

Total

2017
£’000

31
357

388

2016
£’000

95
1,366

1,461

In 2017, the Company impaired £340,000 of inventory which was primarily the value of a remaining inventoried reactor and an
immaterial amount of catalyst. The Company impaired the reactor as a reflection of the fact that it is unlikely the Company will find
a buyer for this reactor due to subsequent advances in the reactor design.

As part of the impairment allocation described in note 17 the Company has impaired £541,000 of inventories in 2017.

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Velocys plc Annual report and accounts 2017 69

Notes to the consolidated financial statements (continued)

22. Cash and cash equivalents and restricted cash
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. Restricted cash relates to an $800,000 letter of credit provided to ENVIA under the
first amendment to the loan agreement. This is determined to be restricted on the basis that for a certain period the funds can only
be accessed by ENVIA.

Cash and cash equivalents
Restricted cash

Total

2017
£’000

2,070
620

2,690

2016
£’000

18,744
–

18,744

Cash and cash equivalents is denominated in UK sterling and US dollars, and restricted cash is denominated in US dollars, as follows.

Cash and cash equivalents

UK sterling denominated
US dollar denominated

Restricted cash

US dollar denominated

Total

23. Trade and other payables: current

Trade payables
Other taxation and social security
Accruals
Deferred income

Total

2017
£’000

1,245
825

620

2,690

2017
£’000

604
52
2,242
618

3,516

2016
£’000

7,114
11,630

–

18,744

2016
£’000

722
51
991
508

2,272

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 (2016: 60 days or less).

24. Trade and other payables: non-current

Accruals
Deferred income

Total

2017
£’000

98
620

718

2016
£’000

110
1,233

1,343

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

Deferred income includes funds received for catalyst to be earned over a two-year period commencing February 2017 at the start-up
of the ENVIA reactors.

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25. Financial instruments
Financial assets
Financial assets are classified upon initial recognition and the classification depends on the nature of the asset and the purpose for
which the assets were acquired. At 31 December 2017 the Company only holds financial assets classified as loans and receivables.

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. From time to time it also holds short-term investments, which
are cash deposits on fixed terms of interest for more than three months. It last held short-term investments in 2015.

Loans and receivables also includes Trade receivables and Other receivables (see note 20), 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. Assets in the comparative year were forward foreign exchange contracts that matured in 2017.

Financial liabilities
Financial liabilities are classified according to the substance of the contractual arrangements.

Financial liabilities at amortised cost
Financial liabilities at amortised cost includes Trade payables, all of which are current liabilities (see note 23), Borrowings and
Finance leases. 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.

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

Financing
The Company’s cash usage is significant versus prospective future cash inflows (particularly in the short term) and Velocys is reliant
on the support of a small group of major shareholders. The timing of cash flows is difficult to predict given the long development
time and reliance on external parties. The Board recognises that further funding will be needed. Note 2 discusses uncertainties
surrounding the extent and composition of future funding. The Company is targeting strategic project investment during the middle
of 2018, at which point financing optionality is created.

The fundraise in May 2017 included the issue of loan notes that are convertible into equity. In management’s view, they have
the key characteristics of equity (see note 26). 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.

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Velocys plc Annual report and accounts 2017 71

Notes to the consolidated financial statements (continued)

25. Financial instruments (continued)
Exchange rates
A significant proportion of commercial activity and development 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.

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.

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.

GBP:USD exchange rate +/- 10%

Income
statement
£’000

2017

Equity
£’000

1,162

Income
statement
£’000

1,421

2016

Equity
£’000

1,421

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.

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.

72 Velocys plc Annual report and accounts 2017

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Financial assets are as follows.

Assets
Trade and other receivables excluding non-financial assets
Cash and cash equivalents
Restricted cash

Total

Assets
Derivative financial instruments
Trade and other receivables excluding non-financial assets
Cash and cash equivalents

Total

31 December 2017

Loans and
receivables
£’000

Assets at fair
value through
profit and loss
£’000

10,575
2,070
620

13,265

–
–
–

–

Total
£’000

10,575
2,070
620

13,265

31 December 2016

Loans and
receivables
£’000

Assets at fair
value through
profit and loss
£’000

–
765
18,744

19,509

537
–
–

537

Total
£’000

537
765
18,744

20,046

The credit risk of Trade and other receivables is considered to be low based on the following:
Velocys is a secured creditor of ENVIA.
ENVIA’s net asset position significantly exceeds the receivable value.
ENVIA forecasts it will have net cash inflow in Q2 2018, and being a JV partner, have access to information that supports this forecast.
Velocys is an equity investor; therefore has significant influence over the activities of the investments.

