AFC Energy Regulatory News (AFC)

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.

7 March 2018

AFC Energy PLC

("AFC Energy" or the "Company")

Final Results and Notice of AGM

AFC Energy (AIM: AFC), the industrial fuel cell power company, is pleased to announce its final results for the year ended 31 October 2017.

FY17 Highlights

· Successful fundraising of £8.1 million before expenses, including support from significant UK institutional investors

· Appointment of Jim Gibson as Chief Operating Officer and John Rennocks as new Non-Executive Chairman to drive the Company into its commercial growth phase

· Extended the strategic partnership with Industrie De Nora S.p.A. ("De Nora") for electrode development and collaboration, with a strong ongoing commitment from De Nora into AFC Energy's technology platform

· De Nora partnership demonstrating a significant increase in working lifecycle of electrodes with consequential reduction in the per kWh cost of power from the AFC Energy fuel cell system

· Material reduction in fuel cell cost structure through removal of solid nickel plate from the enhanced fuel cell system design

· Roadmap identified to a target Levelised Cost of Electricity from AFC Energy's fuel cell system below US$0.10/kWh (excluding the cost of hydrogen), one of the lowest in the industry

· Completed basic engineering of >1MW AFC Energy fuel cell system

· Agreed to partner with Covestro Deutschland AG ("Covestro") on engineering and integration for a 1MW fuel cell deployment that will use surplus hydrogen from Covestro's German operations

· Commenced engineering and design for up to a 1MW fuel cell system that could power 2,600 homes in a new residential and industrial development in Dunsfold, Surrey

· Operating loss of £5.5 million (2016: £6.3 million)

· Cash reserves at 31 October 2017 of £6.7 million (31 October 2016: £2.9 million)

Post Period Highlights

· Successful development and operational validation of the enhanced fuel cell system and cartridge basis of design in December 2017

· AFC Energy fuel cell system now achieving majority of P.L.A.C.E. (Power, Longevity, Availability, Cost and Efficiency) commercial metrics, positioning 2018 as an important year in taking the product to market

Adam Bond, CEO of AFC Energy, commented: "In 2017 we completed our three-year plan with the deliverables we promised. The funding put in place early in 2017 allowed us to enhance the 10kW fuel cell system design to support scaling-up of this modular design basis, complete technical milestones to deliver the longevity and reliability required for power plant application and develop the strategic partnerships to underpin the future commercial manufacturing and supply of fuel cells. With these targets met, AFC Energy is transitioning to commercial exploitation of the significant value in intellectual property that it has created; thereby becoming a key new entrant into the ever-growing clean energy revolution."

Notice of AGM

AFC Energy also today gives notice that its Annual General Meeting will be held at Chelsea Football Club, Stamford Bridge, Fulham, London SW6 1HS at 12 p.m. on Tuesday 24 April 2018.

The Annual Report and Accounts and Notice of AGM will be sent to shareholders in late March and will be available for download from the Company's website, www.afcenergy.com, at that time.

For further information, please contact:

About AFC Energy

AFC Energy plc has developed and successfully demonstrated an alkaline fuel cell system, which converts hydrogen into "clean" electricity. AFC Energy's project POWER-UP demonstrated the world's largest operational alkaline fuel cell system at Air Products' industrial gas plant in Stade, Germany. The Company is now looking to build upon an already established pipeline of commercial opportunities and drive the findings from the development phase of the technology into a technically optimised and commercially relevant fuel cell system. 

For further information, please visit our website: www.afcenergy.com

CHAIRMAN'S STATEMENT

Transition to production

"The advent of the 'hydrogen economy' will bring with it the liberation of energy to be on-demand and on-location that will bring clean and affordable power to the world. Our determination is that AFC Energy will be a central and key part of that new energy economy."

This is my first Chairman's Statement for AFC Energy, and I am delighted to have joined the Company at this critical point in its history. Three years ago, AFC Energy outlined a plan that would take the Company's technology out of the lab and begin the transition into commercial production. I am pleased to state that this plan has been accomplished and that in 2018 the Company expects to see the initial commercialisation of our energy systems through engagement with key customers.

