ANNUAL
REPORT AND
ACCOUNTS
2020
www.velocys.com
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Velocys plc
Magdalen Centre
Robert Robinson Avenue
The Oxford Science Park
Oxford
OX4 4GA
Company Number: 05712187
+44 1865 800 821
info@velocys.com
www.velocys.com
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About us
Velocys is an international UK-based
sustainable fuels technology company.
Velocys designed, developed and now
licenses proprietary Fischer-Tropsch
technology for the generation of
clean, low carbon, synthetic drop-in
aviation and road transport fuel from
municipal solid waste and residual
woody biomass.
Velocys is at present developing two
reference projects: one in Natchez,
Mississippi, USA (incorporating
Carbon Capture, Utilisation and
Storage) and one in Immingham, UK, to
produce fuels that significantly reduce
both greenhouse gas emissions and
key exhaust pollutants for aviation
and road transport. Originally a spin-
out from Oxford University, in 2008
the Company acquired a US company
based on complementary reactor
technology developed at the Pacific
Northwest National Laboratory.
Velocys is headquartered in Oxford in
the United Kingdom.
www.velocys.com
Velocys plc Annual Report and accounts 2020 1
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Contents
Strategic Report
Chairman’s statement
CEO’s report
Financial review
Environmental, social and
governance report
Key performance indicators
Principal risks and uncertainties
Corporate Governance
Corporate governance report
Audit & Risk Committee report
Nomination & Governance
Committee report
Directors’ remuneration report
Directors’ report
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35
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41
Statement of directors’ responsibilities
45
Financial Statements
Independent auditors’ report
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated statement of financial
position
Consolidated statement of changes
in equity
Consolidated statement of cash flows
Notes to the consolidated financial
statements
Velocys plc statement of financial
position
Velocys plc statement of changes
in equity
Velocys plc statement of cash flows
Notes to the financial statements of
Velocys plc
Directors, secretary and advisors to
the Company
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Strategic ReportCorporate GovernanceFinancial Statementswww.velocys.com
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Highlights
• Fund raise of £21m (before
expenses) in July 2020
• Additional £0.5m F4C grant from
the UK Department for Transport
secured for the Altalto waste to
jet fuel project
• Total deferred revenue of £8.2m
including £2.1m invoiced and
received from commercial
customers in 2020 (deferred to
2021 per revenue recognition
accounting policies)
• Effective control of costs,
reducing operating expenses
by 7%
• Cash at year end of £13.1m
(2019: £4.8m)
• Appointed and on-boarded
Worley as our engineering
partner to manage delivery of our
integrated technology globally
• Licensors on-boarded including
TRI, Arvos, Air Liquide, Linde and
Haldor Topsoe
• Granted planning permission for
the Altalto Immingham site
• Delivered four Fischer-Tropsch
(“FT”) reactors and completed
catalyst loading for Red Rock
Biofuels in Oregon, US
• Successfully completed the
NEDO1 demonstration project
in Nagoya, Japan achieving 1500
hours of integrated conversion
of wood chips to sustainable
aviation fuel (“SAF”)
•
Invited to be a founding member
of the UK Government Jet Zero
Council
• Appointed to the boards of
the Renewable Transport
Fuel Association and the
Biotechnology Innovation
Organisation
Velocys plc Annual Report and Accounts 2020
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Our Mission
Our mission is to deliver the next generation of sustainable fuels to decarbonise
aviation and heavy-duty transport. We have designed, developed and now
license our patented proprietary Fischer-Tropsch technology which enables the
production of low carbon sustainable fuels from a variety of waste materials.
It is the turnkey solution to fuel producers that significantly reduces both
greenhouse gas emissions and key exhaust pollutants.
Our Solution
Here-and-now
technology
solution
Low carbon
sustainable
drop-in fuel
No
modification
to aircraft
engines
No changes
to airport
infrastructure
International Leadership
Henrik Wareborn
Chief Executive Officer
Andrew Morris
Chief Financial Officer
Brian Cody
VP Manufacturing &
Technology Licensing
Ivan Greager
VP Engineering
Neville Hargreaves
VP Waste to Fuels
Jeff McDaniel
VP New Projects
Heinz Robota
VP Technology
David Bate
General Counsel, VP
Legal & Compliance
Helen Lillistone
Group Financial
Controller
Lak Siriwardene
Head of Communications
& Sustainability
www.velocys.com
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Our Technology
‘Velocys is now firmly in the phase
of delivering our commercial scale
technology to our clients’ commercial
projects.’ Henrik Wareborn, CEO
Patented Fischer-Tropsch Reactor
A commercially-ready reactor and catalyst for Fischer-Tropsch synthesis of
hydrocarbons. Developed in our laboratory and demonstrated at full scale in
the real world, our reactor and catalyst allows the production of advanced
biofuels from large, sustainable carbon sources such as household waste
and forest residues.
Velocys plc Annual Report and Accounts 2020 Feedstock
A fuel supply based entirely on abundant
sustainable feedstocks.
Municipal Solid Waste
Millions of tonnes of waste is
landfilled or incinerated.
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Wood Chips
A high carbon content by-
product of forest management
and sustainably sourced.
www.velocys.com
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Integrated Technology Package
Process overview
Cleaner burning drop-in fuel
Industry leading licensors were selected to
create an integrated technology solution
consisting of five process steps (including
Velocys’ own technology), each of which has
been demonstrated at commercial scale.
Diesel made using
Velocys process
Diesel from
filling station
1
Velocys plc Annual Report and Accounts 2020
Sustainable aviation fuel
• Approved globally and can be used immediately in all commercial
aircraft without any change to engines or airport infrastructure
• Creates better air quality with emissions reductions of 90% in soot and
up to 100% of sulphur oxides
• Removes hundreds of thousands of tonnes of waste per year therefore
avoiding landfill or incineration
• 70% reduction in greenhouse gas impact compared with the same
volume of conventional jet fuel
• Utilised with Carbon Capture and Storage to achieve zero-carbon flight
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www.velocys.com
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Global reach
• Our technology can be licensed anywhere in the world.
• A geographic presence and breadth spanning continents.
• Delivering on client projects.
• An integral role in carbon footprint reduction.
OFFICES
Houston, Texas, USA
Plain City, Ohio, USA
Oxford, UK
FLAGSHIP PROJECTS
Mississippi, USA
Immingham, UK
OUR ENGAGEMENT
USA
Japan
Spain
United Arab Emirates
Velocys plc Annual Report and Accounts 2020 9
‘Aviation accounts for about 1 billion metric tons or about 3% of
global CO2 emissions annually. Every metric ton of petroleum-
based jet fuel burned produces 3.15 tons of CO2 in addition to
other emissions such as nitrogen oxide, soot and other radiative-
forcing mechanisms. Research suggests that climate impacts of all
propulsion related emissions could be two to four times larger than
those of CO2 emissions alone. There are a number of efficiency-based
and operational changes to reduce climatic effects, such as engine
improvements, fleet renewals, lower altitude flying and others.But
the science is clear – the industry cannot solve its sustainability
challenges through efficiencies and alternative fuels are necessary to
make real progress.’ Clean Skies for Tomorrow, November 2020
Strategic ReportCorporate GovernanceFinancial Statementswww.velocys.com 10
Projects
Altalto, Immingham, UK
•
•
•
The proposed plant will turn household and commercial waste into clean-burning
sustainable aviation fuel with at least 70% lower greenhouse gas emissions
(potentially over 100% with carbon capture and storage).
Altalto investor
Planning consent granted in May 2020.
The plant will produce enough SAF to power over 1000 flights from London to New York
each year.
Bayou Fuels,
Mississippi, US
•
The proposed plant will
create SAF utilising
woody biomass
feedstock.
• Negative emission
transportation fuels
enabled through carbon
capture and storage.
•
The project has
progressed with
all technologies
demonstrated at
commercial scale.
Velocys plc Annual Report and Accounts 2020 11
Red Rock Biofuels
Commercial woody biomass-to-FT
fuels project in Oregon, USA.
•
•
•
Velocys licensing FT technology,
supplying reactors and catalyst.
Reactor manufacturing and
catalyst loading completed in
2020.
Plant expected to be operational
in 2022 with an estimated output
of 15 million gallons/year of SAF
and Renewable Diesel.
Clients
Toyo Engineering
Corporation
Biomass-to-jet-fuel demonstration
facility in Nagoya, Japan.
•
•
•
Japanese publicly-funded project
to demonstrate jet fuel production
from woody biomass.
TOYO Engineering, Mitsubishi
Power, JERA and JAXA consortium.
Velocys FT technology for a
pilot-scale reactor and catalyst
delivered, with technical support
for operational and production
phases.
Strategic ReportCorporate GovernanceFinancial Statementswww.velocys.com
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Chairman’s Statement
2020 has been a challenging year
for Velocys, but I am pleased to
report that the Company was
able to meet the challenges the
COVID-19 Pandemic presented. By
year end, the Executive Team had
delivered on the objectives set
by the Board, the result of which
was the Company being in a much
stronger financial position than
when it began the year.
Velocys plc Annual Report and Accounts 2020
Introduction
Our first priority at the onset of the pandemic was to ensure
that we were able to provide our employees with as safe a
working environment as possible, whilst maintaining their
ability to work efficiently and effectively. We closed all our
offices and arranged for all employees to be able to work from
home, providing additional technical support where necessary
to enable them to work in a safe and secure home environment.
Four achievements during the year were of particular note, and
demonstrated our ongoing progress in delivering our strategy:
• The successful completion of the manufacturing of four FT
reactors and catalyst and delivery to our client Red Rock
Biofuels’ Lakeview site in Oregon. In 2021 we look forward to
working closely with Red Rock to assist with start-up and
commissioning of its bioenergy plant.
• Our application for Planning Consent for the Altalto waste
to jet fuel project was approved in May 2020 by North East
Lincolnshire Council.
• July saw a successful and oversubscribed fund raise of
£21.0 million, and further contributions from both British
Airways and Shell towards the technical development of our
Altalto project.
• We successfully concluded the wood chips to SAF NEDO
demonstration project in Nagoya, Japan with our partner,
Toyo Engineering Corporation, and look forward to delivering
engineering services to the planned larger scale NEDO 2
project managed by the same consortium in Japan. We will
deliver our FT reactors and catalyst in due course to NEDO 2
subject to approvals and funding by the local partners.
The year saw a significant increase of media exposure for
Velocys, which was evidenced by the number of high quality
interviews with the CEO, extensive coverage by the national and
international broadsheets and also in the technical press. UK
Government support for our Altalto Immingham Project was
validated by the mention of Velocys at the Downing Street daily
briefing by the Secretary of State for Transport, Grant Shapps
in June 2020 and the invitation for Velocys to be represented on
the Jet Zero Council.
Strong US policy support for domestic sustainable fuel
production, including SAF with negative carbon intensity has
been recently reaffirmed by the new administration. This is
very positive for our Bayou Fuels project in Mississippi and our
other potential clients in the US.
Whilst there has been significant attention drawn to the
potential use of hydrogen and electric propulsion as a means
of reducing the carbon emissions of air travel, we remain
convinced that the use of Sustainable Aviation Fuel provides
the only near-term opportunity for the airline industry to
reduce its carbon footprint at commercial scale and pace.
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Outlook
We look forward to completing the post-planning consent
and final phase of technical pre-development work of our
Altalto Immingham Project in Q2 2021. In addition, we are
taking advantage of the learnings we have gained working
closely with our engineering partner, Worley, and accelerating
the technical development of our Bayou Fuels Mississippi
Biorefinery Project. This will make both projects highly
standardised and modular, ready for the final FEED work and
future projects.
With the successful fund raise in 2020, the Company is
focused on delivering its reference projects as well as seeking
new commercial opportunities to deploy our technology and
support current and prospective customers.
The recent announcement of a collaboration agreement
with Toyo Engineering Corporation demonstrates that we are
delivering and creating opportunities for enhancing revenues
from third-party developers, whilst opening up a new market
for Velocys in Japan and the Far East.
We are now highly focused on accelerating the customer
adoption of our technology. This requires us, as mentioned
in our 2020 fundraise, to expand our current manufacturing
capability, ensuring it has the capacity to achieve quality
and on time delivery of our reactors at the scale required by
multiple clients at various locations over the next number of
years.
The Executive Team will continue to engage with respective
host Governments and other stakeholders during 2021 to
secure the necessary policy support to unlock the economic
delivery of Sustainable Aviation Fuels to the airline industry at
the scale and pace required to meet their aggressive Net Zero
obligations.
Philip Holland
Chairman
14 May 2021
Management and Board
There were no changes to the Board membership during
the year, however on 30 September 2021Sandy Shaw will be
standing down from the Board after 9 years of loyal service.
We will be conducting a search for a replacement for Sandy
during the first half of 2021, with the intention of the new
NED bringing complementary skills to the Board as we enter
an intensive phase of commercialisation of our technology.
The Board has continued to enjoy strong and cooperative
relationships with the Executive Team.
We were able to strengthen our leadership team during
the year with the appointment of Helen Lillistone as Group
Financial Controller. Helen has over 20 years’ experience
in senior finance and accounting roles within the biotech
sector and has already made significant contributions to
strengthening and upgrading our financial and accounting
processes.
During 2021, we have further strengthened the leadership
team with the appointment of David Bate as General Counsel.
David is an experienced business lawyer with 26 years global
energy sector experience at executive level, encompassing
extensive international project experience across a wide range
of countries.
The Board’s Committees have continued to work constructively
in supporting the Board, and I would like to thank both Sandy
Shaw and Darran Messem for their efforts in chairing the
Remuneration and Audit & Risk Committees respectively. I
would like to particularly thank Sandy Shaw for her efforts
in realising a further year of LTIP’s for the broader leadership
team, ensuring the alignment of the leaders of the business
with the shareholders. We do not envisage increasing the
size of the Board this year, but will do so at a later time
commensurate with the growth of our business.
Corporate governance
The Board has maintained its emphasis on good governance
following the ten principles of the Quoted Companies Alliance
Code (see page 28 for additional details). With the anticipated
appointment of a new Non-Executive Director in Q3 2021, and
following the standing down of Sandy Shaw, there will be a
change in the Chairs of the Audit & Risk and Remuneration
Committees to accommodate the skills and experience of the
new Non-Executive Director to the Board.
Fund raise
The Company successfully raised £21 million before expenses
through a Placing, Retail Offer and Open Offer. This enabled
a variety of UK investors to participate in an oversubscribed
offer. We were extremely pleased with the support shown by
existing investors and to see new high-quality institutional
investors join our shareholder register and thank all those
who participated in the fund raise. The fund raise has enabled
our team to concentrate on delivery and strategy execution,
building shareholder value during this time.
Strategic ReportCorporate GovernanceFinancial Statementswww.velocys.com 14
CEO’s Report
Velocys is in a good position to
take advantage of the growing
demand for climate change
mitigation.
Our global opportunity
Velocys is in a good position to take advantage of the growing
demand for climate change mitigation, specifically the
decarbonisation of commercial aviation. The aviation sector is
staking its post COVID-19 recovery on Net Zero commitments
to win back its passengers and licence to operate by host
governments. For medium and long-haul flights, the only
realistic prospect for the industry to decarbonise is to use fuel
with a chemical composition similar to its current fossil fuel
but with net zero or negative carbon intensity over the full life
cycle.
To avoid the need to replace or modify billions of dollars’
worth of aircraft turbines and airport refuelling systems, and
for aviation safety reasons, the net zero fuel must be ASTM
approved and safe to blend seamlessly into the current fuel
systems.
Synthetic Paraffinic Kerosene (“SPK”) using the Fischer-
Tropsch pathway (our enabling technology) is already ASTM
approved for use at up to 50% blend with fossil based kerosene
in commercial aviation globally. When SPK is made from
sustainable feedstocks such as municipal, agricultural or
forestry waste, it qualifies as Sustainable Aviation Fuel. The
World Economic Forum estimates that these resources are
sufficient to supply up to 95% of the world’s jet fuel demand.
This pathway is also the key to e-fuels (using CO2 as the carbon
source, with renewable energy) which unlock an even greater
additional supply.
Velocys provides the central processing technology which
allows full commercial scale production of SAF using this
pathway. We have integrated our technology into an end-to-
end solution for site owners and developers to deploy on any
site with more than 500,000 tonnes of available solid waste
per year. Beyond the sharp reduction of CO2 emissions, our
technology provides additional societal value through the
diversion of this waste from landfills or incineration, as well as
a final jet fuel with far superior air-quality properties than the
fossil fuel it replaces.
Velocys plc Annual Report and Accounts 2020 15
Outlook
I am thankful for the reliable policy support we have received
from both the US and UK governments during 2020, and
recognise that continuing policy support is essential for
the acceleration of the supply of SAF globally. It is wholly
unrealistic to expect new process technologies, using
sustainable feedstocks, to be able to compete on price with
a mature technology such as fossil oil without a significant
penalty for combusting fossil oil and a corresponding reward
for producing net zero carbon fuels. Such policy support is
already available and mature in parts of the US, and is under
development in the UK and across the EU. In addition, global
aviation rules for decarbonisation under the Carbon Offsetting
and Reduction Scheme for International Aviation (“CORSIA”)
also become mandatory from 2026.
During 2021, Velocys will continue to be an active participant in
consultations with governments and regulators on this topic,
for example as a member of the Jet Zero Council in the UK.
In conclusion, I want to thank my Board, Velocys colleagues,
shareholders and broader stakeholders for unfailing support
during such a dramatic and transformational year as 2020,
putting us in a position to accelerate the adoption of our
climate change mitigation technology globally over the next few
years.
Henrik Wareborn
Chief Executive Officer
14 May 2021
The year in focus
Our Chairman has highlighted our main accomplishments
for 2020, of which I am extremely proud. Our whole team
demonstrated resilience and agility in adapting to the new work
conditions imposed by the COVID-19 restrictions globally and
managed to accelerate delivery of our engineering solutions
to our clients as well as delivering hardware in the form of
reactors and catalyst. I am pleased to say we did not need to
furlough any employee in the US nor in the UK.
I am also particularly pleased with our zero lost time incidents
in the workplace at both our own sites and equally at our client
sites where we have had Velocys engineers deployed during the
year.
We have continued to tightly manage our overhead costs
throughout 2020 by continuing the trend of effective cost
management initiated at the end of 2018. My vision for Velocys
is to remain capital light and low on fixed overhead costs while
accessing a global capability to deliver our technology in its
broadest sense via partners and third-party developers.
Our Financial review details our progress towards positive
cashflow, which is our main strategic goal at this point. This
enables us to unlock the full potential of future revenue
generation from our technology, to meet the needs of all
our stakeholders. We value our shareholder support in
this final, but most important stage, from R&D to full scale
commercialisation. I am very grateful for how that support was
demonstrated by our early and new shareholders’ engaged
participation in our oversubscribed fund raise in July 2020.
Our commitment to sustainability
Velocys manages its own direct energy and resource
consumption carefully as detailed in our Environment, social
and governance report on page 19. However, our overarching
environmental impact is that our technology enables our
clients to reduce net life cycle greenhouse gas emissions
radically for their end-users.
For example, 5 commercial scale Velocys enabled biorefineries
each producing over 100 million litres of sustainable synthetic
fuels would reduce net CO2 emissions by up to 3 million tonnes
per year. This is equivalent to removing over 1 million average
size petrol driven cars from the roads in the UK – but with the
added benefit that the savings are in a much more difficult
sector. Hence for investors, there are few other equally focused
and near-time opportunities to contribute to a massive
reduction of high impact CO2 emissions alongside improving air
quality at altitude and around our airports.
Strategic ReportCorporate GovernanceFinancial Statementswww.velocys.com 16
Financial review
With the oversubscribed fund raise
in July raising £21m and the net
assets of the company increasing,
Velocys has the opportunity to
pursue our strategic goals.
Revenues
The Company1 recognised revenue of £0.2m (2019: £0.3m). The
2020 revenue was primarily the result of professional services
for, and the delivery of reactor components to, Toyo and
professional services related to ongoing reference projects.
Gross profit decreased to £0.1m (2019: £0.2m).
The Company has a total of £8.2m of deferred revenue as
at 31 December 2020 (2019: £6.0m) from licensing, reactor
and catalyst sales which will be recognised when the project
performance obligations have been met. Providing an
integrated package of goods and services typically means our
revenues and corresponding costs can only be recognised once
a customer’s project reaches a specific performance milestone.
Expenses and income
Administrative expenses before exceptional items reduced by
7% to £9.2m (2019: £9.9m). The reduction before exceptional
items is principally the result of reduced corporate overheads
including a reduction in travel costs of 71% due to the
COVID-19 pandemic.
The exceptional items credit of £0.1m recorded in 2019 was for
part-recovery of a loan made to an associate ENVIA totalling
£0.5m, offset by an impairment of £0.4m to the value of land
held as an asset.
Other income totalling £0.4m mainly consisted of £0.3m from
the first tranche of the Future Fuels for Flight and Freight
(“F4C”) grant awarded by the UK Department for Transport. In
2019 other income of £0.1m was recognised from the sale of
assets associated with the final closing of the ENVIA plant.
Operating losses
Operating losses were £8.8m (2019: £9.6m before exceptional
items credit of £0.1m). The reduction of the operating loss is
principally the result of a decrease in administrative expenses.
After exceptional items, the Company recorded an operating
loss of £8.8m (2019: £9.5m operating loss).
Assets and cash
The net assets of the Company were £13.1m, which is an
increase of £10.7m compared to 2019. This increase was
principally the result of an increase in cash, and trade and
other receivables offset by a decrease in inventories and an
increase in deferred revenue and other liabilities.
1.
Velocys plc is managed as a single operation and referred to as “the Company” or
“Velocys” throughout the Strategic report. The “Company” or “Velocys” represents the
consolidated results and Velocys plc refers to the parent company only.
Velocys plc Annual Report and Accounts 2020 17
The cash inflow to the Company in 2020 was £9.2m (2019:
£1.4m cash outflow) principally being cash generated from
financing activities of £19.6m, attributed to £19.6m received
net of expenses from the fund raise that was successfully
completed in July, less £0.8m used in investing activities and
£9.6m used in operating activities. The Company continues
to carefully manage its underlying cost base and spends
prudently on strategy implementation.
The Company incurs much of its expenses in US dollars and
has exposure to the US dollar exchange rate. This is hedged
to the extent possible by holding cash reserves in US dollars.
In addition, the majority of the Company’s income is currently
invoiced in dollars.
Impairment assessment
The Board has assessed the long-term potential of the
Company’s in-process technology assets as at 31 December
2020, and concluded that whilst there has been a positive
change in the market capitalisation value (£108.0m at
31 December 2020 compared to £11.5m at the previous
year end), it is not recommending the reversal of historical
impairments at this stage given the wider economic recovery
considerations and relatively early phase of the COVID-19
vaccination roll-out programmes globally.
The recoverable value is determined by comparing the
higher of the value in use and the fair value less costs of
disposal. Previously, given the early stage of the Company’s
commercialisation plans, the share price of the parent
Company was deemed the most accurate indicator of value.
Alongside the share price of the parent Company, the Board
also considered the following factors and changes:
• The Company successfully completed the manufacture
and sale of reactors and catalyst for commercial use during
2020;
• The present value of estimated future net cash flows, using
the Company’s internal forecasts, exceeded the market
capitalisation value;
• Global demand forecasts for sustainable aviation fuel far
outweigh the available supply expected to be available from
new plants for many years;
• Government policy support has strengthened as countries
look to meet targets and commitments for carbon
reduction;
• Potential competing technologies, such as hydrogen,
require changes to infrastructure whilst the Velocys
technology does not face these additional barriers to
market entry; and
• Company revenues have not grown versus the prior year
and remain modest, and there have not been any significant
new customer arrangements signed during 2020.
Therefore, taking all of the above factors into account, the
Board considers that the Company’s current commercial
position, without any new customer contracts or additional
investors into the reference projects, outweighs the other
positive aspects but is confident that no impairment is
required and at the same time does not recommend reversing
previous impairments at this time. The Company remains
confident that the internal progress made during 2020
combined with an improvement in the economic environment,
will enable the Company to reassess the recoverable value in
due course, which could lead to the reversal of impairments
of approximately £20m less accumulated amortisation at the
date of reversal.
