Results for the 6 months ending 31st March 2017

Released : 30/06/2017 07:00

Intelligent Energy Holdings PLC

30 June 2017

(LSE: IEH; ADR: INGYY)

30 June 2017

INTELLIGENT ENERGY HOLDINGS PLC: RESULTS FOR THE SIX MONTHS ENDED 31 MARCH 2017

Intelligent Energy Holdings plc, the energy technology group ("Intelligent Energy", "IE", the "Group" or the "Company"), announces its unaudited financial results for the six months ended 31 March 2017.

These results are in line with the high level estimated financial results for the half year announced by way of an RNS trading update on 30th March.

This announcement also reflects similar content and themes to the 30th March RNS with respect to the half year trading performance and outlook.

(1) EBITDA is a non-statutory measure often used by investors as a proxy for cash and to calculate the value of a business. The Company uses adjusted EBITDA (Earnings before Interest, impairment charges, Tax, Depreciation, Amortisation, share of joint venture results, equity fund raising costs and IFRS2 share-based payment charges) as an indicator of trading profitability and a proxy for operating cashflow, before any cash movements relating to investment, tax, funding and changes in working capital. It is not an IFRS measure, and not therefore shown in the Group income statement.

(2) Loss after tax in H1 2015/16 is after £23.9m of impairments and inventory write downs and the derecognition of a £21.9m deferred tax asset

(3) Cash is defined as cash and cash equivalents and short term deposits

Key updates for the half year:

· The business is focused on fuel cell product sales as one segment in global markets.

· The restructuring undertaken since May 2016 has reduced adjusted EBITDA losses from £(21.6)m in H1 2015/16 to £(9.1)m in in H1 2016/17. This has included the restructuring during the half year of Indian based activities, to support fuel cell product sales on the same commercial model as the rest of the Company following the cessation of the interim energy management agreement with GTL on 30 November 2016.

· Contracts signed in the half year include:

- The supply of up to 600 1kW fuel cell modules for US based Luxfer-GTM Technologies. These are to be used in their portable, zero-emission lighting towers as part of a growing strategic relationship in the development of a line of integrated fuel cell products;

- The sale of demonstrators of the Group's lightweight stack technologies which have been delivered to drone market participants. This has included PINC, the US logistics group; and

- The sale of showcase demonstrators of stationary power related fuel cell modules and systems that have been deployed in Japan, China, India and the US.

· The Group's fuel cell stacks will be used for a trial of Suzuki Burgman scooters with the Metropolitan Police in London in the summer of 2017.

· Continued improvement in the Group's fuel cell operating capabilities, which the Group continues to consider as industry leading with respect to power output per unit volume and power output per unit weight.

Updates since the half year

· The standardised product available for sale has been refreshed and expanded in June 2017 to cover:

- the economically competitive Fuel Cell Module (FCM) 800 range, for 1kW to 4kW power output across three standard products; and

- Lightweight fuel cell stack and system products for drones in the 650W to 2kW power output range which more than double conventional drone flight times.

· Shipments of the 1kW fuel cell modules has commenced under the Luxfer-GTM Technologies contract signed in February 2017.

· The Digiman grant funded program to reduce the cost of AC manufactured fuel cell stacks at volume was launched in collaboration with other industrial companies.

· The Company has noted significant industrial interest in bringing IE's higher powered Evaporatively Cooled technology to market at scale on a funded basis.

Outlook

The Group continues to focus on progressing fuel cell product sales from the conversion of sales pipeline opportunities. The strengthening of the commercial team on a regional basis over the last year is having a positive impact and further positive developments continue to be expected. The exact scale, timing and margin profile of opportunities that are converted to signed contracts is, however by its nature, uncertain.

Overall, IE continues to believe that it possesses the technology and capability and is able to produce product at the required price points to scale the business. IE also believes that it possesses industry leading technology with respect to power per unit weight and power per unit volume. Furthermore, the presence of in-house manufacturing capacity also means that IE can produce at volume, without incurring significant incremental capex costs, to scale through to free cashflow positive which is envisaged to take place over the next two years. Critically IE also believes that the requisite level of demand exists for its products.

Future Financing

The Group remains focused on moving an estimated cashburn of £1.6m per month after interest to a positive cashflow position within the next two years from profitably growing the revenue line through standard product sales.

