CHAIRMAN & CEO'S LETTER

Dear Shareholders,

Introduction

AEG is focussed on developing next generation biomass products and the manufacturing processes and technology required to produce them.

The Directors believe that CoalSwitch represents a step change for the pellet industry, utilising steam technologies to produce a more efficient fuel addressing environmental and energy concerns for the immediate future.

In the first half of 2021, AEG achieved a number of significant milestones:

·     the successful financial restructuring of the Company's balance sheet and raising of equity funding to construct the first CoalSwitch reference plant;

·    sales and marketing activities moved from conceptual discussions to testing and analysis of sample fuel quantities produced at Ashland, Maine (the "Ashland Facility");

·     supply of CoalSwitch samples to twelve prospective customers, with ongoing discussions with a number of interested parties, including discussions for technology licensing; and

·     independent testing of initial CoalSwitch production has been completed to show that CoalSwitch is a superior biomass pellet fuel to existing white pellets in terms of heating value and bulk density.

The role of biomass in future energy supply

In the shift towards sustainability, there is an increasing recognition of the need for a balanced energy supply. The provision of a consistent level of base-load electricity within existing electricity grid systems currently requires a combination of energy sources which includes biomass fuels.

The International Energy Agency's ("IEA") "Net Zero by 2050" report shows a scenario of a global increase of 50 exajoules in biomass power to 2050 (equivalent to one-third of China's current annual electricity consumption). The IEA report noted that "Solid bioenergy provides flexible low-emissions generation to complement generation from solar PV and wind and it removes CO2 from the atmosphere when equipped with CCUS (Carbon capture)".

To date, Europe's regulation has led the way in the use of biomass power generation. Asia is fast adopting similar policies and this is expected to lead to future growth in these markets. The USA is now facing similar challenges to accommodate sustainability and maintain power supplies within its existing infrastructure. The interest in next-generation biomass fuels has never been greater. Against this backdrop, CoalSwitch is well positioned.

Strategy

The Board has drawn further confidence from:

·     the utilisation of waste biomass material as a core feedstock;

·      the validation of the steam explosion production process in scale from running the test reactors at Ashland;

·      the additional technical product knowledge and know-how obtained during the first production cycles at Ashland; and

·      the positive market interest in CoalSwitch received to date.

The Board is watching regulatory and technology developments, where recent supply challenges have identified potential power shortages.  Next generation biomass fuels (such as CoalSwitch) will play an important part in addressing the shortcomings of renewable energies within existing electricity grid systems.

Developing a new technology has inevitable challenges and CoalSwitch is no different - notably the recent suspension of production at Ashland in August. However, we have now produced CoalSwitch through an industrial scale facility providing considerable manufacturing data and know-how. Design improvements for the reactors have already been identified alongside ways to simplify the manufacturing process to reduce costs of production.

The market requires a scalable solution to produce next generation pellets and the Directors believe that AEG now has the technical solutions to deliver pellets that have been produced via steam technologies. The Company's strategy is to construct scalable production facilities starting with the design and build of the first 70,000 tonne per year CoalSwitch plant in Ashland.

Operational update

During the first six months of the year, AEG focused its operational activities in two centres on the US East Coast, namely Ashland, Maine and Lumberton, North Carolina. AEG remains focussed on developing manufacturing capacity in the USA, which is at the heart of the current global biomass manufacturing industry. Our locations also allow AEG to make the greatest impact toward the industry changes that the biomass industry needs to make in the coming years.

Operations at Ashland, Maine

During construction of the Lumberton reference plant, AEG and Player Design Inc. ("PDI") received additional commercial enquiries about the possibility of combining CoalSwitch production facilities within existing lumber mill operations in North Eastern USA. This model aligned with the strategy being pursued in Lumberton and the Group was keen to expand into this region. In April 2021, AEG and PDI worked with the State of Maine to obtain a temporary operating permit to allow a second CoalSwitch reference plant to be constructed at PDI's facility at the Ashland Facility.