The parent company, Velocys plc, has both equity and debt
investments in its subsidiaries, which are compared to the
recoverable amount. The impairment assessment of equity
investments showed that no impairment indicators were
identified and, as a result, no impairment was recognised
(2019: £3.3m). The parent company also assessed loans due
from subsidiaries and recorded a provision for expected credit
losses (“ECL”) of £1.8m (2019: £0.1m). Any impairment or ECL
provision is eliminated on consolidation and therefore is not
seen in the consolidated financial statements.
Ventech Trustees claim
In December 2020, the Company announced that it had signed
a full and final de minimis settlement agreement with no
material effect on the financial statements and global mutual
release of all current and potential future claims between
the bankruptcy trustees of Ventech Engineers LLC, a former
commercial partner, and the Company.
Fund raise
In July 2020 Velocys raised a total of £21.0m (before expenses)
via a Placing, Retail Offer and Open Offer.
Net proceeds of the capital raising are being used to:
• Complete the process engineering phase of FEED for the
Altalto Immingham Project;
• Complete the fund raising for the FEED stage of the
Mississippi Biorefinery Project;
• Further strengthen the Company’s intellectual property
portfolio and trade secrets protection;
• Provide working capital for operating costs
• Evaluate and design a de-bottlenecking of the reactor
core manufacturing line in the United States to reach
a production capacity of more than 12 Fischer-Tropsch
reactors per year (twice the current capacity); and
•
Implement learnings from a post-operative analysis
of demonstration reactors for the benefit of clients via
updated operating manuals and training.
www.velocys.com
Strategic ReportCorporate GovernanceFinancial Statements
18
Financial review continued
Future funding
With the successful fundraise in July 2020 of £21.0m (before
expenses), 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) the completion of the current
stage of the FEED for the Altalto Immingham Project and the
Mississippi Biorefinery Project prior to securing funding for
the next stage of FEED to financial close; (ii) the completion
of the new design of the upgraded manufacturing facility;
(iii) the continued process of on-boarding one or more
strategic investors to provide the final stages of development
funding for either or both the Altalto Immingham Project
and the Mississippi Biorefinery Project; (iv) revenue from
the ongoing pre-FEED engineering work from the February
2021 announcement of the collaboration agreement with our
customer Toyo Engineering in Japan for the development of
their first commercial plant in Japan; (v) the current overhead
cost run rate.
The Company’s plan is to continue working with our investment
partner British Airways in the Altalto Immingham Project,
having secured £1.0m additional non-dilutive investment in
May 2020 and securing further investment partners into the
project along with completing all the engineering design and
commercial arrangements required to reach financial close on
the project.
At the same time in the US we are also working to secure
investment by one or more strategic partners into the
Mississippi Biorefinery Project, which has undergone a
design review and optimisation during the last half of 2020,
increasing its capacity and attractiveness to investors and SAF
offtakers. We are also working with several other interested
parties in Europe, the US and the Middle East developing their
own projects potentially using our FT technology within an
integrated technology package into a complete plant. Whilst
the Board is confident that one or more of these future plans
will be achieved, nothing is contracted as at the date of signing
these financial statements.
Going Concern
The Company will assess its cash requirements from these
activities and determine at what stage it needs to raise
additional funding. 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; selling additional technology
licences; performing Pre-FEED engineering work for customers
(such as the technical services agreement made with Toyo
Engineering recently for their commercial plant in Japan);
UK or US Government loans or grants; and selling non-core
intellectual property.
Following financial close of one or both reference projects in
late 2022 or early 2023, the Company’s funding requirements
will depend on the final structure of each of the biorefinery
project consortia and on additional third party projects
requiring our FT technology or the integrated technology
packages, including our FT technology, we have developed over
the last few years. Risks and uncertainties regarding our two
reference projects are detailed on pages 23 to 26.
Based on the Company’s latest forecast and cash flow
projections approved by the Board, additional funding will be
required within twelve months of the date of signing these
financial statements. Consequently, these conditions indicate
the existence of a material uncertainty that may cast 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.
The Board will be proposing a Special Resolution at the
forthcoming Annual General Meeting to approve the
disapplication of the pre-emption rights. This may be used by
the Company in securing additional working capital in the year
to come.
Andrew Morris
Chief Financial Officer
14 May 2021
Velocys plc Annual Report and Accounts 2020 19
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Environment, social and governance report
Sustainability
Our business is centred on championing and reducing the
effect of people on the environment and as a Company our
main goal is to enable the production of clean, sustainable
fuels. This results in a significant positive impact on climate
change and a meaningful corporate social responsibility
ethic. Velocys’ commitment to acting and developing
sustainably lies within our corporate strategy and goals. As
part of this commitment, we appointed Lak Siriwardene as
our sustainability officer and have now developed our first
dedicated ESG policy.
As an organisation we are also mindful of the impact of
our own operations. We recognise a shared responsibility
in the conduct of our business to minimise the depletion
of natural resources, reduce waste and lessen our own
contribution to climate change. There is an understanding
that sustainability encompasses human and social aspects
as well as environmental ones. We monitor our manufacturing
operations including catalyst, reactor, and supply chain, as
well as our administrative operations for use of energy, travel,
water, waste and usage of material resources. For example,
in order to reduce direct CO2 emissions, we restrict business
class air travel and through the recent experience of COVID-19
pandemic we have found that replacing travel for face to
face meetings with video conferencing is more time and cost
efficient whilst also reducing our carbon footprint.
Much of how we approach the Company’s sustainability is
driven by the UN’s 17 Sustainable Development Goals (“SDGs”)
which encompass a blueprint for a more sustainable future.
These goals covering eradicating poverty, promoting health and
well-being, education, equality, sustainable development and
consumption, climate action, conserving the marine and land
environment, peace, and justice are interconnected.
These goals guide us as to how we, as a Company, can make
a difference and are increasingly being acknowledged by
investors, as well as our customers and suppliers. Although
we are a small company, we consider ourselves to be in the
process of making meaningful contributions to a number
of these SDGs and the UN 2030 Agenda for Sustainable
Development. To the right we highlight some examples of our
alignment.
We believe that social mobility and
gender equality are important ways of
improving diversity alongside the well-
being of our people.
Our technology allows biorefineries to
be built to produce sustainable fuels
which in turn promotes economic
growth and a decent work environment.
Locally, biorefineries will bring
hundreds of millions of pounds of
investment, create hundreds of jobs
during construction and provide a boost
to the local economy through long term
employment and wider supply chain
benefits.
Global clients can benefit from our
innovative technology offering to
positively impact their industry and
utilise infrastructure, mobilise people
and give back to society.
Waste (municipal and forestry)
which would be an environmental
contamination hazard is utilised in our
process unlocking the potential of net
zero with no fossil fuel usage.
Providing sustainable aviation fuel,
without the need to modify or replace
existing aircraft engines and airport
infrastructure, has a positive impact
through the avoidance of unnecessary
resources being deployed.
Sustainable fuels burn efficiently and
significantly reduce greenhouse gas
emissions and harmful particulate
matter aiding better air quality and
community health, living and travel.
www.velocys.com
20
20
Environment, social and governance report
continued
Health and Safety
Velocys takes the safety and well-being of its employees
seriously. 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. An elevated level of rigor is placed on
completing thorough job safety analyses before work on a new
or unfamiliar task begins. To ensure lost time accident risk is
minimised the Company has a rigorous practice of near-miss
reporting throughout its activities.
The Velocys sites in the US have logged over 139,320 operating
labour hours without a Lost-Time Accident (“LTA”) since July
2018. The UK site continues to operate without any lost time,
bringing the total number of operating labour hours without an
LTA to over 414,043 in the UK.
During 2020 a dedicated COVID-19 response committee was
formed to focus on keeping our employees safe whilst working
from home or travelling on Company business.
Our climate risk and reporting strategy
The Financial Stability Board’s Task Force on Climate-related
Financial Disclosures (“TCFD”) recommendations set an
important framework for understanding and analysing
climate-related risks, and we are committed to regular,
transparent reporting to help communicate and track our
progress.
Employees
Our employees are at the heart of everything we do, and their
expertise and well-being allow our Company to exist, grow
and make that difference both internally and externally. We
strive to be a responsible employer, which includes regular
staff evaluation reviews, career development and training
opportunities, pension and medical schemes, and welfare
monitoring and support. We are an equal opportunity employer
and welcome qualified individuals of diverse nationalities,
backgrounds and race.
We believe respect, kindness and care should be naturally
bestowed and part of our Company foundation to make
our employees feel safe, secure, valued and empowered to
have more than satisfactory roles, be recognised for their
contribution, and included in the strategic drive of the
business. Our culture is one of each voice matters and the
executive and leadership team promote an open access mode
of communication. Regular surveys and talk forums including
a monthly town hall meeting are held to create a positive two-
way flow of business and welfare communication. Externally,
we equally value our stakeholder engagement and alongside
direct communication we also utilise online channels to
disseminate relevant company news to engage and open
debate on our environmentally conscious company offering
and net positive impact on society.
Of the 33 global employees working for Velocys at 31 December
2020, 30% were female (2019: 27%) and one of the five
members of the Board was female (2019: one of the five
members).
The percentage of female employees broken down by areas of
the business was as shown below.
Scientific & engineering
2019
2020
13%
87%
13+
39+
2019
39%
61%
18%
82%
A 18+
A 44+
2020
Male
44%
56%
Sales, finance, HR & admin
Female
Velocys plc Annual Report and Accounts 202087
+
82
+
A
61
+
56
+
A
21
The table below sets out the relevant TCFD recommendations and summarises the progress we have made during the past year.
TCFD recommendation
Our progress in 2020
Governance
Describe the Board’s oversight of climate-related risks
and opportunities
Our Board is responsible for the overall strategic plan which includes assessing both short-
term and longer-term risks and opportunities, including those relating to climate change. The
Board receives regular updates throughout the year.
Describe management’s role in assessing and managing
climate-related risks and opportunities
Strategy
Describe the climate-related risks and opportunities the
organisation has identified over the short, medium and
long term
Our Audit & Risk Committee provides oversight through the periodic review of the Company’s
risk management framework, which includes reviewing the processes and controls for ensuring
risks are identified and managed appropriately.
Our Executive Directors ensure the risk management responsibilities are integrated into
the relevant functional area, including but not limited to engineering, manufacturing, and
operations.
As a sustainable fuels technology company, our business model is underpinned by the shared
global goal of reducing carbon emissions. Industry and consumers want to reduce their carbon
footprint and many businesses are making commitments to achieving Net Zero. Sustainable
aviation fuel delivers over 70% greenhouse gas reduction compared with conventional aviation
fuel, thereby contributing to carbon emissions reductions.
We have identified our key climate related risks over the short, medium and long-term and
identified the principal risk types as resilience risk and policy risk.
For further details of our climate related risks, see page 25 of our Principal risks and
uncertainties.
Describe the impact of climate risks and opportunities
on the organisation’s business, strategy and financial
planning
As a result of the assessment the Board completed in 2017 the Company changed strategy in
order to pursue sustainable fuels projects only using our FT technology.
This is now reflected in everything the Company undertakes.
Describe the resilience of the organisation’s strategy
taking into consideration different climate-related
scenarios, including a 2°C or lower scenario
Our strategy of supplying sustainable fuels technology particularly into the aviation sector,
which is exceptionally hard to decarbonise, has shown great resilience because of the support
offered by governments around the world for sustainable aviation fuel. This fuel production
combined with Carbon Capture and Storage can provide significant contributions towards
climate related scenarios including a less than 2°C scenario.
Risk management
Describe the organisation’s processes for identifying and
assessing climate-related risks
Given that our core strategy is to pursue projects which mitigate climate related risks our
processes for identifying and managing these risks are integrated into our risk management
policy and associated procedures.
Describe the organisation’s processes for managing
climate-related risks
Velocys’ risk management process covers all aspects of risk within the business but also
acknowledges our core principals of pursuing the exploitation of our FT technology within the
sustainable fuels sector. Any climate related risks are therefore considered throughout our risk
management process.
Describe how processes for identifying, assessing and
managing climate-related risks are integrated into the
organisation’s overall risk management
As part of the work the Audit & Risk Committee undertake is to oversee the twice annual
review of the group’s principal risks and uncertainties. Climate change, the transition to a lower
carbon economy and physical climate-related risks such as extreme weather events have been
identified as risks associated with the group’s business, see page 25.
Metrics and targets
Disclose the metrics used by the organisation to assess
climate-related risk and opportunities in line with its
strategy and risk management process
At this stage of the Groups development and given the size of the Company we have not set
target metrics for the business to achieve climate-related targets as we grow, however our
objectives of achieving the uptake of our FT technology to produce sustainable fuels will assist
in international ambitions of achieving net zero for which we are great advocates.
Disclose scope 1, scope 2 and, if appropriate, scope 3
greenhouse gas emissions and the related risks
We aim to disclose further details on our own emissions in future reporting. However, it should
be noted that as a business in 2020 we used fewer flights and more virtual meeting technology
which we expect to continue to some extent in the future.
Conclusion
Velocys is a sustainable fuels technology company, we have a unique technology offering which can significantly benefit the
environment and lessen the impact of heavy transport on climate change. Our values, employees, stakeholders, and environmental
contribution are the essence of our Company foundation and success. We value and are committed to each of them.
Our technology which provides a sustainable solution in the purest sense is one which has a far-reaching impact on the individual,
regions, industry, and governments all driving the ecosystem of economic sustainable growth.
Strategic ReportCorporate GovernanceFinancial Statementswww.velocys.com 22
Key performance indicators
(“KPI”s) and milestones
The Company’s business strategy is to license the use
of our core technology, micro-channel Fischer-Tropsch
Reactors with our ActoCat OMX catalyst, to produce
sustainable fuels. During 2020, despite the COVID-19 crisis
the Company was able to focus on the following KPIs as a
measurement of the Company’s success.
• Complete our supply contracts to our customers and
expand revenues of the Company.
• Maintain effective cost management to ensure the most
efficient use of working capital throughout the business.
• Raise awareness of our technology and its potential to
reduce emissions.
• Continuously improve our core technologies and the
manufacturing of the Velocys micro-channel Fischer-
Tropsch reactors.
• Continue the development of our reference projects and
the addition of new projects.
In 2020 the key milestones set by the Company were as
follows:
• Deliver reactors and reactor components to our
customer Red Rock Biofuels.
• Load catalyst into the Red Rock Biofuels reactors on site
in Oregon, USA ready for installation.
•
Increase capacity and optimise design of the Mississippi
biorefinery project.
• Complete the fund raising for the Mississippi Biorefinery
project and launch the associated FEED.
• Secure second stage consortium funding for the
Immingham, UK waste-to-jet fuel project.
• Complete license agreements with all major process
licensors for the Altalto project.
• Complete the Altalto process engineering phase of
pre-FEED.
• Commence the design and automation of the
manufacturing facility to achieve a significant increase
in capacity and performance.
• Continue to strengthen the IP and trade secrets
protection with new patent applications.
• Complete an equity fund raise during the year to ensure
the Company has the funds to achieve these milestones.
Financial results were reviewed on a regular basis by
the Directors. Careful monitoring of the Company’s cash
and cash commitments is undertaken to ensure that all
the fiduciary responsibilities and commitments of the
Directors are met.
The performance of the Company against these milestones
is expanded upon in the CEO’s report on pages 14 and 15.
The financial results are outlined in the Financial review on
pages 16 to 18.
Velocys plc Annual Report and Accounts 2020
23
Principal risks and uncertainties
Our approach to risk
COVID-19
In any business there are risks and uncertainties that will have
an effect on the execution of the strategy of the business and
consequently on the results. At Velocys we have a rigorous
approach to the risks facing the Group with the Executive
Directors reviewing the risks that the Company encounters
on a continual basis. The identified risks of the business are
presented on this and the following pages.
The Velocys risk management process
The Executive management of the Company are principally
responsible for risk but the Board is responsible for the risk
framework and the management of risk. The Board aims to
make sure that the Group's ability to achieve its goal exceeds
the risk exposure. However, the Group’s risk management
programme can only provide reasonable, but not absolute,
assurance that principal risks are managed to an
acceptable level.
The COVID-19 pandemic has exacerbated some of the short-
term risks facing the business and has generally increased the
risks across the Group, in particular the risks relating to our
key personnel and suppliers.
The Executive Directors are responsible for identifying,
managing and mitigating the risks to the Company. The Audit
& Risk Committee reviews the processes and controls for
ensuring material business risks are identified and managed
appropriately. These are subsequently put to the Board
annually for inclusion in the Annual Report.
There are a number of risks and uncertainties that have the
potential to impact the execution of the Group’s strategy,
as well as its short-term results. The principal risks which
are considered to have a potentially material impact on the
Company’s long-term performance and delivery of its strategy
are set out as follows:
Risk Description
Impact
Trend year on year Mitigation
Financial
Reference
project funding
risk
Access to
Capital
Level
Level
Our two reference projects require
external investment to reach
construction. Momentum in the
sector has ensured that the use of
sustainable fuels is high on the agenda
for large airlines and fuel supply
businesses, which will assist in the
funding of these types of projects.
In the short term Velocys will not
achieve a cashflow positive position.
However once the reference projects
move into FEED and new projects such
as the Toyo Engineering project in
Japan start engineering work the net
income and cashflow to Velocys will
significantly increase.
The engineering work we have
completed has optimised the design
of the plants, allowing better returns
to the projects. During the latter half of
2020 engagement with interested third
parties increased.
The Board recognises that the
Company needs to raise additional
capital from current and new
shareholders on the back of achieved
technology demonstration and project
milestones. The Company’s strategy
is to build the two reference projects
that will lead to a number of customer
developed projects that earn the
Company annually recurring revenues,
which will lead the Company to being
profitable with positive long-term
cashflows.
Risk
rating
Medium
High
Strategic ReportCorporate GovernanceFinancial Statementswww.velocys.com 24
Principal risks and uncertainties continued
Risk Description
Impact
Trend year on year Mitigation
Health and safety
Pandemic risk
Diminishing
The current COVID-19 pandemic
can lead to significant business
interruption and a downturn in
economic activity. As a direct
result there is a heightened risk
of bankruptcy of suppliers and
customers, with consequential risk for
the financial position of Velocys. There
is risk to the health and wellbeing
of employees and others related to
the business of the Company as well
as a threat to the ongoing financial
capability of the Company to operate.
Political
Policy risk
Diminishing
Velocys’ clients rely on policy support to
secure a significant explicit or implicit
revenue for avoided CO2 emissions.
The main risk is that political support
wanes for mitigation of climate change
such as decarbonisation of fuels.
The US rejoined the Paris climate
accords in February 2021, which is
a significant positive move by the
new US administration. In addition
there are now more than 10 states
considering or have already put in
place low carbon fuel standards
similar to California (according to the
Jacobsen Fastmarkets report 2020).
In the UK the Government have set up
the Jet Zero Council of which we are a
founding member
The Company has a Pandemic risk
policy and the technology and training
in place for all employees to work from
home for an extended period of time.
Velocys has therefore, a high capacity
of operating in a fully distributed mode
for a long period of time collaborating
over video links, while protecting
each other from any potential
contamination. This enables the
Company to protect the health of its
employees whilst maintaining a high
level of economic activity and financial
welfare. At the time of reporting, due to
the COVID-19 pandemic, the Company
is not operating any demonstration
plants or significant labour intensive
operations, and all employees are
engaged in high-value engineering
and commercial optimisation work
for clients and reference projects,
which are not yet in construction. The
company reviews the credit worthiness
of suppliers and customers, and makes
every effort to ensure they are able to
fulfil contracts.
Policy support is well established
in the US and UK via RFS-2 and
Road Transport Fuel Obligations
respectively. The Landfill Tax in the UK,
or equivalent Gate Fees for landfilling
in the US provide economic incentives
for Velocys’ technology adoption.
Additional incentives for avoided CO2
equivalent emissions are in place in a
number of US States, such as the Low
Carbon Fuel Standard in California.
Velocys and its strategic partners are
pursuing joint pro-active engagement
with respective governments and
transnational organisations such
as the International Civil Aviation
Organisation (“ICAO”) to further
strengthen and extend essential
policy incentives for sustainable fuels.
The Company is an active member
of advance renewable fuels industry
organisations in the UK and in the
US, and contributes to a broader
engagement on these common policy
goals.
Risk
rating
Medium
Medium
Velocys plc Annual Report and Accounts 2020 25
Risk
rating
Medium
High
High
Risk Description
Impact
Trend year on year Mitigation
Technology
Performance
and integration
risk
Our technology has been operated at
scale in a commercial setting, however
the biomass to fuels plants incorporate
technology supplied by other licensors,
which may not function or integrate
as envisaged with Velocys technology
and may lead to lower than expected
performance.
Reference
Projects
execution risk
The design, construction,
commissioning and operation of
these first of a kind biorefineries
has inherent execution risk with no
guarantees that all aspects will be
completed as planned.
Level
Level
Climate Change
Effects of
climate change
on projects
using our
technology
Increasing
Flood risks which are exacerbated by
adverse weather brought on by climate
change has led to design adjustments
to the reference projects that are being
promoted by Velocys.
We recently experienced an unusual
weather event in Texas whereby snow
and extreme low temperatures led
to widespread power outages and
caused severe disruption to employees
working from home for several days.
The Company’s providers of technology
are world leading in their fields,
deploying well tested technologies with
multiple commercial scale references
worldwide. This significantly reduces
the technology integration risks
associated with operating a Velocys
FT based biorefinery. Commercial
experience on representative feedstock
is a key selection criteria for Velocys’
consortium of process licensors.
The quality of the Velocys engineering
team along with our engineering
partner, Worley, is key to ensuring
that the projects are delivered in
accordance with the planned time,
budget and performance criteria.
The current work on design is key
to reducing the most significant
uncertainties earlier and only later
deploying more resources required for
the finer detailed engineering when
the major cost and schedule risks are
significantly reduced.
Sites chosen for projects need to be
in areas that do not suffer risks of
flooding. Then additional measures
are taken in design to ensure that any
localized flooding can be mitigated and
ensure that electrical installations are
significantly above the potential flood
levels or that higher levees are built
where necessary.
Whilst the Texas event was unusual,
it has heightened our awareness of
climate change causing unforeseen
weather patterns, and will be a
key consideration in reviewing
our response to such potential
emergencies.
Strategic ReportCorporate GovernanceFinancial Statementswww.velocys.com 26
Principal risks and uncertainties continued
Risk Description
Impact
Trend year on year Mitigation
Legal and Statutory
Intellectual
Property risk
There is a risk that the Company may
have a breach of IP or that key staff and
their expertise may leave the Company.
Increasing
Alternative
Technologies
risk
Alternative technologies may be
adopted in preference to Velocys’ FT
technology. Velocys may find it difficult
to gain market share or may find itself
operating in a smaller market than it
had previously anticipated.
Increasing
Loss of IP is mitigated by having the
core technology protected by Patents
and laws supporting protection of
Intellectual Property rights. Velocys
has invested significantly in patents
and IP protection for our designs and
inventions and vigorously defends all
our entrenched rights. By securing
non-disclosure agreements with
parties requiring knowledge of such
IP to fulfil transactions of benefit to
Velocys these risks are mitigated.
To retain staff expertise and protect
Company IP Velocys provides
competitive compensation to attract
and retain staff.
Velocys’ FT technology is considered
to be quite unique in the market
with significant resources having
been invested in the technology to
date. Technology developments such
as ours operating at the current
scale takes significant investment
and time, providing Velocys with a
competitive advantage beyond our core
FT technology capability. Due to the
complexity of the processes to convert
solid biomass feedstocks to drop-in
fuels at commercial scale, the barriers
to entry are significant.
Risk
rating
Medium
Medium
Human Resources
Key Person risk
Increasing
The Company has an executive and
senior leadership team with significant
experience of our technology and
within our business sector. The
departure of any member of staff could
cause disruption to the development
and operational activities of the
Company. A number of our staff have
recently retired or are coming up to
retirement age.
Medium
Succession planning within the
senior leadership team is part of
the objectives of the Executive team
to manage constructively with our
Human Resources department. The
Board formally considers succession
planning as part of our board
evaluation in 2020 (see the Nomination
and Governance report on page 35).
Approved by the Board and signed on its behalf by:
Henrik Wareborn
Chief Executive Officer
14 May 2021
Velocys plc Annual Report and Accounts 2020 27
Corporate
Governance
Strategic ReportCorporate GovernanceFinancial Statementswww.velocys.com 174658 Velocys Annual Report Pt2 (New).qxp_174658 Velocys Annual Report Pt2 25/05/2021 17:13 Page 28
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Corporate governance report
Introduction
Companies whose securities are traded on the Alternative Investment Market (“AIM”) market of the London Stock Exchange are not
required to comply with the principles and provisions of the UK Corporate Governance Code 2018 (“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).
