Audited 2020 Financial Results and Annual Report

30 June 2021

 

Invinity Energy Systems plc

 

("Invinity" or the "Company" or the "Group")

 

Audited 2020 Financial Results and Annual Report

 

Invinity Energy Systems plc (AIM:IES), leading global manufacturer of vanadium flow batteries, is pleased to present below, further to its announcement on 27 May 2021, audited financial results for the year ended 31 December 2020. The full Annual Report and Financial Statements will shortly be available for download from the Investor Resources section of the Company's website and posted to shareholders in the coming days.

 

 

Enquiries:

 

Invinity Energy Systems plc	+44 (0)204 551 0361
Larry Zulch, Chief Executive Officer
Peter Dixon-Clarke, Chief Financial Officer Joe Worthington, Director of Communications
Canaccord Genuity (Nominated Adviser and Joint Broker)	+44 (0)20 7523 8000
Henry Fitzgerald-O'Connor / James Asensio
VSA Capital (Financial Adviser and Joint Broker) Andrew Monk / Simon Barton	+44 (0)20 3005 5000
Hudson Sandler (Financial PR) Nick Lyon / Nick Moore	+44(0) 207 796 4133

 

Notes to Editors

 

Invinity Energy Systems plc (AIM:IES) manufactures flow batteries for large-scale, high-throughput energy storage requirements of business, industry and electrical networks.

 

Invinity's factory-built flow batteries run continually with no degradation for over 25 years, making them suitable for the most demanding applications in renewable energy production. Energy storage systems based on Invinity's batteries are safe, reliable, and economical, and range in size from less than 250 kilowatt-hours to tens of megawatt-hours.

 

Invinity was created in April 2020 through the merger of two flow battery industry leaders: redT energy plc and Avalon Battery Corporation. With over 10 MWh of systems deployed to date across 40 sites in 14 countries, Invinity is active in all major global energy storage markets and has operations in the UK, Canada, USA, China and South Africa. Invinity Energy Systems plc is listed on the London Stock Exchange.

 

To find out more, visit invinity.com or call Investor Relations on +44 (0)204 551 0361. 

 

Audited financial results for the year ended 31 December 2020

 

Chairman's report

 

The adoption of net zero commitments by the world's largest economies, biggest companies and most influential organisations is leading to the increasingly rapid roll-out of renewable energy projects. This provides Invinity with an unprecedented opportunity to benefit from its strategic focus on stationary energy storage with its Vanadium Flow Battery ("VFB") product. 

With the UN Climate Change Conference of Parties (COP26) scheduled for November this year in Glasgow, I have noted a distinctive uptick in urgency to practically address climate change, accelerating progress toward a future increasingly powered by low-carbon energy sources. Energy storage is the bridge to take power from clean, low-cost but fundamentally intermittent solar and wind energy to round-the-clock reliable power. It is becoming abundantly clear that there is a vast opportunity for energy storage manufacturers such as Invinity. 

In my report last year, I noted that 2020 would be a transformational year for the Group. I am accordingly pleased to report that Invinity has had a breakthrough first year, successfully completing the transatlantic merger, launching a new product under a new brand, and building an organisation capable of scaling up to meet the opportunity in front of us.

These steps were accomplished during the most challenging year in recent history. Successfully merging two companies on either side of the Atlantic, whilst servicing existing customers and launching a new product in a highly competitive space is a difficult task at the best of times, let alone during a global pandemic. COVID-19 has understandably had a disruptive effect on the Group's activities, introducing additional challenges for the Invinity team, our customers, partners and suppliers.

However, I am delighted to report that despite COVID-19, the Group made tremendous progress. In 2020, Invinity closed 18.6MWh of sales contracts, which more than doubled the combined sales of redT and Avalon pre-merger.  In addition, we successfully rolled out a new "best of both" product, the VS3, and ended the year with an oversubscribed £22.5m placing and open offer.  This fund raising is providing expansion capital to scale up the business in line with growing demand for our VFBs.

I would like to commend our executives for their leadership during the period and express my sincere thanks to, and respect for, the entire Invinity team for its unwavering dedication and enthusiasm in delivering the progress we have seen. I would also like to thank my Board colleagues for their support and contribution.  Larry Zulch and Matt Harper joined the board from Avalon in the roles of Chief Executive Officer and Chief Commercial Officer, respectively, and have since been joined by Peter Dixon-Clarke in the role of Chief Financial Officer. I would also like to record my thanks to Fraser Welham who steered us through the merger before stepping down as Chief Financial Officer and from the board in August 2020.  We have also seen changes on the Non-Executive front and I am pleased to welcome Rajat Kohli who joined the Board in June 2020.

I am also extremely pleased to note the recent announcement of a Joint Development and Commercialisation Agreement with Gamesa Electric, a wholly owned subsidiary of Siemens Gamesa Renewable Energy ("SGRE"). This partnership with a global leader to develop a new grid-scale product represents important validation of our core technology, underscores the importance of our achievements to date and serves to highlight the magnitude of the commercial opportunity ahead for VFBs.  

In closing, 2020 saw the successful creation of an effective and cohesive organisation with strong foundations on which to build a sustainable business. The period saw Invinity navigate the vast array of challenges presented by the COVID-19 pandemic and emerge stronger for doing so. 2021 has seen the business focus on delivering our projects, converting our growing pipeline of commercial interest into closed sales and scaling the business responsibly to generate long term value for our shareholders.

As the world looks to a sustainable future, Invinity's prospects look ever brighter. I look forward to another successful year.

 

Neil O'Brien

Chairman

 

30 June 2021

 

Chief Executive Officer's report

2020 was quite a year. For the Group, it was the year that Invinity was formed with the objective to establish the commercial viability of vanadium flow batteries ("VFBs"). I'm pleased to report that the Company has made important progress in that effort as I'll detail below.

Macro trends are supporting Invinity's prospects. The global transition to low-carbon energy sources is accelerating. Whether sun, wind, or tide, renewable energy production is fundamentally intermittent. That intermittency requires large-scale, long-duration, and durable energy storage to make energy available when it is needed, to make renewable energy 'dispatchable.' That's where Invinity comes in, with highly advanced products using proven VFB technology. Invinity's batteries have unique characteristics that strongly position our products within emerging segments of the stationary energy storage landscape.

Commercial: Growing market share with record-breaking sales 

During 2020, Invinity's commercial group, led by Chief Commercial Officer Matt Harper, closed VFB sales totalling 18.6 MWh with customers in seven countries. In one year, our team sold VFBs with twice the capacity of the entire redT and Avalon historical fleets combined.

Not only do these sales demonstrate growing acceptance of our technology, many of them are also 'beachhead' projects with significant opportunities for follow-on sales. These projects were not confined to a single market segment. Some were in "grid services" (support of electric transmission and consumption), others in "renewable energy smoothing" (taming intermittency) and yet more in "commercial and industrial" (resilience and self-consumption of renewable energy).

Projects closed in 2020 include:

·    5 MWh Energy Superhub Oxford project, UK.

·    1.8 MWh Flow + Hydrogen + Tidal project, Orkney Islands, UK;

·    0.5 MWh California Energy Commission funded project, California, USA;

·    8 MWh Yadlamalka Energy solar-plus-storage power plant, South Australia; and

·    0.8 MWh Scottish Water treatment plant, solar-plus-storage, Perth, UK.

I will discuss our organisation's progress towards the delivery of these projects in the Execution section of this report.

Our commercial group continues to focus on new opportunities, which have been abundant, especially in our core markets in California and the rest of the USA, UK and Australia. Major factors that are helping accelerate our commercial progress in 2021 include:

·    widespread acceptance of the critical nature of energy storage in the transition to renewable energy-based economies;

·    greater understanding of the limitations of lithium-based battery systems and emerging appreciation for VFB's strengths in high cycle and long duration applications;

·    storage-oriented, and particularly alternative-to-lithium-focused, competition and grant opportunities in the UK and USA; and

·    favourable tax treatment and policy developments for 'renewables plus energy storage' projects across the globe as governments look to stimulate investment as part of their pandemic recovery strategies.

Our commercial group has observed that the average project value we encounter has grown more rapidly than expected, up 44% year-on-year. While this is certainly positive in general, larger deals take longer to close, and the pandemic's influence has also led to delays. Since we don't disclose details of deals that are not signed, we find delays can create frustrating silences despite positive assurances "behind the scenes." Ultimately, our disciplined recognition of projects is healthy and helps build our credibility. I'm pleased to report that our future sales prospects are strong.

Further bolstering what we believe is our emerging reputation for delivering on our promises is the process we employ for assembling our sales pipeline. All of our sales' opportunities, as is typical for our industry, move through a series of stages, sometimes in a few short months, but often taking well over a year.

