AFC Energy Regulatory News (AFC)

3 March 2015

Embargoed until 07:00

AFC Energy PLC

("AFC Energy" or "AFC" or "the Company")

Final Results and Notice of AGM

AFC Energy (AIM: AFC), the industrial fuel cell power company, is pleased to announce its preliminary results for the year ended 31 October 2014.

FY14 Highlights

· Announced strategic partnership with Air Products PLC ("Air Products") at Stade, Germany, within the POWER-UP programme

· Invested in semi-automated manufacturing capability at Dunsfold facilities in advance of commercialisation

· Signed MoU with Allied New Technologies to evaluate feasibility of fuel cells in the US chlor-alkali market

· Foster Wheeler successfully completed HAZOP review of KORE system

· Saw initial commercial traction in South Korea with discussions ongoing

· Appointed Christopher Tawney as Finance Director and Company Secretary

· Revenue increased to £796k (2013: £768k).

· Net research and development expenditure decreased to £1.28m due to increased grant funding levels (2013: £1.48m)

· Diluted loss per share of 2.42p (2013: 1.88p)

· Net cash amounted to £4.9m as at 31 October 2014 (2013: £6.9m)

· Raised £6.1 million through placing and Open Offer

Post Period Highlights

· Appointment of Adam Bond as Chief Executive Officer

· Successful trials of 25 and 51 cell stacks and on-track for successful demonstration of 101 cell stack in Q1 2015

· Announced series of milestones to accelerate POWER-UP programme and delivery of KORE system by 18 months

Tim Yeo, Chairman of AFC Energy, commented: "2015 will be all about driving our KORE programme forward…Alongside that, we expect to make further progress in developing and monetising commercial partnerships in our target markets. We have always said that AFC Energy has world-leading technology with strong commercial appeal and the Board remains very confident that this will be proven in the coming months."

Notice of AGM

AFC Energy also today gives notice that its Annual General Meeting will be held at the offices of Eversheds LLP, 1 Wood Street, London, EC2V 7WS at 12pm on Wednesday 15 April 2015.

The Annual Report and Accounts and Notice of AGM will be sent to shareholders in March and will be available for download from the Company's website, www.afcenergy.com, in accordance with AIM Rule 20.

Directorate Change

Sir John Sunderland has decided not to stand for re-election at the forthcoming AGM and will be stepping down from the Board. Commenting on his decision Sir John said "with renewed financing in place and particularly with the new leadership being provided by Adam Bond, I step down from the AFC Board with confidence in the future direction of the company."

Tim Yeo commented "I am extremely grateful to Sir John for his wise advice and help throughout his time on our board. His contribution has been immensely valuable and very widely appreciated."

For further information, please contact:

About AFC Energy

AFC Energy plc is fast approaching commercialisation for its proven low-cost alkaline fuel cell system ("KORE"), which converts hydrogen into 'clean' electricity. AFC's key project POWER-UP will demonstrate the world's largest alkaline fuel cell system at Air Products' industrial gas plant in Stade, Germany. The date for the demonstration of the 240kW KORE system has been fast tracked to December 2015, representing the final phase of AFC's pre-commercialisation technical development programme and creating the platform for the Company's global commercial fuel cell deployment. For further information, please visit our website: www.afcenergy.com

Chairman's Statement

Due to the fund-raising carried out by the Company in October 2014 and the subsequent management and Board changes, it is deemed appropriate that comments in this statement and in subsequent sections relate to the 14-month period to 31 December 2014.

Overview

Last year the Company operated against a background of change throughout the energy industry at home and abroad. Conditions in the fossil fuel sector were particularly challenging with a sharp fall in the oil price, weakness in gas prices and mounting pressure on the coal industry to curb its greenhouse gas emissions. 

In Britain, low carbon technologies mostly fared better, although the planned revival of civil nuclear power encountered delays. The implementation of the Government's electricity market reforms established new support mechanisms for wind, solar and some other renewable forms of power generation.