As previously noted, the existing cash balance is not sufficient to fund the period through to expected free cash flow positive from organic product sales alone. Since the last update to the market by way of RNS on 30 March 2017, the Company has discussed funding options with appointed financial and legal advisors, and with the principal shareholders of the Company who are also principal holders of the Convertible Loan Notes. This has ensured that all options available to the Company are clearly understood. The preferred option at this point in time is not to seek further funding but to deliver a trading related solution. Good discussions with potential customers have been held, which, while not secured, are positive and which if secured offer the prospect of sufficient funding for the medium term.

In tandem with the pursuit of the discussions with potential customers, the Board and advisors will continue to assess all other options available to the Company and the Group whilst recognising the constraints that the Company faces. These include the security granted over the Group's intellectual property portfolio (as part of the refinancing of the Company in 2016) in favour of the holders of the Convertible Loan Notes and the need to obtain the consent of a majority (by value) of the holders of the Convertible Loan Notes before further debt is taken on by the Company that ranks ahead of (or pari passu with) the Company's obligations to the holders of the Convertible Loan Notes.

The Board continues to be mindful that, in certain circumstances (and in particular where the level of the Company's remaining cash resources is prejudicing, or is inconsistent with, going concern status), the duties of the Board will need to switch from seeking to maximise returns for the Company's shareholders to minimising any potential loss to the Company's creditors, including minimising any potential loss to the holders of the Convertible Loan Notes.

There can be no certainty over the outcome of future funding or trading discussions, or of the review of the options available to the Company and the Group, and further announcements will be made as appropriate in due course.

Finally, in the context of funding, while it is not considered feasible to achieve cash generation through cost reduction alone, or to materially reduce the R&D and operating cost base further without negatively impacting core capability, it remains feasible to continue to reduce non operating costs. This includes reducing overheads relating to the Board and governance costs. More specifically, after due consideration and discussions with shareholders, the Board has concluded to maintain the Company's listed status but to reduce the costs of being a listed company further whilst maintaining an appropriate level of corporate governance. In that regard, Mike Muller, Non Executive Director, will step down from the Board by the end of September 2017, reflecting other commitments on his time. Paul Heiden, Non Executive Chairman, also intends to step down from the Board by the end of September 2017, subject to the satisfactory conclusion of the current financing activities. As a result of these changes and of the cost reductions referred to above, it is envisaged that the current spend of c£1.2m per annum, or 7% of total non financing cash costs, that relate to being a listed company will reduce by an estimated £0.3m per annum.

FINANCIAL REVIEW

Consolidated income statement

Revenue and gross margin

Revenue for the half year was £18.7m (2015/16: £43.9m).

The fuel cell technology segment recorded revenue of £2.0m (2015/16 £3.0m). This reflected activity under a Joint Development Agreement with Suzuki and funded programs with a variety of industrial and government related partners.

£16.7m of revenue was recorded in the Essential Energy segment (2015/16 £40.9m) representing the interim power management contract with GTL to cover 27,000 telecom towers in India. The reduction of £24.2m reflected the cessation of the contract on 30 November. With the subsequent restructuring of Essential Energy and the operations in India being aligned to the model in the rest of the Group, IE is now reported on the basis of one segment fuel cell sales.

Gross margin represents revenue less cost of sales. Cost of sales in the period reflects fuel costs in the Essential Energy segment, labour costs, materials and direct facilities costs used in delivering contracted revenue-earning projects. Gross margin for the half year was £0.6m (2015/16: £1.3m) and in percentage terms, 3% of revenue (2015/16: 3%). The low percentage gross margin reflected the low margin interim agreement with GTL.

Research and development

In the half year, R&D expenditure amounted to £1.5m (2015/16: £10.6m). R&D costs mainly comprise staff costs, outsourced services and material costs related to fuel cell research and development, focused on air cooled technology. The decrease year on year reflects £3.7m of exceptional charge in the prior year arising from restructuring and the subsequent reduction in run rate costs from lower headcount and a focus on air cooled fuel cell activity.

Operations and application engineering

Operations and Application Engineering expenditure in the half year amounted to £6.9m (2015/16: £30.4m). The decrease relates to one off non-cash impairment charges relating to equipment, intangible assets and inventory of £19.3m and the impact on run rate costs of lower headcount and activity following the restructuring of the business.

Administration costs

Administration costs in the half year amounted to £2.6m, (2015/16: £4.5m), the reduction year on year mainly reflecting the impact on run rate costs of lower headcount and activity. Administration costs comprise commercial and corporate activities, including sales, marketing, HR, finance, legal and procurement.