Back in 2015, our plan required an initial scale-up of AFC Energy's fuel cell system and delivery of a 240kW proof-of-concept power plant; the development of a Generation 2 fuel cell system that could deliver over 1,000 continuous hours of operation; and the preparation for commercialisation of the fuel cells through automation of manufacturing and collaboration with partners.

Today, with the support of our key strategic partners such as Industrie De Nora ("De Nora"), these technology milestones have been achieved and the Company stands ready to move from proof-of-concept to commercial production status.

Alongside the technical achievements, over the past year AFC Energy has also enhanced its financial funding position, key management and governance arrangements. These changes have taken place to strengthen the Company as it emerges from being a predominantly R&D-focused organisation to one that is set to become fully commercial.

In March 2017, AFC Energy successfully raised £8.1 million through a placement, subscription and open offer. As part of this fundraise, the Company welcomed Schroder Investment Management Limited on the shareholder register. The Company was also pleased by our existing shareholders' support, with the open offer to existing shareholders being over-subscribed by 57%.

In key management, AFC Energy has strengthened its executive management team with the appointments of Jim Gibson as Chief Operating Officer and Richard Tuffill as Chief Financial Officer. Both have brought considerable experience to the Company from the energy and engineering industries and will prepare the Company well for the commercialisation phase it is entering. Further, the Board has been strengthened with the appointment of Lisa Jordan and Joe Mangion in recent months as Non-Executive Directors, both of whom bring further broad experience to the Company and enable it to further improve its governance arrangements.

The timing of the move into production could not be better; the world is crying out for stable, reliable, affordable and clean energy. Whether it is an office complex that fears a utility outage, a construction site, a datacentre or a remote village that has never experienced reliable electrical power; all share the same fundamental need for clean, reliable and affordable energy.

The Company remains focussed on the industrial application of fuel cells to provide power for grid electricity systems. Since the predominant source of hydrogen today derives from the chlor-alkali industry where the gas is a by-product in the manufacture of chlorine, our strategy has been to seek out chlor-alkali manufacturers and look to partner with them and co-locate the fuel cells next to the source of hydrogen production.

At the same time, new sources of hydrogen are coming on stream where the fuel can be produced from ammonia, bio-methane or water. These new sources lend themselves to the on-demand production of hydrogen and that in turn opens the potential of deploying a combined solution for an integrated hydrogen and fuel cell system for temporary or back-up power, or for applications that are far removed from connections to the grid.

One of the immediate opportunities that presents itself is to utilise AFC Energy's clean running fuel cell as an alternative to back-up power from diesel generation. The generation of power from diesel generation has issues associated with noise and cleanliness of generation as well as selling on this power at many multiples of the cost of production. Information from UK Government reports indicate that diesel particulate pollution may be a contributory factor in the deaths of 29,000 Britons a year. Despite these drawbacks, the global diesel generator market is forecast to be worth around £17 billion by 2020 and is growing at 4.5% per annum according to research from Global Data.

We therefore believe that this is a prime opportunity for AFC Energy's technology in offering a cleaner, quieter, and more economical solution to diesel power generation around the globe.

In the longer term, we see the evolution of fuel cells across other energy applications. Since the first deployment of electricity-generating units in the 1880s the developed-world has adopted the same centralised model for power generation and distribution. In recent years, with the advances in renewable electricity generation technologies, energy storage, and increasing demand-side management, this centralised model is being challenged. The advent of the 'hydrogen economy' will bring with it the liberation of energy to be on-demand and on-location that will bring clean and affordable power to the world. Our determination is that AFC Energy will be a central and key part of that new energy economy.

2017 has been a particularly busy year for AFC Energy and I would like to thank all the staff, partners and contractors working with the Company, in addition to my fellow Board members and shareholders, for their continued support. In particular, I would like to express my appreciation to Eugene Shvidler, Mitchell Field and Tim Yeo, all of whom retired from the Board during 2017 as long-standing Non-Executive Directors of AFC Energy, and I wish them well for the future.

John Rennocks

Chairman

6 March 2018

Operational Review

AFC Energy's commercial future

The most exciting phase in the journey of any technology company is the juncture when the years of painstaking research and development metamorphose into a commercial business. AFC Energy has reached that point after a highly successful 2017 that saw huge progress across fundamental technology research, product development, manufacturing preparation and creation of strategic partnerships.