If the threat of climate change is to be successfully averted then the switch to more low carbon energy now has to accelerate worldwide. The Paris Conference of Parties, to be held at the end of 2015 as the next stage in the process organised by the United Nations Framework Convention on Climate Change, will focus global attention on the need for the wider use of fiscal tools and emission reduction policy measures such as carbon pricing and carbon emissions trading.

An alkaline fuel cell of the sort which the Company is developing has the potential to contribute substantially to averting the climate change threat. Our aim is to produce low carbon energy at a competitive price without depending on subsidy from either taxpayers or consumers.

In the short term however, early-stage technologies benefit from favourable treatment, as successive governments have acknowledged through the help they have given other types of low carbon electricity generation. We hope therefore that Britain will soon follow the example of countries like the United States and South Korea in recognising the important role which alkaline fuel cells can make towards the achievement of low carbon driven economic growth.

Key developments

The Company's strategic target remains to develop and deliver efficient, commercially viable low cost alkaline fuel cell systems to the industrial marketplace within the shortest possible timeframe. In order to achieve that, continued fuel cell performance improvements, scaling-up of production and investment are all required. I am pleased to be able to report very positive developments in all three areas.

Firstly, we have now made sufficient technical progress both in relation to power output and operating temperature that we are able to freeze the electrode design and chemistry ahead of the commissioning of our larger alkaline fuel cell system (KORE) planned for mid-2015. Furthermore, during the year, we took receipt of our automated extruder, which will be integral to the production of 101 cells in each stack and our assembly robot was delivered from its manufacturer, GB Innomech. Our 'semi-automated' production line therefore began operating in the fourth quarter of 2014. Finally, in October 2014, we concluded a placing that raised £6.1 million, which significantly strengthens our ability to deliver our milestone POWER-UP programme in 2015.

All of these represent huge strides towards the validation of the KORE system technology as a prelude to commercialisation.

POWER-UP programme

This EU-funded programme represents our key strategic focus and when successfully deployed will demonstrate the world's largest alkaline fuel cell system at Air Products' industrial gas plant in Stade, Germany. POWER-UP is the final phase of AFC Energy's pre-commercialisation technical development programme and the first power generation is now expected in July 2015 ahead of full testing in December 2015.

During the year, we announced our first order (for the Beta+ fuel cell test system) from Powerhouse Energy, the waste-to-energy systems company, which will be delivered when PHE's facility comes onstream. AFC Energy will receive £150,000 from PHE for the supply of its Beta+ fuel cell test system with a deposit of £50,000 paid in the form of PHE shares and the balance becoming payable after delivery.

Two Memoranda of Understanding were signed with companies in AFC's target markets of the US and South Korea. The first with Allied New Technologies in the US to undertake a feasibility study for a fuel cell system to generate clean energy from hydrogen produced at Allied's bleach production plant in Florida. The second was with Chang Shin Chemical, a leading South Korean hydrogen supplier, for multiple fuel cell systems with a total potential generating capacity of up to 5MW. AFC then followed this with a Heads of Agreement with Daniel Inc., a fuel cell focused power plant owner and development company in South Korea, for an initial 1MW fuel cell system.

Partners

AFC added more companies to its sterling list of partners. The most recent additions to the list were Artelia, a leading European engineering, consulting and project management firm and their sub-contractors, PlantIng, a leading German process engineering consultancy. Together they will undertake all the engineering and design work associated with delivering POWER-UP to Stade. In terms of the POWER-UP "team", they join Air Products and Foster Wheeler (now Amec Foster Wheeler), the latter completing the HAZOP review for the KORE system in June 2014.

Management and Board

There were three changes at Board level during the year and three after the financial year-end.

In June, Jane Dumeresque our Finance Director and Company Secretary decided to leave the Company to pursue other interests and was replaced in September 2014 by Christopher Tawney, who has extensive experience of the cleantech and technology sectors.

In November, Ian Williamson stepped down after three years as Chief Executive and was replaced by Adam Bond, who has been a non-executive Director since May 2012. At the same time, our technical director Gene Lewis stepped down from the Board in order to focus fully on delivery of the development programme.