Adjusted EBITDA

EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) is a non-statutory measure that is widely used as an indicator of trading profitability and a proxy for a company's operating cashflow, before any cash movements relating to investment, tax, funding and changes in working capital. It is not an IFRS measure, and not therefore shown in the Group income statement. 

For Intelligent Energy, adjusted EBITDA is measured as revenue less cost of sales less R&D and Operations and Application Engineering costs and administration costs, adjusted to exclude impairment charges, depreciation, one off fund raising costs and the IFRS 2 share based payments charge, which is predominantly non cash based. On this measure, adjusted EBITDA for the year was a loss of £9.1m (2015/16: loss £21.6m). The movement in EBITDA reflects lower operating costs excluding impairment charges as a result of restructuring.

 (Loss)/profit for the year

The loss for the half year was £11.9m (2015/16 loss: £67.3m), being a reflection of the operating loss of £10.4m (2015/16 H1 loss of £44.2m) including non-cash impairment and inventory write-down charges of £Nil (2015/16 H1 £23.0m), and the following items:

- The Group's share of the loss on joint ventures accounted for under the equity method and impairment of £Nil (2015/16: £1.3m).

- Net finance costs of £2.9m (2015/16: £0.4m).

- An income tax income of £1.4m (2015/16 charge of £21.4m), reflecting the net impact of R&D tax credits and the de-recognition of a £21.9m, non-cash accounting entry, deferred tax asset on the statement of financial position at 30 September 2016.

Consolidated statement of financial position

Non-current assets

Property, plant and equipment at £2.2m (Sept 2016: £2.8m) represented additions of £0.1m in the half year, offset by depreciation of £0.7m. Intangible assets at £8.0m (Sept 2016: £7.9m) reflected additions of £0.7m and amortisation of £0.6m.

Investments using the equity method

The Group accounts for joint ventures using the equity method, and include the carrying value of its share of positive net assets in the statement of financial position. Joint ventures comprise IE CHP, Aquapurum Water in India and SMILE FC System Corporation. In the year, the carrying value of the joint ventures remained at £Nil, reflecting trading losses and non-cash impairment of the remaining carrying values to reflect either their potential disposal or uncertainty on future prospects.

Current assets

Inventory at £1.0m (Sept 2016: £1.6m) was lower reflecting the restructuring of the Essential Energy business and the use of existing stock in the fuel cell technology business in the half year, Inventory primarily comprises of material used for fuel cell applications across the business.

Trade and other receivables at £3.3m (Sept 2016: £7.8m) were lower by £4.5m, reflecting the cessation of the interim power management agreement with GTL on 30 November 2016. The cash and short term deposits balance at £13.0m (Sept 2016: £20.6m) represents the funding of EBITDA losses in the year, adjusted for movements in working capital, together with capital and other investments and interest movements.

Current liabilities

Current liabilities at 31 March 2016 were £4.1m (Sept 2016: £8.7m). 

Non Current Liabilities

Non Current Liabilities at 31 March 2017 were £23.7m (Sept 2016: £22.8m). £22.0m (Sept 2016 £20.7m) relates to the debt component of the £30m 2016 Convertible Loan Note which for accounting purposes is regarded as a compound financial instrument, split between a debt and equity component. 

Commitments

At 31 March 2017, outstanding purchase orders amounted to £2.4m (Sept 2016 £3.5m).

Going Concern

The Directors recognise that the short-term trading and commercialisation of the Group's fuel cell technology provides challenges. The Group meets its day to day working capital requirements through its cash resources. The current trading position of the Group results in cash consumption and while it is expected that the Group will exit the current financial year with cash on its balance sheet, the cash position thereafter will depend on future trading, including a significant level of revenues that are not presently contracted, and potentially a combination of the following factors, namely realising value from the IP portfolio, disposing of part of the operating business, any further action taken with respect to the Company's cost base and an updated assessment of stakeholder support. The exact nature and evolution of these options are by their nature uncertain.

After careful consideration of potential cashflows over the foreseeable future, and from the opportunities available to the Company that are outlined above, the Directors expect the Company to be able to manage its position in a way which allows it to fulfil its commitments and settle its obligations as they fall due for the foreseeable future. It is on this basis that the Directors, in their opinion, consider that the Company remains a going concern and the financial statements have therefore been prepared on that basis.

The Directors do note as a matter of emphasis that with the cash consumptive nature of the Group and the uncertainty inherent in delivering the options available to it result in a material uncertainty which may cast significant doubt on the Company's and Group's ability to continue as a going concern and that it may therefore be unable to realise its assets and discharge its liabilities in the normal course of business. The financial statements do not include the adjustments that would result if the Company and Group were unable to continue as a going concern.

