AFC Energy Regulatory News (AFC)

20 February 2012

Embargoed until 07:00

AFC Energy PLC

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

Preliminary Results and Notice of AGM

AFC Energy (AIM:AFC), a world leading developer of alkaline fuel cells, is pleased to announce its preliminary results for the year ended 31 October 2011.

FY11 Highlights

·; Installed first commercial-scale Beta System unit at Dunsfold, UK

·; Installed two further Beta Systems with AkzoNobel at Bitterfeld, Germany

·; Progressed with partners, including: AkzoNobel, John Lewis Partnership, Air Products, Waste2Tricity, N2telligence

·; Made significant technological advancements, having frozen its system design, deployed it in the field and started to generate data that its customers can use.

·; Increased activity on protection of intellectual property and registration of patents

·; Completed a successful fundraising of £3.93m (net) in July 2011

·; Cash as at 31 October 2011 £5.97m (31 October 2010: £5.35m)

Post Period Highlights

·; Strengthened the Board through the appointment of Ian Williamson as Chief Executive Officer

·; Generated first industrial power from Beta fuel cell system

·; Bolstered the technical team with the recruitment of a renowned fuel cell scientist

·; Awarded a grant of €405,600 as part of €2.9m European Union project "LASER-CELL"

Tim Yeo, Chairman of AFC Energy, commented: "AFC Energy continues to make significant technological progress as it optimises the performance of its Beta fuel cell system using the highly valuable data generated by the field trials, and has made significant strides towards commercialisation. The first installations, commissioned by AkzoNobel, in the year have already provided initial evidence of the robustness and effectiveness of AFC Energy's technology. The Board looks forward to increasing its commercial routes to market through partners, both new and existing, and looks forward to translating its technical excellence into commercial success in the near future."

Notice of AGM

AFC Energy also today gives notice that its Annual General Meeting will be held at Eversheds LLP, 1 Wood Street, London, EC2V 7WS at 2pm on Wednesday 11 April 2012.

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

For further information, please contact:

About AFC Energy

Founded in 2006, AFC Energy plc is re-engineering proven alkaline fuel cell technology to reduce the cost of electricity. Alkaline fuel cells have been used on US and Russian manned space missions for decades to provide electrical power and drinking water. By using modern materials, design tools and manufacturing processes at scale, AFC Energy is developing fuel cells that will compete with conventional technologies such as turbines for electrical power generation. Today, AFC Energy is pursuing opportunities in several sectors where hydrogen is readily available including the chlorine, clean coal and waste-to-energy industries as well as applications for distributed/back-up power. For further information, please visit our website: www.afcenergy.com.

About fuel cells

A fuel cell is a device that produces electricity, heat and water by reacting a hydrogen-rich fuel with oxygen. Conventional engines and turbines combust fuel to produce mechanical energy prior to generating electricity. The direct generation of electricity allows fuel cells to be highly energy efficient. There are several different types of fuel cell, each with its own characteristic but they are all based around a common central design. Fuel cells are increasingly being deployed for applications ranging from vehicles, domestic boilers, powering portable equipment and large scale power stations.

Chairman's Statement

Market Background

During a period when major economies in the west are implementing austerity measures there is a danger that investment in more efficient, cleaner power generation will not get the priority that it deserves. Despite this risk however, the rise of the fuel cell continues with global total shipments of stationary power units increasing in 2011 to around 10,000 units (54.6MW), up from 7,400 units (32.9MW) in 2010.

This rise has been spread across micro-CHP systems and uninterruptible power systems up to multi-megawatt prime power installations, supported in a number of instances by feed-in tariffs set by governments. One or two companies in particular have enjoyed high profile orders recently. We are all encouraged by the industry's progress as a whole, but in our view it will remain a niche, albeit a growing one, until fuel cells can compete on level economic terms with the conventional power generation technologies of turbines and engines.

The only proven fuel cell type that is likely to be capable of competing on level economic terms with conventional electricity generation is the alkaline fuel cell. This is why AFC Energy has focused on re-engineering the fuel cell system so that it has the lowest life-time costs of ownership.

However, as reported by Fuel Cell Today, the industry as a whole is set to benefit from the increasing worldwide focus on clean, renewable energy sources, a good example of which can be seen in South Korea. The Renewable Portfolio Standard (RPS) in South Korea will require electricity producers to generate 10% of their output using new and renewable technologies by 2022, equivalent to approximately 6,000MW of new capacity. Fuel cells are awarded the highest weighting of all renewables in the RPS demonstrating the massive opportunity for large scale stationary fuel cell systems in that country alone. The current feed in tariff is $0.23 per kilowatt hour of electricity and vast proportion of the 54.6MW installed in 2011 globally was in South Korea.