I should like to record the Board's thanks for Ian's insight and invaluable contribution during his time at the Company.

In addition, Sir John Sunderland, who has been a director since March 2012, is retiring at this year's Annual General Meeting. I am extremely grateful to Sir John for his wise advice and help throughout his time on our board. His contribution has been immensely valuable and very widely appreciated.

Summary

Fuel cell penetration continues to grow globally driven by increasing awareness of their inherent advantages relative to other forms of power generation. If one just considers the US market alone, dozens of Fortune 500 companies are now utilising fuel cells for both stationary and back-up power and federal and local government adoptions continue to increase. The opportunities for AFC Energy clearly remain very substantial.

Going forward, 2015 will be all about driving our KORE programme forward, where we have announced a series of technical milestones that we expect to achieve and this is covered later. Alongside that, we expect to make further progress in developing and monetising commercial partnerships in our target markets.

As usual, my thanks go to all Board members for their efforts while special thanks go to the forever hard-working employees who remain the lifeblood of the Company.

We have always said that AFC Energy has world-leading technology with strong commercial appeal and the Board remains very confident that this will be proven in the coming months.

Tim Yeo

Chairman

Strategic Report and Operational review

Chief Executive's overview

I took over as Chief Executive on 1 December 2014 having been a member of the Board as a non-executive director for just over two years. That experience has given me a strong insight into what I believe needs to be done at AFC Energy to capitalise on the tremendous opportunities available to us.

What my time at the Company has taught me is that AFC Energy is blessed with a tremendous technical team with a desire to succeed and most importantly, a technology that is unique and compelling. My primary objective from this point is to drive a renewed and intense focus on commercialisation, for which a successful POWER-UP programme is key. AFC must increasingly transition from a focus on technical development to a focus on commercial deployment in order to deliver value to shareholders.

I am acutely aware that many shareholders have felt disappointed at the Company's inability to secure material orders for its fuel cells or to take these orders forward to completion following an initial signing of MoUs - this is despite the genuine interest and desire for the product in a number of industrial and geographical markets. I hope to start rectifying this issue over the next 12 months with a growing pipeline of opportunities that our team is continuing to develop both in our target markets, and elsewhere.

The significant improvements in the technical performance of the fuel cells in 2014 has positioned the Company to accelerate the date for a commercial fuel cell demonstration of the KORE at its full design specification to the end of 2015, an improvement in the timeline of some eighteen months. Since taking over as Chief Executive, our technical teams have really began to demonstrate focus and clarity of objectives in pushing forward with this accelerated outcome, and I remain confident that we are now on the cusp of great success in 2015.

Operating Review

Technology

In last year's operating review, we reported that we had extended the electrode life in the laboratory but more importantly had made good progress in increasing the power and the longevity of the cells and in the field, achieving outputs between 20% and 30% higher than before.

These results were achieved using the standard testing deck at Dunsfold -comprising 25 fuel cells - and during 2014 three different stacks with the same electrode configuration were trialled, with a focus on achieving an operating temperature solely from the heat produced from cell reactions without a loss in cell performance. The power-to-heat ratio is a key operating parameter and is very important for extending the lifetime of any fuel cell. In addition, in a large system this will remove capital from the cost equation and improve overall system efficiency.

Pleasingly, the performance of the third stack trial saw an increase of 11.09% in electrical output relative to the first stack, producing the highest voltage output of any Beta-based fuel cell cartridge tested at AFC. The third stack was also started with a self-heating strategy and the very positive result from this trial allows AFC to freeze the electrode design and chemistry for the KORE system commissioning in mid-2015.

In early 2015, we look forward to commencing an operational performance monitoring of a 51 cell stack in an industrial environment before increasing this to 101 cells - the standard KORE size.

The progress made in 2013 in terms of preparation for higher production levels continued throughout 2014. We took delivery of an automated extruder early in the year and in the fourth quarter finally took delivery of our assembly robot from our partners GB Innomech and our production line is now "semi-automated".