Forward-looking statements

Certain statements made in this announcement are forward-looking. These represent expectations for the Company's business, and involve risks and uncertainties. The Company has based these forward-looking statements on current expectations and projections about future events. The Company believes that expectations and assumptions with respect to these forward-looking statements are reasonable. However, because they involve known and unknown risks, uncertainties and other factors, which in some cases are beyond the Company's control, actual results or performance may differ materially from those expressed or implied by such forward-looking statements.

Principal risks

The Company considers strategic, operational and financial risks and identifies actions to mitigate those risks. These risk profiles are updated at least annually. The principle risks and uncertainties for the remaining six months of the financial year are consistent with the Group's risks as set out in pages 15-17 of the 2016 Annual Report. In particular the Group would like to draw attention to a principle risk regarding the need to raise additional funds to meet its growth and shareholder return aspirations.

 Intelligent Energy Holdings plc

Condensed consolidated interim income statement

All of the loss for the period is attributable to the owners of the Company and all activities relate to continuing operations.

All of the comprehensive expense for the period relates to continuing operations.Condensed consolidated interim statement of financial position

Condensed consolidated interim statement of changes in equity

Condensed consolidated interim statement of cash flows

Notes to the condensed interim financial statements

1. General information

Intelligent Energy Holdings plc ('the Company') and its subsidiaries (together, 'the Group') are an energy technology business which develops advanced, power-dense hydrogen fuel cell technologies providing highly efficient and clean power generation. The Group works with a range of international companies towards the aim of embedding its technologies in mass market applications.

The company is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the UK. The address of its registered office is Charnwood Building, Holywell Park, Ashby Road, Loughborough, England.

These condensed interim financial statements were approved for issue on 30th June 2017.

These condensed interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 September 2016 were approved by the board of directors on 18 November 2016 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified and did not contain any statement under section 489 of the Companies Act 2006. The report did contain an emphasis of matter paragraph in respect of going concern.

These condensed consolidated interim financial statements have not been audited or reviewed by auditors pursuant to the Auditing Practices Board's Guidance on Financial Information.

2. Basis for preparation

These condensed interim financial statements for the six months ended 31 March 2017 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim financial reporting', as adopted by the European Union. The condensed interim financial statements should be read in conjunction with the annual financial statements for the year ended 30 September 2016, which have been prepared in accordance with IFRSs as adopted by the European Union.

Going Concern

The Directors recognise that the short-term trading and commercialisation of the Group's fuel cell technology provides challenges. The Group meets its day to day working capital requirements through its cash resources. The current trading position of the Group results in cash consumption and while it is expected that the Group will exit the current financial year with cash on its balance sheet, the cash position thereafter will depend on future trading, including a significant level of revenues that are not presently contracted, and potentially a combination of the following factors, namely the ability to realise value from the IP portfolio, disposal of part of the operating business, any further action taken with respect to the Company's cost base and shareholder support. The exact nature and evolution of these options are by their nature uncertain.

After careful consideration of potential cashflows over the foreseeable future, and from the opportunities available to the Company that are outlined above, the Directors expect the Company to be able to manage its position in a way which allows it to fulfil its commitments and settle its obligations as they fall due for the foreseeable future. It is on this basis that the Directors, in their opinion, consider that the Company remains a going concern and the financial statements have therefore been prepared on that basis.

The Directors do note as a matter of emphasis that with the cash consumptive nature of the Group and the uncertainty inherent in delivering the options available to it result in a material uncertainty which may cast significant doubt on the Company's and Group's ability to continue as a going concern and that it may therefore be unable to realise its assets and discharge its liabilities in the normal course of business. The financial statements do not include the adjustments that would result if the Company and Group were unable to continue as a going concern.

3. Accounting policies

The accounting policies applied in these condensed interim financial statements are consistent with those in the previous financial year except as described below:

· Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual profit or loss.

· The Group is strategically organised as one business unit focusing on the delivery of clean energy solutions for the distributed energy, diesel replacement, automotive and aerial drone markets. The Group was reorganised during the six month period into this structure following the termination of the interim power management contract in India, previously being organised as two separate businesses of Fuel Cell Technology and Essential Energy. The segmental disclosures in these condensed consolidated financial statements presents the period's results for the two segments to provide a complete analysis.