AEG had sufficient equipment to build a second facility when combined with PDI's existing operating infrastructure at the Ashland Facility. The Board therefore decided to proceed with this development before the permitting and construction issues arose in Lumberton during May 2021. With the subsequent events at Lumberton, resources within AEG and PDI were refocused toward completion of construction of the second reference plant and for it to become operational within the existing timetables. As a result, the reference plant at the Ashland Facility was completed and operational within 14 weeks from the date of issuance of the relevant temporary operating permit. First CoalSwitch fuel production commenced in May 2021 and first deliveries of CoalSwitch to the program organised by the University of Utah, Brigham Young University ("BYU") and PacifiCorp ("PacifiCorp") were made in June 2021.

The Ashland Facility reference plant continued to operate until 5 August 2021 when a monitoring component failure resulted in a suspension of production, rendering both reactors inoperable and requiring replacement. All other equipment at the Ashland Facility remains operable and capable of recommencing CoalSwitch production operations at any time. More importantly, production from the second reference plant validated the steam explosion process to produce next generation biomass fuels on an industrial scale. During the production period, valuable manufacturing and product data was acquired which provides key information to allow the construction of larger scale production facilities.

Operations at Lumberton, North Carolina

Lumberton (the "Lumberton Site") was purchased in 2019 to become a strategic hub for a variety of lumber activities, including the production of next generation biomass fuels, such as CoalSwitch, and performing various ancillary lumber activities, including the production of rail ties and other lumber products. These activities were seen as complementary given AEG's aim to demonstrate that biomass fuel production must work within sustainability goals. By situating all the activities within one facility, AEG sought to demonstrate that biomass fuel manufacture can be successfully accommodated within an integrated lumber producing facility. This model has attracted increasing interest from prospective lumber partners throughout the USA and Canada during 2021 and remains a core component of the Company's strategy.

In respect of the lumber activities during the period, the first quarter provided a number of operational issues for Active Energy Renewable Power LLP ("AERP"), the Company's operating subsidiary at Lumberton. These issues included adverse weather conditions which disrupted log supplies to the Lumberton Site, ongoing supply chain disruption for product distribution and the continuing operational limitations occurring as a result of COVID-19. The Board had set modest goals to operate AERP's lumber and saw log activities at breakeven by the 2020 year-end but did not achieve the operational scale to attain these targets. The Board's review of the lumber and saw log activities at the Lumberton Site determined that they neither aligned with the Group's strategic intent of utilising residual materials in the production of biomass fuels, nor could the investment required to achieve scale for these businesses be justified at the expense of developing CoalSwitch. As a result, the Board took the decision to cease the Company's lumber and saw log activities in AERP.

Since the fourth quarter of 2020, AEG's focus at the Lumberton Site has been the production of CoalSwitch where relevant permits had been issued by the North Carolina Department of Environmental Quality ("NCDEQ") in August 2020. Preparatory engineering work commenced in the third quarter of 2020 using the engineering services of PDI. The Board set a target for first production by May 2021 and fuel available for customer delivery by June 2021. Construction activities commenced in early February 2021, with regular monitoring carried out by the NCDEQ.

In May 2021, AEG received a notice of violation from NCDEQ in respect of the installation of additional control devices to enhance emissions reduction which required an amendment to the existing air quality permits issued by NCDEQ in 2020. AEG and its representatives immediately submitted the relevant amendments to ensure construction might remain on schedule. Subsequent to this, the NCDEQ requested additional information on emissions including data from an operational facility in order to revise and re-issue the permits. AEG was required to suspend construction activities of the reference plant at the Site.

AERP has continued dialogue with the NCDEQ and the NCDEQ has made clear that AEG cannot resume the permit approval process without the independent emissions analysis being submitted. Nonetheless, it remains AEG's intention to develop the Lumberton Site given its optimal location in South-Eastern USA. Sales and marketing activities continue in the region with the aim of securing sizeable CoalSwitch offtake agreements. In the past AERP has leased out parts of the Lumberton Site. AERP continues to examine options to create economic value from the Lumberton Site.