We take a conservative approach to the categorisation of our sales prospects and do not place a deal in the 'Pipeline' category until we are confident that there is a realistic prospect of us winning it. Deals only move from the broad "Pipeline" category to "Upside" (relative to our Base category) when our confidence in its close has grown considerably, generally when our customers have informed us that we have won their business. We set all of our internal planning, including reservation of production slots and working capital, on deals in our "Base" category, displaying our high level of confidence that they will close because we are actively negotiating the sales contract. Despite that high confidence, some deals in the "Base" category do fall through; in those rare cases, we usually find we don't have to wait long to fill those empty production slots with new opportunities from the Upside list. 

Below are the numbers in each category, as at 17 May 2021. Since the previous reported figures (17 March 2021) we continued to see strong growth in our overall pipeline, which has increased 30% overall since 17 March 2021 and 70% since the Company released its Admission Document in March 2020. This has been accompanied by a notable increase in the Base over the same periods. I note the reduction in the Upside category reported below which was primarily due to a delay to the expected close date of a single large project well into 2022, with that project now forming part of our Pipeline.

	Closed	Base	Upside	Pipeline
17 May 2021 4 March 2021	19.1 MWh 18.6 MWh	10.1 MWh 9.1 MWh	30.8 MWh 50.3 MWh	232.0 MWh 143.7 MWh
% Change	+ 3%	+ 11%	- 39%	+ 61%

 

Further details on the above, including fundamental methodology and category definitions, are available in the Company's recent regulatory filings.

Execution: Delivering on our promises

While our commercial team has been focused on signing new business, we have three highly capable teams working toward delivering already closed projects. The successful delivery and commissioning of our committed new projects is the Company's single highest priority.

Execution starts with our Solutions Engineering team under the leadership of Jean-Louis Cols, our Vice President Solutions Engineering who is based in Bathgate. Mr. Cols' team determines what is needed to ensure our product capabilities meet our customers' project requirements. I mentioned above how the variety of our projects - they run the gamut from storing tidal power for efficient operation of a hydrogen electrolyser in the Scottish islands, to maintaining grid stability in South Australia with a "solar power plant," to supporting the electrification of Oxford - means each one can be viewed as a beachhead into a broader market. However, that variety provides unique challenges for the Solutions Engineering team, often preventing them from realising the efficiencies achieved by repetition. Fortunately, I'm confident they are up to the task and that follow-on projects will benefit from their pioneering work.

Next is our Operations team under the leadership of Neil Lang, our Chief Operating Officer, based in Vancouver. Mr. Lang's team is tasked with assembling a global supply chain for the components of our battery systems and arranging for the manufacture and shipping of the completed product. This far-from-simple task was made significantly more complex in 2020 (and in 2021) by the impact of COVID-19. Neil's team has adapted to industry-wide challenges in supplier production, congested shipping, temporary assembly-line shutdowns and more. While the net result has been the introduction of delays into some of our manufacturing lead-times, it could have been much worse had the Operations team not successfully performed exceptional work to anticipate and prevent major issues.

Finally, our Customer Operations team, under the leadership of Sean Ellickson, our Vice President Customer Operations in Vancouver, is responsible for project installation and commissioning. Mr. Ellickson's team's other responsibility is ensuring that our customers have a great experience with our systems once they have been installed, including the fleet installed by Avalon and redT, a global task also impacted by the pandemic.

I've gone into some detail about the three teams delivering on projects as they merit more recognition than they typically get and because I'm very proud to be working with such talented, hard-working people. Their capabilities are a major asset of the Company.

Integration: Laying the foundations for sustainable growth

Our primary operational focus in our first year was to successfully integrate redT energy and Avalon into a single, scalable organisation operating as one company under a single brand. The progression of Invinity Energy Systems from a concept to a unified and integrated company affected every element of the business from accounting, HR and IT systems to product development and solution engineering, to supply chain and operations, to sales, marketing and all other commercial activities. It would not have been our first choice to conduct this integration in the teeth of a global pandemic, but our teams worked remotely across oceans and took on the challenge with resolve and fortitude.

Notable integration accomplishments in 2020 included the rapid development of a website and brand, designing and launching the latest generation of our VFB, the VS3, using technologies from both companies and creating a single organisation characterised by functional rather than geographic divisions. We scaled up our manufacturing capabilities and met regulatory and exchange requirements in a timely manner with information assembled from operations around the world.

Product Direction

Fundamentally, Invinity is a product company. We build the most advanced VFBs available today as demonstrated by manufacturing a sophisticated, high-performance product at scale in a factory, but we are by no means satisfied.

We must reduce the cost of our battery systems yet further. In applications where our VFB's ability to cycle without degradation is paramount, or the duration of energy storage is relatively long, we are already economically competitive. There are applications, however, where our VFBs are suitable - and may even be the most economical alternative over the life of the project - but their higher initial cost prevents them from currently being considered for deployment. Lowering costs will expand our ability to access those market applications.

We are aggressively reducing costs in our current VS3 product. It starts with the product development process under the leadership of Brian Adams, Vice President of Product Development in Vancouver. Mr. Adams' team focuses on cost, performance and reliability, bringing to the product design process innovations based on their extensive analysis of our flow batteries in operation in the field and their vast experience in flow battery design. The Product Development team's work incorporates performance improvements based on the innovative work in electrochemistry performed by our Technology team under the direction of Andy Klassen, our Chief Technology Officer also in Vancouver.

Invinity's product and technical teams have focused on product design and manufacturing process improvements. They have been able to enhance performance of the VS3 modular product platform and enable greater factory production rates. Advances achieved over the period include improved product modularity to deliver large battery arrays faster, enhanced battery management systems (BMS) and updated cell stack component design for manufacture as well as various other performance improvements. Other notable R&D achievements included advances in core technology materials science, improved BMS algorithms and the granting of 18 additional international patents.

Improvements in product design delivering solutions for innovative applications closed by our Commercial team produce a "virtuous circle." Improved economics from design-for-manufacturing improvements and higher volume production result in lower manufacturing costs. Those reduced costs unlock additional sales opportunities that increase production volume. The resulting cost reductions drive even more business.

Meeting energy storage requirements at grid scale, with project sizes an order of magnitude bigger than our current largest contracts to date, will require further development and even lower product costs as measured primarily by Levelized Cost of Storage (LCOS), a cost analysis methodology that views the entire project cost and capabilities over the project life. Large project developers, such as electric utilities, tend to focus on LCOS. We are highly confident in our ability to achieve significant advances in this area as I will detail further in the "looking to the future" section of my report.

Corporate & Financial

The favourable conditions for energy storage and the advanced state of our integration led us in 2020 to analyse the capital requirements needed to best meet the market opportunity we could see so clearly in front of us. That led to a highly successful fundraising completed in December 2020 of £22.5m that put the Group in a position to grow with our current VS3 product and to develop the next generation of VFB simultaneously.

We have remained vigilant about expenses and have undertaken a rigorous process regarding additions to headcount. This has led to the Group currently employing 125 people, up from 101 at the end of 2020 and 85 at the merger. The Group made a loss for the year of £24.3m as we invested in integration and the future. This, along with other financial matters are covered in more detail by Peter Dixon-Clarke, our CFO, in his report.

Looking to the future

If 2020 was the year for Invinity to set the stage for future success - merging two companies, integrating our teams, establishing commercial traction and raising capital - 2021 is the year in which we start to demonstrate our capabilities on a wider stage.

As we successfully deploy the large projects that are underway, we will demonstrate with experience across a broad spectrum of applications what we have known to be true: our VFBs work well at scale and are the best option for a large number of energy storage requirements.

As we make improvements to, and lower costs of, our VS3 VFB, we will demonstrate our ongoing commitment to product evolution through improving performance without sacrificing reliability.

As we announce new signed deals, we will demonstrate our ability to succeed commercially and grow our share of the emerging energy storage market.

We will do all of this while embarking on the product development process announced on 11 May of this year, working with Gamesa Electric, the power electronics subsidiary of Siemens Gamesa Renewable Energy, to create a next-generation, grid-scale VFB and jointly commercialise the resulting product. This Joint Development and Commercialisation Agreement, after extensive interactions between the parties, represents tremendous validation of and opportunity for Invinity.

As a multi-year undertaking, it will require determination on our part and patience on the part of our shareholders, but the scale of the opportunity and its potential rewards are enormous. We will do our utmost to deliver on the potential for VFBs to become a leading part of the world's push towards a sustainable and profitable net-zero future.

In closing, I would like to acknowledge Invinity's most important asset: our dedicated and hard-working staff who meet each new challenge with passion and enthusiasm. I am extremely proud to be working with such a fine team. My sincere appreciation also to our shareholders, both retail and institutional, for their continued support during a crucial phase for our business. We will uphold your trust.

 

Larry Zulch
Chief Executive Officer

30 June 2021

 

Chief Financial Officer's report

2020 was an exceptional year, and not just because of the global pandemic.  Each of the three core themes were 'one-offs', being: the completion of the Group merger; the refinancing of the merged Group; and the first steps in commercialising the new combined product, the VS3.