Consequently, the Company faces the future with a robust technology platform, a strong go-to-market strategy and a market that is open and receptive to its products.

In 2017 we completed our three-year plan with the deliverables we promised. These included the enhancement of the 10kW fuel cell system design to support scaling-up of this modular design basis, technical milestones to demonstrate the longevity and reliability required for power plant application, and the strategic partnerships to underpin the future commercial manufacturing and supply of fuel cells. With these targets met, AFC Energy can now begin the commercial exploitation of the intellectual property that it has created. While we will continue our focus on the development of the core alkaline fuel cell science, the time has come to take the product to market.

Product finalisation

During the past year we have enhanced the operating basis for our fuel cell, engineered the changes to enable these enhancements to be realised and validated our design enhancements through a controlled testing regime. This revised fuel cell system - flow plates, electrodes and cartridge - has built upon the previous generation of 10kW units and continues the modular approach that allows us to create power plant solutions that can scale to multi-MW requirements.

We have also successfully introduced a new electrode that derives from our strategic partnership with De Nora. This delivers benefits both from a far greater lifetime of the electrode, but also in a reduction in the material costs of manufacture. We judge our progress in product development based on the acronym of P.L.A.C.E. - standing for Power, Longevity, Availability, Cost and Efficiency. Against each of these metrics, we have made significant and continued progress during 2017 and now possess the technology platform to deliver a product with the performance criteria that the market wants, the build costs to make them competitive and the low operational cost that customers demand.

Manufacturing preparation

AFC Energy's technology and engineering team has made major strides throughout 2017 in preparing the way for the commercial manufacture of the Company's fuel cells. This has included modification of the flow plates that hold the electrodes and most importantly modification to the electrode itself. Here, we have been able to remove a significant amount of nickel from the electrode plate substrate to significantly lower costs and most importantly to allow the finalisation and certification of components within the manufacturing process. The result is that AFC Energy is primed and now ready for commercial manufacture.

Outlook

With the product technology defined and internal manufacturing process demonstrated, the final challenge is the commercialisation and marketing to customers. To address this, we are taking three routes to market; the direct sales to customers, the indirect channel through partners and the embedded model where the fuel cells are the power component in a bespoke integrated-solution.

We have learned a great amount through refining the technology for manufacturing both through our rigorous internal testing and our external partnerships. This has enabled us to enhance the manufacturability of our fuel cell while also optimising its operational performance.

Our fuel cell is an ideal power generator for grid-scale applications. During the past year we have continued our discussions with Covestro in Germany with a view to the supply of a fuel cell plant to one of the world's largest chlorine manufacturers, utilising by-product hydrogen as feedstock to the fuel cell. This initial phase of work has been completed and we are now evaluating the outcome from this work. This evaluation will also consider other locations as appropriate for such a facility. We believe that this is a model for the deployment of AFC Energy fuel cells across the developed world.

The scalability of the product from 10 kW to multiple MWs and low cost of electricity produced also means that AFC Energy's fuel-cell system is suited to many different applications from single back-up power source, to office or industrial complexes or integrated as part of a suite of solutions. That said we consider that the AFC Energy technology represents a clean, lower cost alternative to power generation by diesel generators. This market, estimated to be worth over £17 billion by 2020, is ideal for conversion to a cleaner, lower-cost power generation technology.

As we move into this exciting commercial phase, we will also be looking to our marketing and branding strategies, and prioritising the international reach of AFC Energy through new partnerships.

Financial overview

AFC Energy's EU grant-funded projects are nearing completion, and hence grant income from these projects was lower in 2017 at £0.2 million (2016: £1.0 million). Correspondingly, with the lower level of activity on these EU-funded projects than the previous year, cost of sales was also similarly lower.

Overall expenditure on research and development qualifying for R&D tax credits was £1.6 million (2016: £2.7 million), demonstrating our continued commitment to developing the Company's fuel cell system.

An operating loss to 31 October 2017 of £5.5 million (2016: £6.3 million) has been recorded. Cash balances at 31 October 2017, excluding restricted cash, were £6.7 million (2016: £2.9 million).