Overview

Due to a year of excellent technical progress, full commercialisation of AFC Energy's technology is a lot closer.

AFC Energy commissioned its first commercial-design unit, known as the Beta System, at Dunsfold in June and following the completion of a rigorous HAZOP (HAZardous OPerability) study in August, was then able to commission two further Beta Systems with AkzoNobel at its Bitterfeld chlor-alkali plant in October 2011. These units subsequently began producing electricity during late 2011. A comprehensive series of trials is continuing to allow AFC Energy to assess a number of important factors intrinsic to future deployment and development, such as longevity and power density of electrodes.

AkzoNobel was AFC Energy's first major partner and we are grateful for their continued support and advice. The ability to test and modify these systems in the field, as well as the laboratory environment, has been and will continue to be invaluable.

The Centre for Process Innovation (CPI) continued its independent review of AFC Energy in May 2011 and January 2012. We believe these reviews independently benchmark the progress of our technology. This is covered in more detail in the Operating Review but these positive assessments are also a testament to AFC Energy's rapid progress over the last two years.

Congratulations are due to the whole AFC Energy technical team, ably led by Gene Lewis, for these achievements.

The Company has continued to manage its cash resources carefully and at the end of October the net cash position was £5.97 million (31 October 2010: £5.35 million). During the year, AFC Energy raised £3.93 million (net) by way of a placing of new shares, largely to existing investors. As a result of this Linc Energy increased its holding to 12%, which the Board views as a vote of confidence from a significant shareholder.

Our Partners

As I have already mentioned, the work with our first major partner AkzoNobel continues and it remains our view that the chlor-alkali industry represents a significant opportunity given the quantities of high quality hydrogen that is produced as a part of the process. A significant proportion of this is either not used or has relatively low value and therefore provides an abundant source of fuel for our systems.

Linc Energy is AFC Energy's partner in Australia and on underground coal gasification worldwide. During the year we continued to work closely with Linc Energy in preparation for future deployment into these markets.

In the UK, the John Lewis Partnership is making significant progress towards improving their energy efficiency and reducing their carbon emissions through a wide range of initiatives. AFC Energy plc was therefore delighted to sign a commercial Memorandum of Understanding (MoU) with them in April to evaluate the economic potential of using its fuel cell system to generate low carbon emission electricity for Waitrose supermarkets and John Lewis stores. The parties continue to work together to optimise the financial and environmental cases.

AFC Energy's relationship with N2telligence, entered into in May 2011, opens the door for applications where exhaust air from fuel cells, with low oxygen content, can be used to help reduce the risk of fire spreading in buildings such as data centres and archives.

Waste2Tricity Ltd has been working on a number of long lead-time projects to deploy the most efficient economic technologies for the conversion of municipal waste into power. Since 2009, it has had a licence option from AFC Energy to deploy AFC Energy fuel cells on waste to energy projects in the UK. AFC Energy owns 25% of Waste2Tricity and this investment is showing signs of bearing fruit.

Amongst other things Waste2Tricity has the opportunity of deploying fuel cell systems at Billingham, Teesside as part of the Tees Valley Renewable Energy Facility. This project progressed during the year following the grant of planning permission in August 2011. This project is led by Air Products in partnership with AlterNRG Westinghouse with the aim of building a 49MW plant using municipal waste as feedstock.

Management and Board

The Board was delighted to have welcomed Ian Williamson as Chief Executive in September 2011. Ian joined AFC Energy from Air Products, where he had worked for 26 years, and was leading Air Products' new venture into the renewable energy market. Ian was instrumental in Air Products obtaining the planning permission for the municipal waste feedstock project at Billingham in Teesside, mentioned above. His experience within the industrial gas sector particularly centred on the manufacture, provision, distribution and commercial sale of hydrogen is expected to benefit AFC Energy enormously. Ian's arrival has already had a positive impact on the Company.

During the year, there were two further Board changes. David Smith, who is Chief Operating Officer at one of our partners Linc Energy, joined as a Non-Executive Director in October 2011, while Ed Wilson, who was appointed as Managing Director in February 2011, resigned in May 2011.