The development of our patent portfolio has continued and is a vital part of securing our technology development and delivering value to our shareholders.

Funded projects

POWER-UP

This €6.1 million EU-part funded programme will be the world's first demonstration of an alkaline fuel cell system on a large scale and will prove AFC's ability to deliver the technical performance and economic viability that commercial end-users demand.

The Company has now set nine milestones it intends to achieve over the course of 2015 in relation to its programme with the key highlights being:

1. First power generation (up to 15kW) in July 2015

2. Produce commercial revenue from KORE in Q4 2015 by connecting to the German grid

3. Demonstrating 240kW power generation in December 2015

Partners

With POWER-UP being our prime area of focus in 2015, our key partnerships revolve around that project. Air Products is a key partner, given it is their gas processing plant in Stade that is the location for our first operational KORE system.

However, new to our list of partners are Artelia and PlantIng, both in Germany, who are undertaking all engineering and design work associated with delivering the POWER-UP programme on site in Stade.

In the UK we continue to work closely with GB Innomech which has developed the robotic automated stack assembly/disassembly system which enables the 101 fuel cell stack to be accurately assembled and aligned. The first round of 101 fuel cell stacks assembled utilising the automation process are expected to be transferred to Germany for initial trial in the first quarter of 2015.

Our ongoing partners continue to include Akzo Nobel, Waste2Tricity and Lancaster University.

Financial Overview

In 2014 AFC's revenue again increased to £796,000 (2013: £768,000).

Revenue for the year arose from a combination of licence fee and EU grant income. AFC continued to receive support from the EU by way of grants which strongly underpin the AFC research and development programme. Throughout the year and at the year end the Company was actively engaged in three EU funded projects, Alkammonia, Laser-Cell and POWER-UP, with the focus increasingly on POWER-UP which entails the construction and delivery of the first KORE system to an operational site in Germany. These grants continue to allow the company to strengthen its technical and production teams in preparation for commercial production. R&D spend actually decreased slightly to £1.28m (2013: £1.48m) as more costs relating to the grant funded activity was included in cost of sales.

With commercial production imminent, the Company continued to invest in plant, people and the premises at Dunsfold to facilitate the automation of production; a robot which will assemble fuel cell cartridges has been delivered to the Dunsfold site and was commissioned shortly after the year end.

Overall post tax losses to 31 October 2014 were £5.8 million (2013: £4.1 million).

In October 2014 the Company raised funds through a placing and open offer to shareholders amounting to £6.1 million before expenses; the general meeting to approve the allotment of the new shares took place on 30 October so that £1.5 million of the funds raised were not received until after the balance sheet date. Cash balances at 31 October were £4.9 million (2013: £6.9 million).

AFC continues to focus significant efforts on its IP protection and registered a number of new patents this year. Each year the registered patents are reviewed and, where appropriate, written down to a realistic carrying value.

Financial risk management objectives

Principal risks and uncertainties

The major risk faced by the business relates to the technical progress in development of the commercial fuel cell system. Financial risks include the risk of additional development expenditure being required to produce a commercial product.

Key Performance Indicators

AFC sets internal technical targets and milestones that are regularly reviewed. The Company closely monitors spending on its EU grant projects where costs are agreed ahead of the grant and measured against actual expenditure. The Company also maintains a cost model and monitors actual cost of production against expected costs and the Directors constantly review overall expenditure compared to budget and the Company's cash position. At 31 October 2014, the Company's cash balance was in line with the target set.

Cash and cash equivalents at the year-end were £4,858,203 (31 October 2013- £6,961,338).

Outlook

The fast-tracking of the delivery of the KORE and POWER-UP is a significant step forward for the Company and 2015 is likely to be a pivotal year. Our future is in our own hands and I have great confidence in the ability of our technical team to deliver what we need and for the Company as a whole to make the transition to an organization focused on commercialisation.