The merger between redT energy plc and Avalon Battery Corporation (Avalon) was completed on 1 April 2020, and the Avalon results have been incorporated from that point.  Avalon was acquired in an all-share purchase for £17.3m, which generated goodwill of £18.2m.

The refinancing of the merged Group was achieved by way of two placings and open offers, along with a convertible loan, which was fully converted into shares before the year end.  The total value raised was £30.8m and is summarised below.  All values are after expenses:

	£m
First placing and open offer Riverfort facility - converted to equity Second placing and open offer	7.4 1.9 21.5
Total	30.8

 

The post-merger product, the VS3, was launched in the year and combines the modular approach of the Avalon Flow Battery (AFB) with know-how from the redT product (Gen 3).  At six-times the output per minimum unit size of the AFB, the VS3 enjoys the cost benefits of both standardisation and scale. 

The most significant step in commercialising the VS3 was the closure of sales contracts totalling 18.6MWh during the year.  The contracts represent future revenue of approximately £11.7m, the majority of which is expected to be recognised in the second half of 2021.  Of this balance, £2.6m had already been received as deposits by the year end.

Operations

The results and balances of Avalon have been consolidated into the Group's results from the effective date of the merger, being 1 April 2020. The results of Avalon are not included in any comparative financial information.

The Group made a gross loss of £0.8m (2019: £0.1m) and a total loss of £26.3m (2019: £7.7m) for the year ended December 2020.

All £0.4m (2019: £0.2m) of the recognised revenue related to sales contracts for the pre-merger Avalon AFB product.  The associated cost of these sales was £1.2m (2019: £0.3m) and, whilst this generated a gross loss, losses only arose from the first two of the seven sales contracts signed, with all subsequent sales delivered at a gross profit.  In addition, the Company incurred relatively high costs related to unabsorbed overheads from manufacturing downtime that is not expected to reoccur post-lockdown.

Increased administrative expenses of £9.6m (2019: £6.6m) reflects the greater operational and geographic scale of the combined Group.  Of the £9.6m, £5.8m relates to staff costs (including accounting charges for share-based compensation), £1.1m to research & development (none of which was capitalised during the year) and approximately £1.0m related to professional fees (2019: £0.7m).

Other items of operating income and expense of £9.8m (2019: £0.8m) related primarily to the £6.1m write-off of historic redT capitalised development costs related to the legacy Gen 3 machine that was discontinued in the year and a £2.1m provision for onerous contracts (of which £1.0m was charged against Inventory purchased to service those contracts). 

The increase in the onerous contract provision reflects the decision to early adopt the amendment to IAS 37 that requires inclusion of an estimate of indirect overhead to service a warranty claim when establishing a provision together with the number and size of open sales contracts at the year end. Direct costs were also impacted by a spike in international shipping rates and increased steel costs caused by the second global lockdown.
 

Financing

Net financing costs of £2.3m (2019: net financing income of £0.1m) were incurred during the year, of which the majority related to the share-conversion feature included in the Riverfort convertible loan facility. More than 90% of financing costs incurred during the year were non-cash in nature.

At the end of the year, the Group had cash on hand of £22.0m and had no debt, having converted both the $5.0 million Bushveld facility and the £2.0m Riverfort facility, including accrued interest and charges, to equity during the year.  Cash movements in the year were as follows:

	£m
Cash at 1 January 2020 Net operating outflows Investing outflows Cash acquired in merger Refinancing, net (see above)	1.2 (10.9) (0.4) 1.3 30.8
Cash at 31 December 2020	22.0

 

Going concern

The Group's cash balances at the end of May 2021 totalled £14.3m. Latest cash flow forecasts indicate average monthly cash usage is expected to continue at approximately £1.1m over the next 12 months and that, provided existing contracts are delivered and new contracts are signed as forecast and that materials costs start to return to pre-lockdown levels in 2022, the existing cash will be sufficient to fund the business for at least the next 12 months.

As with many companies at this stage in the development cycle, the Company is reliant on timely sales receipts and should customer receipts from delivering existing contracts or closing new contracts be delayed by two months or more then, assuming the Group maintains its current operational capacity, it will be necessary to raise further funding within the next 12 months in order to continue trading and to deliver on its strategic objectives.

A detailed summary of the factors considered by the Board in making the going concern assessment in respect of the Annual Report and Financial Statements together with a description of the material uncertainty that exists is included in the Directors' Report on pages 33-35 of the Annual Report and in the Basis of Preparation contained in Note 2 to the Financial Statements.

Outlook

Delivery of the existing contracts is the operating priority for 2021.  Not least because successfully delivered contracts act as a catalyst for future VS3 sales, generate additional cash and will allow the related revenue to be recognised in the second half of 2021.

Along with delivery, focus will remain on driving down the existing product cost base.  In addition to the opportunities from scaling up and increasing manufacturing efficiencies, will be the anticipated savings as the global supply chain begins returning to pre-lockdown pricing, particularly for shipping and steel.

 

Peter Dixon-Clarke
Chief Financial Officer

30 June 2021

Sustainable Investing and ESG

As a company at the forefront of the global energy transition, Invinity is committed to operating responsibly and sustainably in the pursuit of our corporate mission. We aim to make a meaningful contribution to all of the UN's Sustainable Development Goals (SDGs), focussing primarily on supporting UN SDG 7 (Affordable and Clean Energy) and UN SDG 13 (Climate Action).

Furthermore, Invinity is proud to have been one of the first recipients of the London Stock Exchange's Green Economy Mark, which recognises companies that derive 50% or more of their total annual revenues from products and services that contribute to the global green economy.

Environmental Impact

We are committed to Climate Action. The core activity of our business is concerned with accelerating the global transition to a low-carbon energy system. Invinity's Vanadium flow batteries ("VFB") complement renewable energy generation such as solar PV, wind turbines and tidal power to deliver 'dispatchable', on-demand energy. Together, these resources can displace fossil fuel powered generation and accelerate the phasing out of coal and gas from the global generation mix while continuing to deliver the reliable, low-cost power that is the cornerstone of our modern energy system without having a destabilising effect on the grid.

Our VFBs are also highly recyclable, consisting primarily of easily and widely recyclable materials. For instance, the vanadium which is used in the electrolyte in our VFBs is found in abundance in the earth's crust and can be reused and recycled almost indefinitely. Furthermore, our batteries also do not use so-called 'conflict minerals', such as Cobalt.

Today, our batteries are installed at numerous sites across the world, playing a key role in renewable energy projects which deliver significant CO₂ savings on an ongoing basis for energy intensive businesses, industry and electricity networks.

As a fast-growing company that provides solutions which help avoid or remove emissions, we are fully committed to taking action to reduce our own carbon footprint and in recognition of the United Nation's Race to Zero Campaign, we have signed up to The SME Climate Commitment.

Because of the threat that climate change poses to the economy, nature and society-at-large, our Company commits to take action immediately in order to:

·    halve our carbon intensity (on a CO₂ / revenue basis) before 2030;

·    achieve net zero emissions before 2050;

·    disclose our progress on a yearly basis.

In doing so, we are proud to be recognised by the United Nation's Race to Zero campaign, and join governments, businesses, cities, regions, and universities around the world with the same mission.

Social Impact

We empower our people, partners and customers to change the world. Invinity is committed to fulfilling our social responsibility to all stakeholders and making a positive social impact within the communities in which we operate. We are committed to business and development growth that incorporates:

·    being a great place to work - We treat our people fairly, training and developing them to be the best they can be and providing a work/life balance;

·    supporting employee health, safety and wellbeing - We ensure our people leave work as healthy as they arrive, while constantly striving to provide a safe working environment;

·    strengthening diversity and inclusion - We value all our people equally and are committed to building a workplace free from harassment where individuals can flourish;

·    collaborating with our communities - We are committed to sharing our knowledge with schools, colleges and universities with particular reference to the STEM agenda; and

·    giving something back - In addition to working with education establishments, as Invinity grows we will seek partnerships that advance the interests of social or charitable organisations who serve the communities in which we operate.

 

Governance

Invinity is committed to high standards of corporate governance for which the Directors are accountable to stakeholders and particularly shareholders. The Company is quoted on the AIM Market of the London Stock Exchange (AIM) and as such is required to apply a recognised corporate governance code. During 2018, the board adopted the Quoted Companies Alliance Corporate Governance Code (the "QCA Code"), which is designed for small to mid-sized companies and which has been adopted by many AIM companies. Invinity continues to apply the ten principles of the QCA Code and further information regarding required disclosures and corporate governance can be found in the Governance section of the Annual Report.