AERP has received legal challenges from the Southern Environmental Law Centre ("SELC") based in North Carolina regarding alleged permit breaches at the Site from an existing wastewater treatment plant. This action correlates to the period when the Group first assumed ownership of the property in 2019. The Directors are confident that the Group fully complies with its environmental and permit obligations and wholly refutes SELC's claims. The Group has requested a dismissal of the legal challenge and awaits the verdict of this application.

Development of sales and marketing activities for CoalSwitch fuel and production technology

With the development plans for production of CoalSwitch underway through the first half of the year, the Group focussed on sales activities to look for long term supply contracts both in North America and internationally.

New personnel have been retained both in the USA and Japan to develop sales and marketing in each region. Within the USA, the prime focus has been to examine opportunities with existing power utilities and other key manufacturing industries who remain current users of coal, such as cement and aggregate industries. The interest remains to focus on co-firing opportunities with these industries that want to address their immediate environmental concerns in the consumption of coal.

The opportunity in Japan is different in that Japan has publicly stated its goals for future biomass consumption, which provides AEG with the opportunity to present its fuels to an incentivised audience. Our marketing efforts in Japan are progressing and samples of CoalSwitch fuel have been delivered and tested with favourable results. AEG is working toward securing long term supply contracts but it is acknowledged that this will take time and dedicated resources.

To date, AEG has supplied fuels to twelve prospective clients and universities for independent analysis within North America and internationally. The first test results, published by the Wood Science and Technology Centre at the University of New Brunswick on 2 September 2021, demonstrate, for the first time in three years, the premier qualities of CoalSwitch as a biomass pellet compared to white pellets.

The CoalSwitch delivered to BYU and PacifiCorp in June 2021 allowed the first stage of the test program (the "Test Program") to commence. The Test Program is designed to facilitate the analysis and co-firing qualities of CoalSwitch in both PacifiCorp and BYU facilities. Having completed the ball mill testing, the next stage of the Test Program is testing of the co-firing process. Additional quantities of CoalSwitch will be required for this next stage and, at this point, we are unable to supply sufficient volumes to complete this test. In the meantime, AEG is working with BYU to focus on an additional co-firing program to provide performance data on CoalSwitch utilising some of the existing fuel supplies in Utah. AEG is also in discussions with other commercial partners for additional co-firing opportunities within North America.

Intellectual property progress during the period 

During the 2021, AEG has continued to develop its intellectual property portfolio and production know-how in regard to CoalSwitch and its manufacture. The award of the patent in the USA (Patent No: 10,858,607) has accelerated an additional patent application in the USA. On 4 June 2021, AEG was notified by the Canadian Intellectual Property Office of the grant of notice of allowance confirming the award of the Canadian patent. Since that announcement, AEG has completed the administrative formalities and awaits the formal award of the Canadian patent.

Production data and know-how acquired in recent weeks will further accelerate the intellectual property program for AEG within North America and internationally. Finally, throughout the period, AEG has continued to focus on opportunities for technology licensing using existing and recently developed intellectual property. Recent enquires from South-East Asia, South Africa and India have all demonstrated the underlying interest in steam technologies to produce biomass fuels. Progress has been slowed by the COVID-19 travel restrictions, but we are working with each of these partners to develop these opportunities.

Corporate

In January 2021, Andrew Diamond was appointed as the Group's Finance Director and in February 2021 Antonio Esposito resigned as Executive Director of the Company.

The Company's application to be listed on Nasdaq OTCQB is complete subject to compliance with the existing trading rules. When the Company's share price complies with these rules, the commencement of trading is expected to be formalised and a further announcement will be provided at that time.

Going concern

The Directors have given careful consideration to the appropriateness of the going concern basis in the preparation of the Unaudited Interim Condensed Consolidated Financial Statements. Further details of our current financial position and uncertainties which may affect the Company's ability to continue operating as a going concern are to be found in the Financial Review and in Note 3 of the Unaudited Interim Condensed Consolidated Financial Statements set out below.