Our targets are ambitious, but in my view they must be and this makes it an exciting time to be a shareholder in AFC Energy. In order to ensure that my interests are fully aligned with the wider shareholder base as well as underlining my confidence in the Company, I have agreed that a large percentage of my salary will be payable in shares and not cash. I strongly believe that AFC Energy will become a huge success and my intention is to create significantly greater value for all shareholders in the years ahead.

Adam Bond

Chief Executive Officer

Statement of Comprehensive Income

for the year ended 31 October 2014

All amounts relate to continuing operations.

Statement of Financial Position

as at 31 October 2014

Statement of Changes in Equity

for the year ended 31 October 2014

Share capital is the amount subscribed for shares at nominal value.

Share premium represents the excess of the amount subscribed for share capital over the nominal value of these shares net of share issue expenses.

Other reserve represents the credit to equity in respect of equity-settled share-based payments.

Retained earnings represent the cumulative loss of the Company attributable to equity Shareholders.

Cash Flow Statement

for the year ended 31 October 2014

Notes forming part of the Financial Statements

1. Corporate information

AFC Energy plc ('the Company') is a public limited company incorporated in England & Wales and quoted on the Alternative Investment Market of the London Stock Exchange.

The address of its registered office is Finsgate, 5-7 Cranwood Street, London, EC1V 9EE.

2. Basis of preparation and accounting policies

The financial statements of AFC Energy plc have been prepared in accordance with International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs) and International Financial Reporting Interpretations Committee (IFRIC) interpretations (collectively 'IFRSs') as adopted for use in the European Union and as issued by the International Accounting Standards Board and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The accounting policies set out below have, unless otherwise stated, been applied consistently in these financial statements.

Judgements made by the Directors in the application of these accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 3.

a. New and Revised standards adopted by the Company

· IFRS 10 Consolidated Financial Statements is effective from 1 January 2013. This requires a parent to present consolidated financial statements as those of a single economic entity, replacing the requirements previously contained in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities.

· IFRS 11 Joint Arrangements is effective from 1 January 2013. The core principle of the standard is that a party to a joint arrangement determines type of joint arrangements in which it is involved by assessing the rights and obligations and accounts for those rights and obligations in accordance with the type of joint arrangement. Joint ventures now must be accounted for using the equity method. Joint operator which is a newly defined term recognises its assets, liabilities, revenues and expenses and relative shares thereof.

· IFRS 12 Disclosures of Interests with Other Entities is effective from 1 January 2013. It requires increased disclosure about the nature, risks and financial effects of an entity's relationship with other entities along with its involvement with other entities.

· IFRS 13 Fair Value Measurement is effective from 1 January 2013. It defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. It includes a three-level fair value hierarchy which prioritises the inputs in a fair value measurement.

· IAS 19 'Employee benefits' is effective for annual periods beginning on or after 1 January 2013. It changes a number of disclosure requirements for post-employment arrangements and restricts the options available on how to account for defined benefit pension plans.

· IAS 27 Separate Financial Statements. Requires that when an entity prepares separate financial statements, investments in subsidiaries, associates, and jointly controlled entities are accounted for either at cost, or in accordance with IFRS 9 Financial Instruments/IAS39 Financial Instruments: Recognition and Measurement.

· IAS 28 Investments in Associates and Joint Ventures. This standard supersedes IAS 28 Investments in Associates and prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

· The IASB issued improvement to IFRSs (2011), an omnibus of amendments to its IFRS standards. The amendments have been adopted as they become effective for annual periods on or after 1 January 2011. They include:

- Amendments to IAS 12 - Deferred tax; recovery of underlying assets

- Amendments to IAS 1 - Presentation of items of other comprehensive Income

- Amendments to IFRS 7 - Disclosures; offsetting financial assets and financial liabilities

- Amendment to IAS 32 - Offsetting financial assets and financial liabilities

- Amendments to IFRS 1 - Government Loans

There is no impact from the adoption of the above amendments on the Company's financial position or performance.