 

Consolidated statement of comprehensive loss

For the year ended 31 December 2020

			Restated
		2020	2019
Continuing operations	Note	£'000	£'000
Revenue	3	406	227
Cost of sales	5	(1,221)	(275)
Gross loss		(815)	(48)
Operating costs
Administrative expenses	9	(9,593)	(6,565)
Other items of operating income and expense	10	(9,822)	(832)
Loss from operations		(20,230)	(7,445)
Finance income	12	1	1
Finance costs	12	(2,298)	(28)
(Loss) / gain on foreign currency transactions		(1,744)	92
Net finance costs	12	(4,041)	65
Loss before income tax		(24,271)	(7,380)
Income tax expense		-	(5)
Loss from continuing operations		(24,271)	(7,385)
Discontinued operations
Loss from discontinued operations after taxation		-	(35)
Gain on sale of discontinued operations		-	578
Loss for the year		(24,271)	(6,842)
Other comprehensive loss
Items that may reclassified subsequently to profit or loss:
Exchange difference on the translation of foreign operations		(2,162)	(845)
Total comprehensive loss for the year		(26,433)	(7,687)
Arising from
Continuing operations		(26,433)	(8,088)
Discontinued operations		-	401
		(26,433)	(7,687)
Basic loss per share in pence	13
From continuing operations		(41.0)	(40.6)
From continued and discontinued operations		(41.0)	(37.6)
Diluted loss per share in pence	13		Restated
From continuing operations		(41.0)	(40.6)
From continued and discontinued operations		(41.0)	(37.6)

 

The above consolidated statement of comprehensive loss should be read in conjunction with the accompanying notes.

Prior year loss per share has been restated to give effect to the 50:1 share consolidation that took place on 1 April 2020. The restatement is made to aid comparability with current year loss per share.

 

Consolidated statement of financial position
At 31 December 2020

			Restated
	Note	2020	2019
		£'000	£'000
Non-current assets
Property, plant and equipment		695	254
Right-of-use assets		1,014	71
Goodwill and other intangible assets	8	24,127	12,789
Total non-current assets		25,836	13,114
Current assets
Inventories	16	905	236
Other current assets	14	1,414	726
Contract assets	4	5	58
Trade receivables	4	33	62
Cash and cash equivalents	15	21,953	1,243
Total current assets		24,310	2,325
Total assets		50,146	15,439
Current liabilities
Trade and other payables	17	(2,468)	(1,523)
Contract liabilities	4	(2,644)	(38)
Lease liabilities		(161)	(52)
Borrowings	18	-	(1,143)
Provisions	4	(1,927)	(95)
Total current liabilities		(7,200)	(2,851)
Net current assets/ (liabilities)		17,110	(526)
Non-current liabilities
Lease liabilities		(595)	-
Total non-current liabilities		(595)	-
Total liabilities		(7,795)	(2,851)
Net assets		42,351	12,588
Share capital and share premium		162,415	109,192
Share based payment reserve		3,762	2,250
Accumulated losses		(122,185)	(97,914)
Other reserves		(1,641)	(940)
Total equity		42,351	12,588

 

The above consolidated statement of comprehensive loss should be read in conjunction with the accompanying notes.

The financial statements were authorised by the board of directors and authorised for issue on 30 June 2020 and were signed on its behalf by:

Michael Farrow

Director

 

Consolidated statement of changes in equity

	Share capital and share premium	Share-based payment reserve	Accumulated losses	Translation reserve	Other reserves	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2020	109,192	2,250	(97,914)	482	(1,422)	12,588
Total comprehensive loss for the year	-	-	(24,271)	-	-	(24,271)
Other comprehensive loss
Foreign currency translation differences	-	-	-	(2,162)	-	(2,162)
Total comprehensive loss for the year	-	-	(24,271)	(2,162)		(26,433)
Transaction with owners in their capacity as owners
Contribution of equity, net of transaction costs	31,734	-	-	-	-	31,734
Issue of ordinary shares as consideration for a business combination, net of transaction costs	21,403	-	-	-	-	21,403
Exercise of share options	86	-	-	-	-	86
Fair value realised on note conversion	-	-	-	-	1,461	1,461
Share based payments	-	1,512	-	-	-	1,512
Total contributions by and distributions to owners	53,223	1,512	-	-	1,461	56,196
At 31 December 2020	162,415	3,762	(122,185)	(1,680)	39	42,351

 

The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

 

	Share capital and share premium	Share-based payment reserve	Accum-ulated losses	Translation reserve	Other reserves	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2019	106,250	2,225	(91,072)	1,327	(1,422)	17,308
Total comprehensive loss for the year	-	-	(6,842)	-	-	-
Other comprehensive loss
Foreign currency translation differences	-	-	-	(845)	-	(845)
Total comprehensive loss for the year	-	-	(6,842)	(845)	-	(7,687)
Transaction with owners in their capacity as owners
Contribution of equity, net of transaction costs and taxes	2,942	-	-	-	-	2,942
Share based payments	-	25	-	-	-	25
Total contributions by and distributions to owners	2,942	25	-	-	-	2,967
At 31 December 2019	109,192	2,250	(97,914)	482	(1,422)	12,588

 

The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

Consolidated statement of cash flows
For the year ended 31 December 2020

			Restated
	Note	2020	2019
		£'000	£'000
Cash flows from operating activities
Cash used in operations	6	(10,885)	(6,660)
Interest received		1	1
Interest paid		(32)	(3)
Income taxes paid		-	(5)
Net cash outflow from operating activities		(10,916)	(6,667)
Cashflows from investing activities
Acquisition of property plant and equipment		(349)	(6)
Acquisition of intangible assets	8	(9)	-
Proceeds from the sale of discontinued operations		-	628
Net cash outflows from investing activities		(358)	622
Cashflows from financing activities
Payment of lease liabilities		(163)	(91)
Proceeds from the issue of share capital, net of transaction costs		28,915	2,942
Proceeds from the issuance of convertible notes, net of transaction costs		1,944	-
Proceeds from borrowings	18	-	1,165
Acquisition of cash through business combination	7	1,264	-
Proceeds from the exercise of share options		37	-
Net cash inflow from financing activities		31,997	4,016
Net increase/ (decrease) in cash and cash equivalents		20,723	(2,029)
Cash and cash equivalents at the beginning of the year		1,243	3,344
Effects of exchange rate changes on cash and cash equivalents		(13)	(72)
Cash and cash equivalents at the end of the year	15	21,953	1,243

 

The above consolidated cash flow statement should be read in conjunction with the accompanying notes.

 

Notes

(forming part of the consolidated historical financial information)

1. General Information

 

Invinity Energy Systems plc is a public limited company (plc) incorporated in Jersey under the Companies (Jersey) Law 1991 and limited by shares. The Company is domiciled in Jersey with its registered office address at: 3rd floor, Standard Bank House, 47-49 La Motte Street, St. Helier Jersey, JE2 4SZ. The Company is listed on the Alternative Investment Market of the London Stock Exchange with the ticker symbol IES.L.

The principal activities of the Company and its subsidiaries (together 'the group') relate to the manufacture and sale of vanadium flow battery systems plus associated installation, warranty and other services.

 

2. Summary of significant accounting policies

Basis of preparation

These consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, the associated interpretations issued by the IFRS Interpretations Committee (together 'IFRS') and in accordance with the Companies (Jersey) Law 1991.

Separate presentation of the parent company Financial Statements is not required by the Companies (Jersey) Law 1991 and, accordingly, such statements have not been included in this report.

The significant accounting policies applied in preparing these consolidated Financial Statements are set out below. These policies have been consistently applied throughout the period and to each subsidiary within the group.

The Financial Statements have been prepared under the historical cost convention except where stated.

Going concern

In the fourth quarter of 2020, prior to the second UK lockdown, the Group raised £21.5 million (after expenses) by way of a placing and open offer.  Whilst the placing was significantly over-subscribed, the directors chose to limit the number of new shares issued and hence funds raised to the authorities then held for the dis-application of pre-emption rights, as this supported the business plan at that time.

The purpose of the placing was to provide funds for the planned scale-up of the business in order to accelerate the delivery of existing contracts and the closing of new contracts as well as driving the product cost savings arising from greater economies of scale.  Whilst the Group has been scaling up during the first half of 2021, the impact of the second lockdown delayed the delivery of existing contracts and the closing of new contracts and has also resulted in increased input costs, particularly related to shipping services and steel.

The Group's cash balances at the end of May 2021 totalled £14.3 million.  The Group's latest cash flow forecasts indicate that, provided existing contracts are delivered and new contracts are signed as forecast and that materials costs start to return to pre-lockdown levels in 2022, the existing cash will be sufficient to fund the business for at least the next 12 months.

Should customer receipts, from delivering existing contracts or closing new contracts, be delayed by two months then, assuming the Group maintains its current operational capacity it will be necessary for it to raise further funding within the next 12 months in order to continue trading and delivering on its strategic objectives.

Based on the recent signing of a Joint Development Commercialisation Agreement (JDCA) with Gamesa Electric S.A.U. (a wholly owned subsidiary of Siemens Gamesa Renewable Energy) along with ongoing discussions with existing and potential customers, grant providers, investors and debt providers, the directors are optimistic that the necessary customer receipts or, if delayed, additional funding will be secured in the appropriate time scale.  It therefore considers it appropriate to present these Financial Statements on a going concern basis. 