Summary and Outlook

Fuel cells are gaining increasing acceptance worldwide as companies seek progressively to decarbonise, requiring them to embrace renewable technology. To date however, AFC Energy believes that there has been little consideration of the cost per kilowatt hour of electricity produced when fuel cells are used. This is likely to become an increasingly important component in any calculation and thus play to one of the many key strengths of AFC Energy's fuel cells.

2011 was another year of strong progress towards commercialisation, with the first Beta systems deployed in the field. The further strengthening of the management team will enable AFC Energy to maximise its potential in 2012 and beyond.

Once again I would like to thank the Board and the outstanding team of hard working people at AFC Energy and its partner companies, as well as suppliers, for their efforts during the year, and for the support we have received from investors.

Tim Yeo

Chairman

20 February 2012

Operating and Financial Review

We believe that the successful commercialisation of AFC Energy's fuel cell system will be as important to a hydrogen economy as the internal combustion engine was to the petrochemical industry.

AFC Energy has seized the opportunity to apply modern engineering materials and manufacturing methodologies to an already proven fuel cell technology. We have re-engineered the alkaline fuel cell to radically reduce its cost and provide the prospect, at maturity, of a fuel cell that can compete economically with conventional turbines. AFC Energy is continuing to open up a significant lead in this field through its intellectual property and commercial relationships.

Technical Progress

This has been a very successful year in terms of the technical development of our fuel cells. We have seen the first industrial deployment, testing and operation of Beta systems at AkzoNobel's Bitterfeld plant in Germany. The focus of working with a prestigious partner at its site has quickened the pace of our development cycles. The availability of hydrogen has allowed us to test stack longevity and performance at minimal cost to the Company. Our modular Beta system design allows us to test multiple cartridges and balance of plant options. We have also been able to perform stack maintenance in the field, which builds on our assertion that this is a very robust technology.

Over the course of the last few years, Dr. Jon Helliwell, Project Manager of Fuel Cell Applications at the Centre for Process Innovation (CPI) has been engaged with by AFC Energy to conduct periodic independent technical reviews. We believe these reports independently benchmark the progress of our technology. A report was conducted in May 2011, as announced 30 June 2011, and in January 2012, as announced 13 February 2012.

In summary, the recent findings demonstrate that it has been an extremely important period for AFC Energy, with the key being the establishment of two Beta systems at a customer site in Germany and a third at the Company's own site in Dunsfold, Surrey. Both projects have run for significant periods of time and generated valuable data.

This full report is available on the website and the main points are excerpted below:

·; AFC Energy has gradually developed a robust materials/electrode methodology and an effective and robust system development and engineering capability culminating in the Beta-system design.

·; The company has frozen its system design, deployed it in the field and started to generate data that its customers can use.

·; And, generating highly useful feedback data in its trials that is enabling it to further optimise its systems.

·; The system has proved robust in operation.

·; The relationship with Akzo is clearly being managed properly and has progressed from a service provider / customer relationship almost to that of development partners. This clearly demonstrates to the author the level of trust and buy-in that has been achieved with the customer.

·; The technical programme agreed with Akzo is realistic and this has undoubtedly increased the confidence of the customer that AFC Energy will deliver on its promises.

·; The development activities and manufacturing activities have been separated, but in such a way that they are not remote. This gives both areas a greater degree of focus.

·; The improvements that have come from these initial field trials give the author a great deal of confidence that future Akzo milestones will be met.

Ian Williamson is undoubtedly correct in asserting that the organisation now needs to develop a Production and Manufacturing capability to meet its ongoing and future requirements. On the team front, it would have been understandable if progress had faltered during the senior personnel changes last year. What is highly encouraging is the fact that the technical team remained focussed on their delivery plans. The author firmly believes that AFC Energy is highly likely to deliver low cost, modular fuel cell systems to the stationary power industry. The systems are relatively simple, but use clever engineering and elegant design to minimise cost and complexity.

Financial Highlights

AFC Energy has continued to adopt a prudent approach to managing its cash resources against a backdrop of global economic uncertainty. It continually reviews cash balances and forward requirements and seeks to ensure that an adequate funding horizon is maintained whilst minimising shareholder dilution from additional fundraising. The Board was therefore very pleased to be able to take the opportunity to raise a total of £3.93 million after expenses by placing of 9,999,555 new shares at 40 pence per share, largely with existing investors.