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

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

Aa2
Aa3
A1
A2
A3

Total
Restricted cash
Aa2

£’000

102
1,040
904
24
–

2,070

620

2017

5
50
44
1
–

–

£’000

663
8,817
8,747
–
517

18,744

100

–

2016

3
47
47
–
3

–

www.velocys.com

Velocys plc Annual report and accounts 2017 73

Notes to the consolidated financial statements (continued)

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

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

Total

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

Total

The ageing of financial liabilities is as follows.

Within one year
Within two to five years

Total

Financial liabilities
at amortised cost
£’000

540
604
2,340
1

3,485

Financial liabilities
at amortised cost
£’000

880
722
991
36

2,629

2017
£’000

3,232
253

3,485

31 December 2017

Total
£’000

540
604
2,340
1

3,485

31 December 2016

Total
£’000

880
722
991
36

2,629

2016
£’000

2,036
593

2,629

74 Velocys plc Annual report and accounts 2017

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26. Called up share capital and reserves
Share capital and share premium include ordinary shares in Velocys plc issued to shareholders and options that have been exercised
by employees and associated consultants.

Convertible loan note instruments (‘loan notes’) issued by the Company allow the issuer the right to exchange all outstanding loan
notes and all accrued interest thereon for equity in the parent company. The Company assesses whether the loan notes and the
conversion feature should be classified as a financial liability or equity instrument. In making this assessment the Company assesses
whether there is an obligation for the Company to:
a) deliver cash to another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are

potentially unfavourable to the Company (as the issuer); and
if the instrument will or may be settled in the issuer's own equity instruments it is:
(i)

a non-derivative that includes no contractual obligation for the Company to deliver a variable number of its own equity
instruments; or

(ii) a derivative that will be settled only by the Company exchanging a fixed amount of cash or another financial asset for a fixed

number of its own equity instruments.

If these criteria are met, the loan notes will be recorded as an equity instrument.

Judgement
In May 2017 18,000,000 loan notes were issued to the Company’s two largest shareholders at a price of £0.50 per share. The final
maturity date of the loan notes is 18 months from the date of issue, after which the Company has the right but not the obligation to
convert the outstanding principal and interest into a fixed number of ordinary shares, at a conversion price of £0.50 per share. The
fixed annual interest rate is 8.0%, with accrued interest also being convertible into additional ordinary shares.

Based on the contractual terms it was determined that the Company does not have a contractual obligation to deliver cash to the
loan note holders, and the loan notes convert into a fixed number of shares at a fixed price. Based on these criteria being met the loan
notes were recorded as an equity instrument. The interest accrued on the loan notes is recorded as a distribution to holders of the
loan notes within equity.

At 1 January 2016
Employee share options scheme: Shares issued

including 1p exercise price options

Holdback shares

At 31 December 2016
Employee share options scheme: Shares issued

including 1p exercise price options

Proceeds from share issues

Convertible loan notes

Interest on convertible loan notes

At 31 December 2017
*

All shares have been issued, authorised and fully paid.

Number of
shares*
(thousands)

141,923

1,912
41

143,876

406
2,578

–

Ordinary
shares
£’000

1,419

19
–

1,438

4
26

–

Share
premium
£’000

149,197

(13)
91

149,275

–
689

9,000

421

146,860

1,468

159,385

A total of 10,014,317 (2016: 11,811,991) options to subscribe for ordinary shares of Velocys plc have been granted and are
outstanding at 31 December 2017 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 in 2016.

In May 2017 18,000,000 convertible loan notes were issued to the Company’s two largest shareholders.

On 15 January 2018 Velocys announced that it had secured around £18.4m of additional funding (before expenses), having issued
183,662,946 ordinary shares (see Financial review on pages 16 to 17).

www.velocys.com

Velocys plc Annual report and accounts 2017 75

Notes to the consolidated financial statements (continued)

26. Called up share capital and reserves (continued)
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 £2,654,000 (2016: a credit balance of £7,051,000).

The share-based payment reserve records the IFRS 2 charge for equity settled share-based payment awards. At 31 December 2017
the Company’s share-based payment reserve was £16,085,000 (2016: £15,843,000).

27. Commitments
The Company leases certain property, plant and equipment. 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. Leases under
which the Company incurs substantially all the risks and rewards of ownership are classified as finance leases, however are not
material to the Company.