The Directors recognise the value and importance of good corporate governance and are committed to drawing upon best practice and
maintaining high standards. Further to AIM Rule 26, the Board has determined to follow the QCA Corporate Governance Code (“QCA
Code”), published by the Quoted Companies Alliance (“QCA”), which sets out a minimum best practice standard for small and mid-size
quoted companies, particularly AIM companies.
The following information is provided to describe how the Company applies the principles of the QCA Code and explain any departures
from the specific provisions of that code.
The QCA’s Ten Principles of Corporate Governance
The ten principles of corporate governance set out under three headings in the QCA Code – Deliver Growth, Maintain a Dynamic
Management Framework, and Build Trust - are applied by the Company as follows:
Deliver Growth
1. Establish a strategy and business model which promote long-term value for shareholders.
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 Velocys’ business. Velocys’ strategy and business model can be found in the Chairman’s and
CEO’s reports on pages 12 and 14, respectively.
2. Seek to understand and meet shareholder needs and expectations.
The Board considers effective communication with shareholders to be very important and encourages regular dialogue with investors.
At the Company’s Annual General Meeting, the whole Board including the Chairman and Chief Executive Officer are available before
and after the meeting for further discussions with shareholders. Due to the UK Government’s COVID-19 measures in force, it was not
practical for shareholders to attend the 2020 AGM, however the Company intends subject to government guidelines and safety
considerations that appropriate arrangements will be in place for shareholders to attend and ask questions at the time of the 2021
AGM.
The Chief Executive Officer and the Chief Financial Officer attend meetings with shareholders and analysts on various occasions
during the year, primarily following the Company’s Annual Results and Interim Results announcements. A number of such meetings
took place in 2020 by way of video conference. Relevant feedback from shareholder discussions is advised to the Board. Other
members of the Board including the Chairman and the Chair of the Remuneration Committee have also either met or consulted with
shareholders from time to time. The Board considers that their policy on shareholder engagement has resulted in the considerable
support demonstrated by major shareholders since the Company was originally admitted to AIM in 2006.
The Board responds promptly to questions received, which may be sent to info@velocys.com.
3. Take into account wider stakeholder and social responsibilities and their implications for long-term success.
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. We are also committed to equal opportunities for all our employees. In addition, as an advanced
biofuels company, we have a duty to limit the environmental impact of our own operations and are careful to monitor and improve
their environmental impact. Further information on our corporate social responsibility and Key Performance Indicators (“KPI’s”) can be
found on pages 19 to 22.
There is an ongoing dialogue with our technology partners, customers, suppliers and other stakeholders which is continuously fed
back into our knowledge base in relation to projects under development and, where relevant, integrated into the Company’s strategy
and business model.
4. Embed effective risk management, considering both opportunities and threats, throughout the organisation.
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.
The Audit & Risk Committee reviews all of the Company’s principal risk management policies and the ongoing development of a Group
Risk Register. Further information on Risk Management can be found page 23. This is reviewed and updated as required and adopted
by the Board at least annually.
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 pages 23 to 26.
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Maintain a Dynamic Management Framework
5. Maintain the Board as a well-functioning, balanced team led by the Chair.
The Board comprises a Chairman and two part-time Non-Executive Directors with relevant experience to complement the two full-
time Executive Directors and to provide an independent view to the Executive Directors. Details of the Board can be found in the
Corporate Governance report on page 30. A time commitment of up to 4 days a month is expected of the Non-Executive Directors.
Attendance at Board and committee meetings
Scheduled Special Nomination &
Board Board Audit & Risk Remuneration Governance
meetings meetings Committee Committee Committee
Number of meetings held in 2020 7 5 5 6 2
Attendance* by:
Philip Holland 100% 100% – – 100%
Darran Messem 100% 100% 100% 100% 100%
Sandy Shaw 100% 100% 100% 100% 100%
Andrew Morris 100% 100% – – –
Henrik Wareborn 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).
The Board regards each of the Non-Executive Directors as being fully independent.
There were no changes to the Board or to the committee memberships during the year.
The roles of the Chairman and the Chief Executive Officer are separated, with clear written guidance to support the division of
responsibilities. The role of the Senior Independent Director is also clearly set out.
The Chairman is principally responsible for leadership and effectiveness of the Board, for corporate governance matters, setting the
Board agenda, ensuring adequacy of information flow to the Board, that due consideration is given to strategic issues, and promoting
a culture of openness of debate at Board level, and between directors and the Executive Committee.
The Chief Executive Officer 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.
6. Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities.
The Board includes individuals with a deep knowledge of markets worldwide and relationships at the highest level of industry. The
Board believes that, as a whole, it contains the necessary mix of experience, skills, personal qualities (including gender balance) and
capabilities to deliver the strategy of the Company for the benefit of the shareholders over the medium to long term. This is an area
which is maintained under constant review.
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Corporate governance report (continued)
Name Philip Holland
Role Chairman
Skills and experience
Philip was appointed as Chairman on 10 December 2019, and previously served as Senior Independent Director from
1 January 2019. Philip holds a BSc in Civil Engineering from Leeds University and a MSc in Engineering and
Construction Project Management from Cranfield School of Management. He has extensive experience in managing
large scale oil and gas projects around the globe. In 1980, he joined Bechtel Corporation and managed major oil and
gas projects in a wide range of international locations. In 2004, he joined Shell as vice president of projects, Shell
Global Solutions International. In 2009, Philip became Executive Vice President Downstream Projects in Shell’s newly
formed projects and technology business and in 2010 he was appointed as Project Director for Shell’s Kashagan
phase 2 project in Kazakhstan, and subsequently the Shell/QP Al Karaana petrochemicals project. Since 2013, he
has operated as an independent project management consultant. Philip joined the Board of Enquest plc in August
2015, where he chairs its Safety, Climate & Risk Committee and is a member of its Remuneration Committee. Philip
has also joined the board of KazMunayGas in August 2020, chairing the Nomination & Remuneration Committee and
the Strategy & Portfolio Management Committee.
Name Henrik Wareborn
Role Chief Executive Officer
Skills and experience
Henrik was appointed Chief Executive Officer and Executive Director in November 2018, having acted as a consulting
adviser to the Company and provided services equivalent to those of a Chief Commercial Officer since March 2017.
Henrik was formerly a Managing Director with Natixis S.A. (both in the UK and North America), and previously Global
Head of Crude Oil Sales and Trading at BP PLC. His experience prior to this included roles as Executive Director at
Hess Energy Trading Ltd, and Executive Director at Goldman Sachs International, London. His expertise includes
investment banking, commodities trading, fund raising, and commodity finance. Henrik has an MBA from INSEAD
and graduated from the Stockholm School of Economics with a BA in finance and economics.
Name Andrew Morris
Role Chief Financial Officer
Skills and experience
Andrew was appointed Chief Financial Officer and Executive Director in November 2018. He was formerly a Non-
Executive Director of the Company and Chair of Velocys’ Audit & Risk Committee and has been on the Board since
June 2017. 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. Until November 2018, he acted as CEO of Envirofusion, a company with nascent technology in the waste-to-
energy and biomass-to-power sector. For six years he acted as Commercial & Finance Director for Advanced Plasma
Power Limited, a private equity funded company that owns gasification and plasma waste treatment technology. He
began his career at Price Waterhouse in London, is a qualified accountant and graduated from the University of
Newcastle with a BSc in agricultural economics.
Name Sandy Shaw
Role Senior Independent Director
Skills and experience
Sandy was appointed to the Board of Velocys in October 2012 and chairs the Remuneration Committee. Sandy has over
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. In January 2019 Sandy joined the
Board of Hurricane Energy plc as a Non-Executive Director and Chair of the Remuneration Committee, and was also
appointed Chair of their ESG Committee in late 2020.
Name Darran Messem
Role Non-Executive Director
Skills and experience
Darran was appointed to the Board of Velocys in January 2019 and chairs the Audit & Risk Committee. Darran has 30
years of commercial experience in energy, transport and sustainable development, with particular focus on
renewable energy and low-emission transport. He has served as Managing Director Certification and International
Director at the Carbon Trust, Vice President Fuel Development at Shell, and General Manager Market Development at
British Airways. At Shell he worked on the removal of lead and sulphur from fuel in the UK, and the development of
Shell’s global biofuel business, where he worked on a number of biofuel technologies including gasification and
Fischer-Tropsch synthesis. He was Shell’s nominated Director, and subsequently elected Chair, of Iogen Energy. From
2014 to 2020 he served as Chair of the Low Carbon Vehicle Partnership, where he remains Director, a UK public-
private partnership that works to accelerate the deployment of low carbon vehicles and fuels. In July 2019 Darran
was appointed to the Board of BRE (formerly the Building Research Establishment) and Chair of the Remuneration
and Nominations Committee, and in November 2019 he was appointed as an advisor to the Roads Advisory Panel of
the UK Office for Rail and Road.
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Internal Advisory Responsibilities
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 the Company complies with applicable rules and regulations. 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 2020, no director sought independent legal advice pursuant to the policy.
The Company regularly reviews the ongoing training requirements of directors as part of the annual board evaluation process,
Directors keep their personal skillsets up to date through a combination of industry contact, reading of relevant material and, where
appropriate, training courses. The Board has recently agreed that relevant training courses should be made available to Directors, and
a formal record of training has been implemented.
There is a process for ensuring that any new director receives advice, including from the Company’s nominated adviser and external
lawyers where appropriate, on his/her responsibilities as a director of an AIM company. The Board ensures that any new appointee
benefits from an induction programme.
7. Evaluate board performance based on clear and relevant objectives, seeking continuous improvement.
An annual evaluation of the Board and its committees is carried out by the Company Secretary, taking the form of comprehensive
questionnaires which provide all directors with an opportunity to score (1=Dissatisfied; 5= Satisfied) their opinion on a series of
questions in relation to inter alia the constitution, execution and performance of the Board and the three Board sub-committees, and
to comment on procedures or any relevant matters. Average scores for each question are measured against relevant scores in the
previous two years to help identify trends, and are also assessed in absolute terms. The scoring and any comments are assimilated
into a report on an unattributed basis, and the results of the evaluation are considered by the Board and each sub-committee in open
session.
Where appropriate, actions arising from such reviews are implemented. Previous evaluations have resulted in improvements to timing
and quality of management information; the provision to the Board of more detailed information on individual projects; and
improvements to the structure and workings of committees. Following the 2020 Board evaluation, the Board has agreed to place a
greater emphasis on strategic initiatives/business risk. In addition, there will be increased emphasis on making training courses
available to Directors, and a formal record of training has been implemented.
An annual performance evaluation of the Chairman is carried out, led by the Senior Independent Director, and takes into account the
views of all directors.
Succession planning at Board and committee level is formally reviewed on an annual basis, and the Board has reviewed a succession
plan for all Board members and senior management. In accordance with best practice, all directors are proposed for re-appointment
at the Annual General Meeting, and due consideration is given by the Nomination & Governance Committee as to whether individual
directors are recommended for re-election.
8. Promote a corporate culture that is based on ethical values and behaviours.
The Board believes that the business culture is consistent with the Company’s objectives, strategy and business model as set out in
the strategic report and the description of principal risks and uncertainties.
The Board ensures that the Company has the means to determine that ethical values and behaviours are recognised and respected
through the adoption of appropriate policies, including an Anti- Corruption and Bribery and Anti-Modern Slavery Policy; a
Whistleblowing Policy; and a Policy on Equal Employment Opportunity and Diversity.
In addition, in response to the Market Abuse Regulations (“MAR”) which came into force on 3 July 2016, and which apply to AIM
companies, the Company has adopted a Share Dealing Policy and Dealing Code which apply to all directors and employees of the
Company.
9. Maintain governance structures and processes that are fit for purpose and support good decision-making by the board.
The Board meets at least six times a year with a formal schedule of matters reserved for its decision. The Board has also established a
schedule of delegated authorities, which are reviewed to ensure they are commensurate with the level of the Company’s development.
The governance structure in place is considered to be appropriate for the foreseeable future but will be evolved in line with the
Company’s plans for growth.
Board Committees
The minutes of the Audit & Risk, Remuneration and Nomination & Governance Committees are circulated to the Board. The Committee
Chairs also report to the Board on the outcome of committee meetings at the subsequent Board meeting. All of the committees
annually review and re-adopt their terms of reference. The committees have the following roles:
www.velocys.com
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Corporate governance report (continued)
Audit & Risk Committee
The members of the Audit & Risk Committee are currently Darran Messem (Chair) and Sandy Shaw (Senior Independent Director).
Meetings are held not less than four times a year and are based on the work programme set out in the Audit Committee Guide
published by the QCA.
Under its Terms of Reference, which can be found on the Company’s website, the Audit & Risk Committee reviews inter alia 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. It normally meets at least once a year with the external Auditors without executive directors present.
Further information is set out in the Audit & Risk Committee report, which can be found on pages 33 to 34.
Remuneration Committee
The members of the Remuneration Committee are currently Sandy Shaw (Chair) and Darran Messem (Non-Executive Director).
Meetings of the committee take place not less than three times a year.
Due regard is paid to the Investment Association Principles of Remuneration. At the 2021 AGM, a resolution will be proposed seeking
shareholder approval of the Directors’ Remuneration Report set out on pages 36 to 40.
The committee reviews, inter alia, the performance of executive directors and senior managers setting 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 senior managers. No executive director has a service agreement
exceeding one year.
The remuneration of the Non-Executive Directors is a matter for the Chairman and the Company’s executive directors. Under its Terms
of Reference, which can be found on the Company’s website, no director is permitted to participate in decisions concerning his or her
own remuneration.
Nomination & Governance Committee
The members of the Nomination & Governance Committee are Philip Holland (Chair), Sandy Shaw (Senior Independent Director) and
Darran Messem (Non-Executive Director). The committee met twice during 2020. 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 corporate governance code.
The Terms of Reference can be found on the Company’s website.
Further information is set out in the Nomination & Governance Committee report, which can be found on page 35.
Build Trust
10. Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other
relevant stakeholders.
The Board considers effective communication with shareholders to be very important and encourages regular dialogue with investors.
Directors regularly attend meetings with shareholders and analysts throughout the year, and the Board responds promptly to
questions received. Shareholders will be given at least 21 days’ notice of the Annual General Meeting, at which they have the
opportunity to raise questions of the Board on the Company’s developments and performance, although special arrangements will be
made in respect of the 2021 Annual General Meeting in light of the continuing COVID-19 health and safety requirements. Details of
arrangements for the 2021 Annual General Meeting are set out in the Company’s notice of 2021 AGM which is being published at the
same time as this Annual Report and Accounts and are available on the Company’s website. Further information is shown under QCA
Principle 2 above.
Copies of the Annual Report and Accounts are issued to all shareholders and copies are available on the Company’s website
www.velocys.com, which provides information to shareholders and other interested parties. The website contains full details of the
Company’s business activities, press releases and links to the London Stock Exchange website for share price information, share
trading activities and graphs, as well as Regulatory News Service (“RNS”) announcements. The Company Secretary also deals with
shareholder correspondence and may be contacted at investors@velocys.com.
Velocys plc Annual Report and Accounts 2020
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Audit & Risk Committee report
Dear Shareholder
On behalf of the Board, I am pleased to present the Audit & Risk Committee report for the year ended 31 December 2020.
Committee members
The members of the Audit & Risk Committee are currently Darran Messem (Chair) and Sandy Shaw (Senior Independent Director).
Meetings are held not less than four times a year and are based on the work programme set out in the Audit Committee Guide
published by the QCA.
Roles and responsibilities
Under its Terms of Reference, which can be found on the Company’s website, the Audit & Risk Committee reviews inter alia 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.
Committee meetings
Meetings are attended by committee members, the Chair, Chief Executive Officer and Chief Financial Officer. The external Auditors are
invited as appropriate. The Committee normally meets at least once a year with the external Auditors without the executive directors
being present.
Both committee members attended each of the five meetings held during the year ended 31 December 2020.
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.
Financial statements
The Audit & Risk Committee has considered the integrity of the Company’s 2020 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 PricewaterhouseCoopers LLP. In addition, the interim financial statements were reviewed by the
committee. In both cases, the committee reported to the Board that in its view the statements were fair, balanced and
understandable.
Significant areas
The significant reporting matters and judgements considered by the Committee during the year included:
Going concern – see page 18, for consideration from the Board regarding going concern;
Valuation of assets (consolidated company) and investment in subsidiaries (Velocys plc); and
The impact of the COVID-19 pandemic.
As noted in the Financial Review and disclosed in further details in note 17 of the consolidated financial statements, the Company
considered the reversal of historical impairments relating to In-process technology assets. Whilst the assessment was performed on a
basis consistent with prior years, and indicated a significant increase in the equity value of the parent company, the Committee was in
agreement with Management’s recommendation to maintain a prudent approach and not record a reversal of impairments at
31 December 2020. A key consideration was the impact of the COVID-19 pandemic on the airline industry and the global economy
more generally.
Audit review
The Audit & Risk Committee monitors the Group’s relationship with the external Auditors, PricewaterhouseCoopers LLP, to ensure that
external independence and objectivity has been maintained. The Committee has reviewed PricewaterhouseCoopers LLP’s audit
process, the findings from the audit of the 2020 financial year, and 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 external Auditors.
External Auditors
PricewaterhouseCoopers LLP have provided audit services to the Group since 2008. Performance has been reviewed annually and
audit partner rotation requirements have been observed. The Committee obtained confirmation from PricewaterhouseCoopers LLP
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 auditors and the
Committee is satisfied that the external Auditors remain independent.
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Audit & Risk Committee report (continued)
Non-audit services
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, and on the engagement of any former employees of the external Auditors. Further
details of fees paid to PricewaterhouseCoopers LLP for audit work and minor non-audit services relating to international employee
taxation services can be found in note 11 to the consolidated financial statements.
Internal audit
There is currently no formal internal audit function in place which the Audit & Risk Committee has concluded is appropriate given the
size and complexity of the business and the mitigating controls in place. The Committee will continue to keep under review the need
for the Group to introduce such a function.
Approved on behalf of the Audit & Risk Committee by:
Darran Messem
Non-Executive Director and Chair of the Audit & Risk Committee
14 May 2021
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Nomination & Governance Committee report
Dear Shareholder
On behalf of the Board, I am pleased to present the Nomination & Governance Committee report for the year ended 31 December
2020.
Committee members
The members of the Nomination & Governance Committee are currently Philip Holland (Chairman of the Board and Chair of the
Nomination & Governance Committee), Sandy Shaw (Senior Independent Director) and Darran Messem (Non-Executive Director).
Committee meetings
Meetings are held not less than twice a year and are attended by committee members. The Chief Executive Officer and Chief Financial
Officer may also be invited as appropriate.
All committee members attended the two meetings held during the year ended 31 December 2020.
Roles and responsibilities
Under its Terms of Reference, which can be found on the Company’s website, the Nomination & Governance Committee inter alia:
reviews the structure, size and composition (including the skills, knowledge, experience and diversity) of the board and makes
recommendations to the board with regard to any changes;
reviews plans for the orderly succession to board and senior management positions, and oversees the development of a diverse
pipeline for succession, taking into account the challenges and opportunities facing the company, and the skills and expertise
needed on the board in the future;
keeps under review the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the
continued ability of the organisation to compete effectively in the marketplace;
reviews the results of the board performance evaluation process;
considers the re-appointment of non-executive directors at the conclusion of their specified term of office;
approves the re-election by shareholders of directors under the annual re-election provisions;
reviews annually the time required from non-executive directors; and
considers director independence under the corporate governance code.
The significant matters considered by the Committee during the year included:
Sandy Shaw stands down as a Non-Executive Director at the conclusion of her third consecutive three year term of office on
30 September 2021. The Committee has considered the skills, knowledge and experience and diversity required from a new Non-
Executive Director, in particular that they are qualified to be appointed as Chair of the Audit & Risk Committee. Following a careful
selection process, a specialist recruitment agency has been engaged to assist with this process, and an appropriate
announcement will be made in due course.
Approved on behalf of the Nomination & Governance Committee by:
Philip Holland
Chairman of the Board of Directors and Chair of the Nomination & Governance Committee
14 May 2021
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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 they can be applied practically given the size of the Company. The Company is traded on the
Alternative Investment Market (“AIM”) of the London Stock Exchange and is therefore not required to comply with the following
regulations: disclosure requirements of the Directors’ Remuneration Report Regulations 2013; the UKLA Listing Rules; Schedule 8 of
the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The content of this report is unaudited
unless stated. Consequently, certain disclosures contained in these regulations are not included below.
Remuneration Committee
The following served as members of the Committee throughout the year ended 31 December 2020:
Sandy Shaw (Chair)
Darran Messem (Non-Executive Director)
The Committee’s constitution and operation has been compliant with the provisions of the QCA Code, published by the Quoted
Companies Alliance, which sets out a minimum best practice standard for small and mid-size quoted companies, particularly AIM
companies. In determining remuneration policy for Executive Directors, the Committee takes into consideration both the QCA Code
and the guidelines published by The Investment Association Principles of Remuneration (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 and takes advice from specialist advisors when necessary.
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.
Target
Minimum
Base
Bonus
LTIP
0
50
100
150
200
250
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 external advisors were engaged during the year ended 31 December 2020. Current
remuneration is based on the following principles:
Base salary
The base salary is reviewed annually at the beginning of each year. The review process undertaken by the Remuneration Committee
considers the ongoing development of the Company, the contribution of the individual, the need to retain and motivate employees, and
benchmark remuneration information from comparable organisations.
Annual performance incentive
All Executive Directors are eligible, at the discretion of the Remuneration Committee, for an annual bonus. The target bonus award for
each individual is based on a percentage of base salary, which, for the year commencing 1 January 2020, was 75%. 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. Where performance is judged against measurable targets, the Remuneration
Committee retains discretion to adjust the outturn to ensure it is fair, reasonable and related to the Company’s performance and
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shareholders’ experience. Due to the continuing economic impacts of the COVID-19 pandemic and the need for the Company to
conserve its funds, no bonuses have been approved or salary rises implemented in respect of performance for the year ended
31 December 2020, assessed in the first quarter of 2021. This applies consistently to all employees of the Company. In the course of
2020 a discretionary bonus in respect of 2019 performance was awarded.
Long-term Incentive Plan (“LTIP”)
The Committee believes that an LTIP scheme should provide Executive Directors and other senior managers the appropriate
incentivisation, focus, retention and reward for achievement, that is aligned with shareholders’ interests. In late 2018 as part of the
engagement of the new Executive Directors, the Committee agreed to the grant of Commencement and Performance Options as set
out below to enable early engagement with the Executive Directors and their alignment with shareholders’ interests. During 2019 the
Committee also developed and adopted a new equity-based incentive scheme, the 2019-2021 LTIP Scheme (“Scheme”) which applies
to all Velocys staff except Non-Executive Directors, with varying awards. The Scheme is intended to run for three years; it is subject to
and is consistent with the LTIP rules agreed by the Board and approved by Shareholders in 2015. The Company made an initial award
under the Scheme in December 2019, details of which are set out below. The award for 2020 was not made until after the year end in
February 2021 and has been shown in the post financial position events on page 84.
As part of the process of developing the Executive Directors’ remuneration packages and then developing the Scheme, the Committee
undertook market research and took advice from external remuneration consultants, who confirmed that they believed the packages
and the Scheme were fair and reasonable and in line with market practice. The Committee then consulted with major shareholders to
seek their views before the Scheme was formally approved by the Board and adopted. Given the time necessary to agree the format
and documentation and subject to an open period, no awards were made until December 2019.
All Options were granted subject to the Rules of the Velocys 2012 Share Option Scheme, the Company’s Share Dealing Code and
applicable law (including new General Data Protection Regulation terms and terms for Malus and Clawback). By way of clarification,
the strike price, upon exercise, is payable by the employee so that the employee only gains if the share price rises. There are no nil-cost
Options; this is understood by the Executive, senior management and staff who are fully committed to the principle of gain by
delivering value.
Grants to Executive Directors
2020 Grants
The Executive Directors were eligible for annual 2020 awards under the Scheme, however these awards were not granted until
February 2021 and therefore have not been shown here but instead information on the 2020 LTIP has been shown in the post financial
position events on page 84. They were issued under the current 2012 Scheme Rules and in line with the amounts given for the 2019
annual awards.