However, the Group's need to secure customer receipts or additional funding, creates a material uncertainty that casts significant doubt about its ability to continue as a going concern.  In addition to the issues discussed above, the directors have also reviewed other varying, and wide-ranging information relating to both present and future conditions when reaching their conclusion regarding going concern.  These included the:

-      opportunity presented by the emergent energy storage market,

-      commercial viability of the Group's existing product within this market,

-      growing sales pipeline of 273MWh against 203MWh at the March Trading Update, and

-      validation of the business as provided by the JDCA with Gamesa Electric.
 

Having taken all the above factors into account, the directors continue to believe it is appropriate to prepare these Financial Statements on a going concern basis, noting the material uncertainty that exists arising from the need to secure customer receipts or long-term funding within the coming months.

The Financial Statements do not include any adjustments that would be necessary if the Group were unable to continue as a going concern.

Reclassification of prior year figures

In preparing the Financial Statements for the year ended 31 December 2020, certain changes have been made to the comparative financial information presented in respect of the year ended 31 December 2019. All of the changes made relate to the reclassification of transactions or balances to improve the financial statement presentation and better reflect the underlying nature of transactions and balances in question.

There has been no change to either net assets at 31 December 2019 or to net loss for the year ended 31 December 2019 as previously reported. Accounting standards require that reclassifications are presented as restatements of previously reported financial information.

Summary of reclassifications made

Revenue and administrative costs, notes 3, 9

Grant income received in the year ended 31 December 2019 and recognised as revenue in that year has been reclassified where the terms of the grant show that grant funds received relate to contributions in respect of development or other costs. A total of £436k previously recognised as revenue have been reclassified to administrative costs to offset the underlying costs the grants were awarded in respect of.

Cost of sales and administrative expenses, note 5,9

Overhead and other costs of £60k related to operational staff or facilities that were classified within administrative costs in 2019 have been reclassified as cost of sales. The revised presentation is considered to better reflect the nature of the costs.

Administrative and other items of operating income and expense, note 9,10

Inventory impairments of £332k that were classified within administrative costs in 2019 have been reclassified as other items of operating income and expense. The revised presentation is considered to better reflect the nature of the costs.

Trade receivables and accrued income, other current assets, note 14

In 2019, trade receivables were presented together with accrued income. Amounts receivable related to grant awards totalling £125k and previously included within trade receivables and accrued income have been reclassified as other current assets. This presentation is consistent with no longer presenting certain grant income as revenue.

Accrued income and contract related balances, note 4

In 2019, trade receivables and accrued income included £58k related to accrued customer receipts. This amount has been reclassified as contract related balances in the current period.

Foreign currency

Presentation currency - the consolidated Financial Statements are presented in Great British Pounds (GBP) rounded to the nearest thousand (£'000), except where otherwise indicated.

Functional currency - items included in the financial information of the individual companies that comprise the Group are measured using the currency of the primary economic environment in which each subsidiary operates (its functional currency).

Whilst Jersey uses the Jersey Pound as its currency, Jersey is in a currency union with the United Kingdom and hence the functional currency of the parent company of the Group has been determined to be GBP.

Foreign currency transactions - transactions in currencies other than an entity's functional currency (foreign currencies) are translated using the exchange rate on the date of the transaction. Foreign exchange gains and losses resulting from the settlement of transactions denominated in a foreign currency are translated into GBP using the relevant exchange rate at the date of the transaction.

Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at the balance sheet date of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive loss within gains/ (losses) on foreign currency transactions.

Foreign currency gains/ (losses) realised on the retranslation of subsidiaries as part of the year-end consolidation are recorded in the translation reserve that forms a part of shareholders' funds in the consolidated Financial Statements of the Group.

Consolidation of subsidiaries

Subsidiaries are all entities over which the Company has control. The Company controls an entity when it is exposed to, or has rights over, variable returns from its involvement with the entity and can affect those returns through its ability to exercise control over the entity. Subsidiaries are consolidated in the Group Financial Statements from the date at which control is transferred to the Company.

Subsidiaries are deconsolidated from the date that control ceases, for instance because of the sale of a subsidiary or other change in the Company's shareholding, voting rights or board representation, such that the Company is no longer able to exercise control over the entity in question.

Foreign operations

Subsidiaries of the Company that are based in countries other than the UK or Jersey may have functional currencies that are different to the Company (Euro). In addition, the Group Financial Statements are presented in Pounds Sterling. The assets and liabilities of foreign subsidiaries consolidated into these Financial Statements are translated into the Group's presentational currency using exchange rates prevailing at the end of the reporting period. Income and expense items are similarly translated using the month-end rate for each month during the year. Where exchange rates fluctuate significantly within a month the exchange rates on the actual dates of transactions are used. Exchange differences arising on consolidation are recognised in other comprehensive income and are accumulated as part of shareholder's equity.

Investments in associates and joint arrangements

Associates are entities where the Company can exert significant influence but not control.

Joint arrangements may be incorporated, where an entity exists, or may be unincorporated, where the venture or joint operation is governed by contract or other arrangement between two or more parties.

The Company is not currently party to any unincorporated joint arrangements.

The Group accounts for its interests in associates and incorporated joint ventures using the equity method of accounting where the relevant investment is initially recorded at the cost to acquire the interest. After initial recognition, the Group recognises its share in the post-acquisition income and expenses of the associate in the statement of comprehensive loss with a corresponding increase (for income) or decrease (for losses) in the carrying value of the investment in the associate.

Dividends received by the Company from an associate are treated as a reduction in the carrying value of the associate (as the net assets have reduced by it giving the dividend) and income for the Group (as its net assets have increased by receiving the dividend).

The Group assesses the carrying value of associates for impairment at each reporting period end or where there is an indication that an impairment may exist. Where there is an indication of impairment of an investment, the Group assesses if an actual impairment loss exists by comparing the carrying value of the investment to its recoverable amount to assess which is the lower of its fair value less cost to sell or its value in use. Fair value less costs to sell is determined by reference to the proceeds that could be expected to be received should the interest in the associate be sold less the costs of doing so. Value in use is typically calculated by reference to the value of the discounted cashflows expected to be received from the associate.

Where there is a deficit of recoverable value as compared to the carrying value of the investment then an impairment loss is recognised in the income statement of the amount of the deficit. The carrying value of the investment in the associate is also reduced by a corresponding amount.

Acquisitions

The Group allocates the purchase consideration given in respect of the acquisition of a subsidiary to the assets acquired and liabilities assumed based on an assessment of their individual fair values at the date of acquisition. Any excess of the cost of the acquisition over the fair value of assets acquired and liabilities assumed in the business combination is recognised as goodwill.

Goodwill is an intangible asset and is reviewed annually to determine if the goodwill can continue to be carried at its originally calculated value or, if circumstances exist that show that the value of the goodwill may be impaired. Goodwill is impaired where circumstances show that the recoverable value of the underlying cash generating unit to which the goodwill that has been allocated can no longer support the carrying value of the goodwill.

The assessment of fair value is made by comparing the discounted value of the future cashflows expected to be generated from the cash generating unit (CGU) to which the goodwill has been allocated to the net book value of the assets and liabilities of that CGU including the allocated goodwill. Any deficit of discounted cash flows when compared to the carrying value of the CGU's net assets and allocated goodwill is recognised as an impairment charge. A corresponding reduction is made to the carrying value of goodwill and then to the net assets of the CGU if goodwill is insufficient to absorb the loss. Goodwill may also be tested for impairment under the fair value less costs to sell method where the recorded value of goodwill is compared to the market or value of the Company calculated by reference to its share price.

Any such impairment loss is recognised in profit and loss in the period in which it is identified. Impairment losses related to goodwill cannot be reversed in future years.

Merger transaction with Avalon Battery Corporation (Avalon)

On 1 April 2020, the Company completed a business combination transaction with Avalon. The comparative financial information that is presented in these Group Financial Statements consists of the comparative financial information of the legacy Invinity Energy Systems plc group (Invinity) (formerly redT energy plc) for the year ended 31 December 2020. The financial information of the Avalon group has been consolidated within these Financial Statements for the period from 1 April to 31 December 2020.

Transaction between entities within the Group

Transactions and balances between companies forming part of the Group together with any unrealised income and expenses arising from intra-group transactions are eliminated in the preparation of the consolidated Financial Statements of the Group.

Discontinued operations

A discontinued operation is a component of the Company's business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale. Classification as a discontinued operation occurs on actual disposal or earlier if the operation meets the criteria to be held for sale. When an operation is classified as a discontinued operation, the comparative income statement is restated as if the operation had been discontinued from the start of the comparative period.