I would like to thank all of the staff, partners and contractors working with AFC Energy, together with the EU's FCH JU, and the Board, for their continued support.

This report was approved by the Board on 6 March 2018.

Adam Bond

Chief Executive Officer

6 March 2018

Managing our risks

Effective risk management underpins the delivery of our objectives. It is essential to protect our reputation and generate sustainable shareholder value. We aim to identify key risks at an early stage and develop actions to eliminate them or mitigate their impact and likelihood to an acceptable level.

Our approach to risk and risk management

There are a number of risks and uncertainties that could adversely impact the achievement of the Company's strategy. The Board of Directors has identified and discussed the risks that are considered to have the highest severity and likelihood, along with the mitigations the Company adopts to either avoid the risk occurring or manage the impact. The Executive Directors are responsible for managing and mitigating the risks to the Company.

Our principal risks

STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 October 2017

All amounts relate to continuing operations.

STATEMENT OF FINANCIAL POSITION

As at 31 October 2017

These financial statements were approved and authorised for issue by the Board on 6 March 2018.

John Rennocks Richard Tuffill

Chairman Chief Financial Officer

AFC Energy plc

Registered number: 05668788 

STATEMENT OF CHANGES IN EQUITY

For the year ended 31 October 2017

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 charge to equity in respect of equity-settled share-based payments.

Retained deficit represents the cumulative loss of the Company attributable to equity Shareholders.

CASH FLOW STATEMENT

For the year ended 31 October 2017

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 with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The Directors have prepared a cash flow forecast (the "Forecast") for the period ending 30 April 2019. During this period, the Company will focus on product and commercial development and the Forecast indicates that it will have sufficient cash resources to meet its obligations as they fall due for a period of at least 12 months from the date of approval of these financial statements. Consequently, the Directors believe that it is appropriate to prepare the financial statements on a going concern basis.

The Forecast includes a contingency in respect of unforeseen product development activities, should they become necessary. In addition, certain identified discretionary and non-essential activities can be cancelled to provide a further cash buffer.

A future fundraising, not assumed in the Forecast described above, will be necessary to enable the Company to meet the costs of commercial deployment in order to deliver its growth potential. The Directors are confident in the ability of the Company to raise additional funds through the market, or at the project level as deemed appropriate at the time.

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. Standards, Amendments and Interpretations to Published Standards not yet Effective

At the date of authorisation of these 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 financial statements:

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

· IFRS 15 Revenue from contracts with customers. The new standard will replace IAS 18 Revenue and IAS 11 Construction contracts. It will become effective for accounting periods on or after 1 January 2018 at the earliest

· IFRS 16 Leases is effective from 1 January 2019. Management has not yet analysed the input to the financial statements upon adoption.

The Company expects no impact from the adoption of IFRS 9. As the Company is not currently revenue generating, there would be no impact relating to the adoption of IFRS 15 on the current financial position. The Company will determine the effects of the adoption of IFRS 16 in future periods.

b. 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.

c. Grants

The Company participates in two projects, ALKAMMONIA and POWER-UP, which receive funding from the European Union ("EU"). These grants are based on periodic claims for qualifying expenditure incurred by all the entities participating in each project consortium. The Company acts as coordinator for the projects and submits claims and receives funding on behalf of the other participants in each project consortium. Grant funds of other participants are paid over to them as soon as they are received and only the grant funding relating specifically to the Company's activities is reflected in the statement of comprehensive income. The qualifying expenditure is shown in the statement of comprehensive income as cost of sales. Grants, including grants from the EU, are recognised in the statement of comprehensive income in the same period as the expenditure to which the grant relates.

d. Other Income

Other income represents sales by the Company of waste materials.

e. Development Costs

Development expenditure does not meet the strict criteria for capitalisation under IAS 38 and has been recognised as an expense. Expenditure on and relating to the Company's alkaline fuel cell system installed at Stade in Germany under the EU funded POWER-UP project has been considered to be development expenditure to date, as the module is the first of its kind that has been produced.

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

Inventory is recorded at the lower of cost and net realisable value. Cost comprises purchase cost plus production overheads.

h. Other Receivables

Other receivables arise principally through the provision by the Company of activities associated with grant-funded projects. 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.