2019 Grants
1. The two Executives were granted long term incentives by way of one–off grants of Options as part of their engagement in 2018
comprising of:
a) A “Commencement Award” of 2,000,000 Options to each Executive Director at a strike price of 10 pence being the price at
which new ordinary shares were issued during the fundraising in July 2018, notwithstanding the lower share price prevailing at
the time of the award with vesting phased over 3 years from date of employment contract; and
b) A “Performance Award” to focus them on high level, stretch performance of 2,000,000 Options to each Executive Director at a
strike price of 15 pence being a fifty percent increase on the strike price that the Commencement Awards were made at, with
vesting on the third or fourth anniversary of the grant subject to the performance condition, see page 39 for further
information.
2. The Executive Directors were also eligible for annual 2019 awards under the Scheme. These awards comprised a mix of Options
and Enterprise Management Incentive (“EMI”) Options with a value equivalent to 75% of base salary. The Options have a strike
price of 3 pence, being the price at which new ordinary shares were issued during the fundraising in July 2019, notwithstanding
the lower share price prevailing at the time of the award. Vesting requirements for 2019 Scheme Options were based 50/50 as to
elapsing of time and meeting a target share price performance; this was considered appropriate under the current circumstances
of the Company. The number of Options awarded to each Executive Director and the vesting conditions are set out in the table on
page 39.
Grants to other staff
Annual awards may be made by the Committee under the Scheme to the Executive Directors (reference item 2 above) and to the
senior management with awards varied by grade level. Awards were made to senior management at the same time as to the Executive
Directors in December 2019, at the same 3 pence strike price and on the same terms. Awards for the 2020 LTIP to eligible senior
management were made in February 2021 and consequently information has been shown in the post financial position events on
page 84.
In December 2019, to bring all employees into the long term incentive programme, a one-off “Special Award” was granted to senior
staff and non-Scheme participants (excluding the Executive Directors and Non-Executive Directors). Many of our employees had
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Directors’ remuneration report (continued)
received no awards of Options since joining the Company. The Company values all of its employees and wishes to incentivise, focus,
retain and reward them as well. The Special Award was granted at a strike price of 3 pence and vests rateably over three years from
date of grant.
Headroom Calculations
The total of awards set out above represents a potential maximum dilution of current shareholders’ interests of 6.7% taking into
account historic awards outstanding (5.3%) and options granted in 2021 (1.4%). The Remuneration Committee believes the Scheme is
reasonable and necessary to compensate for the absence of a share scheme in recent years, and to motivate and retain expert staff
who are essential to the success of Velocys over the crucial next three years. The Company continues to work well within its
shareholder agreed headroom cap on awards of equity.
Pensions and other benefits
The Company contributes to the Executives Directors’ defined contribution pension plans at 10% of base salary. For other employees
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) with an additional contribution of between 1% to 3% to match the employee’s own
contribution 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 Directors 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. The Chairman’s fee is set by the Executive Directors in consultation with the Remuneration
Committee. No director can be involved in the determination of his or her own remuneration.
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
appointment is on the same terms and the 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
considering 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 has decided to put all Non-Executive Directors up for re-election at its Annual General Meeting (“AGM”).
Fees paid to Non-Executive Directors
The aggregate amount of Non-Executive Directors’ fees, as set out in the Company’s Annual report and accounts for the years ended
31 December 2020 and 2019 is as follows. This is less than the aggregate limit of £250,000 specified in Article 92 of the Company’s
Articles adopted on 22 June 2011.
2020 2019
£ £
Aggregate fees paid to Chairman and Non-Executive Directors 172,000 219,079
Directors’ remuneration (audited)
Aggregate emoluments excluding pension contributions made by the Company for current and former directors in 2020 totalled
£1,041,204 (2019: £737,249), and Company pension contributions were £47,500 (2019: £54,832).
The directors who held office at 31 December 2020 received the following remuneration in relation to the year ended 31 December
2020, with the bonuses paid in 2020 relating to their performance in respect of 2019.
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Salary
Other
& fees benefits(1)
£
£
Bonus
£
Pension
£
2020
Total
£
Salary
Other
& fees benefits
£
£
Bonus Pension(2)
£
£
2019
Total
£
250,000
225,000
19,969
17,985
187,500
168,750
25,000
22,500
482,469
434,235
250,000
225,000
7,118
6,365
15,625
14,062
29,263
25,569
302,006
270,996
50,000
72,000
50,000
–
–
–
–
–
–
–
–
–
–
–
–
–
50,000
72,000
50,000
–
50,000
51,418
50,000
67,661
–
–
–
–
–
–
–
–
–
–
–
–
50,000
51,418
50,000
67,661
647,000
37,954
356,250
47,500 1,088,704
694,079
13,483
29,687
54,832
792,081
Name of director
Executive
Henrik Wareborn
Andrew Morris
Non-Executive
Sandy Shaw
Philip Holland(3)
Darran Messem
Pierre Jungels(4)
Aggregate emoluments
and pension
contributions
(1) Other benefits include medical cover for Executive Directors and their dependents.
(2) Amounts stated for pensions in 2019 for Henrik Wareborn and Andrew Morris include proportionate amounts for 2018 of £4,263 and £3,069 respectively,
paid in 2019 when the schemes were set up.
(3) Philip Holland was appointed Chairman of the Company on 10 December 2019.
(4) Pierre Jungels resigned from the Board on 10 December 2019 and received fees of £67,661 during the period 1 January 2019 to 10 December 2019.
Directors’ share options (audited)
Aggregate emoluments disclosed above include any amounts paid through the employee benefit trust (“EBT”) in relation to share
options exercised. In 2020 no such payments were made to serving or former directors (2019: nil).
Details of all directors’ shareholdings are disclosed on page 43 in the Directors’ report.
Details of options held by the directors at 31 December 2020 were as follows.
Name of Director
Henrik Wareborn
Commencement
Performance
LTIP 2019 – performance
LTIP 2019 – time
Subtotal
Andrew Morris
Commencement
Performance
LTIP 2019 – performance
LTIP 2019 – time
Subtotal
Total
At 31
December
2019
2,000,000
2,000,000
3,125,000
3,125,000
10,250,000
2,000,000
2,000,000
2,812,500
2,812,500
9,625,000
19,875,000
Granted
Exercised
Lapsed
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At 31
December
2020
2,000,000
2,000,000
3,125,000
3,125,000
10,250,000
2,000,000
2,000,000
2,812,500
2,812,500
9,625,000
Exercise
price (£)
10.00p
15.00p
3.00p
3.00p
10.00p
15.00p
3.00p
3.00p
Earliest
date of
exercise
13/12/19
31/12/21
13/12/22
13/12/22
Date of
expiry
12/12/29
12/12/29
12/12/29
12/12/29
13/12/19
31/12/21
13/12/22
13/12/22
12/12/29
12/12/29
12/12/29
12/12/29
19,875,000
–
–
–
Exercisable
at 31
December
2020
2,000,000
–
–
–
2,000,000
2,000,000
–
–
–
2,000,000
4,000,000
No options were exercised by directors during 2020. The total charge for share-based payments during the year in respect of directors
was £28,000.
Option grants 2020:
No new grants were made in 2020, but awards were made in February 2021 under the Scheme in respect of 2020 annual awards
entitlements. See page 41 of the Directors’ report for further information.
Option grants 2019:
Commencement Awards. In connection with the commencement of service of Mr. Wareborn and Mr. Morris, it was agreed to award
each of them 2,000,000 share options with an effective date of grant at the date of the services agreement, two-thirds of the Options
vested on the effective date of grant, 13 December 2019. The balance of the Options vested on 4 December 2020. The exercise price of
the awards is 10 pence and the last date for exercise is the day immediately preceding the tenth anniversary of the date of grant.
Performance Awards. In connection with the commencement of service of Mr. Wareborn and Mr. Morris, each was awarded 2,000,000
performance based awards. These awards vest and become exercisable at either (i) 31 December 2021 if the target conditions are met
or (ii) 31 December 2022 if the target conditions are not met by 31 December 2021 but are met within the calendar year 2022. The
target condition is that for any 15 consecutive dealing days leading up to the vesting date the weighted average share price of the
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Directors’ remuneration report (continued)
Velocys shares on each of these days is equal to or more than 15 pence or for any 45 consecutive days in the six month period leading
up to 31 December 2021 the weighted average share price of a share over the 45-day period is equal to or more than 15 pence. The
exercise price is 15 pence.
2019-2021 LTIP Scheme (“Scheme”) Awards:
During 2019, the Executives were awarded a single award based on 75% of base salary under this Scheme split equally into time-
based and performance awards. Under the Scheme, Mr. Wareborn and Mr. Morris were awarded 3,125,000 and 2,812,500 time-based
share options, respectively, on 13 December 2019. These options vest and become exercisable on the third anniversary of the date of
grant. The exercise price of the awards is 3 pence and the last date for exercise is the day immediately preceding the tenth anniversary
of the date of grant.
In addition, Mr. Wareborn and Mr. Morris were awarded 3,125,000 and 2,812,500 performance based share options, respectively, on
13 December 2019 under the Scheme. These awards vest and become exercisable in full on the third anniversary of the date of grant
provided the weighted average share price of a share for the month preceding that third anniversary is at least 4.5 pence. The exercise
price of these awards is 3 pence and the last date for exercise is the day immediately preceding the tenth anniversary of the date of
grant.
The Velocys 2012 Share Option Scheme rules
The 2012 scheme rules have been reviewed by the Remuneration Committee as well as with external advisors and apart from some
minor adjustments of the rules to accommodate retirees leaving and other amendments of leaver provisions in the rules allowing
some level of Board discretion, the Committee considers that the Scheme Rules should be renewed for another ten year period.
Subject to these minor adjustments the Remuneration Committee has recommended to the Board to propose the new Scheme for
shareholder approval at the 2021 Annual General Meeting.
Share price
The market price of the parent company’s shares as at 31 December 2020 was 10.15p (2019: 1.79p) and the range during the year was
1.68p to 14.65p (2019: 1.17p to 5.24p). Details of options and the cost of share-based payments are given in note 15 of the
consolidated financial statements.
Gender and diversity
The Committee recognises the importance of ensuring that neither gender nor diversity considerations create a pay gap or other
differentiation in workforce remuneration considerations. However, as a Company of less than 35 employees performing technical
roles within their respective areas of expertise, comparability is currently limited.
Approved by the Board and signed on its behalf by:
Sandy Shaw
Senior Independent Director and Chair of the Remuneration Committee
14 May 2021
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Directors’ report
The directors present their report and the audited consolidated financial statements for the year ended 31 December 2020
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 12 to 26.
Dividends
The Directors do not recommend any dividend for the year ended 31 December 2020 (2019: nil).
Research and development
The Company’s research and development (“R&D”) activities relate primarily to the development of first-of-a kind sustainable fuel
projects in the UK and the USA. Research continues on catalysis as well as development work on parts of the reactor design that can
affect the scale of the reactors in the field. Details of R&D costs are shown in note 10 of the consolidated financial statements.
Donations
The Company made no political donations during 2020 (2019: nil).
Post financial position events
F4C grant from the Department for Transport
In January 2021, the Company received £290,000 of grant funding for the Altalto waste-to-fuels project from the UK Department for
Transport (“DfT”), under the Future Fuels for Flight and Freight Competition (“F4C”). The DfT made a total of £0.5m available to Velocys
under Phase Two of the scheme and the Company expects to receive the remaining £210,000 in the first half of 2021 subject to
completion of project milestones.
US SBA loan forgiveness application
In April 2020, the Company received a $709,000 (£567,200) loan from the Pay-check Protection Program awarded by the Small
Business Administration (“SBA”), a US Federal Agency. The SBA program is part of the Federal stimulus package known as the CARES
(Coronavirus Aid, Relief and Economic Security) Act to offer help to small businesses in the USA during the early days of the COVID-19
crisis. This unsecured loan was awarded to support Velocys’ US payroll costs in the short-term. It is an unsecured loan with a 2-year
maturity and 0.98% interest. No interest or principal payments are due in the first six months. The loan is however eligible for
“forgiveness”, becoming non-repayable upon application by Velocys after 60 days from receipt if used for retaining US employees and
maintaining US payroll costs of at least this amount in the period until the end of June 2020. Velocys met the forgiveness criteria and
submitted its application to the SBA in January 2021.
Altalto Joint Development Agreement
In January 2021, by mutual consent of the parties to the Altalto Joint Development Agreement, Shell International Petroleum Company
Limited (“Shell”) withdrew from the agreement. Velocys and British Airways plc (“British Airways”) will continue to work together in
order to secure finance for the Altalto Immingham plant. Shell will no longer have an option over shares in Altalto Limited (a subsidiary
of the Company), nor any rights or obligations in relation to the Altalto project. The Altalto project has no immediate funding calls and
will continue according to its existing development plan. There is no direct financial impact on Altalto or Velocys as a result of these
changes.
Collaboration Agreement with Toyo Engineering Corporation
In February 2021, the Company announced the signing of a collaboration agreement with Toyo Engineering Corporation (“Toyo”) to start
the development of their commercial projects to produce sustainable aviation fuel and other renewable fuels in Japan. The agreement
follows on from the successful work already conducted in 2020 between Velocys and Toyo at the biomass-to-jet-fuel demonstration
facility in Japan. The Company will grant an exclusive right for Toyo to secure and use the licence and technical services of the Velocys
Fischer-Tropsch technology for a commercial plant in Japan. An advance deposit of $4.0m (£3.0m) was received in 2019 of which
$3.5m (£2.6m) remains in escrow, which will be offset against future revenues.
Grant of share options to Executives and employees
In February 2021, the Company granted options totalling 14,088,205 to Executives and senior management in respect of 2020
performance and options totalling 500,000 to new employees who joined the Company during 2020. The Executive Directors,
Mr. Wareborn and Mr. Morris received a total of 3,264,503 and 2,938,053 options respectively, allocated equally between time-based
and performance-based options. The exercise price was set at the time of grant at 7.86 pence being the highest of the share price at
the last fund raise, the share price on the date of grant and the weighted average share price for the month prior to grant. The total
number of options granted represents a dilution of current shareholders’ interests of 1.37%. There is no impact on the financial results
for the year ended 31 December 2020.
Extension of the Altalto option agreement
In March 2021, the Company announced that it has agreed with British Airways to extend the Altalto option agreement to 31 March
2022. Exercise of the option would give both parties, Velocys and British Airways, equal equity ownership (50/50) of Altalto Ltd and the
right to appoint a director. There is no impact on the financial results for the year ended 31 December 2020.
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Directors’ report (continued)
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.
Philip Holland (Non-Executive Chairman)
Henrik Wareborn (Chief Executive Officer)
Andrew Morris (Chief Financial Officer)
Sandy Shaw (Senior Independent Director)
Darran Messem (Non-Executive Director)
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 2021 Annual General Meeting all of the directors will again retire and offer themselves
for re-election. Sandy Shaw will stand down as a Non-Executive Director on 30 September 2021, the conclusion of her third three-year
term of office. For further information, please see the Nomination & Governance Committee report on page 35.
The S172(1) Statement of Directors’ Duties
The Directors of the Company must act within a general set of duties, which have been set out in Section 172 of the UK Companies Act
2006. The reporting requirements were effective from December 2019. They arise from the 2018 UK Corporate Governance Code and
the Companies (Miscellaneous Reporting) Regulations 2018. Both the Code and the Regulations introduced new requirements for
boards to explain how they have taken account of stakeholder views and met the requirements of S172 of the Companies Act.
Specifically, the Code states that:
“The board should understand the views of the company’s other key stakeholders and describe in the annual report how their
interests and the matters set out in Section 172 of the Companies Act 2006 have been considered in board discussions and
decision-making.”
The Regulations formalise this by requiring companies to include a s172(1) statement in their annual reports, which “describes how
the directors have had regard to the matters set out in Section 172(1) (a) to (f) when performing their duty under Section 172.”
The matters set out in Section 172(1) (a) to (f) are:
(a) the likely consequences of any decision in the long term;
(b) the interests of the company’s employees;
(c) the need to foster the company’s business relationships with suppliers, customers and others;
(d) the impact of the company’s operations on the community and the environment;
(e) the desirability of the company maintaining a reputation for high standards of business conduct; and
(f) the need to act fairly between members of the company.
The Company’s governance and decision making processes, which the Board considers are appropriate to the size and complexity of
the business, are set out in the Corporate governance report on pages 28 to 32. The periodic Board meetings and Committee meetings
have a rolling agenda and are structured to ensure the requirements of Section 172 are fully considered when key strategic decisions
are made. Below we describe how the Directors fulfil their duties by considering the potential impact of decisions made on our key
stakeholders:
Risk Management and Long-Term Consequences
Decisions brought to the Board are considered in the wider context of their consequences for the business both in the short term but
also in the long term. We are making decisions about reference projects; feasibility studies with potential partners and customers;
manufacturing capacity for many years to come; research into the development of our reactors and catalyst; and the health and safety
of both our employees and customers along with how to resource this work with finance and human resources. The consequences of
these decisions and the risks taken have a direct impact on the activities of the Company and the relationships with all aspects of our
stakeholders and the community.
For further details of how we manage the risks in our business please see pages 23 to 26 for our Principal risks and uncertainties.
Engagement with our Employees
During the year, where the impact on the working environment has been unprecedented with the coronavirus pandemic, the protection
of and communication with our employees has been utmost in the Board’s collective thoughts and decision making. We have set up a
Covid Response Team (“CRT”) chaired by one of our Vice President’s in the US, with representatives from across the Company. The
objectives of the CRT is to monitor the differing governmental bodies’ rules and laws about what our employees are allowed to do in
terms of coming to work but also to assist with the working from home that we have all had to do for the last year. The CRT also
monitors the spread of the virus to advise the Executive Directors and the Board of the actions that the Company needs to take. A
principal decision was made in consultation with the Board to implement 100% work from home procedures for all employees.
The success of the CRT has meant that we have been able to safely complete the manufacturing of our reactors for Red Biofuels in
Oregon from two sites in Alabama and Wisconsin. It has also allowed us to complete the loading of the catalyst into those reactors in
Oregon during November 2020, without incident or any employee catching the virus. We have also been able to complete the
commissioning of the NEDO demonstration project in Japan during April 2020 prior to the first full lockdown. The Executive Directors
Velocys plc Annual Report and Accounts 2020
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together with the CRT have held regular “townhall” meetings during which we discuss the activities of the Company but also the
mental health of our employees and the continued protection of our teams in the US and the UK. In terms of talent retention, we have
continued with the three-year Long-Term Incentive Plan, which includes all our senior staff and any new joiners. More information
about this can be seen in the Directors’ remuneration report and in note 15 of the consolidated financial statements. Even though we
have not been able to meet with our staff during the pandemic we engage with our employees on a personal basis by completing a
performance evaluation with them twice a year. This helps with decisions on promotion, career advancement, training, fixed and
variable compensation. It also ensures that there is an opportunity for us to hear back from our employees as to how we are doing for
them as a Company, helping us to improve our employment practices and so the well-being and performance of our team.
Business Relationships
The Company recognises the importance of mutually beneficial, long-term business relationships to our business. During the
pandemic this has been more important than ever in order to keep our business operating such that each major relationship with a
customer, supplier, trade body, government department or other organisation is assigned a senior manager who is responsible for
ensuring overall success and co-ordinating the interactions with other team members. Given the remote working the Company has
taken to regularly using internet platforms for our meetings. A successful example of this has been our fund raising completed in July
2020 where all meetings with potential investors and our current institutional investors were conducted via the internet. More details
of the fund raise can be found in the Financial Review on pages 16 to 18.
Other relationships including with our engineering partners, our customers and our business development activities have led, for
example, to the completion of the successful demonstration project in Japan, whilst also continuing to complete the engineering of
the pre-FEED work for our reference projects. Whilst we have also been able to create new relationships with customers in the US,
Europe and the Middle East, the aim is to develop a pipeline of opportunities throughout the world that will benefit from the use of our
FT technology and the integrated engineering package that we have developed leveraging off the momentum that the green industrial
revolution that has been supported by governments throughout the world but in particular within the UK and the US. This pipeline
then develops into a small number of actual projects from which we then earn sales and technical support revenues.
Community and the Environment
Our “raison d’être” is to provide a solution to parts of the transport sector that are hard to decarbonise, especially the airlines. We have
developed a technology and now an engineered, integrated technology package, which will allow plants to be built with a significant
beneficial impact on the carbon emissions of this sector. Velocys is committed to acting and developing sustainably and as part of
that commitment we have appointed our first Sustainability Officer and developed our dedicated ESG policy. Much of how we
approach the Company’s sustainability is driven by the UN’s Sustainable Development Goals. Further details can be seen in the
Environmental, social and governance report on pages 19 to 21.
Standards of Business Conduct
The Company complies with the QCA Code on Corporate Governance, which in part regulates how we conduct our business with all
stakeholders. We also have a policy on anti-corruption and bribery and an anti-modern slavery policy, which sets out the rules by
which the officers of the Company have to act in relationships with other organisations and the personnel employed by the Company.
Our Engagement with Shareholders
We treat all shareholders in the Company with equal respect and are grateful to them for supporting the Board during such a
challenging year as 2020, enabling the Company to remain focused on delivering its renewable fuels technology and pursuing exciting
opportunities in this developing market. Given that we raise funds from the public market on a regular basis the Executives on the
Board regularly meet with the larger shareholders of the Company but also have group meetings arranged by our brokers of smaller
shareholders to keep all of them up to date with the activities of the Company. We have developed regular communications to our
shareholders through the media including our website, Twitter and LinkedIn.
A principal decision was made by the Board to proceed with the fund raise in July 2020 which included a firm placing and an open
offer to the wider public and the smaller shareholder community to ensure the Company has acted fairly and considered the interests
of all our shareholders.
Directors’ interests
The directors who held office at 31 December 2020 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).
Sandy Shaw(1)
Philip Holland
Darran Messem
Andrew Morris
Henrik Wareborn
Velocys plc ordinary shares
31 December
2020
31 December
2019
548,055
1,203,118
433,333
847,817
2,118,445
449,201
972,894
333,333
433,333
1,666,666
(1) The number of shares outstanding at 31 December 2019 has been restated from 451,091 to 449,201 due to the sale of 1,890 shares on 2 December 2019.
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Directors’ report (continued)
The following Board members purchased shares as part of the July 2020 fundraise during the year (as recorded in the Register of
Directors’ Interests and including those of the spouse or civil partner and children under 18): Sandy Shaw (100,000), Philip Holland
(230,224), Darran Messem (100,000), Andrew Morris (414,484), and Henrik Wareborn (451,779).
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 24 of the consolidated financial statements.
Financial risk management
Financial risks, and exposure and risk management policies and objectives are detailed in the Strategic Report on pages 23 to 26, and
in note 24 of the consolidated financial statements.
Substantial shareholdings
The Company has been notified of, or is otherwise aware of, the following holdings of 3% or more of the issued share capital of Velocys
plc as at 30 April 2021.
Landsdowne Partners
Ervington Investments Limited
Hargreaves Lansdown Asset Management
Ruffer LLP
Interactive Investor Trading
Amati AIM VCT plc
DWP Bank
Number of
shares held
186,638,262
137,855,776
125,035,431
85,139,117
51,142,954
45,791,476
32,806,971
Percentage
of issued
share capital
17.5%
12.9%
11.7%
8.0%
4.8%
4.3%
3.1%
Going concern and future funding
Based on the Company’s latest forecast and cash flow projections approved by the Board, additional funding will be required within
twelve months of the date of signing these financial statements. Consequently, these conditions indicate the existence of a material
uncertainty that may cast doubt on the Company and Velocys plc’s ability to continue as a going concern.
For additional information on the going concern of the Company and the future funding please see the Financial Review on pages 16
to 18.
The financial statements do not include any adjustments that would arise if the Company and Velocys plc were unable to continue as
a going concern.
Annual General Meeting
Details of arrangements for the 2021 Annual General Meeting are set out in the Company’s notice of 2021 AGM which is being
published at the same time as this Annual Report and Accounts and are available on the Company’s website.
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 28 to 32.
Approved by the Board and signed on its behalf by:
Henrik Wareborn
Chief Executive Officer
14 May 2021
Velocys plc Annual Report and Accounts 2020
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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 group and the parent company financial statements in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006.
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 group and parent company and of the profit or loss of the group 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 international accounting standards in conformity with the requirements of the Companies Act 2006 have
been followed, subject to any material departures disclosed and explained in the financial statements;
make judgements and accounting estimates that are reasonable and prudent; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and parent
company will continue in business.
