AFC Announces Interim Results

Interim Results

AFC Energy has announced its interim results for the six months ended 30 April 2008

Highlights

• All milestones achieved on time and future development costs in line with budget

• Cash at bank and in hand at 30 April 2008: £0.95 million (30 April 2007: £3.25 million)

• Successful 500-hour operation of AFC Energy’s prototype fuel cell in line with the Company’s expectations

• Further cost savings of fuel cell through development of replaceable and recyclable electrode

• Trend towards use of sub-stations in chlorine industry leading to increased locations of waste hydrogen

• Plastic moulding suppliers and partners identified for outsourced manufacturing

• Gaskatel in Germany confirmed as third-party testing and validation partner

• Delivery of the first systems to Akzo Nobel is on schedule for August 2008

• Blueprint for 50kW system under development

Post-period events

• £4.4 million (gross) raised via placing

• Size of the offer was increased owing to strong demand from institutional investors

Chairman's statement

I am pleased to report the interim results for the six months ended 30 April 2008 and update shareholders on progress.

The Company is focused on developing fuel cells for industrial companies that produce hydrogen as a by-product from their activities. The hydrogen is currently vented off and released into the atmosphere.

The directors of AFC Energy estimate that the global chlorine industry produces approximately 1.6 million tonnes of hydrogen every year or approximately 3,000 MW per annum of potential generating capacity.

Fuel cell development

AFC Energy is involved in the cost engineering of an existing technology with the objective of producing alkaline fuel cells at a commercial price point. In addition, the product needs to be easy to operate and easily maintained.

It is very encouraging that all of the technology milestones to date have been met on time and that the Company now has a fully functioning prototype.

The development of a replaceable and recyclable electrode has enabled the Company to produce simple ‘plug and play’ fuel cells. This has the benefit of allowing our service partner Gaskatel in Germany to maintain high and efficient levels of customer service.

AFC Energy will continue to work on reducing the cost of the electrode and the number of components the fuel cell requires. Both have the effect of increasing the cost effectiveness of the fuel cell system.

Commercialisation and market opportunities

We are in discussions with a number of large companies in the chlorine industry. Chlorine production is a highly energy-intensive process and companies in the sector are keen to identify methods of reducing this significant cost.

By taking AFC Energy’s fuel cells to the hydrogen source, an immediate cost saving can be generated by re-using the hydrogen that would otherwise be vented off and lost into the atmosphere.

The chlorine industry is currently adjusting how it supplies its customers, principally by moving towards smaller sub-stations which are closer to their own customer base.

This medium-term development presents further opportunities for AFC Energy as it significantly increases the number of locations in which we can install our fuel cells.

The directors are looking at a growing market in the energy-from-waste sector. Waste can be gasified by passing hot steam over it. This produces a hydrogen-rich gas which would be used by the AFC Energy fuel cell to generate clean electricity. The advantage of using fuel cells in this process is that the customers in the UK would qualify for double Renewables Obligation Certificates, reducing the payback time on the system.

Business models

AFC Energy has developed two contract models which provide potential customers with alternative ways of entering into an agreement with us.

The first is a straight “install-and-maintain” model – the basis on which we are working with Akzo Nobel, our first customer - whereby AFC Energy sells systems to the customer and receives additional revenues via an ongoing maintenance contract.

The second is a leasing agreement whereby we install our systems but maintain ownership of them. The customer supplies its hydrogen under a fixed-term contract, which AFC Energy then converts to clean electricity. This electricity is sold back to the customer at a pre-determined price, or to the grid at a premium price.

Akzo Nobel

AFC Energy has received payments from Akzo Nobel as part of the development of the new system that is to be shipped to Akzo Nobel in Bitterfeld in Germany in August 2008.

The 500-hour testing of the prototype in February provided important information that will help ensure the successful integration of the Company’s products with Akzo Nobel’s own operating and safety systems.

As part of our ongoing collaboration with Akzo Nobel we are making good progress with the Product Design Specification of the 50kW system and will shortly move towards the final system design.

Manufacturing

AFC Energy will outsource the manufacture of our fuel cells. Our core skills lie in developing technological improvements – we maintain intellectual property rights at all times through various patents. Selecting the right suppliers of key components, particularly the plastic mouldings which house the fuel cells, is vital. In addition a third party will be used to assemble the final product.

Financials

During the six months to 30 April 2008, post-tax losses were £1.14 million (30 April 2007: £0.52 million), reflecting the planned increase in the development of the fuel cell, particularly the electrode, catalyst and balance of plant design.

The Company continues to build its scientific and technical teams with 24 full-time staff at the half-year end. Staff costs account for about 50 per cent of the Company's cost base.

The Company's investment in its production facility in Dunsfold has been within budget. Some further expansion is anticipated during the current financial year.

During the period, the Company benefited from increased interest on its cash deposits producing £43,000 in interest receivable, compared with £16,000 for the same period last year.

Immediately following the May placing the Company held cash of £4.7 million (30 April 2008: £0.95 million; 30 April 2007: £3.24 million).

The Board is not recommending payment of a dividend, in accordance with the dividend policy stated at the time of the flotation.

Fund raising

On 21 May 2008 the Company announced that it had raised £4.4 million (before expenses) via a placing of 40 million new ordinary shares, representing 31.3% of the Company’s enlarged issued share capital.

The placing attracted a number of new and existing shareholders and the size of the offer was increased owing to strong demand from institutional investors.

Part of the proceeds from the placing will be used to provide operating capital for the completion and installation of AFC Energy systems at Akzo Nobel's Bitterfeld site in Germany, and for the development of our 50kW system.
Proceeds will also be used for the establishment of manufacturing processes and supply chains with third parties with the opening up of additional sales opportunities.

Outlook

AFC Energy is at an exciting time of its development and the support shown from investors is very encouraging. The Company is now in a strong position to take advantage of the opportunities created by hydrogen-producing industries that are looking to drive down their energy costs.

With a strong management team, a proven technology and growing opportunities for AFC Energy’s fuel cells, the Board views the outlook as very promising.

Tim Yeo MP, Chairman

Source: Fuel Cell Today