Disposal of subsidiaries

Transactions that result in the loss of control of a subsidiary are accounted for as disposals. The previously consolidated assets and liabilities and the carrying amount of any non-controlling interests in the subsidiary are derecognised. Any retained interest in the former subsidiary is recognised at its fair value at the date when control is lost. A gain or loss on disposal is recognised as the difference between the fair value of the consideration received together with the fair value adjustment made in respect of any retained interest in the subsidiary as offset by the carrying value of the assets and liabilities derecognised. Any gains or losses of the disposed entity that were previously recognised in other comprehensive income or loss and that require to be recycled to profit or loss also form part of the gain or loss on disposal.

New standards, amendments and interpretations effective and adopted by the Group in 2020

No new standards became effective for the preparation of Financial Statements in accordance with IFRS for the year ended 31 December 2020.

Amendments to existing standards previously issued by the IASB with effective dates during the year ended 31 December 2020 are summarised below. With the exception of the amendment to IAS 37, there was no effect on the group's consolidated financial statements for the year ended 31 December 2020 as a result of the adoption of these amendments.

Amendment to IAS 37 - Provisions, contingent liabilities and contingent assets

An amendment to IAS 37 was published in May 2020 and requires the provision in respect of an onerous contract to also include an assessment of the indirect costs, such as production overhead or indirect labour, that are expected to be incurred in servicing a contract considered to be onerous.  The Company elected to adopt the amendment as of 1 January 2020.

New standards and interpretations not yet adopted

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2020 reporting periods and have not been early adopted by the Company. These standards are not expected to have a material impact on the entity in the current or future reporting periods an on foreseeable future transactions.

Amendment to IFRS 16 - Leases

IFRS 16 was issued by the IASB in January 2016 with an effective date of 1 January 2019 and introduced a single lease model requiring the recognition of right-of-use assets for all leases with a term greater than 12 months together with a corresponding lease liability. There is no longer any distinction between the accounting treatment for lease contracts that were previously classified as either operating leases or finance leases. IFRS 16 was adopted by the Group in its 2019 Annual Report and Financial Statements, as required by the standard.

On 28 May 2020, the IASB issued an amendment to the standard related to the treatment of rent concessions given by lessors in relation to COVID-19. The Group did not receive any rent concessions related to COVID-19 that would require consideration of the amendment to IFRS 16 and, accordingly, the amendment had no impact on the consolidated Financial Statements for the year ended 31 December 2020.

Amendments to IFRS 9 - Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement, and IFRS 7 - Financial Instruments: Disclosures

On 26 September 2019, the IASB issued 'Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)' related to potential effects of the IBOR reform on financial reporting related to hedging instruments. The amendment was effective for accounting periods starting on or after 1 January 2020. The Company does not currently use hedges or other purchased derivative instruments and therefore there is no impact on the Group Financial Statements for the period ended 31 December 2020.

A second amendment related to the IBOR reform was issued on 27 August 2020 with an effective date of 1 January 2021. This amendment is similarly not expected to have an impact on the financial reporting for the Group.

Amendment to IFRS 3 - Business Combinations

On 22 October 2018, the IASB issued 'Definition of a Business (Amendments to IFRS 3)' that sought to resolve difficulties that may arise in determining whether a business or a group of assets has been acquired. The amendment was effective for accounting periods commencing on or after 1 January 2020 and had no impact on the Group or on the reporting for the business combination completed in the period.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of the Financial Statements in conformity with generally accepted accounting practice (GAAP) requires management to make estimates and judgments. Those estimates and judgments can affect the reported values for assets and liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet date.

Management is also required to make estimates and judgments related to the reported amounts of revenues and expenses and related to the timing of the recognition of those revenues and expenses.

Judgements made and estimates applied are based on historical experience and other factors including management's expectations of future events that are considered relevant. Actual results may differ from these estimates. The estimates, judgements and underlying assumptions made are reviewed on an ongoing basis and specifically in the preparation of the interim and full-year published financial information.

Revisions to accounting estimates are recognised in the period in which the estimate is revised and applied consistently in future periods subject to the ongoing reassessment of estimates.

Critical judgments

Going concern

The directors are required to assess whether it is appropriate to prepare the Financial Statements on a going concern basis. In making this assessment the directors need to be satisfied that the Group can meet its obligations as they fall due and will remain cash-positive for a period of at least 12 months from the date of approval of the Financial Statements. Potential additional funding that is not yet committed at the date of approval of the Financial Statements cannot be anticipated in making the assessment of going concern.

The directors make their assessment based on a cashflow model prepared by management and based on their expectation of cashflows for the 18-month period from the date of approval of the Financial Statements. The extended period in the model provides additional comfort that the 12-month solvency requirement can be met when making the assessment of going concern.

In preparing the cashflow model, assumptions have been made regarding the timing of cash collection from customers based on the expected cash receipt under contracts that require milestone payments to be made by customers. The timing of the receipt of milestone payments may not always align with or precede the costs incurred by the Company in performing its obligations under a contract.

Downside sensitivities have been applied to the cashflows primarily related to the delay of customer receipts from existing or expected sales contracts. Refer to 'Basis of preparation' for details of the going concern analysis performed and the directors' conclusions regarding going concern.

Notwithstanding the uncertainty articulated in relation to the basis of preparation, the directors expect that the business will continue to be viable throughout the model period and, accordingly, the Financial Statements have been prepared on a going concern basis.

Revenue recognition

Sales contracts are assessed in accordance with the Group accounting policy for revenue recognition. The policy requires the separate performance obligations, or promises, under the contract to be identified. Revenue is recognised only when a distinct performance obligation under a contact is satisfied.

Some performance obligations are satisfied independently - for instance, the delivery of equipment, other obligations may be satisfied in conjunction with other contract promises - for instance, where a contract calls for equipment sold under the contract to be integrated into a larger project before formal acceptance is notified by the customer.

Where the ability of a customer to benefit from a product or service is dependent on the satisfaction of other performance obligations, more than one promise may need to be bundled together as a combined performance obligation that must be satisfied before the revenue related to each element can be recognised.

Identifying where equipment or, more likely, services are readily available from other providers is a key determinant as to whether a contract promise represents a separate performance obligation or if it should be bundled with other promises that, together, represent a single performance obligation.

The assessment of what constitutes a performance obligation can be complex and requires judgement. Revenue is only recognised for each performance obligation under a contract when that performance obligation, bundled or otherwise, is satisfied. The requirement to bundle combinations of goods and/ or services together as a single performance obligation could delay the timing of revenue recognition where the separate promises comprising the performance obligation are delivered sequentially.

Capitalisation of development costs

The Group undertakes internal projects and test work to advance the core technology used in its battery systems and the physical design of the battery systems themselves. The Group has developed a standard homogenous design for battery systems, known as the VS3, based on the elements of each of the pre-merger legacy battery designs. The Group continues to refine and enhance that design based on experience gained in constructing the units and performance data gathered from their use that will inform the design of successive generations of battery systems.

Management must determine when the ongoing process of enhancement represents development work that will benefit future generations of battery systems and generate economic benefits for the Group. Where this determination can be made objectively, the associated costs will likely meet the criteria for capitalisation.

Capitalised development costs are amortised as the battery systems that have been constructed based on that development work and using the resultant technologies, techniques or materials and component selections are sold to customers.

Recoverability of internally generated intangible development asset

Following the introduction of the new VS3 battery design, management has reconsidered the carrying value of the capitalised development costs. Costs that relate to technologies or techniques developed over time but which are not directly relevant to or used in the VS3 battery design have been amortised in full during the year with a corresponding charge of £6.1m recognised in the income statement for the period ended 31 December 2020.

Business combination

A number of significant judgments were required to be made by management in relation to the merger with Avalon that took place in the year. Judgments were required to determine the acquirer for accounting purposes, the fair value of the consideration given and the fair value of the assets acquired and liabilities assumed. Judgement was also required in determining the value of goodwill recognised and determining if the carrying value of any goodwill recognised could be supported.

Refer to note 7 and discussion of estimations below.

Key sources of estimation uncertainty

Accounting for business combinations and the assessment of fair value

Business combinations are accounted for at fair value. The assessment of fair value for assets acquired and liabilities assumed is subjective and will depend on a number of assumptions.

These assumptions include assessment of appropriate discount rates, taxation rules in different jurisdictions, and the amount and timing of future cash flows related to assets and liabilities. In addition, the selection of specific valuation methods for individual assets and liabilities requires judgment and will be driven by the nature of the specific asset or liability being assessed.

The consideration given to a seller for the purchase of a business or a company is accounted for at its fair value and may contain multiple elements that are required to be assessed separately.

In accounting for a business combination, fair value may need to be calculated for items that would not be included in the Financial Statements under the historic cost convention. These items may include certain contingent liabilities, contracts that have terms that are more, or less beneficial than current market practice or contracted future sales. Where these items represent a benefit that will be realised in the future they are recorded as assets. Items that are expected to result in cash outflow are recorded as liabilities.

Goodwill is recognised where the fair value of the purchase consideration given to the seller is greater than the fair value of the assets acquired and liabilities assumed. Determining what goodwill relates to requires judgement. Where the value of goodwill cannot be supported the goodwill is not recognised and a corresponding charge equal to the value of the unsupportable goodwill is recorded as an impairment loss in the income statement.