The directors are also responsible for safeguarding the assets of the group and parent company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group’s and parent
company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and parent company
and enable them to ensure that the financial statements comply with the Companies Act 2006.
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.
Directors’ confirmations
In the case of each director in office at the date the Directors’ report is approved:
so far as the director is aware, there is no relevant audit information of which the group’s and parent company’s auditors are
unaware; and
they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit
information and to establish that the group’s and parent company’s auditors are aware of that information.
On behalf of the Board
Henrik Wareborn
Chief Executive Officer
14 May 2021
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Financial
Statements
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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 Velocys plc’s affairs as at 31 December 2020 and of the Company’s
consolidated loss and the Company’s and Velocys plc’s cash flows for the year then ended;
have been properly prepared in accordance with international accounting standards in conformity with the requirements 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, which comprise: the consolidated and Velocys plc
statements of financial position as at 31 December 2020; 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 related 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. Due to the
nature of the Company’s and Velocys plc’s activities, and based on the forecasts prepared by management, the Company and Velocys
plc need to secure additional external funding within 12 months from the date of approval of the financial statements in order to
continue as a going concern. 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.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
Our evaluation of the directors’ assessment of the Company's and Velocys plc’s ability to continue to adopt the going concern basis of
accounting included:
We assessed the Company’s and Velocys plc’s cash flow forecast for the 12 month period to 31 May 2022 and agreed these to be
based on Board approved budgets.
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 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 including applying a severe but plausible downside scenario. We obtained an update on the
current status of the sources of funding options being sought, as set out in note 2 to the financial statements, and we considered
whether there were additional risks that needed to be reflected in the forecasts. 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. Furthermore we have considered management’s track record in raising equity finance and investment
from third parties in assessing whether this may be achievable.
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.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of
this report.
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Independent auditors’ report to the members of Velocys plc
(continued)
Our audit approach
Overview
Audit scope
Overall Company materiality: £497,000 (2019: £500,000), based on 5.1% of loss before tax, before exceptional items.
Overall Velocys plc materiality: £126,000 (2019: £107,600), based on 0.5% of total assets.
We identified two financially significant components which were subject to full scope audits.
We performed a full scope audit over the significant components Velocys plc and Velocys Inc. as well as Velocys Technologies
Limited for statutory reporting purposes.
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 group engagement team.
Components where we performed audit procedures accounted for 94% of Company loss before tax and 99% of Velocys plc total
assets.
Key audit matters
Material uncertainty related to going concern
Valuation of assets for the Company and investment in subsidiaries for Velocys plc (Company and Velocys plc)
COVID-19 (Company and Velocys plc)
Materiality
Overall Company materiality: £497,000 (2019: £500,000) based on 5.1% (2019: 5%) of loss before tax, before exceptional items.
Overall Velocys plc materiality: £126,000 (2019: £107,600) based on 0.5% (2019: 1%) of total assets.
Performance materiality: £323,000 (Company) and £81,900 (Velocys plc).
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.
Capability of the audit in detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined in the Auditors’ responsibilities for the audit of the financial statements section, to detect material
misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities,
including fraud, is detailed below.
Based on our understanding of the Company and industry, we identified that the principal risks of non-compliance with laws and
regulations related to employment law, health and safety, bribery and corruption, international tax legislation, data protection and UK
and US environmental regulations, and we considered the extent to which non-compliance might have a material effect on the
financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the financial
statements such as the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation
of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting
inappropriate journal entries, omitting, advancing or delaying recognition of events and transactions that have occurred during the
reporting period and management bias in accounting estimates or judgements to manipulate results. Audit procedures performed by
the engagement team included:
Held discussions with the Company’s management, legal and tax advisors, including consideration of known or suspected
instances of non-compliance with laws and regulation and fraud.
Evaluated management’s controls designed to prevent and detect irregularities.
Reviewed meeting minutes of the Board, Audit & Risk, Nomination & Governance and Remuneration Committees.
Identified and tested journal entries based on our risk assessment and evaluating whether there was evidence of management
bias that represents a risk of material misstatement due to fraud.
Incorporated elements of unpredictability into the audit procedures performed.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-
compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements.
Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as
fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
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
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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.
In addition to going concern, described in the Material uncertainty related to going concern section above, we determined the matters
described below to be the key audit matters to be communicated in our report. This is not a complete list of all risks identified by our
audit.
The key audit matters below are consistent with last year.
Key audit matter
How our audit addressed the key audit matter
Valuation of assets for Company and investment in subsidiaries for Velocys plc
(Company and Velocys plc)
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 group’s assets, the group has one
CGU. We evaluated management’s impairment indicators and
their approach to calculating the CGU’s recoverable amount,
based on its fair value, using Velocys plc’s market capitalisation.
Management’s assessment considered the market
capitalisation at 31 December 2020 and post year end up to the
date of this report. We concluded that the application of this
market approach was appropriate. We independently verified
the calculation of the market capitalisation as well as the
fluctuations in share price. We compared the carrying value of
assets with their recoverable amount. We did not identify any
material exceptions in these tests and concur with
management that there are no indicators of impairment. We
then assessed whether a reversal of impairment was required
and concluded that although the market capitalisation has
increased, given that there are no significant operational or
trading advances (such as a large new revenue contract or a
technology proof milestone), it is appropriate to not record a
reversal of previous impairment. We also assessed the
Company’s and Velocys plc’s disclosures regarding the
significant accounting judgements. We consider that these
disclosures appropriately draw attention to the significant
areas of judgement that support management’s conclusion.
The carrying value of the Company’s intangible assets is £0.7m
(2019: £0.4m) and net assets are £13.1m (2019: £2.3m). The
carrying value of Velocys plc’s investments in subsidiaries is
£9m and remains in line with the previous year following an
impairment loss of £3.3m recorded in the prior 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
considered any changes in operations and compared the
carrying amount of the Company’s and Velocys plc’s net assets
to Velocys plc’s market capitalisation. For the assessment of the
recoverable amount of the Company’s and Velocys plc’s assets,
the recoverable amount was determined for the cash
generating unit (‘CGU’) to which these assets belong. The
Company and Velocys plc have one CGU. 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. IAS 36 also requires that the Company assess at
the end of each reporting period whether there is any indication
that an impairment loss recognised in prior periods for an asset
other than goodwill may no longer exist or may have decreased.
The market capitalisation significantly increased from 31
December 2019 to 31 December 2020 indicating no impairment
and that a potential reversal of impairment may be appropriate.
However, management considered the trading performance in
2020, with no significant new revenue contracts, did not
indicate the impairment loss should be reversed. Furthermore,
the market capitalisation remains volatile both during the year
and after the year end driven mainly by the fluctuation in share
price.
During the year the share price reported a low of 1.68p as at
18 March 2020 and a high of 14.65p on 18 June 2020 and at
year end the share price was 10.15p. Post year-end the share
price decreased to a low of 5.6p on 5 May 2021. Whilst, the
market capitalisation has fluctuated, it has remained above the
net assets of the Company and Velocys plc. Our audit focused
on the risk that the carrying value of the Company’s assets and
Velocys plc’s investments in subsidiaries could be overstated
and further impairments could be necessary as well as
considering if there were any indicators that the previous
impairment may be reversed.
Refer also to note 17 to the Company (consolidated) financial
statements and note 9 to the financial statements of Velocys
plc.
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Independent auditors’ report to the members of Velocys plc
(continued)
Key audit matter
How our audit addressed the key audit matter
COVID-19 (Company and Velocys plc)
The impact of COVID-19 on the Company includes both the
wider impact to the global economy (the air travel and oil and
gas industries are key stakeholders), and the direct impact on
slowing operations. Following the social distancing policy
implemented in both the UK and the US, the group had to
temporarily close offices and sites in Oxford, Houston and Plain
City and put in place a work from home policy. Management
consider that whilst this has impacted productivity, progress
continues to be made in all aspects of the business. Despite the
wider economic challenges Velocys plc raised gross cash
proceeds from equity of just under £21 million in June 2020.
Our audit focussed on the extent of the impact both to the
Company’s near-term liquidity, its basis of preparation as a
going concern and the associated disclosures.
Refer also to note 17 to the Company (consolidated) financial
statements and note 9 to the financial statements of Velocys
plc.
We evaluated the process used by management to assess going
concern and tested the mathematical accuracy of the models
used by management in their assessment. We evaluated
management’s assumptions in respect of downside scenarios in
the cash flow forecast, in particular cash inflows from
customers and the ability to receive strategic funding following
the impact on the airline and oil and gas industries. We
performed sensitivities over the Company’s cash flow forecasts
taking account of reasonably possible adverse effects that
could arise such as no new revenues and not securing new
project funding. We concur with management that there is a
material uncertainty in relation to going concern as additional
funding needs to be raised within 12 months of signing the
financial statements.
We assessed the transparency and reasonableness of the going
concern disclosure and considered these to be adequate.
Overall, we have concluded that the directors' use of the going
concern basis is appropriate. However, because not all future
events or conditions can be predicted, this is not a guarantee as
to the Company’s or Velocys plc's ability to continue as a going
concern and a material uncertainty does exist for the reasons
outlined in note 2.
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.
Overall Company materiality: £497,000 (2019: £500,000), equivalent to 5.1% (2019: 5%) of loss before tax, before exceptional items.
Overall Velocys plc materiality: £126,000 (2019: £107,600), based on 0.5% (2019: 1%) of total assets.
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:
Financial statements - Company
Financial statements - Velocys plc
Overall materiality
£497,000 (2019: £500,000).
£126,000 (2019: £107,600).
How we determined it
5.1% of loss before tax, before exceptional items.
0.5% of total assets.
Rationale for benchmark
applied
Based on the benchmarks used in the Annual
Report, loss before 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 shareholders in assessing
the performance and position of the entity and
reflects Velocys plc’s principal activity as a
holding company.
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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 £126,000 and £472,150. Certain components were audited to a
local statutory audit materiality that was also less than our overall Company materiality.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our
audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in
determining sample sizes. Our performance materiality was 65% of overall materiality, amounting to £323,000 for the Company
financial statements and £81,900 for the Velocys plc financial statements.
In determining the performance materiality, we considered a number of factors – the history of misstatements, risk assessment and
aggregation risk and the effectiveness of controls – and concluded that an amount at the upper end of our normal range was
appropriate.
We agreed with those charged with governance that we would report to them misstatements identified during our audit above
£24,850 (Company audit) (2019: £25,950 ) and £7,000 (Velocys plc audit) (2019: £5,380 ) 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.
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 our work undertaken in the course of the audit, the Companies Act 2006 requires 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 2020 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 in respect of the financial statements, 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.
www.velocys.com
174658 Velocys Annual Report Pt2 (New).qxp_174658 Velocys Annual Report Pt2 25/05/2021 17:14 Page 52
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Independent auditors’ report to the members of Velocys plc
(continued)
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We
will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit
sampling to enable us to draw a conclusion about the population from which the sample is selected.
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 the company’s members as a body in accordance with Chapter
3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility
for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
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 obtained all the information and explanations we require for our audit; or
adequate accounting records have not been kept by the company, 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
the company financial statements are not in agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Gareth Murfitt
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Reading
14 May 2021
Velocys plc Annual Report and Accounts 2020
174658 Velocys Annual Report Pt3a.qxp_174658 Velocys Annual Report Pt3a 25/05/2021 17:14 Page 53
Consolidated income statement
for the year ended 31 December 2020
2020
£’000
2020
£’000
2020
£’000
2019
£’000
2019
£’000
2019
£’000
Before Exceptional
items
(note 4)
exceptional
items
Before Exceptional
items
(note 4)
exceptional
items
Revenue
Cost of sales
Gross profit
Administrative expenses
Other income
Operating loss
Loss before net finance costs
Finance income
Finance costs
Net finance costs
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)
Note
6
10
9
7
8
13
178
(101)
77
(9,238)
400
(8,761)
(8,761)
6
(850)
(844)
(9,605)
810
(8,795)
16
(1.05)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
The notes on pages 58 to 84 are part of these consolidated financial statements.
53
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Total
178
(101)
77
(9,238)
400
(8,761)
(8,761)
6
(850)
(844)
(9,605)
810
332
(132)
200
(9,898)
79
(9,619)
(9,619)
48
(429)
(381)
(10,000)
291
(8,795)
(9,709)
Total
332
(132)
200
(9,804)
79
(9,525)
(9,525)
48
(429)
(381)
(9,906)
291
(9,615)
–
–
–
94
–
94
94
–
–
–
94
–
94
(1.05)
(1.91)
0.1
(1.90)
www.velocys.com
174658 Velocys Annual Report Pt3a.qxp_174658 Velocys Annual Report Pt3a 25/05/2021 17:14 Page 54
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Consolidated statement of comprehensive income
for the year ended 31 December 2020
Loss for the year
Other comprehensive expense
items that may be reclassified to the income
statement in subsequent periods
Foreign currency translation differences
Total comprehensive expense for the year
attributable to the owners of Velocys plc
2020
£’000
2020
£’000
2020
£’000
2019
£’000
2019
£’000
2019
£’000
Before Exceptional
items
(note 4)
exceptional
items
(8,795)
(251)
(9,046)
–
–
–
Before Exceptional
items
(note 4)
exceptional
items
(9,709)
94
Total
(8,795)
Total
(9,615)
(251)
(262)
(9,046)
(9,971)
–
94
(262)
(9,877)
The notes on pages 58 to 84 are part of these consolidated financial statements.
Velocys plc Annual Report and Accounts 2020
174658 Velocys Annual Report Pt3a.qxp_174658 Velocys Annual Report Pt3a 25/05/2021 17:14 Page 55
Consolidated statement of financial position
as at 31 December 2020
Assets
Non-current assets
Intangible assets
Property, plant and equipment
Right-of-use asset
Current assets
Inventories
Trade and other receivables
Current income tax asset
Cash and cash equivalents
Total assets
Liabilities
Current liabilities
Trade and other payables
Lease liability
Borrowings
Other liabilities
Deferred revenue
Non-current liabilities
Lease lability
Borrowings
Deferred revenue
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
19
21
20
22
23
19
27
28
29
19
27
29
25
25
2020
£’000
740
1,479
653
2,872
970
6,182
810
13,051
21,013
23,885
(932)
(470)
(152)
(474)
(7,774)
(9,802)
(270)
(371)
(382)
(1,023)
(10,825)
13,060
10,642
199,701
369
16,345
3,038
(217,035)
13,060
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2019
£’000
444
1,734
836
3,014
3,332
1,637
648
4,797
10,414
13,428
(1,331)
(581)
–
(2,804)
(5,562)
(10,278)
(343)
–
(470)
(813)
(11,091)
2,337
6,438
184,256
369
16,225
3,289
(208,240)
2,337
The notes on pages 58 to 84 are part of these consolidated financial statements.
The financial statements on pages 53 to 84 were approved by the Board of directors and authorised for issue on 14 May 2021. They
were signed on its behalf by:
Henrik Wareborn
Chief Executive Officer
Company number 05712187
www.velocys.com
174658 Velocys Annual Report Pt3a.qxp_174658 Velocys Annual Report Pt3a 25/05/2021 17:14 Page 56
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Consolidated statement of changes in equity
for the year ended 31 December 2020
Called up Share
share premium
capital account
£’000 £’000
Note
Share-
based Foreign Accumu-
Merger payment exchange lated
reserve reserve reserve losses
£’000 £’000 £’000 £’000
Balance at 1 January 2019
4,105 180,016
369 16,143 3,551 (198,625)
Total
equity
£’000
5,559
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
Total transactions with owners
Balance at 31 December 2019
Balance at 1 January 2020
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
Proceeds from options exercised
Total transactions with owners
Balance at 31 December 2020
– –
– – – (9,615)
(9,615)
– –
– –
– – (262) –
(262)
– – (262) (9,615)
(9,877)
15
25
– –
2,333 4,240
2,333 4,240
– 82 – –
– – – –
– 82 – –
6,438 184,256
369 16,225 3,289 (208,240)
6,438 184,256
369 16,225 3,289 (208,240)
82
6,573
6,655
2,337
2,337
– –
– – – (8,795)
(8,795)
– –
– –
– – (251) –
(251)
– – (251) (8,795)
(9,046)
15
25
– –
4,200 15,437
4 8
4,204 15,445
– 120 – –
– – – –
– – – –
– 120 – –
10,642 199,701
369 16,345 3,038 (217,035)
120
19,637
12
19,769
13,060
The notes on pages 58 to 84 are part of these consolidated financial statements.
Velocys plc Annual Report and Accounts 2020
174658 Velocys Annual Report Pt3a.qxp_174658 Velocys Annual Report Pt3a 25/05/2021 17:14 Page 57
Consolidated statement of cash flows
for the year ended 31 December 2020
Cash flows from operating activities
Operating loss
Depreciation and amortisation
Loss on disposal of intangible assets
Impairment of property, plant and equipment
Impairment of inventory
Share-based payments
Changes in working capital (excluding the effects of exchange
differences on consolidation)
Trade and other receivables
Trade and other payables
Other liabilities
Deferred revenue
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
Payment from associate ENVIA
Interest received
Net cash (used in)/generated from investing activities
Cash flows from financing activities
Proceeds from issues of shares and exercise of options
Costs of issuing shares
Proceeds from issue of share options
Principal elements of lease payments
Interest paid
Proceeds from borrowings
Repayment of borrowings
Net cash generated from financing activities
Net increase/(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
The notes on pages 58 to 84 are part of these consolidated financial statements.
Note
17
4
21
29
25
19
8
22
22
2020
£’000
(8,761)
1,099
72
–
270
120
(4,545)
(399)
(2,330)
2,124
2,092
(10,258)
648
(9,610)
(342)
(513)
–
6
(849)
21,000
(1,363)
12
(457)
(142)
567
–
19,617
9,158
4,797
(904)
13,051
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2019
£’000
(9,525)
1,094
187
439
569
82
(165)
(1,687)
712
819
(2,473)
(9,948)
736
(9,212)
(779)
(394)
3,432
33
2,292
7,000
(427)
–
(479)
(201)
–
(371)
5,522
(1,398)
6,964
(769)
4,797
www.velocys.com
174658 Velocys Annual Report Pt3b.qxp_174658 Velocys R&A Pt3b 25/05/2021 17:15 Page 58
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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 12 to 26. The parent company financial statements are included on pages 85 to 94. 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 accounting standards in conformity with
the Companies Act 2006 (“IFRS”).
The financial statements have been prepared under the historical cost convention. For the years ended 31 December 2020 and 2019,
there were no applicable financial assets and liabilities requiring revaluation at fair value.
The preparation of financial statements to conform to IFRS as adopted by the UK 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.
Going concern
The nature of the Company’s strategy means that the precise timing of milestones and funds generated during the early years of
development projects are difficult to predict. The directors have prepared financial forecasts to estimate the likely cash requirements
of the Company and Velocys plc over the next twelve months from the date of approval of the financial statements. The cash forecast
includes the following assumptions:
(i) the completion of the current stage of the Front End Engineering Design (“FEED”) for the Altalto Immingham Project and the
Mississippi Biorefinery Project prior to securing funding for the next stage of FEED to financial close;
(ii) the completion of the new design of the upgraded manufacturing facility;
(iii) the continued process of on-boarding one or more strategic investors to provide the final stages of development funding for either
or both the Altalto Immingham Project and the Mississippi Biorefinery Project;
(iv) revenue from the ongoing pre-FEED engineering work from the February 2021 announcement of the collaboration agreement with
our customer Toyo Engineering Corporation for the development of their first commercial plant in Japan; and
(v) the current overhead cost run rate.
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.
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; selling additional technology licences; performing Pre-FEED
engineering work for customers (such as the technical services agreement made with Toyo Engineering Corporation recently for their
commercial plant in Japan); UK or US government loans or grants; and selling non-core intellectual property.
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. Should additional funding not be secured within 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 any adjustments that would arise if the Company and Velocys plc were unable to continue as
a going concern.
Changes in accounting policies
New standards, interpretations and amendments adopted from 1 January 2020
The Company has assessed the new standards, interpretations and amendments issued that are effective from 1 January 2020 and
does not consider these to be relevant to the financial statements or to have a material impact on the Company in the current or
future reporting periods and on foreseeable future transactions.
New standards, interpretations and amendments not yet effective
There are a number of standards, amendments to standards, and interpretations which have been issued by the International
Accounting Standards Board (“IASB”) that are effective in future accounting periods that the Company has decided not to adopt early.
Velocys plc Annual Report and Accounts 2020
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The following amendments are effective for the accounting period beginning 1 January 2022:
Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37);
Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16);
Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS1, IFRS9, IFRS16 and IAS 41); and
References to Conceptual Framework (Amendments to IFRS 3).
In January 2020, the IASB issued amendments to IAS 1, which clarify the criteria used to determine whether liabilities are classified as
current or non-current. These amendments clarify that current or non-current classification is based on whether an entity has the
right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period. The
amendments also clarify that ‘settlement’ includes the transfer of cash, goods, services or equity instruments unless the obligation to
transfer equity instruments arises from a conversion feature classified as an equity instrument separately from the liability
component of a compound financial instrument. The amendments were originally effective for annual reporting periods beginning on
or after 1 January 2022. However, in May 2020, the effective date was deferred to annual reporting periods beginning on or after
1 January 2023.
The Company is currently assessing the impact of these new accounting standards and amendments. The Company does not believe
that these amendments will have a material impact.
Financial risk management policies
Financial risk management policies are set out in the Strategic report on pages 23 to 26, and in note 24.
Capital management policies
Capital management policies are set out in note 24.
Significant accounting policies
Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of Velocys plc’s subsidiaries 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
pounds sterling (£). It should be noted that the functional currency for Velocys plc is pounds sterling as Velocys plc is traded on the
AIM market and is head quartered in the UK. Currently all new equity based fund raises are completed in the UK and made in £.
Transactions and balances
Foreign currency transactions are booked in the functional currency of the entity at the exchange rates ruling 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 included 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 Velocys plc has in its subsidiary undertakings is its interest in the net assets of that subsidiary.
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. income and expenses for each income statement are translated at average exchange rates; and
3. all resulting exchange differences are recognised as a movement within other comprehensive income.
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 included in the note to which they apply.
www.velocys.com
174658 Velocys Annual Report Pt3b.qxp_174658 Velocys R&A Pt3b 25/05/2021 17:15 Page 60
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Notes to the consolidated financial statements (continued)
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. Please see the notes referenced below for the details associated with the critical
accounting estimates and judgements.
Items involving a critical estimate
IFRS 16 critical estimates
Share-based payments
Other receivables – impairment assessment under IFRS 9
Items involving a judgement
Revenue recognition under IFRS 15
Share-based payments
Intangible assets – impairment assessment
Note
19
15
20
6 and 29
15
17
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:
Property, plant and equipment impairment
Recovery of loan to an associate
Total
2020
£’000
–
–
–
2019
£’000
(439)
533
94
Administrative expenses
Property, plant and equipment impairment – in 2019, the Company made an impairment of £439,000 for the land associated with a
subsidiary based on a current valuation appraisal by a third party expert. The value of the land either for development or for a sale of
the land determined a lesser value than was held as an asset. As a result of the third party’s appraisal, the Company determined that
the land required an impairment.
Recovery of loan to an associate – in 2019, the Company released deferred revenue in the amount of £533,000 in final settlement of a
loan receivable from ENVIA Energy, LLC (“ENVIA”) representing the recovery on an impairment first recorded in 2018.
5. Segmental information
The Company’s chief operating decision-making unit is the Executive management team made up of the Chief Executive Officer and
the Chief Financial Officer. The Executive management team 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 Executive management team considers that the business comprises a single activity, which is the design, development, marketing
and sale of technology for the production of sustainable transport fuels. This includes facilitating project development by putting
together partnerships with technology licensors, engineers, feedstock suppliers, the offtakers who purchase the fuel and financing
entities. The Executive management team 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 Executive management team 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 sustainable transport 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.
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The Chief Executive Officer assesses the performance of the operating segment based on a measure of operating loss.
The Company’s operating segment operates in two main geographical areas. Revenue is allocated based on the country in which the
customer is located.
Asia Pacific
Americas
Total revenue
2020
£’000
157
21
178
2019
£’000
266
66
332
Revenues during the year originated predominantly from Japan relating to the sale of equipment and engineering services in the Asia
Pacific region.