Depreciation is charged to the statement of comprehensive income 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

Decommissioning asset life of the lease

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 statement of comprehensive income.

k. Intangible Assets

Expenditure on research activities is recognised in the statement of comprehensive income 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 statement of comprehensive income.

l. Cash and Cash Equivalents

Cash and cash equivalents comprise cash balances and call deposits with major banking institutions realisable within three months. Restricted cash is €125,000 held in escrow to support a bank guarantee in favour of Air Products GmbH relating to contractual obligations by the Company in relation to the Stade site in Germany.

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 statement of comprehensive income 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. Capitalised leased assets are depreciated over the estimated useful life of the asset. 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 the statement of comprehensive income.

Operating Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the statement of comprehensive income on a straight-line basis over the period of the lease.

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 Company becomes a party to the contractual provisions of the instrument.

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

· Receivables are recognised initially at fair value and subsequently held at amortised cost less an allowance for any uncollectable amounts when the full amount is no longer considered receivable

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

· Equity instruments issued by the Company 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. 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 the Black-Scholes 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 statement of comprehensive income on the date of cancellation.

r. Provisions

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

s. Taxation

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

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 the timing of their recovery.

t. R&D Tax Credits

The Company's research and development activities allow it to claim R&D tax credits from HMRC in respect of qualifying expenditure; these credits are reflected in the statement of comprehensive income in administrative expenses or in the taxation line depending on the nature of the credit.

u. Pension Contributions

The Company operates a defined contribution pension scheme which is open to all employees and makes monthly employer contributions to the scheme in respect of employees who join the scheme. These employer contributions are currently capped at 3% of the employee's salary and are reflected in the statement of comprehensive income in the period for which they are made.

3. Critical accounting judgements and key sources of estimation and uncertainty

In the preparation of the financial statements management makes certain judgements and estimates that impact the financial statements. While these judgements are continually reviewed, the facts and circumstances underlying these judgements may change, resulting in a change to the estimates that could impact the results of the Company. In particular:

Useful Lives and Impairment of Intangible Assets

Intangible assets are amortised over their useful lives. 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. After undertaking a comprehensive review of intangible assets, an impairment value of £7,104 has arisen with respect to intangible assets during the year and subsequent to 31 October 2017 (2016: £nil).

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 that, until the Company's fuel cell system is proven to be commercially deployable, it would not be appropriate to capitalise development expenditure. Consequently, all development expenditure has been charged to the statement of comprehensive income during the year ended 31 October 2017.

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.

Decommissioning Provision

The Company has set-up a decommissioning provision for the removal of the plant and equipment installed at the Stade site in Germany, and for dilapidations associated with the leasehold premises at Dunsfold in the UK, the cost of which is based on estimates.

4. Segmental analysis

Operating segments are determined by the chief operating decision maker based on information used to allocate the Company's resources. The information as presented to internal management is consistent with the statement of comprehensive income. It has been determined that there is one operating segment, the development of fuel cells. In the year to 31 October 2017, the Company operated mainly in the United Kingdom and in Germany. All non-current assets are located in 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

Adam Bond's services as Chief Executive Officer and Director are provided under a service agreement with the Company dated 1 January 2016. Under this agreement, Adam is entitled to a salary of £300,000 per annum plus payment or receipt of other benefits including a housing allowance, private medical insurance and a company car. In addition, £46,250 of his other compensation was settled during the year through the issuance of 250,000 shares in the Company. As part of Adam's contract with the Company, in 2015 he was granted 6,000,000 share options with an exercise price of £0.51 per share. These options have performance conditions attached to them; 3,000,000 of the options will only vest if specific operational targets for energy output are met, and the remaining options will only vest if the share price achieves and sustains targeted amounts with equal portions vesting at share prices of £1.00, £1.50 and £2.00. In accordance with IFRS 2 (Share-Based Payment), the Company recognises as an employee expense the fair value of options granted to employees. The fair value is determined using an appropriate pricing model, and the resulting expense is recognised over the period in which the performance and/or service conditions are fulfilled ending on the date on which the employee becomes fully entitled to the award. During the year the Company recorded a non-cash expense of £599,062 relating to the options granted to Adam. The vesting conditions for the options has not been reached and hence Adam has not received any cash benefit from the options in the year. Further details are contained in notes 2, 3 and 18. After the year-end, Adam has repaid to the Company all outstanding taxation remitted by the Company in previous years to HMRC on Adam's behalf in relation to different tax jurisdictions between the UK and Australia. Also, after the year-end, and following Board approval as a result of meeting certain performance conditions, the Company has paid Adam a £100,000 bonus that was accrued for in the previous year.