The Company was party to a business combination in the period through which it acquired 100% of the issued share capital of Avalon in return for new shares to be issued in the combined Group, see note 7 to the consolidated Financial Statements.

Warranty provision

The Company provides time-limited standard warranties in its contracts for sale of battery systems. In addition, customers may elect to purchase separate, standalone extended warranties. Extended warranties are for periods greater than the standard warranties provided with the purchase of battery systems.

Estimating the costs that may be incurred by the Company in servicing warranty agreements requires judgment to be exercised in respect of the estimation of the number of expected warranty claims in relation to the total number of battery systems sold. In addition, an estimate of costs that the Company could expect to incur to remedy each warranty claim should be made to determine the amount of the total provision that should be recorded for warranties.

Provisions made in respect of expected warranty obligations are reassessed and remeasured where actual experience indicates the claim rate may be higher or lower than expected or where costs to remedy warranty claims differ from the assumptions used in calculating the provision. The release of an over-provision of warranty costs results in income being recognised in the period whereas an additional provision for warranties results in a charge being recognised.

If the number of actual warranty claims were 10% higher (or lower) than estimated by management in determining the level of the provision, then the estimated warranty expense would increase (or decrease) by approximately £85k.

Refer to note 4, contract related balances.

Provision for onerous contracts

A contract is onerous when the unavoidable costs of meeting the Company's obligations under the contract are expected to be greater than the revenue earned under that contract. The assessment of the unavoidable costs under a contract previously only required direct costs such as parts and labour to be considered.

An amendment to IAS 37 - Provisions, contingent liabilities and contingent assets, was published in May 2020 and requires the provision in respect of an onerous contract to also include an assessment of the indirect costs, such as production overhead or indirect labour, that are expected to be incurred in servicing a warranty claim. The Company elected to adopt the amendment as of 1 January 2020.

The assessment of future costs is inherently subjective and requires the exercise of judgment in determining the appropriate amount of provision that may be required.

Onerous contracts provisions are first used to write-down the value of associated contract inventory with any remaining balance held as a provision on the balance sheet. The total value of the onerous provision in the balance sheet may therefore be presented at a value lower than the initial calculation where contract inventory is held.

Substantially all of the high value and variable costs expected to be incurred in respect of servicing contracts determined to be onerous at 31 December 2020 have been locked-in by way of advance purchases for vanadium, steel and third-party manufactured components. However, if overall costs were to be 10% higher (or lower) than estimated by management in determining the level of the provision, then the estimated warranty expense would increase (or decrease) by approximately £110k.

Refer to note 4, contract related balances.

Share based payments, warrants and employee options

The Company determines the fair value of share-based payments and employee options using a Black-Scholes methodology. Black-Scholes uses certain assumptions to determine fair value including measures of share price volatility, expected conversion or exercise rates and levels of employee retention, among others.

Operating segments

The Group is organised internally to report to the Group's executive directors as a group. The executive directors comprise the Chief Executive Officer, the Chief Commercial Officer and the Chief Financial Officer. The Group's executive directors as a group have been determined, collectively, to prosecute the role of chief operating decision maker of the Group.

The chief operating decision maker is ultimately responsible for entity-wide resource allocation decisions, the evaluation of the financial, operating and ESG performance of the Group.

The Group's activities have been determined to represent a single operating segment being the provision of vanadium flow batteries and ancillary services, principally comprising installation and integration services, and the provision of extended warranties for battery units.

Accounting policies

Revenue

The Group measures revenue based on the consideration specified in the contracts for sale with customers. Revenue is recognised when a performance obligation is satisfied by transferring control over a good or service to a customer. Revenue excludes any taxes such as sales taxes, value added tax or other levies that are invoiced and collected on behalf of third parties such as governmental tax collection authorities.

The Group generates revenue from the sale of battery storage systems and related hardware and services. The main portion of sales is derived from contractual arrangements with customers that have multiple elements (or performance obligations), that principally comprise the sale of battery systems, system related options, installation, and extended warranties. The sales agreements do not include a general right of return.

For agreements that contain multiple elements or promises, the Group accounts for individual goods and services separately if they are distinct. A product or service is distinct if it is separately identifiable from other items in the agreement and where a customer can benefit from the good or service on its own or together with other resources that are readily available.

The consideration paid for each performance obligation is typically fixed. A significant portion of the aggregate payment due under a contract for sale is normally due before shipment or completion of the service. The total consideration under the contract is allocated between the distinct performance obligations contained in the contract based on their stand-alone selling prices. The stand-alone selling price is estimated using an adjusted market assessment approach that looks to industry benchmarks or pricing surveys for certain standalone products or services.

In addition, under the terms of its contracts for sale, the Group may be responsible for shipping battery systems to its customers. When this is the case, the Group will invoice the relevant customer for, and will recognise as revenue, any charges incurred for shipping products to customers together with any associated handling costs. The related costs incurred by the Group for shipping and handling services are recognised as cost of sales concurrent with the recognition of the associated revenue.

Grant income

Government and other grants received are recognised in the income statement in the period that the related expenditure is incurred. Grant income received in respect of costs incurred are presented net within the associated cost category. Capital grants are similarly netted against the relevant asset acquired or constructed.

Grant income received in advance of the associated expenditure is presented as deferred income within contract liabilities and released to profit and loss as the associated expenditure is incurred. Grant income receivable is presented as accrued income within contract assets and until such time as it can be claimed or is received.

Finance income and costs

Finance income comprises interest on cash deposits, foreign currency gains and the unwind of discount on any assets that are carried at amortised cost. Interest income is recognised as it accrues using the effective interest rate method.

Finance cost comprises interest expense on borrowings including movements in fair value of certain embedded derivatives and other financial instruments granted to lenders under arrangements for borrowing. Finance costs also include foreign currency losses and the unwind of the discount on any liabilities held at amortised cost, such as lease liabilities arising from lease contracts.

Employee benefits

Short-term benefits

Benefits given to employees that are short-term in nature are recognised as expenses in the statement of comprehensive loss as the related service is provided. The principal short-term benefits given to employees are salaries, associated holiday pay and other periodic benefits such as healthcare and pension contributions made by the Company for the benefit of the employee. A liability is recognised for the amount expected to be paid under short-term cash bonus plans if there is either a present legal or constructive obligation to pay the amount and the amount can be reliably estimated.

Share based payments

The Group operates certain equity-settled share-based compensation plans, under which it compensates employees for services rendered through the issue of equity instruments, deferred share awards or options to subscribe for ordinary shares of the Company. The fair value of the employee services received in exchange for the grant of the equity instruments, shares or options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:

-      including any market conditions (for example, the Company's share price)

-      excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets, and remaining an employee of the Group over a specified period)

-      including the impact of any non-vesting conditions (for example, the requirement for an employee to save)

Non-market performance and service conditions are included in the assumptions regarding the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all the specified vesting conditions are to be satisfied.

In some circumstances, employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between service commencement and the grant date.

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

Any social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge will be treated as a cash-settled transaction.

Taxes

The total tax charge or credit recognised in the statement of comprehensive loss comprises both current and deferred taxes.

Taxation is recognised in the income statement except to the extent that it relates to a business combination or items recognised directly in equity or other comprehensive income.

Current tax

The current tax charge is based on the taxable profit for the year. Taxable profit or loss is different to the profit or loss reported in the statement of comprehensive loss as it excludes items of income and/or expense that are taxable or deductible in other years and it further excludes items that are never taxable nor deductible.

Deferred tax

Deferred tax is the tax that is expected to be payable or recoverable on differences between the carrying value of assets and liabilities in the Financial Statements and the corresponding value of those assets and liabilities used to calculate taxable profit or loss.

Deferred tax assets are recognised as deductible temporary differences only where it is probable that taxable profits will be generated against which the carrying value of the deferred tax asset can be recovered. Deductible temporary differences exist where there is a difference in the timing of an item of income or expense between the statement of comprehensive loss and the calculation of taxable profit or loss.

Deferred tax assets and liabilities are recognised using the liability method, for all taxable temporary differences except in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint operations. Where the timing of the reversal of temporary difference arising from such investment related assets and liabilities can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future then the Group does not recognise deferred tax liabilities on these items.

A deferred tax asset or liability is not recognised if a temporary difference arises on initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

Current and deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted at the balance sheet date.

Earnings per share

The Group presents basic and diluted earnings per share ("EPS") data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year.

 

Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.

 

The effects of anti-dilutive potential ordinary shares are ignored in calculating diluted EPS. Anti-dilution is when an increase in earnings per share or a reduction in loss per share result from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.

 

Intangible assets

Goodwill

The Group allocates the fair value of the purchase consideration on the acquisition of a subsidiary to the assets acquired and liabilities assumed based on an assessment of fair value at the acquisition date. Any excess of purchase consideration is recognised as goodwill. Where goodwill is recognised, it is allocated to the cash generating units (CGUs) in a systematic manner reflective of how the Group expects to recover the value of the goodwill.