The total amount of revenue recognised from customers where revenue comprises 10% or more of Company revenue is as follows:
Customer 1
Customer 2
Customers less than 10%
Total revenue
Non-current assets held in the United States are as follows:
Intangible assets
Property, plant and equipment
Right-of-use asset
Total
2020
£’000
157
21
–
178
2020
£’000
213
1,260
422
1,895
2019
£’000
266
44
22
332
2019
£’000
347
1,627
751
2,725
All other non-current assets were held in the United Kingdom and amounted to £977,000 (2019: £289,000).
6. Revenue
The Company generates revenue through contracts in which it (i) sells Fischer-Tropsch (“FT”) reactors, (ii) sells FT catalyst, (iii) provides
licence agreements and (iv) performs engineering services. In general, contracts with the Company provide a licence agreement for the
use of its intellectual property associated with the catalyst and reactors both of which have been specifically designed and over which
the Company holds a significant number of patents. The majority of the Company’s revenue is derived from a small number of
significant commercial customers and development partners.
Revenue is recognised when the Company satisfies a performance obligation by transferring promised goods or services to a
customer. The sales income related to sales of reactors and catalyst will be recognised as the performance obligations are satisfied.
Revenue from engineering services is earned on a time and materials basis and is recognised as the work is performed provided that it
does not relate to the sale of equipment and therefore is bound by the performance obligations of that sale.
If the entity is providing a single performance obligation in the form of an integrated set of activities, each contract is assessed to
determine if it meets the criteria for recognition over time. This would require the contract to either transfer control of the combined
output over time or for the entity to have an enforceable right of payment for the performance completed to date for activities that do
not create an asset with alternative use. One contract that was signed in 2018 with reactor and catalyst deliveries completed in 2020
is subject to a performance test run in 2021 or performance obligations which expire under the terms of the contract in 2021 if the
test is not completed. This has been assessed as a combined performance obligation and it was determined that the above criteria
have not been met as at the year end. As such, all consideration received has been deferred and revenue will be recognised when the
project performance obligations described above have been met.
Critical estimates and judgements
Determining whether the goods or services provided are considered distinct performance obligations from the supply of equipment
can require significant judgment. The Company’s agreements, in some instances, could have a single performance obligation, which
would result in the deferral of revenue until the performance obligation is satisfied. This is the case when the entity promises an
integrated package of goods and services and where the customer is receiving a combined output (for example, an engineering service
that results in operational technology at a particular site). In other instances, there will be no integration service and each good or
service will be considered separately.
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Notes to the consolidated financial statements (continued)
6. Revenue (continued)
When there are multiple performance obligations, revenue from goods or services is allocated to the respective performance
obligations based on relative stand alone selling prices and is recognised as the performance obligations are satisfied. Revenue from
goods or services is measured as the amount of consideration expected to be received in exchange for the goods and services
delivered.
FT reactor, catalyst and licence
Engineering services
Total
2020
£’000
63
115
178
2019
£’000
273
59
332
FT reactor, catalyst and licence revenue in the amount of £63,000 for the year ended 31 December 2020 consisted principally of the
sale of catalyst to a customer in Japan, and in the previous year consisted principally of the sale of substacks to the same customer.
This revenue was recognised at a specific point in time upon delivery and title transfer of the catalyst (and in 2019, substacks) for the
customer’s demonstration plant. Revenue from engineering services was recognised on a time and materials basis during the period
in which the services were delivered.
7. Finance income
Interest income on bank deposits
Total
8. Finance costs
Interest on lease liabilities
Interest on borrowings
Foreign exchange losses
Total
2020
£’000
6
6
2020
£’000
142
–
708
850
2019
£’000
48
48
2019
£’000
196
4
229
429
Interest on borrowings in 2019 is the interest associated with other loans repaid during 2019.
9. Other income
Other income consists of items such as government grants, sales of fixed assets and any other operating income recognised outside
of commercial activities.
Income from government grants is recognised only when there is reasonable assurance that (a) the Company has complied with any
conditions attached to the grant and (b) the grant will be received. Further details relating to the £290,000 included below can be
found in note 20.
Income from government grants
Release of aged deposit received
Profit on sale of fixed assets
Total
2020
£’000
290
80
30
400
2019
£’000
–
–
79
79
Velocys plc Annual Report and Accounts 2020
174658 Velocys Annual Report Pt3b.qxp_174658 Velocys R&A Pt3b 25/05/2021 17:15 Page 63
10. Administrative expenses
Employee benefit expense (note 12)
Sub-contractor and consultant costs
Depreciation of property, plant and equipment (note 18)
Amortisation of intangible assets (note 17)
Depreciation of right-of-use asset (note 19)
Patent and other IP costs
Other direct and administrative costs
Professional services
Legal
Travel
Total administrative expenses before exceptional items
Exceptional items (note 4)
Total administrative expenses
Included in administrative expenses were research and development costs of £1,603,000 (2019: £1,174,000).
11. Auditors’ 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
For the audit of the financial statements of subsidiaries of the parent company in respect of the prior year
Other services:
International payroll taxation services
Total
63
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2019
£’000
3,332
2,967
568
112
414
89
937
560
450
469
9,898
(94)
9,804
2019
£’000
158
54
35
12
–
259
2020
£’000
4,530
1,563
500
137
462
104
1,043
404
358
137
9,238
–
9,238
2020
£’000
192
30
35
5
12
274
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 Consolidated income statement in respect of pension costs and other post-retirement benefits represents
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.
The average monthly number of Company employees (including Executive Directors) was as follows.
Research, design and development
Administration
Total average headcount
2020
number
2019
number
17
16
33
15
18
33
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Notes to the consolidated financial statements (continued)
12. Employee benefit expense (continued)
Their aggregate remuneration comprised the following items.
Wages and salaries
Short-term non-monetary benefits
Social security contributions and similar taxes
Defined contribution pension costs
Severance expense
Share-based payments granted to directors and employees (note 15)
Total remuneration before capitalisation of wages and salaries
Capitalisation of wages and salaries
Total remuneration
2020
£’000
4,813
560
393
228
43
120
6,157
(1,627)
4,530
2019
£’000
3,817
543
286
188
138
82
5,054
(1,722)
3,332
Wages and salaries include discretionary bonus payments made to Executive Directors and employees totalling £983,000 during the
year ended 31 December 2020 in respect of 2019 performance. In 2019, £545,000 was credited to Wages and salaries in respect of
bonuses, as the total amount paid out to Executive Directors and employees was lower than the amount accrued at 31 December
2018. The Company has not recorded a bonus accrual as at 31 December 2020 in respect of 2020 performance, as explained in the
Strategic report on page 36.
Short term non-monetary benefits are in respect of health insurance benefits provided to employees and the amounts paid for
workers compensation policies in respect of US based employees.
The capitalisation of wages and salaries relates to employees who manufacture the reactors associated with one of the Company’s
sales contracts, where the costs are deferred until revenue and cost recognition is allowed in accordance with the performance
obligations of the contract. In addition, capitalisation of wages and salaries includes those costs related to the Altalto project which
are offset against Other liabilities (see note 28).
Severance in the amount of £43,000 was paid to one employee who was made redundant in the year. No redundancies were made
during 2019, however severance in the amount of £138,000 in 2019 was paid to a former director, who resigned in December 2018.
Details of directors’ remuneration are given in the audited information in the Directors’ remuneration report on pages 36 to 40, which
forms part of these financial statements.
13. Income tax credit
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
2020
£’000
–
(810)
(810)
(810)
2019
£’000
247
(538)
(291)
(291)
Due to the availability of losses incurred in the year, there is no charge to corporation tax. The Company recognised £810,000 for R&D
tax credits (2019: £291,000). 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 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 (2019: 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
Remeasurement of deferred tax for changes in tax rates
Unutilised tax losses for which no deferred tax asset is recognised
R&D tax credit
Income tax total
Velocys plc Annual Report and Accounts 2020
2020
£’000
(9,605)
(1,825)
5
(1,254)
3,074
(810)
(810)
2019
£’000
(9,906)
(1,882)
72
–
1,810
(291)
(291)
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The weighted average applicable tax rate was 20% (2019: 21%).
In the Spring Budget 2020, the UK Government announced that from 1 April 2020 the UK corporation tax rate would remain at 19%
(rather than reducing to 17%, as previously enacted). This new law was substantively enacted on 17 March 2020 so the unrecognised
UK deferred tax balances have been measured at 19% (recognised: £nil). In the Spring Budget 2021, the UK Government announced
that the headline UK corporation tax rate would increase from 19% to 25% from 1 April 2023 on profits in excess of £250,000. A small
profits rate of 19% will apply to profits of £50,000 or less and for companies with profits in between these amounts there will be a
gradual increase in the effective corporation tax rate. As this new law had not been substantively enacted at the balance sheet date
current tax is calculated at 19%.
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 recognised deferred tax in the year or the comparative period.
Unrecognised
Deferred tax assets
Trading losses
Share based payments
Total
2020
£’000
2019
£’000
(28,660)
(321)
(28,981)
(27,116)
–
(27,116)
At 31 December 2020, the Company had a net unrecognised deferred tax asset of £28,660,000 (2019: £27,116,000) arising from trading
losses since incorporation. No recognition (2019: £nil) of the net deferred tax asset has been made at 31 December 2020 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 £12,889,000 (2019: £10,663,000) 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 2039
(2019: 2025 and 2039).
The unrecognised deferred tax asset of £321,000 (2019: £nil) in respect of share based payments is calculated by reference to the
intrinsic value of outstanding share options as at 31 December.
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 fair value calculation of share-based payments requires several assumptions and estimates. Such
assumptions and estimates could change and could affect the amount recorded.
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 commensurate with the remaining contractual term, 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, contract term is assumed to be 10 years. This has been adjusted, using management’s best estimate, for the effects of
non-transferability, exercise restrictions, and behavioural considerations.
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Notes to the consolidated financial statements (continued)
15. Share-based payments (continued)
At the end of each reporting period, for awards not containing a market condition 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; the proceeds received, net of attributable transaction costs, are credited
to share capital and share premium. The Company does not hold any treasury shares.
The number of options outstanding at 31 December 2020 and the expense recognised in the Consolidated income statement for these
schemes, along with bonus shares and other schemes, was as follows.
Scheme
Employees UK/US
LTIP (Executives and Senior Management team)
Velocys, Inc.
Bonus shares
Other
Total
2020
Income
statement
£’000
59
61
–
–
–
Options
outstanding
17,993,269
38,568,280
58,566
37,655
212,625
120
56,870,395
2019
Income
statement
£’000
55
27
–
–
–
82
Options
outstanding
16,691,961
34,842,671
45,543
–
212,625
51,792,800
Critical estimates and judgements
Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which
depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the
valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making
assumptions about them. For the measurement of the fair value of equity-settled transactions with employees at the grant date, the
Company uses a Black-Scholes model and a Monte-Carlo simulation model for awards granted in 2019.
Employees UK/US
In 2019, the Company awarded all of its UK and US employees (excluding the Executive Directors and Non-Executive Directors) with a
Special Award grants of options. The UK awards had advanced assurance from the HMRC for EMI qualification. The Special awards
were made as a once-off award, looking forward, to incentivise, focus, retain and reward staff and in part as recognition that no long
term equity based award schemes have been put in place since 2014. The Special Award also encompassed and superseded awarded
options in new joiner employment contracts where the options had not yet been granted.
The Special Awards granted vest over a three year period with the first tranche vesting on 31 December 2019. The options granted
expire after ten years. The options will normally lapse if the option holder ceases to hold an office or employment within the Group. The
exercise price was set at the time of grant at 3 pence. Options are fair valued at grant date using the Black-Scholes model, and
expensed over the vesting period.
Prior to 2019, options were 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. No options were granted in 2018.
Movements in the number of options outstanding and their related weighted average exercise prices was as follows.
At 1 January
Granted
Forfeited
Exercised
At 31 December
Weighted
average
exercise price
12.31p
–
11.79p
3.00p
12.05p
2020
Number of
options
17,993,269
–
(901,308)
(400,000)
Weighted
average
exercise price
129.45p
3.00p
106.42p
–
2019
Number of
options
1,767,100
16,700,000
(473,831)
–
16,691,961
12.31p
17,993,269
Of the 16,691,961 options outstanding at 31 December 2020, 11,568,624 were exercisable (2019: 1,389,934). The weighted average
exercise price of the exercisable shares was 16.03p (2019: 41.85p).
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Options outstanding at the end of the year have the following expiry dates and exercise prices.
Year of expiry
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Total
Range of
exercise price
57.78 – 68.32p
50.91 – 72.25p
65.54 – 69.89p
185.98 – 206.53p
202.61 – 293.23p
60.47 – 174.66p
28.74 – 39.26p
–
–
3.00p
Number of
options
–
421,961
10,000
460,000
130,000
100,000
70,000
–
–
15,500,000
2020
Weighted
average
exercise price
–
50.91p
65.54p
185.98p
220.01p
163.77p
28.74p
–
–
3.00p
Number of
options
21,308
491,961
10,000
460,000
140,000
100,000
70,000
–
–
16,700,000
3.00 – 293.23p
16,691,961
12.05p
17,993,269
2019
Weighted
average
exercise price
57.78p
53.74p
67.55p
191.71p
230.81p
168.81p
29.65p
–
–
3.00p
12.31p
In respect of the 16,700,000 options granted in 2019, the significant inputs into the Black-Scholes 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
2019
1.45p
3.00p
73.40%
0.01% – 0.63%
0%
5.03 – 6.03
The total expense recognised in the Consolidated income statement for share options granted to the Executive Directors and
employees was £59,000 (2019: £55,000).
LTIP (Executives and Senior Management team) options
Executive and Senior Management options (also referred to as “LTIP” and the “Scheme” in the Directors’ remuneration report) 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.
In 2019, the Remuneration Committee introduced a new annual equity-based incentive scheme for executive directors and senior
managers. Under the 2019 Scheme, Executive Directors and senior managers were awarded (i) time based share options and (ii)
performance based awards in equal amounts.
No awards were made during the year ended 31 December 2020, however awards have been made in February 2021 in respect of 2020
annual awards entitlement, as disclosed in note 32.
The time based share options awarded in December 2019 vest and become exercisable on the third anniversary of the grant date of
December 2019 and expire after ten years. The exercise price was set at the time of grant at 3 pence. The options will normally lapse if
the option holder ceases to hold an office or employment within the Group. Options are fair valued at grant date using the Black-
Scholes model, and expensed over the vesting period.
The performance awards vest and become exercisable in full on the third anniversary of the grant date provided the weighted average
share price for the month preceding that third anniversary is at least 4.5 pence. The options expire after ten years. The exercise price
was set at the time of grant at 4.5 pence. The options will normally lapse if the option holder ceases to hold an office or employment
within the Group. Options are fair valued at grant date using the Monte-Carlo model, and expensed over the vesting period.
In connection with the commencement of service of Mr. Wareborn and Mr. Morris, it was agreed to award 2,000,000 share options with
an effective date of grant at the date of the services agreement, two-thirds of the Options vested on the effective date of grant being
13 December 2019. The balance of the Options vested on 4 December 2020. The exercise price of the awards is 10 pence and the last
date for exercise is the day immediately preceding the tenth anniversary of the date of grant.
In connection with the commencement of service of Mr. Wareborn and Mr. Morris, each was awarded 2,000,000 performance based
awards. These awards vest and become exercisable at either (i) 31 December 2021 if the target conditions are met or (ii) 31 December
2022 if the target conditions are not met by 31 December 2021 but are met within the calendar year 2022. The target condition is that
for any 15 consecutive dealing days leading up to the vesting date the weighted average share price of the Velocys shares on each of
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Notes to the consolidated financial statements (continued)
15. Share-based payments (continued)
these days is equal to or more than 15 pence or for any 45 consecutive days in the six month period leading up to 31 December 2021
the weighted average share price of a share over the 45-day period is equal to or more than 15 pence. The exercise price is 15 pence.
Executive options granted up to and including 2014, are exercisable at a price of 1 pence 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 (“RSU”s), awarded after 2014 were divided into those with a service period and those with
market performance conditions. Except for a former executive, 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
a possible final re-measurement in 2019; options are subject to the discretion of the Board if the employee leaves the Company before
the options vest.
Movements in the number of options outstanding and their related weighted average exercise prices are as follows.
At 1 January
Granted
Forfeited
At 31 December
Weighted
average
exercise price
14.55p
–
60.51p
2020
Number of
options
38,568,280
–
(3,725,609)
7.82p
34,842,671
Weighted
average
exercise price
97.02p
5.69p
78.48p
14.55p
2019
Number of
options
4,922,741
35,125,146
(1,479,607)
38,568,280
Of the 34,842,671 options outstanding at 31 December 2020, 4,933,069 were exercisable (2019: 3,238,134). The weighted average
exercise price of the exercisable shares was 27.31p (2019: 37.49p).
Share options, performance awards and RSUs outstanding at the end of the year have the following expiry dates (RSU latest exercise
dates) and exercise prices.
Year of expiry
2021
2022
2023
2024
2025
2026
2027
2029
Total
Range of
exercise price
1.00 – 58.00p
49.00p
159.00p
153.00 – 163.50p
Nil
1.00p
1.00p
3.00-15.00p
Number of
options
81,250
212,700
283,191
214,543
141,385
–
–
33,909,602
2020
Weighted
average
exercise price
58.00p
49.00p
159.0p
161.0p
Nil
–
–
5.24p
Number of
options
471,876
851,503
911,853
763,937
238,965
105,000
100,000
35,125,146
Nil – 163.50p
34,842,671
7.82p
38,568,280
2019
Weighted
average
exercise price
10.82p
28.00p
97.85p
112.94p
Nil
1.00p
1.00p
5.69p
14.55p
In 2019, the Company awarded 35,121,146 equity awards with a weighted average fair value of 3 pence 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
2019
1.45p
3.00p-15.00p
70.89%
0.69%
0%
5.03-10.0
The total expense recognised in the Consolidated income statement for LTIP options granted to the Executive Directors and employees
was £61,000 in 2020 (2019: £27,000).
Velocys plc Annual Report and Accounts 2020
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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: 25% of grant
Each month subsequent to one year of service: 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 Catalysts Group PLC, option (the ratio of
the value of one share of Velocys, Inc. stock to one share of Velocys plc, formerly Oxford Catalysts 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 vested in three years and expire ten years from date of grant.
Details of the share options outstanding under the Velocys, Inc. scheme are as follows.
At 1 January
Forfeited
At 31 December
Weighted
average
exercise price
$0.93
$0.93
$0.93
2020
Number of
options
58,566
(13,023)
45,543
Weighted
average
exercise price
$0.93
$0.93
$0.93
2019
Number of
options
63,570
(5,004)
58,566
Of the options outstanding presented above, 45,543 (2019: 58,566) were exercisable as of 31 December 2020. The weighted average
share price of the exercisable shares was $0.93 (2019: $0.93).
Share options outstanding at the end of the year have the following expiry dates and exercise prices.
Year of expiry
2021
Total
Exercise price
per share
Number of
options
$0.93
$0.93
45,543
45,543
2020
Weighted
average
exercise price
$0.93
$0.93
2019
Weighted
average
exercise price
$0.93
$0.93
Number of
options
58,566
58,566
The total expense recognised in the Consolidated income statement for share options granted under the Velocys, Inc. plan was £nil
(2019: £nil).
Bonus shares
The Company previously maintained a bonus share scheme for certain executives where 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 have been made
under the scheme during, or in respect of, 2020 and 2019 and the Company does not expect to use the scheme going forward. All
expense has been recognised prior to 2019.
The Velocys Technologies Limited bonus share scheme awarded nominal value share options (1 pence) 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
Forfeited
At 31 December
Exercise
price
1.00p
1.00p
1.00p
2020
Number of
options
37,655
(37,655)
–
Exercise
price
1.00p
1.00p
1.00p
2019
Number of
options
79,760
(42,105)
37,655
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174658 Velocys Annual Report Pt3b.qxp_174658 Velocys R&A Pt3b 25/05/2021 17:15 Page 70
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Notes to the consolidated financial statements (continued)
15. Share-based payments (continued)
The Velocys Technologies Limited bonus share options outstanding at the end of the year have the following expiry dates.
Year of expiry
2021
Total
Exercise
price
1.00p
1.00p
2020
Number of
options
–
–
2019
Number of
options
37,655
37,655
Other share options
The Board has historically approved the granting of share options to a small number of consultants (non-employees) who provided a
strategic service to the Company. No options have been granted to consultants since 2015.
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
104.15p
–
–
104.15p
2020
Number of
options
212,625
–
–
212,625
Weighted
average
exercise price
104.15p
–
–
104.15p
2019
Number of
options
212,625
–
–
212,625
Of the options issued to consultants and outstanding at 31 December 2020, 212,625 were exercisable (2019: 212,625). The weighted
average exercise price of the exercisable shares was 104.15p (2019: 104.15p).
Share options outstanding at the end of the year have the following expiry dates and exercise prices.
Year of expiry
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
2020
Weighted
average
exercise price
53.10p
145.25p
108.03p
104.15p
2019
Weighted
average
exercise price
53.10p
145.25p
108.03p
104.15p
Number of
options
29,500
21,375
161,750
212,625
No options have been granted to consultants in respect of 2020 and 2019.
The share-based payment expense for the year includes a cost of £nil (2019: £nil) relating to options granted to consultants.
Share-based payments charge
The total charge for share-based payments during the year was £120,000 (2019: £82,000) of which £28,000 (2019: £23,000) relates to
options granted to directors and the remainder to other employees.
16. Basic and diluted 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)
Velocys plc Annual Report and Accounts 2020
2020
2019
(8,795)
836,710,315
(9,615)
507,218,656
(1.05)
(1.90)
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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 2020 and 2019 there were no other potentially dilutive
instruments (see note 25). Details of share options are given in note 15.
17. Intangible assets
Significant accounting policies
Cost or valuation and amortisation
Goodwill
Goodwill is stated at cost less impairments. Goodwill is deemed to have an indefinite useful life and is tested for impairment at least
annually.
In-process technology
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 2020 and 2019. This
resulted in a loss on disposal of patents of £72,000 (2019: loss of £187,000).
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 or its license period, whichever is the shorter.
Amortisation
The Company amortises intangible assets with a limited useful life, using a straight-line method, over the following periods:
In-process technology up to 20 years
Patents, licences and trademarks 20 years
Software 2-5 years
Amortisation charges of £137,000 for patents, licences and trademarks are included in administrative expenses (2019: £112,000).
There were no amortisation charges recorded in respect of other classes of intangible assets during the year as the net book value
was £nil (2019: £nil).
Impairment
Intangible assets are reviewed for impairment annually and 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 Cash Generating Unit (“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 other intangible assets 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.
In 2017, the Company recorded an impairment of intangible assets totalling £28.8m, which comprised £7.4m of Goodwill, £20.6m of
In-process technology and £0.8m of Patents, licence and trademarks. The majority of the intangible assets arose on the Company’s
acquisition of Velocys, Inc. in November 2008 and relates to the acquired microchannel process technology which forms an integral
part of the Company’s patented Fischer-Tropsch (“FT”) reactors. Over the last few years, the FT reactors have been used successfully in
demonstration plants in both the US and Japan, and have also been manufactured and supplied to a commercial customer for which
the Company has received £7.8m of revenue including licence fees, reactor sales and catalyst sales (see note 29).
For the impairment assessment performed in 2017, the recoverable amount was determined by comparing the carrying amount of the
Company’s total net assets with the fair value of the business, by reference to the value of Velocys plc’s market capitalisation. This
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174658 Velocys Annual Report Pt3b.qxp_174658 Velocys R&A Pt3b 25/05/2021 17:15 Page 72
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Notes to the consolidated financial statements (continued)
17. Intangible assets (continued)
approach has been followed in subsequent years including for the assessment performed at 31 December 2020, to test whether
further impairments or a reversal of previous impairments is required.
The analysis performed at 31 December 2020 compared the carrying amount of £0.7m with the value of Velocys plc’s equity based on
the AIM-listed shares at 31 December 2020.
This assessment also considered the operating performance of the Company during 2020 which included delivery of reactors and
catalyst to an existing commercial customer, progress being made on our reference projects and new external funding obtained.
Whilst there was clear evidence of the Company’s progress during 2020, Management also considered the wider economic
environment and increased risks posed by the COVID-19 pandemic.