8. Finance cost

9. Taxation

The amount of the unused tax losses for which no deferred tax asset was recognised at 31 October 2017 was £23,884,000 (31 October 2016: £20,757,000). The related deferred tax asset, calculated at 19%, of £4,538,000 (31 October 2016: calculated at 20%, £4,151,000) will be recognised in the financial statements when the trend of future profits has been established.

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 £4,925,059 (2016: loss of £5,656,064) and a weighted average number of shares in issue for the year.

Diluted earnings per share

As set out in note 18, there are share options and warrants outstanding as at 31 October 2017 which, if exercised, would increase the number of shares in issue. However, 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

12. Property and equipment

The Company has set-up a decommissioning asset for the removal of the plant and equipment installed at the Stade site in Germany, and for dilapidations associated with the leasehold premises at Dunsfold in the UK, the cost of which is based on estimates.

13. Investment

As at 31 October 2017 the Company held 340,500 shares representing 23.2% (2016: 230,000 shares representing 17.5%) of the share capital of Waste2Tricity Ltd (a company registered in England & Wales). In the view of the Directors this investment has no value currently and has been recognised at cost less impairment. No revenue was recognised in the period under the licence agreements with Waste2Tricity Ltd and Waste2Tricity International (Thailand) Ltd.

14. Inventory

15. Other receivables

There is no significant difference between the fair value of the receivables and the values stated above.

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.

Restricted cash, not included in cash and cash equivalents, is €125,000 held in escrow to support a bank guarantee in favour of Air Products GmbH relating to contractual obligations by the Company in relation to the Stade site in Germany.

17. Issued share capital

All issued shares are fully paid.

The Company considers its capital and reserves attributable to equity Shareholders to be the Company's capital. In managing its capital, the Company's primary long-term objective is to provide a return for its equity Shareholders through capital growth. Going forward the Company will seek to maintain a gearing ratio that balances risks and returns at an acceptable level and also to maintain a sufficient funding base to enable the Company to meet its working capital needs. The Company's commercial activities are at an early stage and management considers that no useful target debt to equity gearing ratio can be identified at this time.

Details of the Company's capital are disclosed in the statement of changes in equity.

There have been no other significant changes to the Company's management objectives, policies and processes in the year nor has there been any change in what the Company considers to be capital.

18a. Share options

18b. Warrants

18c. SAYE

During the year the Company operated a share save scheme.

18d. Equity-settled share-based payments charge

Share Options

Warrants

SAYE

Expected volatility has been based on the 3.5 year historical volatility of share price. Vesting requirements are three years for the exercise of warrants and options, except for 500,000 options granted which vest in two years. Certain options granted to Directors are also subject to performance conditions.

Adam Bond received 6,000,000 options on 17 July 2015 with vesting conditions that include market and non-market based conditions. Under the market-based conditions vesting is contingent on the average share price of the Company reaching certain targets. Under non-market based conditions vesting is contingent on the Company's fuel cell system installed at Stade in Germany reaching certain output of wattage targets and the Company entering into commercial contracts.

The fair value of services received in return for share options and other share-based incentives granted is measured by reference to the fair value of share options and incentives granted. This estimate is based on a Black-Scholes model for non-market based conditions and a Log-normal Monte Carlo stochastic model for market conditions. Both are appropriate considering the effects of the vesting conditions, expected exercise period and the dividend policy of the Company.

19. Trade and other payables

20. Provisions

During the current year, the Company has set-up a decommissioning provision associated with a commitment to remove the plant and equipment installed at the Stade site in Germany at a future date, and for dilapidations associated with the leasehold premises at Dunsfold in the UK.

21. Operating lease commitments

The lease commitments relate to accommodation and a vehicle.