Summary

The first half of 2021 has brought some challenges and a number of steps forward. With the support of our shareholders, CoalSwitch has moved from concept to the production of a next generation biomass fuel, which we have successfully produced and supplied to prospective customers. In addition, our balance sheet has been restructured and the Company is largely debt free.

The next key step for the Company is the design and construction of a facility to produce up to 70,000 tonnes of CoalSwitch per annum, to show that AEG can produce commercial volumes of CoalSwitch and meet market volume demand. Engineering activities are underway to improve the reactor and process designs are underway, following which the Group will seek to obtain the appropriate permits from the State of Maine. It is imperative that we move quickly to achieve these steps.

To maintain our positive momentum, we are examining all options to re-establish limited production at Ashland as soon as practicable, subject to relevant operating permits being granted. Suitable existing test reactors remain available at Lumberton and we are analysing moving and modifying these, as a temporary measure, whilst new reactors are designed and fabricated.

Recent events within the global power industry have highlighted the need for stable and diverse sources of energy supply, including biomass, which of itself needs to evolve to meet increasing environmental criteria and regulation. The Board is more convinced than ever that CoalSwitch has these properties and has an important future role to play. The Board views the prospects of the Company with confidence.

James Leahy                                                                                                    Michael Rowan

Non-executive Chairman                                                                               CEO

27 September 2021

FINANCIAL REVIEW

The Unaudited Interim Condensed Consolidated Financial Statements for the six-month period ended 30 June 2021 ("reporting period" or "H1 21") is compared to the six-month period ended 30 June 2020 ("prior period" or "H1 20") as required by International Financial Reporting Standards ("IFRS")

The Group has made significant progress during H1 21. In February 2021, the convertible loan note ("CLN") holders agreed to either convert their CLN's or have them redeemed. Furthermore, the CLN holders agreed to a release of the security previously held over the Group's assets by the CLN holders. At the same time, the Company raised £7.0 million in an equity fundraising (before expenses), principally to progress the final stages of construction of the first reference plant at Lumberton Facility. These actions restructured the Group's balance sheet and positioned the Company to advance its CoalSwitch product.

On 20 May 2021, the Company announced its 50/50 joint venture arrangement with PDI. Under this joint venture, AEG and PDI jointly own a CoalSwitch plant in Ashland, Maine. The second reference plant was completed and production commenced in May 2021.

On 5 August 2021, a monitoring component failure resulted in an unexpected interruption in a production cycle. As a result of this failure, both reactors at the Ashland Facility are inoperable and will require replacement. All other equipment remains operable and capable of resuming CoalSwitch production operations at any time.

The Company has engaged sales and marketing representatives to establish CoalSwitch supply contracts in North America and internationally. Aside from initial deliveries to BYU and PacifiCorp, CoalSwitch samples have been sent to several prospective customers who have expressed an interest in the fuel and wish to test independently.

In January 2021, Advanced Biomass Solutions Plc ("ABS"), a subsidiary of the Company, agreed a debt facility up to £1 million and has drawn down £550,000 to date. The debt instrument is repayable within twelve months based on monthly capital repayments following a four-month repayment holiday. Initiation fees of 7% were payable, and interest is charged at 10% per annum payable quarterly in arrears. The Company has provided a corporate guarantee as security. The Company has been repaying the amounts drawn down and the balance outstanding at the date of reporting is £284,167.

Going concern

The Interim Financial Statements have been prepared on a going concern basis. Note 3 of the Interim Financial Statements lays out the material uncertainties relating to the Group's ability to continue as a going concern. The net proceeds of the fundraise in February 2021 received by the Company, after CLN redemptions, have been used to construct the CoalSwitch plants at Lumberton and Ashland. The Directors anticipate that further funding will be required in the coming twelve-month period in order to finance plant modifications, expand CoalSwitch production capacity, undertake additional research and testing programs and for marketing activities.

Whilst there can be no guarantee that funding will be available on terms that are acceptable to the Company or at all, the Directors are confident, based on the progress made to date on the production of CoalSwitch, and the restructured balance sheet of the Group, that it will be able to secure the funding required. The Directors are considering a number of options for securing the additional funding including debt and equity or a combination of both.