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.

Future aggregate minimum lease payments
Within one year

Between one and five years
After more than five years

Total

Capital commitments are not material.

2017
£’000

395
1,267
–

1,662

2016
£’000

491
1,319
194

2,004

At 31 December 2017 the Company had committed to make available additional loan funding to ENVIA of £593,000 ($800,000), which
is repayable by 31 December 2019.

28. Post-financial position events
The following events occurred after 31 December 2017.

On 15 January 2018 Velocys announced that it had secured around £18.4m of additional funding (before expenses).

On 16 January 2018 the Company announced that ENVIA believed that fuel produced at its Oklahoma City plant met the necessary
requirements to be submitted for qualification under the Renewable Fuel Standard and that the facility had submitted a certain
number of RINs to the registration system. Confirmation that the RINs produced at ENVIA had been verified was announced on
15 March 2018.

The resignation of Non-Executive Director Julian West from the Board was announced on 7 February 2018.

On 4 May 2018 the Company announced that the third party project developer Red Rock Biofuels had commenced construction of its
Oregon plant and had issued a notice to proceed (NTP) to Velocys.

On 15 May 2018 the Company announced that ENVIA had detected a leak that is believed to have originated inside one of the plant’s
two Fischer-Tropsch (FT) reactors. The Company is confident that the issue is not a result of a flaw in the core Velocys FT technology.
The carrying value of the investment has not been adjusted to reflect the impacts of this event.

29. Related parties
For 2017 the Company recognised catalyst lease revenue totalling £484,000 related to a catalyst lease agreement with ENVIA, an
associate in which the Company has ownership and voting rights as detailed in note 19 of the consolidated financial statements.
During 2017 Velocys committed to provide up to $13,810,000 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 2017, draw downs on
this facility had been made by ENVIA in the amount of £13,010,000 (2016: $400,000 – see note 19).

The Company provided engineering services of £100,000 to Norma Investments Limited, which is the parent company of Ervington
Investments, the largest shareholder in Velocys plc with a holding of 28.9% at 31 December 2017.

76 Velocys plc Annual report and accounts 2017

www.velocys.com

Velocys plc statement of financial position
as at 31 December 2017

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
At 1 January
Loss for the year attributable to owners
Convertible loan note interest

Note

9
9
9

2017
£’000

14,441

6
438

14,885

(184)

14,701

1,468
159,385
16,085

(99,116)
(62,700)
(421)

2016
£’000

66,831

31
650

67,512

(72)

67,440

1,438
149,275
15,843

(39,197)
(59,919)
–

The notes on pages 80 to 85 are part of these parent company financial statements.

The financial statements on pages 77 to 85 were approved by the Board of directors and authorised for issue on 22 May 2018.
They were signed on its behalf by:

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David Pummell
Chief Executive Officer
22 May 2018

Company number 05712187

www.velocys.com

Velocys plc Annual report and accounts 2017 77

Velocys plc statement of changes in equity
for the year ended 31 December 2017

Balance at 1 January 2016

Loss for the year
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

Balance at 1 January 2017

Loss for the year
Foreign currency translation differences

Total comprehensive expense

Transactions with owners
Share-based payments – value of employee services
Proceeds from share issues
Convertible loan notes
Interest on convertible loan notes

Total transactions with owners

Balance at 31 December 2017

Share Share-based

Called up
share capital
£’000

premium
account
£’000

payment Accumulated
losses
£’000

reserve
£’000

Total
equity
£’000

1,419

149,197

15,362

(39,197)

126,781

–
–

–

–
19
–

–
–

–

–
78
–

–
–

–

793
–
(312)

481

(68,085)
8,166

(59,919)

–
–
–

–

793
97
(312)

578

1,438

149,275

15,843

(99,116)

67,440

–
–

–

–
30
–
–

–
–

–

–
689
9,000
421

10,110

–
–

–

242
–
–
–

242

(56,839)
(5,861)

(62,700)

–
–
–
(421)

(421)

242
719
9,000
–

9,961

1,468

159,385

16,085

(162,237)

14,701

The notes on pages 80 to 85 are part of these parent company financial statements.