A number of new standards and amendments and revisions to existing standards have been published and are mandatory for the Group's future accounting periods. They have not been adopted early in these condensed consolidated financial statements. None of these are expected to have a significant impact on the consolidated financial statements when adopted except as disclosed below:

· IFRS 9, 'Financial instruments'. This standard replaces IAS 39. It includes requirements on the classification and measurement of financial assets and liabilities; it also includes an expected credit losses model that replaces the current incurred loss impairment model. The Group is yet to assess the full impact of IFRS 9 which becomes effective for accounting periods beginning on or after 1 January 2018.

· IFRS 15, 'Revenue from contracts with customers'. This standard replaces IAS 18, 'Revenue' and IAS 11 'Construction contracts' and related interpretations. It establishes principles for reporting the nature, amount and timing of revenue arising from an entity's contracts with customers. The Group is yet to assess the full impact of IFRS 15 which becomes effective for accounting periods beginning on or after 1 January 2018.

· IFRS 16, 'Leases'. This standard replaces IAS 17 'Leases'. It requires lessees to recognise a lease liability reflecting future lease payments and a 'right-to-use asset' for virtually all lease contracts. The Group is yet to assess the full impact of IFRS 16 which becomes effective for accounting periods beginning on or after 1 January 2019. The standard is subject to endorsement by the European Union.

4. Judgments and estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 30 September 2016, with the exception of the following:

Income taxes

Changes in estimates are required in determining the provision for income taxes (see note 3).

Receivables

As a result of the termination of the interim contract with GTL and the associated business restructure in India during the period a number of receivables remain outstanding at the period end where the recoverable amount in uncertain. The Directors have taken a judgment as to the amounts that will be collected in respect of these items reflected this in the carrying value of the receivable.

5. Operating segments

The Group complies with IFRS 8 'Operating Segments' which requires operating segments to be identified and reported upon that are consistent with the level at which results are regularly reviewed by the entity's chief operating decision maker. The chief operating decision maker for the Group is the Intelligent Energy Holdings plc Board of Directors. Information on the divisions is the primary basis of information reported to the Intelligent Energy Holdings plc Board of Directors. The performance of the business is assessed on a non-IFRS measure being EBITDA (earnings before interest, tax, depreciation, amortisation, and share of joint venture results).

The Group is strategically organised as one business unit focusing on the delivery of clean energy solutions for the distributed energy, diesel replacement, automotive and aerial drone markets. The Group aims to embed its fuel cell stack technology into applications across its target market sectors. The business was reorganised during the period into this structure, following the cessation of the interim contract with GTL in India. Previously the business was organised as two business units of Fuel Cell Technology and Essential Energy. The segmental disclosures presents the period's results for the two segments to provide a complete analysis.

9. Finance income / (cost)

Other finance income relates to the expiry of obligations from convertible loan notes issued in prior years. Other finance costs for the six months ended 31 March 2016 relates to impairment of a financial asset.

10. Taxation

11. Earnings per share

Earnings per share is based on the Group's profit attributable to ordinary shareholders and a weighted average number of ordinary shares outstanding during the period.

The impact of convertible loan notes, share options, share warrants and potential ordinary share awards have an antidilutive impact on the earnings per share for the six month period ended 31 March 2017 and 31 March 2016 and therefore were excluded from the weighted-average number of ordinary shares used in the calculation of diluted earnings per share.

12. Property, plant and equipment

13. Intangible assets

14. Cash and cash equivalents

15. Share Capital

16. Financial risk management and financial instruments

Financial risk factors

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk.

The condensed interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group's annual financial statements as at 30 September 2016. There have been no changes in the risk management processes or in any risk management policies since the year end.

Financial instruments

Fair value estimation

Financial instruments are classified as follows: level 1 instruments are those valued using unadjusted quoted prices in active markets for identical instruments; level 2 instruments are those valued using techniques based significantly on observable market data; level 3 instruments are those valued using information other than observable market data.

Derivative financial assets at March 2016 comprise forward foreign exchange contracts. These derivatives have been fair valued using forward exchange rates that are quoted in an active market and falls within level 2 of the fair value hierarchy.

There have been no transfers between valuation levels and no changes in valuation techniques during the period.

17. Related party transactions

There have been no significant related party transactions during the period requiring disclosure.

18. Events occurring after the reporting period

There have been no significant events occurring after the reporting period.

Statement of directors' responsibilities

The directors confirm to the best of their abilities that these condensed interim financial statements have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

· an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

By order of the Board

Martin Bloom

30 June 2017

Chief Executive Officer

John Maguire

30 June 2017

Chief Financial Officer