Critical estimates and judgements
In assessing whether there is any indication that an asset may be impaired or whether a reversal of prior year impairments is
required, the Company considers, as a minimum, a number of indicators. In 2020, the Company considered:
At 31 December 2020, whether the carrying amount of the Company’s net assets was above or below Velocys plc’s market
capitalisation;
Whether significant increases or decreases in the market price of the assets had occurred;
Whether there were significant favourable or adverse changes in the extent or manner in which the assets are being used; and
Whether there were significant favourable or adverse changes in the global market for sustainable aviation fuel and global
economic factors more generally.
Based on the 2020 analysis, the Company concluded that no further impairment was required.
As detailed in the accounting policy set out above, the Company is considered to operate as a single CGU. Whilst the Company’s
strategy and biorefinery development plans are clearly defined, Management considers that it is still too early to rely upon its 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 previous years.
The Company also decided not to reverse prior year impairments as at 31 December 2020, despite the market capitalisation exceeding
the carrying amount of the Company’s net assets, as the Board concluded that the Company’s current commercial position, without
any significant new customer contracts or additional investors into the reference projects outweighed the other positive aspects
considered.
2020
Cost
At 1 January 2020
Additions
Disposals
Foreign exchange movement
At 31 December 2020
Accumulated amortisation and impairment
At 1 January 2020
Charge for the year
Disposals
Foreign exchange movement
At 31 December 2020
Net book amount
At 31 December 2020
Goodwill
£’000
In-process
technology
£’000
Patents,
licence and
trademarks
£’000
Software
£’000
7,398
–
–
–
7,398
7,398
–
–
–
7,398
–
23,681
–
–
–
23,681
23,681
–
–
–
23,681
1,598
513
(103)
(37)
1,971
1,154
137
(31)
(29)
1,231
–
740
96
–
–
–
96
96
–
–
–
96
–
Total
£’000
32,773
513
(103)
(37)
33,146
32,329
137
(31)
(29)
32,406
740
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2019
Cost
At 1 January 2019
Additions
Disposals
Foreign exchange movement
At 31 December 2019
Accumulated amortisation and impairment
At 1 January 2019
Charge for the year
Disposals
Foreign exchange movement
At 31 December 2019
Net book amount
At 31 December 2019
Goodwill
£’000
In-process
technology
£’000
Patents,
licence and
trademarks
£’000
Software
£’000
7,398
–
–
–
7,398
7,398
–
–
–
7,398
–
23,681
–
–
–
23,681
23,681
–
–
–
23,681
1,580
394
(291)
(85)
1,598
1,223
112
(104)
(77)
1,154
–
444
96
–
–
–
96
96
–
–
–
96
–
Total
£’000
32,755
394
(291)
(85)
32,773
32,398
112
(104)
(77)
32,329
444
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 considered but nothing
applied subsequent to the impairment review (see note 17).
An impairment loss in respect of property, plant and equipment would be 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.
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.
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Notes to the consolidated financial statements (continued)
18. Property, plant and equipment (continued)
2020
Cost
At 1 January 2020
Additions
Transfers to plant and machinery
Foreign exchange
At 31 December 2020
Accumulated depreciation and impairment
At 1 January 2020
Charge for the year
Impairment
Disposals
Foreign exchange
At 31 December 2020
Net book amount
At 31 December 2020
2019
Cost
At 1 January 2019
Additions
Transfers to plant and machinery
Foreign exchange
At 31 December 2019
2019
Accumulated depreciation and impairment
At 1 January 2019
Charge for the year
Impairment
Transfer to plant and machinery
Foreign exchange
At 31 December 2019
Net book amount
At 31 December 2019
Assets under
construction
£’000
982
–
(982)
–
–
–
–
–
–
–
–
–
Assets under
construction
£’000
532
621
(171)
–
982
Assets under
construction
£’000
33
–
–
(33)
–
–
982
Land
£’000
1,299
–
–
(78)
1,221
1,142
–
–
–
(68)
1,074
Plant and
machinery
£’000
8,281
342
982
(298)
9,307
7,686
500
–
–
(211)
7,975
Total
£’000
10,562
342
–
(376)
10,528
8,828
500
–
–
(279)
9,049
147
1,332
1,479
Land
£’000
1,285
–
–
14
1,299
Land
£’000
706
–
439
–
(3)
1,142
157
Plant and
machinery
£’000
7,841
158
171
111
8,281
Plant and
machinery
£’000
7,100
568
–
33
(15)
7,686
Total
£’000
9,658
779
–
125
10,562
Total
£’000
7,839
568
439
–
(18)
8,828
595
1,734
As at 31 December 2020, the Company had not entered into any contractual commitments for the material acquisition of property,
plant and equipment (2019: none).
As at 31 December 2020, the gross carrying amount of fully depreciated property, plant and equipment still in use was £3,827,000.
19. Leases
The Company leases certain building and equipment under non-cancellable leases with varying lease terms. Until the 2018 financial
year, leases of property, plant and equipment were classified as either finance leases or operating leases under the principles of
IAS 17 Leases. As a result of the adoption of IFRS 16 on 1 January 2019, the company recognised a right-of-use asset and a lease
liability on the Balance Sheet. These liabilities were measured at the present value of the remaining lease payments, discounted using
the lessee’s incremental borrowing rate as of 1 January 2019. The weighted average lessee’s incremental borrowing rate applied to the
lease liabilities on 1 January 2019 was approximately 21%.
The Company is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in
the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability
is reassessed and adjusted against the right-of-use asset.
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Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements
do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not
be used as security for borrowing purposes. Building leases are typically for a fixed period of time but may have extension options.
Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so
as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
The associated right-of-use assets for property leases were measured on a retrospective basis as if the new rules had always been
applied. Other right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or
accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. There were no onerous lease
contracts that would have required an adjustment to the right-of-use assets at the date of initial application.
To determine the incremental borrowing rate, the Company uses a build-up approach that starts with a risk-free interest rate adjusted
for credit risk for leases, which does not have recent third party financing, and makes adjustments specific to the lease, e.g. term,
country, currency and security. The Company is exposed to potential future increases in variable lease payments based on an index or
rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate
take effect, the lease liability is reassessed and adjusted against the right-of-use asset. Interest expense (included in finance costs)
was £142,000 (2019: £196,000).
Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis.
Impairment of right-of-use assets is accounted for under IAS 36.
Payments associated with short-term leases and all leases of low-value assets are recognised on a straight-line basis as an expense
in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Expense related to short term leases and lease
of low-value was £2,000 (2019: £2,000) and were included in administrative expenses.
Critical estimates and judgements
Leases - Estimating the incremental borrowing rate
The Company cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (“IBR”) to
measure lease liabilities. The IBR is the rate of interest that the Company would have to pay to borrow over a similar term, and with a
similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.
The IBR therefore reflects what the Company ‘would have to pay’, which requires estimation when no observable rates are available
(such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and
conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The Company estimates the IBR
using a build-up approach as stated above. The incremental borrowing rate is not sensitive to changes as a 10% movement in the IBR
does not have a material impact on the lease liability.
Leases - Determining the lease term of contracts with renewal and termination options
The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to
extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is
reasonably certain not to be exercised.
The Group has several lease contracts that include extension and termination options. The Group applies judgement in evaluating
whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant
factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the
Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its
ability to exercise or not to exercise the option to renew or to terminate.
www.velocys.com
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Notes to the consolidated financial statements (continued)
19. Leases (continued)
The balance sheet presents the following amounts relating to its right-to-use assets:
Cost
At 1 January 2020
Transfers to Buildings
Additions
Foreign exchange
At 31 December 2020
Accumulated depreciation
At 1 January 2020
Charge for the year
Foreign exchange
At 31 December 2020
Net Book value
At 31 December 2020
Cost
At 1 January 2019
Additions
Foreign exchange
At 31 December 2019
Accumulated depreciation
At 1 January 2019
Charge for the year
Foreign exchange
At 31 December 2019
Net Book value
At 31 December 2019
Equipment
£’000
Buildings
£’000
168
(35)
85
(8)
210
63
63
(4)
122
88
1,096
35
211
(28)
1,314
365
399
(15)
749
565
Equipment
£’000
Buildings
£’000
168
–
–
168
–
63
–
63
105
870
208
18
1,096
–
351
14
365
731
Total
£’000
1,264
–
296
(36)
1,524
428
462
(19)
871
653
Total
£’000
1,038
208
18
1,264
–
414
14
428
836
Additions to right-to-use assets during 2020 of £296,000 (2019: £208,000) mainly related to the expansion of the Company’s office
space within the Oxford Science Park, UK.
Lease liability
Current
Non-Current
20. Trade and other receivables
Trade receivables
Deferred costs
Prepaid costs
Grants receivable
Other receivables
Total
2020
£’000
470
270
740
2020
£’000
110
4,947
531
290
304
6,182
2019
£’000
581
343
924
2019
£’000
37
1,054
447
–
99
1,637
Trade receivables represent assets that are held for collection of contractual cash flows and those cash flows represent solely
payments of principal and interest. Trade receivables, in general, are collected within 45 days of invoice date.
Deferred costs are in respect of the Red Rock Biofuels customer contract, for which the Company has deferred revenue as shown in note
29.
Trade receivables and deferred costs (contract assets) are written off where there is no reasonable expectation of recovery. Indicators
that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with
the Company, and a failure to make contractual payments for a period of greater than 90 days past due.
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Impairment losses on trade receivables and contract assets are presented as net impairment losses within administrative expenses
in the income statement. Subsequent recoveries of amounts previously written off are credited against the same line item.
Grants receivable relate to the Stage Two grant funding for the Altalto waste-to-jet fuels project from the UK Department for Transport
(“DfT”), under the Future Fuels for Flight and Freight Competition (“F4C”). The DfT has made £500,000 of the Stage Two grant available
to the Company. As at 31 December 2020 the Company had completed the project milestones to qualify for the first tranche of
£290,000 to be paid, which was received in January 2021.
As at 31 December 2020 other receivables consist of vendor deposits and sales taxes recoverable. As at 31 December 2019 other
receivables mainly consisted of vendor deposits.
Critical estimates and judgements
The Company applies the IFRS 9 simplified approach to measuring Expected Credit Loss (“ECL”), which uses a lifetime expected loss
allowance for trade receivables. To measure the ECL, trade receivables have been grouped based on shared credit risk characteristics
and the days past due. The Company will adjust its analysis based on the historical credit loss. The Company’s historical credit loss
experience may also not be representative of customer’s actual default in the future. As part of the ECL analysis, it was noted that
trade receivables are considered to be both short term and low credit risk and as such any provision would be trivial.
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
Work in progress
Finished goods
Total
2020
£’000
336
45
589
970
2019
£’000
1,782
1,550
–
3,332
Raw material and consumables consist of material that will be consumed in the manufacturing of reactors and catalyst. Work in
progress consists of labour associated with the manufacturing of reactors. In 2020, the Company recognised £23,000 (2019: £73,000)
of inventory in Cost of sales in the Consolidated income statement. as The majority of the inventory delivered to customers during
2020 is recorded as a deferred cost within Trade and other receivables (see note 20).
As at 31 December 2020, the Company had a total inventory provision of £653,000 (2019: £383,000). The Company recorded £270,000
(2019: -£191,000) related to slow moving inventory in the Administrative expenses line of the Consolidated income statement.
In 2019, the Company recognised a provision of £38,000 related to two cores manufactured for use in its reactors which did not meet
the Company’s specifications, and impaired test reactors totalling £123,000. The Company also reversed an impairment of £352,000
made in 2017 for a reactor that was delivered to a customer during 2019. The cost of this reactor is included in deferred costs as at 31
December 2020 and 2019 as it relates to the Red Rock Biofuels customer contract.
www.velocys.com
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Notes to the consolidated financial statements (continued)
22. Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with
original maturities of three months or less.
Cash and cash equivalents
Total
Cash and cash equivalents is denominated in UK sterling, Euros and US dollars as follows.
Cash and cash equivalents
UK sterling denominated
US dollar denominated
Euro denominated
Total
23. Trade and other payables
Trade payables
Other taxation and social security
Accruals
Total
2020
£’000
13,051
13,051
2020
£’000
6,584
6,465
2
13,051
2020
£’000
360
31
541
932
2019
£’000
4,797
4,797
2019
£’000
3,783
927
87
4,797
2019
£’000
333
45
953
1,331
Due to their short maturity, the fair value of trade and other payables is 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 (2019: 60 days or less).
24. Financial instruments
Financial assets
Financial assets are classified upon initial recognition and the classification is based on the guidance in IFRS 9. In accordance with
IFRS 9, the Company classifies its financial assets at amortised cost only if both of the following criteria are met: (i) the asset is held
within a business model with the objective of collecting the contractual cash flows and (ii) the contractual terms give rise on specified
dates to cash flows that are solely payments of principal and interest on the principal outstanding.
The Company holds cash, trade and other receivables at amortised cost in accordance with IFRS 9.
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.
Trade and other receivables (see note 20) are classified as both non-current assets and current assets. Other receivables primarily
consist of deferred costs which are outside of the scope of IFRS 9. At 31 December 2020, there were £nil (2019: £nil) non-current Trade
and other receivables.
Financial liabilities
Financial liabilities are classified in accordance with IFRS 9. The financial liabilities of the Company are measured at amortised cost.
Financial liabilities at amortised cost
Financial liabilities at amortised cost include Trade payables, all of which are current liabilities (see note 23), as well as 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.
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Financial risks
The Company’s exposure to various risks associated with the financial instruments is discussed below.
Liquidity
The Company’s cash usage is significant versus prospective future cash inflows and Velocys is reliant on the support of a small group
of major shareholders and project partners. 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.
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; and
To be in a position to take advantage of opportunities that can deliver a return to shareholders.
The Company’s revenue stream relies on the projects incorporating its technology, securing project finance. The Company’s strategy is
to take a pro-active role in this process and 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.
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. With the completion of the July 2020 fundraise (see note 25), the Company maintains sufficient
cash balances to meet anticipated requirements for the remainder of 2021. However, the Company is likely to require a further
fundraise before operating cash flows generate sufficient funds to be self-sustaining.
Additional income may come from one, or a combination of, the following sources, with agreements being actively sought from third
parties:
Additional third-party license sales, similar to the Red Rock Biofuels project;
The realisation of certain assets and the selling of non-core intellectual property;
Additional strategic investment of development capital into either or both of the Altalto Immingham Project and the Mississippi
Biorefinery Project, which are expected during the second half of 2021; and
UK or US government loans or grants.
Exchange rates
A proportion of commercial activity and development costs are US-dollar denominated. Where possible, revenue is received in US
dollars (USD) to act as a natural hedge against this exposure. Additionally, a proportion of liquid assets are held in US dollars. It should
be noted that the functional currency for Velocys plc is pounds sterling (“GBP”) as it is traded on the AIM market and head-quartered
in the UK. Currently all new equity based fundraises are completed in the UK and made in pounds sterling.
The use of financial derivatives is governed by Company policies, which are approved by the Board of directors, and which provide a set
of written principles for the management of these risks. At 31 December 2020, there were no financial derivatives (2019: £nil).
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
589
2020
Equity
£’000
543
Income
statement
£’000
62
The Company’s exposure to foreign currency risk was in respect of US dollar balances at the end of the reporting period, and
expressed in functional currency was as follows:
Cash and cash equivalents
Trade receivables
Trade payables
Debt
2020
USD
£’000
6,465
110
74
523
2019
Equity
£’000
(100)
2019
USD
£’000
–
37
201
–
www.velocys.com
174658 Velocys Annual Report Pt3b.qxp_174658 Velocys R&A Pt3b 25/05/2021 17:15 Page 80
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Notes to the consolidated financial statements (continued)
24. Financial instruments (continued)
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.
The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets
mentioned above.
Interest rates
Variations in interest rates affect only Velocys’ cash holdings, as interest on its borrowing is payable at a fixed rate. The Company
received a loan of $709,000 from the Pay-check Protection Program awarded by the Small Business Administration (“SBA”), a US
Federal Agency. The SBA program is part of the Federal stimulus package known as the CARES (Coronavirus Aid, Relief and Economic
Security) Act to offer help to small businesses in the USA during the COVID-19 crisis. This unsecured loan has been awarded to
support Velocys’ US payroll costs in the short-term. It is an unsecured loan with a 2-year maturity and 0.98% interest. No interest or
principal payments are due in the first six months. The loan is however eligible for “forgiveness”, becoming non-repayable upon
application by Velocys after 60 days from receipt if used for retaining US employees and maintaining US payroll costs of at least this
amount in the period until the end of June 2020. The Company met the criteria during 2020 and submitted its application for
“forgiveness” in January 2021.
The Company had no borrowings, other than lease liabilities, at 31 December 2019.
As far as the cash flow forecast allows for certainty, excess funds are placed on fixed rate deposits. The effect of interest rates on
exchange rates is not anticipated.
Financial assets are as follows.
Assets
Trade and other receivables excluding non-financial assets
Cash and cash equivalents
Total
Assets
Trade and other receivables excluding non-financial assets
Cash and cash equivalents
Total
Assets at
amortised costs
£’000
Assets at fair
value through
profit or loss
£’000
110
13,051
13,161
–
–
–
Assets at
amortised
costs
£’000
Assets at fair
value through
profit and loss
£’000
37
4,797
4,834
–
–
–
The credit risk of short-term investments, and cash and cash equivalents is summarised in the following table.
Short-term bank deposits, cash at bank and in hand
Aa2
Aa3
A1
Total
£’000
81
6,299
6,671
13,051
2020
%
1
48
51
100
£’000
–
1,498
3,299
4,797
Velocys plc Annual Report and Accounts 2020
31 December 2020
Total
£’000
110
13,051
13,161
31 December 2019
Total
£’000
37
4,797
4,834
2019
%
–
31
69
100
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Financial liabilities are as follows.
Financial liabilities
at amortised cost
£’000
Liabilities as per balance sheet
Borrowings 523
Trade and other payables excluding non-financial liabilities 360
Accruals 541
740
Lease liabilities
Total
£’000
523
360
541
740
31 December 2020
Total
2,164
2,164
31 December 2019
Financial liabilities
at amortised cost
£’000
Liabilities as per balance sheet
Trade and other payables excluding non-financial liabilities 378
Accruals 953
924
Lease liabilities
Total
2,255
The contractual maturity of financial liabilities is as follows.
2020
£’000
Within one year 1,524
640
Within two to five years
Total
2,164
Total
£’000
378
953
924
2,255
2019
£’000
1,912
343
2,255
The financial liabilities payable within one year, consisting primarily of trade payables and year end accruals, will be paid in
accordance with the terms of the agreements, generally 30 to 60 days.
25. 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.
At 1 January 2019
Proceeds from share issues
At 31 December 2019
Proceeds from share issues
Expenses of share issues
Proceeds from exercise of options
At 31 December 2020
* All shares have been issued, authorised and fully paid.
Number of
shares*
(thousands)
410,423
233,333
643,756
420,000
–
400
1,064,156
Ordinary
shares
£’000
4,105
2,333
6,438
4,200
–
4
10,642
Share
Premium
£’000
180,016
4,240
184,256
16,800
(1,363)
8
199,701
Ordinary shares
Ordinary shares have a par value of 1 pence. They entitle the holder to participate in dividends, and to share in the proceeds of winding
up the Company in proportion to the number of and amounts paid on the shares held.
In July 2020, Velocys completed a gross fundraise of £21.0 million (£19.6 million net of fees and expenses). This constituted a Placing,
Retail Offer and Open Offer of 419,999,957 Ordinary shares at a price of 5 pence. These shares represented 39% of the enlarged
Ordinary share capital.
In July 2019 Velocys completed a gross fundraise of £7.0 million (£6.6 million net of fees and expenses). This constituted a firm placing
of 233,333,335 Ordinary shares at a price of 3 pence with existing and new shareholders. These shares represented 36% of the
enlarged Ordinary share capital.
A total of 51,792,800 (2019: 56,870,395) options to subscribe for ordinary shares of Velocys plc have been granted and are outstanding
at 31 December 2020 under the employee option schemes operated within the Company and contracts for options granted to a limited
number of consultants. Details are given in note 15.
www.velocys.com
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Notes to the consolidated financial statements (continued)
25. 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. At 31 December 2020, the Company’s foreign
exchange reserve was a credit balance of £3,038,000 (2019: £3,289,000).
The share-based payment reserve records the IFRS 2 charge for equity settled share-based payment awards. At 31 December 2020,
the Company’s share-based payment reserve was £16,602,000 (2019: £16,225,000).
26. Commitments
The Company leases certain property, plant and equipment. The leases have varying terms, escalation clauses and renewal rights. On
renewal, the terms of the leases are renegotiated.
From 1 January 2019, the Company has recognised right-of-use assets for these leases, except for short-term and low-value leases.
Details are given in note 19. At 31 December 2020 and 31 December 2019, the Company did not have any short-term or low-value
leases with lease term greater than one month.
27. Borrowings
Borrowings comprise a loan received from the Pay-check Protection Program as part of a US Federal Government stimulus package to
support small businesses in the US during the COVID-19 crisis. It is an unsecured loan with a 2-year maturity and a fixed rate of
interest of 0.98%. See note 24 for further details including the criteria for loan “forgiveness” for which the Company applied in January
2021.
The book value and fair value of borrowings are as follows.
Book value
£’000
Fair value
£’000
Current
Unsecured government loan
152
Book value
£’000
Non-current
Unsecured government loan
371
Borrowings are repayable as follows.
2020
£’000
Fixed-rate borrowings
Expiry within 1 year 152
371
Expiry within 1-2 years
Total
523
The currency profile of the borrowings are as follows.
2020
£’000
US dollars
523
152
Fair value
£’000
371
2019
£’000
–
–
–
2019
£’000
–
28. Other liabilities
Other liabilities are comprised of contract liabilities related to the development funding received from industry partners in respect of
the UK Altalto Immingham waste-to-jet fuels project, being £474,000 as at 31 December 2020 (2019: £2,804,000).
29. Deferred revenue
Deferred revenue consists of contract liabilities as a result of instances in which the Company receives payments prior to the
satisfaction of the performance obligation, as defined in IFRS 15. Deferred revenue is allocated to the respective performance
obligations based on relative transaction prices and is recognised as the performance obligation is satisfied. Determining the
performance obligations associated with the Company’s contracts can require significant judgment.
Velocys plc Annual Report and Accounts 2020
174658 Velocys Annual Report Pt3b.qxp_174658 Velocys R&A Pt3b 25/05/2021 17:15 Page 83
The Company recognised the following liabilities associated with contracts with customers:
£’000
At 1 January 2019
Contract liabilities incurred
Released deferred revenue
At 31 December 2019
Contract liabilities incurred
At 31 December 2020
Catalyst
Reactor
2,065
499
(533)
2,031
1,155
3,186
1,949
853
–
2,802
969
3,771
License
1,199
–
–
1,199
–
1,199
Total
5,213
1,352
(533)
6,032
2,124
8,156
In 2019 the Company released deferred revenue in the amount of £533,000 in final settlement of the ENVIA loan receivable balance
representing a recovery on the impairment recorded in 2018, see note 4.
Management expects that approximately 95% of the deferred revenue as at 31 December 2020 could be recognised as revenue in
2021 if the related performance obligations are met.
30. Related parties
The participation of each of Ruffer LLP and Lansdowne Partners in the July 2020 Placing constitutes a related party transaction under
the AIM Rules as each is a substantial shareholder (within the meaning of the AIM Rules). Ruffer LLP subscribed for 88,604,000
Placing Shares at the Placing Price of 5 pence per share, and Lansdowne Partners subscribed for 60,000,000 Placing Shares at the
Placing Price. The Directors consider, having consulted with Numis Securities Limited, the Company’s nominated advisor at that time,
that the terms of the related party transaction were fair and reasonable.
Disclosures related to key management personnel can be found in the Directors’ remuneration report, see pages 36 to 40. Only the
Executive and Non-Executive Directors are recognised as being key management personnel.
31. Net cash/(debt) reconciliation
This section sets out an analysis of net cash/(debt) and the movements in net cash/(debt) for each of the periods presented.