b. Standards, amendments and interpretations to published standards not yet effective

At the date of authorisation of these consolidated financial statements, the IASB and IFRIC have issued the following standards and interpretations, which are effective for annual accounting periods beginning on or after the stated effective date. These standards and interpretations are not effective for and have not been applied in the preparation of these consolidated financial statements:

· IAS 32 Financial Instruments: Presentation is effective from 1 January 2014. The standard outlines the accounting requirements for the presentation of financial instruments, particularly as to the classification of such instruments into financial assets, financial liabilities and equity instruments. The standard also provides guidance on the classification of related interest, dividends and gains/losses, and when financial assets and financial liabilities can be offset.

· IAS 36 Impairment of Assets is effective from 1 January 2014. The standard seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use).

· IAS 39 Financial Instruments: Recognition and Measurement is effective from 19 November 2013. It outlines the requirements for the recognition and measurement of financial assets, financial liabilities, and some contracts to buy or sell non-financial items.

· IFRS 9 Financial Instruments is effective from 1 January 2015. This standard includes requirements for recognition and measurement, derecognition and hedge accounting.

The Company expects no impact from the adoption of the above amendments on its financial position or performance.

c. Capital policy

The Company manages its equity as capital. Equity comprises the items detailed within the principal accounting policy for equity and financial details can be found in the Statement of Financial Position. The Company adheres to the capital maintenance requirements as set out in the Companies Act.

d. Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and other sales taxes or duty. Revenue arising from the provision of services is recognised when and to the extent that the Company obtains the right to consideration in exchange for the performance of its contractual obligations. Licence income is recognised in accordance with the substance of the agreement. When a licensee has the right to use certain technology for a specified period of time, this is usually on a straight-line basis over the life of the agreement in accordance with IAS 18. Revenue based grants are recognised in the profit and loss account in the same period as the expenditure to which the grant relates.

e. Development costs

Development expenditure does not meet the strict criteria for capitalisation under IAS 38 and has been recognised as an expense.

f. Foreign currency

The financial statements of the Company are presented in the currency of the primary economic environment in which it operates (the functional currency) which is pounds sterling. In accordance with IAS 21, transactions entered into by the Company in a currency other than the functional currency are recorded at the rates ruling when the transactions occur. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the balance sheet date.

g. Inventory and work in progress

Inventory is recorded at the lower of cost and net realisable value. Work in progress is valued at cost, less the cost of work invoiced on incomplete contracts and less foreseeable losses. Cost comprises purchase cost plus production overheads.

h. Trade and other receivables

Trade and other receivables arise principally through the provision by the Company of goods and services to customers (trade debtors). They also include other types of contractual monetary assets. These assets are initially recognised at fair value and are subsequently measured at amortised cost less any provision for impairment.

i. Loans and other receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, loans and receivables are carried at amortised cost using the effective interest method less any allowance for impairment. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

The Company's loans and receivables include cash and cash equivalents. These include cash in hand, and deposits held at call with banks.

j. Property and equipment

Property and equipment are stated at cost less any subsequent accumulated depreciation and impairment losses.

Where parts of an item of property and equipment have different useful lives, they are accounted for as separate items of property and equipment.

Leases in which the Company assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses.

Depreciation is charged to the income statement within cost of sales and administrative expenses on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows:

- Leasehold improvements 1 to 3 years- Fixtures, fittings and equipment 1 to 3 years- Vehicles 3 to 4 years

Expenses incurred in respect of the maintenance and repair of property and equipment are charged against income when incurred. Refurbishment and improvement expenditure, where the benefit is expected to be long lasting, is capitalised as part of the appropriate asset.

The useful economic lives of property, plant and equipment and the carrying value of tangible fixed assets are assessed annually and any impairment is charged to the income statement.

k. Intangible assets

Expenditure on research activities is recognised in the income statement as an expense as incurred. Expenditure in establishing a Patent is capitalised and written off over its useful life.

Other intangible assets that are acquired by the Company are stated at cost less accumulated amortisation and impairment losses.