The cash outflow from operating activities increased by £0.69 million compared to the previous year, largely as a result of a £0.38million increase in R&D expenditure, connected with the construction of the first Beta systems and, increased activity and expenditure on protection of its intellectual property and registration of patents.

AFC Energy continued to invest in equipment required for production of fuel cells and also expanded its fuel cell testing capability with a view to maintaining the flow of future generations of fuel cells. Total investment for the year was £0.58 million.

At the year end, AFC Energy undertook a comprehensive review of fixed and intangible assets. It concluded that impairment of £30,000 has arisen in respect of equipment and that certain of the specific intellectual property and patents, consisting mainly of items acquired from Eneco in 2006, were no longer core to AFC Energy's development and will not contribute significantly to revenue generation in the future. This resulted in an impairment charge of £191,379.

A combination of these asset write-downs, the increased R&D expenditure and consultancy support related to manufacturing scale-up account for the increase in administrative expenses for the year. Although no further options or warrants were issued during the year the charge to the income statement under IFRS2 relating to historic options and warrants increased to £690,472. This is not a cash cost. Taken together with the increased administrative expenses described, this accounts for the increase in operating loss compared with the previous year.

Looking ahead, AFC Energy does not anticipate a significant change in the costs of its development activities or the investment required for pilot scale manufacturing.

The fall in revenue compared to prior year reflects the fact that the Company did not make a delivery of a fully customer funded system in the year, instead focussing its development resources on the trial of the Beta system with its development partner, AkzoNobel.

Intellectual Property

AFC Energy continues to generate intellectual property as a result of its research and development activities. The Company regularly reviews this intellectual property to determine its value and the best way to protect it. AFC Energy is currently pursuing 12 families of patents with two filed since the last annual report and others in preparation.

AFC Energy endeavours to anticipate future technical developments in the field of alkaline fuel cells and to apply for patent protection for inventions which are likely to be incorporated in future generations of its products. In January 2012 AFC Energy was delighted to recruit renowned fuel cell scientist Naveed Akhtar to help ensure that AFC Energy continues to secure the optimal intellectual property position going forward.

Health and Safety

The health and safety of our employees and those we work with is regularly reviewed by and on behalf of the Board.

Commercial Outlook

AFC Energy is on track to drive forward the process of commercialisation.

It is a critical time for any company, as it translates its technical excellence into commercial success. Where we need additional support we will add resource, whilst ensuring expenditure overall is carefully targeted and controlled. It is particularly encouraging that the Company has attracted a world class fuel cell scientist, Naveed Akhtar, to the team. Naveed's experience is already contributing to the technical developments at AFC Energy.

Ian Williamson has ensured that the strategic plans have been set for the Company, having aligned the commercial and technical arms of the Company together via a set of business targets for the coming period. These are to:

1. deliver on our set of defined goals for the fuel cell system trials with AkzoNobel.

2. transfer electrode production from technical staff to manufacturing staff.

3. expand, in a controlled way, the number of 'partner' customers. Where we have existing relationships we either progress them or move on.

4. gain experience of more hydrogen production methods and integration requirements.

5. position the Company to access other international markets.

AFC Energy occupies a very clear space within the fuel cell and future energy landscape. We believe our technology will develop into one of the lowest cost, most efficient fuel conversion mechanisms available. Great strides continue to be made in development terms but also we see increased activity from many interested future customers that understand the potential of AFC Energy's technology and are seeking to apply it to their own needs.

The Company remains focused on the chlorine industry as its first commercial market; identified as the most likely for AFC Energy's fuel cells to be able to offer the most efficient, robust energy conversion system for that industry. We achieved an important goal this year by beginning our scaled Beta testing at AkzoNobel and we have already generated significant amounts of valuable data. These trials will continue during the current year as further system derivations are tested and assessed with our partner.

One area of our testing is demonstrating that the design of the Beta Systems which has a low lifetime cost of ownership is easy to manufacture, install, operate and maintain using a relatively low skilled workforce. This we believe will greatly increase the accessible international market for AFC Energy's Alkaline fuel cell product.

Our commercial strategy remains largely focused around the ESCo model under which AFC Energy would obtain financing to build and supply fuel cell systems to a customer and then share the revenue generated by the installed equipment. Our financial modelling shows that there is a distinct benefit to the Company from doing this, especially as we expect, over time, that new generations of fuel cell cartridges will be increasingly lower cost per kilowatt hour of electricity generated and that our fuel cells will be retrofitted to already installed fuel cell systems.