22. Financial instruments

In common with other businesses, the Company is exposed to risks that arise from its use of financial instruments. This note describes the Company's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements.

Principal Financial Instruments

The principal financial instruments used by the Company, from which financial instrument risk arises, are as follows:

Financial instruments that are measured subsequent to initial recognition at fair value are grouped into three levels based on the degree to which the fair value is observable as defined by IFRS 7:

· Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets and liabilities

· Level 2 fair value measurements are those derived from inputs, other than quoted prices included within Level 1, that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices) and

· Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data.

No financial instruments have been transferred between Levels during the year.

General Objectives, Policies and Processes

The Board has overall responsibility for the determination of the Company's risk management objectives and policies and, while retaining ultimate responsibility for them, it has delegated part of the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Company's finance team. The Board receives reports from the financial team through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets.

The overall objective of the Board is to set policies that seek to reduce ongoing risk as far as possible without unduly affecting the Company's competitiveness and flexibility. Further details regarding these policies are set out below.

Credit Risk

Credit risk arises principally from the Company's other receivables and cash and cash equivalents. It is the risk that the counterparty fails to discharge its obligation in respect of the instrument. The maximum exposure to credit risk equals the carrying value of these items in the financial statements as shown below:

The Company's principal other receivables arose from: a) annual payments for various services held as pre-payments b) VAT debtors receivable from UK and German tax authorities c) an R&D tax credit d) grant funding receivable from the EU. Credit risk with cash and cash equivalents is reduced by placing funds with banks with acceptable credit ratings and government support where applicable and on term deposits with a range of maturity dates. At the year-end, most cash was temporarily held on short-term deposit.

Liquidity Risk

Liquidity risk arises from the Company's management of working capital and the amount of funding required for the development programme. It is the risk that the Company will encounter difficulty in meeting its financial obligations as they fall due. The Company's policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due.

The principal liabilities of the Company are trade and other payables in respect of the ongoing product development programme. Trade payables are all payable within two months. The Board receives cash flow projections on a regular basis as well as information on cash balances.

Interest Rate Risk

The Company is exposed to interest rate risk in respect of surplus funds held on deposit and, where appropriate, uses fixed interest term deposits to mitigate this risk.

Fair Value of Financial Liabilities

There is no difference between the fair value and book value of trade and other payables and provisions.

The Company does not enter into forward exchange contracts or otherwise hedge its potential foreign exchange exposure. The Board monitors and reviews its policies in respect of currency risk on a regular basis.

23. Capital commitments

The Company had no capital commitments outstanding at 31 October 2017 (2016: £nil).

24. Board changes and post-balance sheet events

On 5 December 2017, Joe Mangion was appointed by the Company as a Non-Executive Director, and Tim Yeo and Mitchell Field retired as Non-Executive Directors.

25. Ultimate controlling party

There is no ultimate controlling party.

26. Related party transactions

During the year ended 31 October 2017:

£315 was invoiced by Richards and Appleby Ltd (a company registered in England & Wales) for reimbursement of expenses incurred in respect of the services of Mitchell Field as a Director of AFC Energy plc (2016: £nil). Mr. Field is also a Director and Shareholder of Richards and Appleby Ltd. At 31 October 2017, the sum owing to Richards and Appleby Ltd was £nil (2016: £nil).

£30,967 was invoiced by Locana Corporation (London) Ltd (a company registered in England & Wales) for consultancy services in respect of the services of Tim Yeo as a Director of AFC Energy plc (2016: £40,200). Mr. Yeo is also a Director and Shareholder of Locana Corporation (London) Ltd. At 31 October 2017, the sum owing to Locana Corporation (London) Ltd was £nil (2016: £3,350).

£191,917 was invoiced by iProcess Engineering & Consulting Ltd (a company registered in England & Wales) for consultancy services in respect of the services of Jim Gibson as a Director of AFC Energy plc (2016: £nil). Mr. Gibson is also a Director and Shareholder of iProcess Engineering & Consulting Ltd. At 31 October 2017, the sum owing to iProcess Engineering & Consulting Ltd was £25,500 (2016: £nil).

At 31 October 2017, Adam Bond owed £103,639 (2016: £132,799) to the Company which has been fully repaid after the year-end.