Amortisation of intangible assets is charged using the straight-line method to administrative expenses over the following period:

- Patents 20 years

Useful lives are based on the management's estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness and any impairment is charged to the income statement.

l. Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with major banking institutions realisable within 12 months.

m. Other financial liabilities

The Company classifies its financial liabilities as:

· Trade and other payables

These are initially recognised at invoiced value. These arise principally from the receipt of goods and services. There is no material difference between the invoiced value and the value calculated on an amortised cost basis or fair value.

· Deferred income

This is the carrying value of income received from a customer in advance which has not been fully recognised in the Income Statement pending delivery to the customer. The carrying value is fair value.

n. Leases

Finance leases

Finance leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in profit or loss. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term.

Operating leases

Operating lease rentals are charged to the Income Statement on a straight-line basis over the lease term.

o. Financial assets

All of the Company's financial assets are loans and receivables and investments. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets at fair value and comprise trade and other receivables and cash and cash equivalents. Investments are accounted for at cost less impairment.

p. Financial instruments

Financial assets and liabilities are recognised on the balance sheet when the Group becomes a party to the contractual provisions of the instrument.

- Cash and cash equivalents comprise cash held at bank and short term deposits

- Trade payables are not interest bearing and are stated at their nominal value

- Equity instruments issued by the Group are recorded at the proceeds received except where those proceeds appear to be less than the fair value of the equity instruments issued, in which case the equity instruments are recorded at fair value. The difference between the proceeds received and the fair value is reflected in the share based payments reserve.

q. Valuation of derivative financial asset

The Company has placed shares with Lanstead Capital L.P. and at the same time entered into equity swap and interest rate swap agreements in respect of the subscriptions for which consideration will be received monthly over an 18 month period as disclosed in the notes to these financial statements. The amount receivable each month is dependent on the Company's share price performance. At each period end the amount receivable is restated based on the share price of the Company at that date. Any change in the value of the receivable is reflected in the income statement.

r. Share-based payment transactions

The Company awards share options and warrants to certain Directors and employees to acquire shares of the Company. The fair value of options and warrants granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the Directors and employees become unconditionally entitled to the options or warrants. The fair value of the options and warrants granted is measured using a binomial option valuation model, taking into account the terms and conditions upon which the options and warrants were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options and warrants that vest only where vesting is dependent upon the satisfaction of service and non-market vesting conditions or where the vesting periods themselves are amended by the introduction of new schemes and the absorption of earlier schemes by agreement between the Company and the relevant Directors and employees. Where options or warrants granted are cancelled, all future charges arising in respect of the grant are charged to the income statement on the date of cancellation.

s. Provisions

Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to settle the obligation. Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the balance sheet date and are discounted to present value where the effect is material.

t. Taxation

Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable or recoverable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date together with any adjustment to tax payable in respect of previous years.

Deferred tax assets are not recognised due to the uncertainty of their recovery.

3. Significant accounting estimates and judgements

Carrying values of property and equipment

The Company monitors internal and external indicators of impairment relating to its property and equipment. Management has considered whether any indicators of impairment have arisen over certain assets relating to these assets. After assessing these, management has concluded that no impairment has arisen during the year and subsequent to 31 October 2014 (2013: £Nil).

Useful lives and impairment of intangible assets, and property and equipment

Intangible assets, and property and equipment are amortised or depreciated over their useful lives. Useful lives are

based on the management's estimates of the period that theassets will generate revenue, which are periodically reviewed for continued appropriateness. After undertaking a comprehensive review of intangible assets with its patent attorneys, management has concluded that no impairment has arisen with respect to intangible assets during the year and subsequent to 31 October 2014 (2013: £118,314).

Income taxes and withholding taxes

The Company believes that its receivables for tax recoverable are adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgements about future events. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact income tax expense in the period in which such determination is made.

Capitalisation of development expenditure

The Company uses the criteria of IAS 38 to determine whether development expenditure should be capitalised. After assessing these, management has concluded it would not be appropriate to capitalise development expenditure incurred during the year ended 31 October 2014.