Performance

During H1 21, the Board has reassessed AEG's strategy and determined that the saw log export business, which involved loading saw logs into containers to be shipped to South-East Asia, did not align with AEG's environmental strategy to focus on the use of residual and waste forestry products from the lumber industry. In addition, the Company has not been able to operate the saw log export business at a scale to produce profitable returns. The level of capital investment required to scale up and operate profitably, to the detriment of CoalSwitch development, was deemed unacceptable and the Board decided it was in the best interests of the Company to cease the operations of this business.

Furthermore, the sawmill business struggled to operate profitably. With a limited pool of capital the Board believes that it is in the best interests of the Group to focus its time and capital allocations on the opportunities presented by CoalSwitch and therefore ceased sawmill activities.

Revenue for H1 21 was US$636,241 (H1 20: US$499,893). With the closure of the saw log and sawmill businesses, the Company does not anticipate further revenues from these businesses in H2 21.

Gross loss for H1 21 was US$496,588 (H1 20: profit of US$357,835) reflecting the difficulties in both trading conditions and the lack of scaled operations in the saw log and sawmill businesses.

Administrative costs were US$1,486,064 (H1 20: US$1,080,087). Costs associated with the operations and closure of the saw log and sawmill businesses have been fully accounted for. The ongoing costs associated with maintaining the Lumberton property have been reduced as far as possible.

The full conversion of the CLN's, which incurred interest charges to 31 January 2021, has reduced the interest cost charge. Foreign exchange costs, which are included in disclosed finance costs resulted in an increase in costs for the reporting period.

Loss for the reporting period was US$2,039,316 (H1 20: US$593,914), and basic and diluted loss per share was 0.06 cents (H1 20: 0.05 cents).

Financial Position

Non-current assets

Additions to plant and equipment of US$4,251,496 relate to the development of the Lumberton and Ashland CoalSwitch plants. The termination of leases following the cessation of the sawmill business resulted in a deemed disposal of US$435,066 of plant and equipment.

Liabilities

Trade and other payables of US$1,573,733 (31 December 2020: US$2,091,657) includes an accrual of approximately US$700,000 for Lumberton and Ashland construction costs which have not yet been invoiced.

Loans and borrowings of US$852,471 (31 December 2020: US$22,127,323) reflects the impact of the removal of the CLN obligation. The remaining balance mainly reflects the ABS debt facility referred to above.

Net debt

The Group reports a net cash position at 30 June 2021 of US$1,135,058 compared to a net debt of US$21,127,692 at 31 December 2020 (see note 11). The strong reduction in the liabilities of the Group reflects the actions taken to strengthen the balance sheet following the conversion and redemption of CLN obligations and the equity raised at the beginning of the year.

Cash Flows

Operating cash outflows of US$3,409,601 (H1 20: US$172,038) included US$1,047,804 of working capital reductions, reflected in the reduction of trade and other payables.

Investing outflows of US$3,543,036 (H1 20: US$95,420) relate to the purchase of equipment related to the CoalSwitch facilities in Lumberton and Ashland.

Financing activities included US$8,994,643 of net equity raised in the fundraising in February 2021, less US$1,484,728 of CLNs redeemed as part of the balance sheet restructuring process. Funds of US$750,296 were raised via the ABS facility in January 2021. 

Directors' Responsibility Statement

The Directors confirm that to the best of their knowledge the unaudited Interim Financial Statements have been prepared in accordance with IAS 34 'Interim Financial Reporting'.

Changes in Directors during the period is discussed in the Corporate section of the Chairman's letter. A list of the current Directors is available on the Company's website: www.aegplc.com

Andrew Diamond

Finance Director

27 September 2021

CONDENSED CONSOLIDATED STATEMENT OF INCOME AND OTHER COMPREHENSIVE INCOME

FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 2021

OTHER COMPREHENSIVE (LOSS) / INCOME

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2021