78 Velocys plc Annual report and accounts 2017

www.velocys.com

Velocys plc statement of cash flows
for the year ended 31 December 2017

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 used in operating activities

Cash flow from investing activities
Interest received

Net cash generated from investing activities

Cash flows from financing activities
Proceeds from issues of shares and convertible loan notes
Costs of issuing shares and convertible loan notes

Net cash generated from financing activities

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

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£’000

(62,294)
57,256
–

25
(5,648)
115

(10,546)
829

(9,717)

–

10,160
(443)

9,717

–
–

–

2016
£’000

(72,485)
65,716
(312)

(68)
6,066
1

(1,082)
1,070

(12)

6
–

–
–

–

Cash and cash equivalents at end of year*
*

Velocys plc does not hold a bank account or cash and cash equivalents; however significant non-cash transactions are presented. For additional information in
respect of the issue of convertible loan notes see note 26 to the consolidated financial statements.

The notes on pages 80 to 85 are part of these parent company financial statements.

www.velocys.com

Velocys plc Annual report and accounts 2017 79

Notes to the financial statements of Velocys plc

1. General information
Velocys plc is a non-trading holding 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”.

Velocys plc is a public limited company listed on AIM.

2. Accounting policies
The principal accounting policies applied in the preparation of these parent company financial statements are the same as those
of the Company unless otherwise specified. The additional accounting policy for the parent company relates to the Investments in
subsidiaries (see note 7). The policies have been consistently applied to each year presented unless otherwise stated.

Basis of preparation
The basis of preparation is the same as the Company, as set out on page 48 of the consolidated financial statements. The parent
company has taken advantage of the legal dispensation contained in Section 408 of the Companies Act 2006 allowing it not to
publish a separate income statement and related notes and not to publish a separate statement of other comprehensive income.
The comprehensive loss for the parent company for the year was £62,700,000 (2016: loss £59,919,000), which included a £57,256,000
impairment of investment in subsidiary in 2017 (2016: £65,716,000) see note 7.

Going concern
The going concern of Velocys plc is intrinsically linked to that of its subsidiaries, through which it trades in the UK and the
US. The going concern basis of preparation is consistent with that set out for the Company. See page 48 of the consolidated
financial statements.

Accounting developments
No new standards, amendments or interpretations, effective for the first time for the financial year beginning on or after
1 January 2017 have had a material impact on Velocys plc. The following standards with significant changes to the accounting
framework will be relevant to future periods.

IFRS 15 Revenue from contracts with customers (IFRS 15) and IFRS 9 Financial instruments (IFRS 9) are mandatory for the first
time for the financial year beginning 1 January 2018. IFRS 15 is not expected to be relevant to Velocys plc as it does not generate
revenue. The parent company’s financial assets comprise its loans to subsidiaries, which upon adoption of IFRS 9 will be reclassified
from Loans and receivables to Financial assets held at amortised cost, as they are held only for repayment of principal and interest.
The standard requires any amortisation of these assets to be calculated on an expected future credit losses basis, rather than
on incurred losses. An impairment was recorded in 2017 spread across the subsidiary loans; details of how this was calculated
are included in note 7. The Company does not consider that the impairment provision recorded would be materially different in
accordance with IFRS 9.

IFRS 16 Leases is mandatory for the first time for the financial year beginning 1 January 2019. This standard is subject to
endorsement by the European Union. This standard is not expected to be relevant to Velocys plc as it has not entered into any
lease arrangement.

Financial risk management policies
Financial risk management policies are set out in the Strategic report on page 25, and in note 25 of the consolidated
financial statements.

Capital management policies
Capital management policies are set out in note 25 of the consolidated financial statements.

3. Critical accounting estimates and judgements
In applying the parent company’s accounting policies set out in note 2, the parent company is required to make certain estimates
and judgements concerning the future. Although these estimates and judgements are based on management’s best knowledge of
the amount and or timing, actual results ultimately may differ. These estimates and judgements are regularly reviewed and revised
as necessary. The estimates and judgements that have the most significant effect on the amounts included in these financial
statements are listed below and described in the relevant note.

Item of critical estimate

Investment in subsidiaries – impairment assessment

Note

80 Velocys plc Annual report and accounts 2017

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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 Executive Committee to monitor and measure the underlying performance of the
parent company are classified as exceptional items. They include, for instance, impairments to the parent company’s investments.
Exceptional items are included within the appropriate parent company income statement category but are highlighted separately in
the notes to the financial statements.

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

Impairment of investment in subsidiaries

Total

2017
£’000

(57,256)

2016
£’000

(65,716)

At the end of both 2016 and 2017 the parent company reviewed for impairment its investments in subsidiaries in light of the
respective closing market capitalisation, and in both years concluded that an impairment was required. Details including critical
estimates are included in note 7.