Share-based payments

Certain employees (including Directors and senior Executives) of the Company receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments ('equity-settled transactions').

The fair value is determined using an appropriate pricing model.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ('the vesting date'). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest. The profit or loss charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance and/or service conditions are satisfied. Where the terms of an equity-settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified. An additional expense is recognised for any modification which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

Licence fees

Licence fees are recognised on a straight line basis over the life of the licence, with payments being received in staggered instalments. Fees which are contingent on an event are recognised when the Company believes that it is probable that the event will occur.

Going Concern

The Company prepares cash flow forecasts based on current estimates of future revenues and expenditure. These are agreed by the Board and monitored against actual expenditure to ensure the Company's resources are sufficient for the directors to prepare the accounts on a going concern basis.

4. Segmental analysis

A segment is a distinguishable component of the Company that is engaged in providing products or services in a particular business sector (business segment) or in providing products or services in a particular economic environment (geographic segment), which is subject to risks and rewards that are different in those other segments. The Company operated in the year in one business segment, the development of fuel cells, and in one principal geographic segment, the United Kingdom.

5. Operating loss

This has been stated after:

6. Staff numbers and costs, including Directors

The average numbers of employees in the year were:

The aggregate payroll costs for these persons were:

7. Directors' remuneration

8. Financial income

9. Taxation

10. Loss per share

The calculation of the basic loss per share is based upon the net loss after tax attributable to ordinary Shareholders of £5,841,016 (2013: loss of £4,136,648) and a weighted average number of shares in issue for the year.

Diluted earnings per share

The diluted loss per share is the same as the basic loss per share, as the loss for the year has an anti-dilutive effect.

11. Intangible assets

For details of impairment charge, see note 3.

12. Property and equipment

For details of impairment charge, see note 3. There are no assets held under finance leases.

13. Investment

The Company holds 23% in Waste2Tricity Ltd (W2T) (a company registered in England & Wales). As at 31 October 2014 the Company held 230,000 shares representing 23% (2013: 230,000 representing 23%) of the share capital of W2T.

14. Inventory and work in progress

15. Trade and other receivables

The trade and other receivables balances are categorised as loans and other receivables. There is no significant difference between the fair value of the trade and other receivables and the values stated above.

Included above is an amount of £1,233,670 due from Lanstead Capital L.P. ('Lanstead'). In October 2014, as part of a placing and general offer to raise, in aggregate, £6,120,863 (before expenses) from new and existing shareholders, the Company initially issued 22,000,000 new ordinary shares of 0.1p each in the capital of the Company ("Ordinary Shares") at a price of 10p per share to Lanstead for £2,200,000. The Company simultaneously entered into an equity swap with Lanstead for 75 per cent of these shares with a reference price of 13.3333p per share (the "Reference Price"). The equity swap is for an 18 month period. All 22,000,000 Ordinary Shares were allotted with full rights on the date of the transaction.

Of the subscription proceeds of £2,200,000 received from Lanstead, £1,870,000 (85 per cent.) were invested by the Company in the equity swap with the remaining £330,000 (15 per cent.) available for general working capital purposes.

To the extent that the Company's volume weighted average share price is greater or lower than the Reference Price at each swap settlement, the Company will receive greater or lower consideration calculated on a pro-rata basis i.e. volume weighted average share price / Reference Price multiplied by the monthly transfer amount. As the amount of the effective consideration receivable by the Company from Lanstead under the swap agreements will vary subject to the movement in the Company's share price and will be settled in the future, the receivable is treated for accounting purposes as a derivative financial asset and has been designated at fair value through profit or loss.

The Company also issued, in aggregate, a further 1,100,000 Ordinary Shares to Lanstead as a value payment in connection with the equity swap agreements.

16. Cash and cash equivalents

Cash at bank and bank deposits consist of cash. There is no material foreign exchange movement in respect of cash and cash equivalents.