The models show that payback can be expected to be achieved relatively quickly from sales of electricity generated. In some applications, the water and heat produced by the fuel cell system may also have a considerable value. This model appears attractive to chlorine manufacturers that AFC Energy has engaged in discussions with and we believe AFC Energy will have a highly attractive commercial product.

In addition AFC Energy continues to work with partners to open other channels to market.

The Company took a 25% stake in Waste2Tricity Limited (Waste2Tricity) in June 2009 and continues to see both political support and commercial opportunities to help resolve the waste issues facing the UK.

Waste2Tricity's involvement with Air Products plc via the latter's plans for a 350,000MT/year waste-to-energy plant in Teesside, UK, continues. The plant remains a potential demonstration opportunity for AFC Energy's alkaline fuel cell technology alongside conventional generating technologies. Waste2Tricity expects that its involvement in this project will enable it to purchase an exclusive UK licence for the Company's fuel cell technology for use in the conversion of waste into electricity. The Government's review into the support for green energy provision in the UK has delayed the decision making progress somewhat, although it has highlighted the opportunity to the marketplace and other projects are also being progressed by Waste2Tricity.

We continue to work with Linc Energy (ASX:LNC), a 12% shareholder in AFC Energy and our partner for clean power generation in the underground coal gasification market. Whilst opportunities to facilitate further demonstrations for this market segment have been limited during the year, we are currently working together on the next steps in our plans.

There are many other markets open to AFC Energy although we acknowledge that government funding support is frequently necessary to open these markets up fully and to equalise the playing-field vs. existing, mature, power generation options. To that end, AFC Energy has been active in both the European and National fuel cell targeted funding calls to leverage its near-term commercialisation plans. It should be noted that, in most cases, it is not the costs associated with the fuel cell which need support, but the delivery of the hydrogen itself.

A large step forward was taken by the Company this year with the award by the Joint Technology Initiative of funding support for the Laser-Cell development project. The Laser-Cell project received a grant of 1.4 million Euros to pursue the investigation of electrode design/manufacture. AFC Energy's share of the grant is €405,600. The project has raised AFC Energy's European profile and heightened its credibility within funding circles.

We look forward to continuing to deliver real progress on AFC Energy's drive to commercialisation.

Ian Williamson

Chief Executive

Statement of comprehensive income for the year ended 31 October 2011

All amounts relate to continuing operations.

Statement of financial position as at 31 October 2011

Statement of Changes in Equity for the year ended 31 October 2011

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 2011

Notes to the Preliminary Results for the year ended 31 October 2011

1. Basis of preparation

Financial information in this preliminary statement does not comprise statutory accounts for the purpose of section 435 of the Companies Act 2006 and has been extracted from the statutory accounts for the period to 31 October 2011.

The statutory accounts for the year to 31 October 2010, prior to re-statement, have been filed with the Registrar of Companies and those for the year to 31 October 2011 will be filed on or before 30 April 2012. The auditors reported on those accounts; their report was unqualified and did not contain any statements under the Companies Act 2006. The statutory accounts for the year ended 31 October 2011 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies.

On the advice of the Company's auditors, the comparative period, from 1 November 2009 to 31 October 2010, has been re-stated in this preliminary statement to reverse the previous equity accounting treatment of investment in Waste2Tricity. This has reduced the prior year loss after tax by £17,781 and increased the total equity attributable to shareholders at 31 October 2010 by £44,432.  

Whilst the information in this preliminary statement has been prepared in accordance with recognition and measurement criteria of IFRSs, this statement in itself does not give sufficient information to comply with IFRSs.

2. 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 operating segment, the development of fuel cells, and in three principal geographic areas, the United Kingdom, Germany and Australia, All revenue was derived from one customer in each of Germany (£27,498) and Australia (£7,970). All assets and liabilities were in UK at the year end.

3. Operating loss (2010: loss)

4. Financial income

5. Loss per share

The calculation of the basic loss per share is based upon the net loss after tax attributable to ordinary shareholders of £3,990,440 (2010: loss of £2,770,949) and a weighted average number of shares in issue for the year.

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.

6. Trade and other receivables

There were no trade and other receivables that were past due or considered to be impaired. 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.

7. 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.

8. Trade and other payables

9. Availability of report and accounts

The Company will advise when copies of the Annual Report and Accounts will be sent to shareholders and be available from the Company's website www.afcenergy.com 

END