Income tax

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

Current tax total

Income tax total

2017
£’000

(179)
(438)

(617)

2016
£’000

(470)
(650)

(1,120)

Due to the availability of losses incurred in the year, there is no charge to corporation tax. The parent company recognised £617,000
for R&D tax credits (2016: £1,120,000).

The actual tax credit for the current and previous year is lower (2016: higher) than the theoretical amount that would arise using
the weighted average tax rate for the reasons set out in the following reconciliation.

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
Impairment loss not deductible for tax purposes
Unutilised tax losses
R&D tax credit

Income tax total

2017
£’000

(57,456)

(11,060)

4
11,022
34
(617)

(617)

2016
£’000

(69,211)

(13,842)

37
13,143
662
(1,120)

(1,120)

The impairment loss not deductible for tax purposes represents the impairment of investment in subsidiaries as described in note 7.

The weighted average applicable tax rate was 19.25% (2016: 20%).

The standard rate of corporation tax in the United Kingdom changed from 20% to 19% with effect from 1 April 2017. Accordingly,
profits in the United Kingdom for 2017 were taxed at 19.25%. Legislation to reduce the rate to 17% from 1 April 2020 was enacted
on 15 September 2016. The parent company has not recognised a deferred tax asset or liability in 2017 (2016 £nil). Unrecognised UK
deferred tax balances have been measured at 17% (recognised: £nil).

www.velocys.com

Velocys plc Annual report and accounts 2017 81

Notes to the financial statements of Velocys plc (continued)

6. Deferred tax
The parent company has not recognised a deferred tax asset or liability in 2017 (2016 £nil).

Unrecognised
Deferred tax assets
Trading losses

Total

2017
£’000

(8,411)

2016
£’000

(8,381)

At 31 December 2017 the Company had a net unrecognised deferred tax asset of £8,411,000 (2016: £8,381,000) arising from trading
losses since incorporation. No recognition (2016: £nil) of the net deferred tax asset has been made at 31 December 2017 on the
grounds of uncertainty over its recoverability in light of the Company’s nascent revenue streams and commitment to continued
investment in the development of its biorefineries, and therefore there is no impact on the current or prior year’s income statement.

All of the unrecognised deferred tax asset (2016: all) is anticipated to remain available indefinitely to offset against future taxable
trading profits.

Investments in subsidiaries

7.
Investments in subsidiaries are held by Velocys plc 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.

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.

Critical estimates and judgements
Assets are reviewed for impairment annually and also whenever events or changes in circumstances indicate their carrying value
may not be recoverable. 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 varying points during 2017, the carrying amount of the parent company’s net assets exceeded the Velocys plc’s

market capitalisation;
The fundraise, completed in January 2018, was discounted to 10p per share, and which prompted the share price to drop to 10p
immediately afterwards, further reducing the Velocys plc’s market capitalisation.

As set out in note 17 to the consolidated financial statements, an impairment assessment was carried out on the Company’s
intangible assets and an impairment was indicated. Velocys plc 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 its 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 £57,256,000 (2016: £65,716,000) was recognised. This impairment eliminated on consolidation.

82 Velocys plc Annual report and accounts 2017

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2016

Capital
Loan to contributions to
subsidiaries
£’000

subsidiaries
£’000

Total
investment in
subsidiaries
£’000

Capital
Loan to contributions to
subsidiaries
£’000

subsidiaries
£’000

Total
investment in
subsidiaries
£’000

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

At 31 December

47,770
13,919
–
(41,842)
(9,293)

10,554

19,061
240
–
(15,414)
–

3,887

66,831
14,159
–
(57,256)
(9,293)

14,441

89,369
(2,792)
–
(46,973)
8,166

47,770

36,920
–
884
(18,743)
–

19,061

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

66,831

Velocys plc has direct investments in the following subsidiary undertakings.

Subsidiary undertakings

Country of
incorporation or principal
business address

Velocys Technologies Limited*

England and Wales

Velocys (USA Holdings) LLC**

Ohio, USA

Oxford Catalysts Trustees Limited*

England and Wales

Principal activity

Exploitation of platform
catalyst technologies

Holding company
for US subsidiaries

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.**

Country of
incorporation or principal
business address

Delaware, USA

Principal activity

Design, development
and exploitation of its
microchannel technologies

YellowRock GTL Services, LLC**

Delaware, USA Secondment of employees to plants

VMH Assets LLC**

Ohio, USA Holds manufacturing assets in Ohio

The following are dormant subsidiaries.