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2020
£’000
Cash and cash equivalents 13,051
Borrowings (523)
(740)
Lease liabilities
Net cash/(debt)
11,788
Cash and cash equivalents 13,051
(1,263)
Gross debt – fixed interest rate
Net cash/(debt)
Liabilities from financing activities
11,788
Cash/bank
overdraft
£’000
6,964
(1,304)
–
(863)
4,797
9,158
(904)
Net cash/(debt) as at 1 January 2019
Cash flows
Other changes
Foreign exchange adjustments
Net cash/(debt) as at 31 December 2019
Cash flows
Foreign exchange adjustments
Net cash/(debt) as at 31 December 2020
Borrowings
£’000
(289)
281
1
7
–
(541)
18
(523)
Leases
£’000
(1,038)
114
–
–
(924)
161
23
(740)
Sub-total
£’000
(1,327)
395
1
7
(924)
(380)
41
(1,263)
13,051
11,788
Other changes include non-cash movements, including accrued interest expense which will be presented as operating cash flows in
the statement of cash flows when paid.
www.velocys.com
2019
£’000
4,797
–
(924)
3,873
4,797
(924)
3,873
Total
£’000
5,637
(909)
1
(856)
3,873
8,778
(863)
174658 Velocys Annual Report Pt3b.qxp_174658 Velocys R&A Pt3b 25/05/2021 17:15 Page 84
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Notes to the consolidated financial statements (continued)
32. Post financial position events
The following events took place after 31 December 2020.
F4C grant from the Department for Transport
In January 2021, the Company received £290,000 of grant funding for the Altalto waste-to-fuels project from the UK Department for
Transport (“DfT”), under the Future Fuels for Flight and Freight Competition (“F4C”). The DfT made a total of £0.5m available to
Velocys under Phase Two of the scheme and the Company expects to receive the remaining £210,000 in the first half of 2021 subject
to completion of project milestones.
US SBA loan forgiveness application
In April 2020, the Company received a $709,000 (£567,000) loan from the Pay-check Protection Program awarded by the Small
Business Administration (“SBA”), a US Federal Agency. The SBA program is part of the Federal stimulus package known as the CARES
(Coronavirus Aid, Relief and Economic Security) Act to offer help to small businesses in the USA during the COVID-19 crisis. This
unsecured loan was awarded to support Velocys’ US payroll costs in the short-term. It is an unsecured loan with a 2-year maturity
and 0.98% interest. No interest or principal payments are due in the first six months. The loan is however eligible for “forgiveness”,
becoming non-repayable upon application by Velocys after 60 days from receipt if used for retaining US employees and maintaining
US payroll costs of at least this amount in the period until the end of June 2020. Velocys met the forgiveness criteria and submitted
its application to the SBA in January 2021.
Altalto Joint Development Agreement
In January 2021, by mutual consent of the parties to the Altalto Joint Development Agreement, Shell International Petroleum
Company Limited (“Shell”) withdrew from the agreement. Velocys and British Airways plc (“British Airways”) will continue to work
together in order to secure finance for the Altalto Immingham plant. Shell will no longer have an option over shares in Altalto Limited
(a subsidiary of the Company), nor any rights or obligations in relation to the Altalto project. The Altalto project has no immediate
funding calls and will continue according to its existing development plan. There is no direct financial impact on Altalto or Velocys as
a result of these changes.
Collaboration Agreement with Toyo Engineering Corporation
In February 2021, the Company announced the signing of a collaboration agreement with Toyo Engineering Corporation (“Toyo”) to
start the development of their commercial projects to produce sustainable aviation fuel and other renewable fuels in Japan. The
agreement follows on from the successful work already conducted in 2020 between Velocys and Toyo at the biomass-to-jet-fuel
demonstration facility in Japan. The Company will grant an exclusive right for Toyo to secure and use the licence and technical
services of the Velocys Fischer-Tropsch technology for a commercial plant in Japan. An advance deposit of $4.0m (£3.0m) was
received in 2019 of which $3.5m (£2.6m) remains in escrow, which will be offset against future revenues.
Grant of share options to Executives and employees
In February 2021, the Company granted options under the 2012 Share Option Scheme totalling 14,088,205 to Executives and senior
management in respect of 2020 performance and options totalling 500,000 to new employees who joined the Company during 2020.
The exercise price was set at the time of grant at 7.86 pence being the highest of the share price at the last fund raising, the share
price on the date of grant and the weighted average share price for the month prior to grant. The Executive Directors, Mr. Wareborn
and Mr. Morris received a total of 3,264,503 and 2,938,053 options respectively, allocated equally between time-based and
performance-based options.
Extension of the Altalto option agreement
In March 2021, the Company announced that it has agreed with British Airways to extend the Altalto option agreement to 31 March
2022. Exercise of the option would give both parties, Velocys and British Airways, equal equity ownership (50/50) of Altalto Ltd and
the right to appoint a director. There is no impact on the financial results for the year ended 31 December 2020.
Velocys plc Annual Report and Accounts 2020
174658 Velocys Annual Report Pt3c.qxp_174658 Velocys Annual Report Pt3c 25/05/2021 17:16 Page 85
Velocys plc statement of financial position
as at 31 December 2020
Assets
Non-current assets
Investments in subsidiaries
Property, plant and equipment
Current assets
Trade and other receivables
Current income tax asset
Cash and cash equivalents
Total assets
Liabilities
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
Total equity
Note
9
8
10
6
11
13
13
13
2020
£’000
9,121
10
9,131
9,805
595
6,870
17,270
26,401
(341)
(341)
26,060
10,642
199,701
16,345
(195,428)
(5,200)
26,060
85
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2019
£’000
9,121
27
9,148
1,400
539
1,492
3,431
12,579
(1,088)
(1,088)
11,491
6,438
184,256
16,225
(185,563)
(9,865)
11,491
The notes on pages 88 to 94 are part of these parent company financial statements.
The financial statements on pages 85 to 94 were approved by the Board of directors on 14 May 2021 and signed on its behalf by:
Henrik Wareborn
Chief Executive Officer
Company number 05712187
www.velocys.com
174658 Velocys Annual Report Pt3c.qxp_174658 Velocys Annual Report Pt3c 25/05/2021 17:16 Page 86
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Velocys plc statement of changes in equity
for the year ended 31 December 2020
Balance at 1 January 2019
Net loss for the year
Total comprehensive expense
Transactions with owners
Share-based payments – value of employee
services
Proceeds from share issues
Total transactions with owners
Balance at 31 December 2019
Net loss for the year
Total comprehensive expense
Transactions with owners
Share-based payments – value of employee
services
Proceeds from share issues
Proceeds from options exercised
Total transactions with owners
Called up
share capital
£’000
4,105
–
–
–
2,333
2,333
6,438
–
–
–
4,200
4
4,204
Share
premium
account
£’000
180,016
–
–
–
4,240
4,240
Share-based
payment
reserve
£’000
Accumulated
losses
£’000
16,143
(185,563)
–
–
82
–
82
(9,865)
(9,865)
–
–
–
184,256
16,225
(195,428)
–
–
–
15,437
8
15,445
–
–
120
–
–
120
(5,200)
( 5,200)
–
–
–
–
Balance at 31 December 2020
10,642
199,701
16,345
(200,628)
The notes on pages 88 to 94 are part of these parent company financial statements.
Total
equity
£’000
14,701
(9,865)
(9,865)
82
6,573
6,655
11,491
( 5,200)
( 5,200)
120
19,637
12
19,769
26,060
Velocys plc Annual Report and Accounts 2020
Velocys plc Annual Report and Accounts 2020
174658 Velocys Annual Report Pt3c.qxp_174658 Velocys Annual Report Pt3c 25/05/2021 17:16 Page 87
Velocys plc statement of cash flows
for the year ended 31 December 2020
Cash flows from operating activities
Operating loss before tax
Depreciation of property, plant and equipment
Impairment of investments in subsidiaries
Impairment of loans due from subsidiaries
Share based payments
Changes in working capital:
Trade and other receivables
Trade and other payables
Cash consumed by operations
Tax credit received
Net cash used in operating activities
Cash flow from investing activities
Loans (advanced to)/received from subsidiary undertakings
Purchase of property, plant and equipment
Interest received
Net cash generated from investing activities
Cash flows from financing activities
Proceeds from issues of shares
Costs of issuing shares
Proceeds from exercise of options
Net cash generated from financing activities
Net movement 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
The notes on pages 88 to 94 are part of these parent company financial statements.
Note
8
9
10
8
13
13
2020
£’000
(5,398)
17
–
1,756
120
(117)
(747)
(4,369)
539
(3,830)
(10,044)
–
–
(10,044)
21,000
(1,363)
12
19,649
5,775
1,492
(397)
6,870
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2019
£’000
(10,200)
6
3,322
127
16
(1,523)
1,013
(7,239)
384
(6,855)
66
(33)
53
86
7,000
(427)
–
6,573
(196)
1,803
(115)
1,492
www.velocys.com
174658 Velocys Annual Report Pt3c.qxp_174658 Velocys Annual Report Pt3c 25/05/2021 17:16 Page 88
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Notes to the financial statements of Velocys plc
1. General information
Velocys plc is a 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”. The securities of Velocys plc are traded on AIM, as described in note 1 of the
consolidated financial statements.
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. An additional accounting policy for the parent company, in respect of its investments in
subsidiaries, is disclosed in note 9. 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 57 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 £5,200,000 (2019: loss £9,865,000).
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 note 2 of the consolidated financial
statements.
Accounting developments
New and amended standards adopted by the parent company
There are no standards that are not yet effective and that would be expected to have a material impact on Velocys plc in the current or
future reporting periods or on foreseeable future transactions.
Financial risk management policies
Financial risk management policies are set out in the Strategic report on pages 23 to 26, and in note 24 of the consolidated financial
statements.
Capital management policies
Capital management policies are set out in note 24 of the consolidated financial statements.
3. Critical accounting estimates and judgements
In applying the parent company’s relevant 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
Trade and other receivables
Share based compensation
Note
9
10
12
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’s 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 in
subsidiaries. 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
Impairment of loans due from subsidiaries
Total
Velocys plc Annual Report and Accounts 2020
Velocys plc Annual Report and Accounts 2020
2020
£’000
–
(1,756)
(1,756)
2019
£’000
(3,322)
(127)
(3,449)
174658 Velocys Annual Report Pt3c.qxp_174658 Velocys Annual Report Pt3c 25/05/2021 17:16 Page 89
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At the end of 2020 and 2019, the parent company reviewed for impairment its investments in subsidiaries by reference to the
respective closing market capitalisation value. It concluded that no impairment was required as at 31 December 2020 as the market
capitalisation value significantly exceeded the book value of its investments in subsidiaries. As a result of the same analysis in 2019,
Velocys plc recorded an impairment of £3,322,000 related to its investment in subsidiaries.
The parent company recorded a total loss allowance at 31 December 2020 of £1,883,000 (2019: £127,000) in respect of loans made to
subsidiaries, following an assessment of expected credit losses. Further details are set out in note 10.
5. Revenue
The parent company generates revenue through contracts with its subsidiary companies to provide a licence for the use of its
intellectual property associated with the catalyst and reactors both of which have been specifically designed and over which the
parent company and its subsidiaries hold a significant number of patents. Royalties are invoiced and paid in accordance with the
underlying licence agreements which state Velocys plc will share in 50% of the licence fees earned by its subsidiaries.
For the year ended 31 December 2020, the parent company recognised royalty revenue of £nil (2019: £584,000).
6.
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
2020
£’000
–
(595)
(595)
(595)
2019
£’000
202
(539)
(337)
(337)
Due to the availability of losses incurred in the year, there is no charge to corporation tax. The parent company recognised £595,000
for R&D tax credits in 2020 (2019: £337,000).
The actual tax credit for the current and previous year is lower (2019: lower) than the theoretical amount that would arise using the tax
rate for the reasons set out in the following reconciliation.
Loss before income tax
Tax calculated at domestic tax rates applicable to losses
Tax effects of:
Expenses not deductible for tax purposes
Impairment loss not deductible for tax purposes
Remeasurement of deferred tax for changes in tax rates
Unutilised/(utilised) tax losses
R&D tax credit
Income tax total
2020
£’000
(5,795)
(1,101)
1
335
(700)
1,465
(595)
(595)
2019
£’000
(10,200)
(1,938)
2
655
–
1,281
(337)
(337)
In 2020, the impairment loss not deductible for tax purposes represents the loss allowance recorded on loans due from subsidiaries
as described in note 10. In 2019, the impairment loss related to the impairment of investment in subsidiaries as described in note 9.
The applicable tax rate was 19% (2019: 19%).
In the Spring Budget 2020, the UK Government announced that from 1 April 2020 the UK corporation tax rate would remain at 19%
(rather than reducing to 17%, as previously enacted). This new law was substantively enacted on 17 March 2020 so the unrecognised
UK deferred tax balances have been measured at 19% (recognised: £nil). In the Spring Budget 2021, the UK Government announced
that the headline UK corporation tax rate would increase from 19% to 25% from 1 April 2023 on profits in excess of £250,000. A small
profits rate of 19% will apply to profits of £50,000 or less and for companies with profits in between these amounts there will be a
gradual increase in the effective corporation tax rate. As this new law had not been substantively enacted at the balance sheet date
current tax is calculated at 19%.
www.velocys.com
174658 Velocys Annual Report Pt3c.qxp_174658 Velocys Annual Report Pt3c 25/05/2021 17:16 Page 90
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Notes to the financial statements of Velocys plc (continued)
7. Deferred tax
The parent company has not recognised a deferred tax asset or liability in 2020 (2019: £nil).
Unrecognised
Deferred tax assets
Trading losses
Share based payments
Total
2020
£’000
(7,354)
(321)
(7,675)
2019
£’000
(5,952)
–
(5,952)
At 31 December 2020, the parent company had a net unrecognised deferred tax asset of £7,354,000 (2019: £5,952,000) arising from
trading losses since incorporation. No recognition of the net deferred tax asset has been made at 31 December 2020 (2019: £nil) 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.
100% of the unrecognised deferred tax asset in respect of trading losses (2019: 100%) is anticipated to remain available indefinitely
to offset against future taxable trading profits.
The unrecognised deferred tax asset of £321,000 (2019: £nil) in respect of share based payments is calculated by reference to the
intrinsic value of outstanding share options as at 31 December.
8. 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 considered but nothing
applied subsequent to the impairment review.
An impairment loss in respect of property, plant and equipment would be 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 assets carrying amount does not exceed that which
would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
2020
Cost
At 1 January 2020
Additions
At 31 December 2020
Accumulated depreciation
At 1 January 2020
Charge for the year
At 31 December 2020
Net book amount
At 31 December 2020
Velocys plc Annual Report and Accounts 2020
Velocys plc Annual Report and Accounts 2020
Furniture and
Fixtures
£’000
Total
£’000
33
–
33
6
17
23
10
33
–
33
6
17
23
10
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Cost
At 1 January 2019
Additions
At 31 December 2019
Accumulated depreciation
At 1 January 2019
Charge for the year
At 31 December 2019
Net book amount
At 31 December 2019
Furniture and
Fixtures
£’000
Total
£’000
–
33
33
–
6
6
27
–
33
33
–
6
6
27
In 2019, Velocys plc purchased furniture and fixtures for its offices.
Investments in subsidiaries
9.
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 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.
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.
An impairment assessment was carried out on the parent company’s investment in subsidiaries at 31 December 2020 and no
impairment was indicated. Velocys plc used the total value of its equity based on the AIM-listed shares of Velocys plc for calculating
the recoverable amount, consistent with the impairment analysis performed in the prior year. 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 lower than the recoverable amount, determined by fair value
less costs of disposal. In the previous year, the assessment indicated that the carrying value of the investments in subsidiaries was
higher than the recoverable amount by £3,322,000 and therefore an impairment was recorded.
The parent company also decided not to reverse prior year impairments at 31 December 2020, despite the market capitalisation value
exceeding the carrying amount of its investments in subsidiaries, as concluded that the current commercial position of the Velocys
group, without any significant new customer contracts or additional investors into the reference projects, alongside the continuing
economic impact of the COVID-19 pandemic outweighed the other positive aspects considered.
Impairments recorded in Velocys plc’s individual financial statements are eliminated through consolidation.
2020
Capital
contributions to
subsidiaries
£’000
Total
Capital
investment in contributions to
subsidiaries
£’000
subsidiaries
£’000
2019
Total
investment in
subsidiaries
£’000
Investments in subsidiaries
At 1 January
Capital contributions
Impairment of subsidiaries
At 31 December
9,121
–
–
9,121
9,121
–
–
9,121
12,377
66
(3,322)
9,121
12,377
66
(3,322)
9,121
www.velocys.com
174658 Velocys Annual Report Pt3c.qxp_174658 Velocys Annual Report Pt3c 25/05/2021 17:16 Page 92
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Notes to the financial statements of Velocys plc (continued)
Investments in subsidiaries (continued)
9.
Velocys plc has direct investments in the following subsidiary undertakings.
Country of
incorporation or principal
Subsidiary undertakings business address
Principal activity
% Holding
(all ordinary
share capital)
Velocys Technologies Limited* England and Wales
Exploitation of platform catalyst technologies
Velocys (USA Holdings) LLC** Ohio, USA
Holding company for US subsidiaries
Altalto Ltd* England and Wales
UK reference project operations
Velocys Projects Ltd* England and Wales
UK reference project operations
Oxford Catalysts Trustees Limited* England and Wales
Holds assets and makes distributions in respect
of employee remuneration
100
100
100
100
100
The following companies are indirectly owned subsidiaries of the parent company whose immediate parent is not Velocys plc.
Country of
incorporation or principal
Subsidiary undertakings business address
Velocys, Inc.** 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
Altalto Immingham Holdings Ltd* England and Wales
UK reference project operations
Altalto Immingham Ltd* England and Wales
UK reference project operations
% Holding
(all ordinary
share capital)
100
100
100
100
100
The following are dormant subsidiaries.
Dormant subsidiaries Incorporated
Immediate parent
% Holding
Oxford Catalysts UK Limited* England and Wales
Velocys Project Solutions, LLC*** Delaware, USA
Velocys Renewables LLC** Ohio, USA
Ashtabula Energy, LLC*** Delaware, USA
Bayou Fuels One LLC Delaware, USA
Bradford GTL LLC*** Delaware, USA
JAB Land-Ashtabula** Ohio, USA
Susquehanna GTL LLC*** Delaware, USA
Westlake GTL, LLC** Delaware, USA
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
* Located at Magdalen Centre, Robert Robinson Avenue, The Oxford Science Park, Oxford, OX4 4GA, UK.
** Located at 7950 Corporate Boulevard, Plain City, OH 43064, USA.
***Located at 2603 Augusta Drive, Suite 1175, Houston, TX 77057, USA.
10. Trade and other receivables
Trade and other receivables – current
Amounts due from group undertakings
Total
2020
£’000
175
9,630
9,805
100
100
100
100
100
100
100
100
100
2019
£’000
58
1,342
1,400
Amounts due from group undertakings consist of loans with subsidiaries. All amounts are unsecured and are not repayable on
demand. The loans automatically renew for a period of twelve months from the anniversary date of 1 January each year. Interest is
charged on all intercompany loans at 5%.
A loss allowance of £1,756,000 was recognised in relation to the loans made to subsidiaries (2019: £127,000). At 31 December 2020
the total loss provision was £1,883,000 (2019: £127,000).
Critical estimates and judgements
The parent company applies the general approach under IFRS9 when measuring Expected Credit Loss (“ECL”) on loans with
subsidiaries.
Velocys plc Annual Report and Accounts 2020
Velocys plc Annual Report and Accounts 2020
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In accordance with IFRS9, the parent company determined that there had not been a significant increase in credit risk during the year
and the loans were categorised as stage 1. A probability of default of 29.76% was applied, based on external market data for corporate
bond default rates for CCC/C grade bonds. Further analysis was performed to determine a loss given default for each loan, taking into
account the available liquid assets of the respective subsidiaries.
11. Trade and other payables: current
Trade payables
Accruals
Amounts due to group undertakings
Total
2020
£’000
95
246
–
341
2019
£’000
62
135
891
1,088
Due to their short maturity, the fair value of trade and other payables is 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 (2019: 60 days or less).
Amounts due to group undertakings consists of loans with subsidiaries. All amounts are unsecured and have no fixed date of
repayment. Interest is charged on all intercompany loans at 5%.
12. 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 24 to the
consolidated financial statements).
Financial risks
The risks that the parent company faces are intrinsically linked to those of the Company, see note 24 to the consolidated financial
statements. No mitigation of this risk is taken at parent company level.
Financial assets and liabilities are held at amortised costs and are as follows.
Assets
Cash and cash equivalents
Trade and other receivables excluding non-financial assets
Loans receivable from subsidiaries
Liabilities
Trade and other payables excluding non-financial liabilities
Loans payable to subsidiaries
2020
£’000
6,870
175
9,630
2020
£’000
95
–
2019
£’000
1,492
53
1,342
2019
£’000
62
891
In 2020 and 2019, no share options were exercised which resulted in an obligation for the parent company to fund the Employee
Benefit Trust. For additional information related to Share-based payments, see note 15 to the consolidated financial statements.
13. Called up share capital
Disclosures in respect of the share capital of Velocys plc are provided in note 25 to the consolidated financial statements.
14. Commitments
The parent company has no right-of-use asset leases (2019: nil) and no capital commitments (2019: nil).
15. 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 parent company operates various defined contribution pension schemes for its employees. The parent 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 parent company has no further payment obligations once the contributions have been paid.
www.velocys.com
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Notes to the financial statements of Velocys plc (continued)
15. Employee benefit expense (continued)
Employees
The average monthly number of employees (including Executive Directors) was as follows.
Administration
Total average headcount
Their aggregate remuneration comprised the following items.
Wages and salaries
Short-term non-monetary benefits
Social security contributions and similar taxes
Defined contribution pension costs
Share-based payments granted to directors and employees
Total remuneration
2020
number
2019
number
6
6
2020
£’000
1,090
26
204
48
37
1,405
6
6
2019
£’000
303
–
31
20
16
370
Directors’ remuneration
Details of the remuneration paid to directors of the parent company are provided in the Directors’ remuneration report on
pages 36 to 40.
Auditors’ remuneration
Details of remuneration paid for the audit of the parent company are disclosed in note 11 to the consolidated financial statements.
16. Related parties
The participation of each of Ruffer LLP and Lansdowne Partners in the July 2020 Placing constitutes a related party transaction under
the AIM Rules as each is a substantial shareholder (within the meaning of the AIM Rules). Ruffer LLP subscribed for 88,604,000
Placing Shares at the Placing Price of 5 pence per share, and Lansdowne Partners subscribed for 60,000,000 Placing Shares at the
Placing Price. The Directors consider, having consulted with Numis Securities Limited, the nominated advisor at that time, that the
terms of the related party transaction were fair and reasonable.
17. Post financial position events
The following events took place after 31 December 2020.
Grant of share options to Executives and employees
In February 2021, the Company granted options under the 2012 Share Option Scheme totalling 14,088,205 to Executives and senior
management in respect of 2020 performance and options totalling 500,000 to new employees who joined the Company during 2020.
The exercise price was set at the time of grant at 7.86 pence being the highest of the share price at the last fund raising, the share
price on the date of grant and the weighted average share price for the month prior to grant.
The Executive Directors, Mr. Wareborn and Mr. Morris received a total of 3,264,503 and 2,938,053 options respectively, allocated
equally between time-based and performance-based options.
Velocys plc Annual Report and Accounts 2020
Velocys plc Annual Report and Accounts 2020
Directors, secretary and advisors to the Company
Registered office
Velocys
Magdalen Centre
Robert Robinson Avenue
The Oxford Science Park
Oxford
OX4 4GA
Velocys plc registration no.
05712187
Directors
Philip Holland (Non-Executive Chairman)
Henrik Wareborn (Chief Executive Officer)
Andrew Morris (Chief Financial Officer)
Sandy Shaw (Senior Independent Director)
Darran Messem (Non-Executive Director)
Company secretary
Jeremy Gorman
Nominated advisors and joint brokers
Panmure Gordon (UK) Limited
One New Change
London
EC4M 9AF
Joint brokers
Shore Capital Stockbrokers Limited
Cassini House
57-58 St James’s Street
London
SW1A 1LD
Registrars
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds
LS1 4DL
Bankers
Barclays Bank Plc
Wytham Court
11 West Way
Oxford
OX2 0JB
Public relations
Field Consulting Limited
Second Floor
38 St Martins Lane
London
WC2N 4ER
Investor relations
Radnor Capital Partners Limited
1 King Street
London
EC2V 8AU
Independent auditors
PricewaterhouseCoopers LLP
3 Forbury Place
23 Forbury Road
Reading
RG1 3JH
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www.velocys.com
ANNUAL
REPORT AND
ACCOUNTS
2020
www.velocys.com
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Velocys plc
Magdalen Centre
Robert Robinson Avenue
The Oxford Science Park
Oxford
OX4 4GA
Company Number: 05712187
+44 1865 800 821
info@velocys.com
www.velocys.com