% Holding
(all ordinary
share capital)

100

% Holding
(all ordinary
share capital)

100

Dormant subsidiaries

Incorporated

Immediate parent

% Holding

Oxford Catalysts UK Limited*
Velocys Projects Ltd*
Velocys Project Solutions, LLC***
Velocys Renewables LLC**
Ashtabula Energy, LLC***
Bayou Fuels One LLC
Bradford GTL LLC***
JAB Land-Ashtabula**
Susquehanna GTL LLC***
Westlake GTL, LLC**
*
** Located at 7950 Corporate Boulevard, Plain City, OH 43064, USA.
*** Located at 2603 Augusta Drive, Suite 1175, Houston, TX 77057, USA.

England and Wales
England and Wales
Delaware, USA
Ohio, USA
Delaware, USA
Delaware, USA
Delaware, USA
Ohio, USA
Delaware, USA
Delaware, USA

Located at Harwell Innovation Centre, 173 Curie Avenue, Harwell, Oxfordshire, OX11 0QG, UK.

Velocys plc
Velocys plc
Velocys (USA Holdings) LLC
Velocys (USA Holdings) LLC
Velocys Project Solutions, LLC
Velocys Projects Ltd
Velocys Project Solutions, LLC
Ashtabula Energy, LLC
Velocys Project Solutions, LLC
Velocys (USA Holdings) LLC

100
100
100
100
100
100
100
100
100
100

www.velocys.com

Velocys plc Annual report and accounts 2017 83

Notes to the financial statements of Velocys plc (continued)

8. Financial instruments
Financial assets
Velocys plc classifies, measures and accounts for its financial assets in the same way as the Company as a whole (see note 25 to the
consolidated financial statements).

Financial risks
The risks that the parent company faces are intrinsically linked to those of the Company, in that they stem from the subsidiaries’
ability to repay the intercompany loans. The loans to US subsidiaries are denominated in US dollars. No mitigation of this risk is taken
at parent company level.

Financial assets of Velocys plc are as follows.

Assets
Trade and other receivables excluding non-financial assets

31 December 2017

Loans and receivables
£’000

10,554

31 December 2016

Loans and receivables
£’000

47,770

Parent company loans and receivables are all intercompany loans. An impairment of £57,256,000 (2016: £65,716,000) was recorded
against the intercompany loans. Details, including critical estimates and judgements, are included in note 3.

Liabilities
Trade and other payables excluding non-financial liabilities

31 December 2017

Financial liabilities
at amortised cost
£’000

31 December 2016

Financial liabilities
at amortised cost
£’000

–

The parent company liability is an obligation to fund the Employee Benefit Trust (EBT) in 2018 in respect of a share options exercise
(see consolidated accounts note 15).

84 Velocys plc Annual report and accounts 2017

www.velocys.com

9. Share capital
Disclosures in respect of share capital of the Velocys plc are provided in note 26 to the consolidated financial statements on page 75.

10. Commitments
The Company has no capital commitments (2016: nil) or operating lease commitments (2016: nil).

11. 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

2017
£’000

1,727
2,865
5,962

10,554

2016
£’000

21,170
5,205
21,395

47,770

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

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 £nil (2016: £13,300).

12. Other information
Directors’ remuneration
Details of the remuneration paid to directors of the parent company are provided in the Directors’ remuneration report on
pages 32 to 35.

Velocys plc does not have any employees. Refer to note 12 in the consolidated financial statements for Company employees.

Auditor’s remuneration
Details of remuneration paid for the audit of the Company are disclosed in note 11 to the consolidated financial statements on
page 54.

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Velocys plc Annual report and accounts 2017 85

Notes

86 Velocys plc Annual report and accounts 2017

www.velocys.com

Directors, secretary and advisors to the Company

Registered office
Velocys
Harwell Innovation Centre
173 Curie Avenue
Harwell, OX11 0QG

Velocys plc registration no.
05712187

Directors
Pierre Jungels (Non-Executive Chairman)
David Pummell (Chief Executive Officer)
Paul Schubert (Chief Operating Officer)
Sandy Shaw (Non-Executive Director)
Andrew Morris (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
Link Market Services Limited
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

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Velocys plc
Harwell Innovation Centre
173 Curie Avenue
Harwell
Oxfordshire
OX11 0QG

Company Number: 05712187
+44 1235 838 621
info@velocys.com
www.velocys.com