Any goodwill arising is recognised as an intangible asset in the balance sheet and is subject to annual review for impairment. Goodwill is written off where circumstances indicate that the recoverable amount of the underlying CGU may no longer support the carrying value of the goodwill. Any such impairment is recognised in the statement of comprehensive loss for the period in which it is determined the goodwill is no longer recoverable. Impairment losses related to goodwill cannot be reversed in future periods.

In testing for impairment, goodwill arising on business combinations at the date of acquisition is allocated to the Group of CGUs representing the lowest level at which it will be monitored. Because the Group has been determined to consist of a single business unit, the carrying value of goodwill is tested for impairment based on the recoverable value of the Group as a whole.

The recoverable amount of a CGU or a group of CGUs is based on the higher of its assessed fair value less costs of disposal or its value in use. Value in use is calculated by reference to the expected future cashflows from the CGU after discounting to take account of the time value of money. Fair value less costs to sell can be based on a similar cash flow measure adjusted for disposal costs or can be estimated by reference to similar comparable reference transactions. Because the Company is listed, fair value can also be assessed by reference to the Company's market capitalisation. Where cash flows are used, they are risk weighted to reflect an assessment of future commercial success.

The key assumptions in assessing cash flows relate to the ability of the Company to develop existing markets and applications and to establish new markets and applications for the sale and use of its battery systems. Prospective cash flows are also sensitive to the Company's ability to realise economies of scale as market penetration grows.

 

Internally generated intangible assets - research and development costs

Research

Expenditure on research activities is recognised as an expense in the period in which it is incurred. Research activities are aimed at creating new knowledge or the use of existing knowledge in new or creative ways to generate new concepts. Research activity does not typically have a defined commercial objective at the outset

Development

Where projects evolve toward commerciality or are related to a specific commercial objective they are assessed to determine if the activity constitutes development that is associated with a commercial objective or practical application.

The associated costs represent development costs and can be capitalised if, and only if, the following conditions can be demonstrated:

-       the technical feasibility of completing the intangible asset so that it can be made available for use or sale

-       the intention to complete the intangible asset for use or sale

-       the availability of adequate technical, financial and other resources to complete the development and to use or sell it

-       an asset is created that can be separately identified for use or sale

-       it is probable that the asset created will generate future economic benefits, and

-       the development cost of the asset can be measured reliably.

Development work undertaken by the Group typically relates to the refinement of design, materials selection, construction techniques, firmware and control systems to enhance battery system performance over successive generations. Where development costs are capitalised, they are amortised over the expected period to the introduction of the next generation of battery system. Depreciation is recorded over that period on a straight-line basis with the corresponding depreciation charge recognised in the statement of comprehensive loss as a component of administrative expenses.

Four years has historically been the typical cycle time between successive generations of battery system design.

Other intangible assets

Intangible assets other than goodwill that are acquired by the Group are stated at their historical cost of acquisition less accumulated amortisation and any impairment losses.

Software and purchased domain names

Third-party software is initially capitalised at its cost of purchase. Amortisation is charged to administrative expenses over the expected useful life of the software which has been assessed as three years from the date of acquisition.

Acquired domain names are initially capitalised at cost of purchase. Amortisation is charged to administrative expenses over the expected useful life of the domain name which has been assessed as ten years from the date of acquisition.

Patents and certifications

Patent rights and certifications are initially capitalised at the cost of applying for relevant patent rights and other protections, and certifications. Amortisation is charged to administrative expenses over the expected useful life of the patents and certifications which has been assessed as five years from the date of acquisition.

Property, plant and equipment

Items of property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent expenditure is only included in the asset's carrying amount or recognised as a separate asset, as appropriate, when it is probable that future economic benefits associated with that item will flow to the Group.

Costs that do not enhance the value of an asset such as repair and maintenance costs are charged to the statement of comprehensive loss in the period in which they are incurred.

Depreciation is charged to write off the cost of assets over their estimated useful lives on a straight-line basis. Depreciation commences on the date the asset is brought into use. Work in progress assets are not depreciated until they are brought into use and transferred to the appropriate category of property, plant and equipment.

Estimated useful lives for property, plant and equipment are:

Category	Period (years)	Recognition in statement of comprehensive loss
Computer and office equipment	3 - 5	Administrative expenses
Leasehold improvements	Shorter of lease term or useful life	Administrative expenses / Cost of sales
Vehicles	3	Administrative expenses
Manufacturing equipment and tooling	3 - 20	Cost of sales
R&D Equipment	5 - 10	Administrative expenses

Depreciation methods, useful lives and residual values of assets are reviewed, and adjusted prospectively as appropriate, at each reporting date.

Where an asset is disposed of, the corresponding gain or loss on disposal is determined by comparing the sales proceeds received with the carrying amount of that asset at the date of disposal. Gains or losses on disposal of fixed assets are included within other items of operating income and expense in the statement of comprehensive loss.

Impairment of tangible and intangible assets

The Group reviews the carrying values of its tangible and intangible assets, other than goodwill, at each balance sheet date to determine if any indicators exist that could mean those assets are impaired. Where an indicator of impairment exists the recoverable amount of the relevant asset (or CGU) is estimated to determine the quantum of any impairment loss.

Recoverable amounts are determined using a discounted cashflow model related to each asset or CGU being assessed. The discount rate applied to the cash flows in the model is a pre-tax discount rate that reflects market assessment of the time value of money and risks specific to the Company or the groups of assets being considered.

If the recoverable value estimated in the cash flow model for a specific asset (or CGU) is lower than the carrying valve, then the carrying value of the asset is reduced to its estimated recoverable value with a corresponding charge immediately recognised in the statement of comprehensive loss.

Where the condition giving rise to an impairment loss reverses in a subsequent period, the impairment loss is similarly reversed and the carrying value of the asset increased to the revised estimate of its recoverable value. The carrying value of an asset immediately following the reversal of an impairment cannot exceed the carrying value that the asset would have had if the original impairment had not been made and the asset was depreciated as normal.

A reversal of an impairment loss is recognised immediately in profit or loss.

The value of any impairment (or reversal of impairment) of an asset is recorded in the same financial statement line item that depreciation or amortisation of the asset would normally be included in.

Where it is impractical to meaningfully assess recoverable amount using a discounted cashflow model, for instance where near term cashflows are low or negative, an assessment of the fair value adjusted for the costs that would be incurred in the disposal of an asset or operation is used.

This is typically the case for development stage assets, operations or associated intangible assets (including goodwill) where the underlying products or technologies have not yet been commercialised.

Provisions

Provisions are established when the Group has a present legal or constructive obligation because of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount of that outflow can be reliably estimated.

Provisions are measured at the present value of the expenditures that are expected to be incurred in settling the obligation using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks related to the obligation. The initial recognition of a provision results in a corresponding charge to profit or loss.

The increase in a provision as the discount rate unwinds due to the passage of time, is recognised in the income statement as other items of operating income and expense.

Leases

Group entities only participate in lease contracts as the lessee. Lease contracts typically relate to vehicles and facilities.

On inception of a contract, the Group assesses whether it contains a lease. A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an identified asset is determined based on whether the Group has the right to obtain substantially all the economic benefits from the use of the asset throughout the period of use, and if the Group has the right to direct the use of the asset.

Obligations under a lease are recognised as a liability with a corresponding right-of-use asset, these are recognised at the commencement date of the lease.

The lease liability is initially measured at the present value of the lease payments that have not yet been paid at the inception of the lease, discounted using the interest rate implicit in the lease contract. Where the interest rate implicit in the lease contract cannot be readily determined, the Group's incremental borrowing rate is used.

Variable lease payments that do not depend on an index or rate are not included in the measurement of the lease liability. The lease liability is measured at amortised cost using the effective interest rate method.

The lease liability is subsequently measured at amortised cost using the effective interest method. It is remeasured when:

-      there is a change in future lease payments arising from a change in an index or rate

-      there is a change in the Group's estimate of the amount expected to be payable under a residual value guarantee, or

-      the Group changes its assessment of whether it will exercise a purchase, extension or termination option.

When a lease liability is remeasured under one of these scenarios, a corresponding adjustment is made to the carrying value of the right-of-use asset or in profit and loss when the carrying amount of the asset has already been reduced to zero.

The corresponding right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability plus any lease payments made at or before the commencement date, any initial direct costs incurred and an estimate of the costs required to remove or restore the underlying asset, less any lease incentives received. The right-of-use asset is amortised over the shorter of the asset's useful life and the lease term on a straight-line basis.

The Group has elected not to recognise right-of-use assets and corresponding lease liabilities for short-term leases that have a lease term of 12 months or less, those existing leases with a remaining lease term of less than 12 months at 1 January 2020 and leases related to low value assets with an annual lease cost of £3,500 or less.

The Group recognises these lease payments as an expense on a straight-line basis over the lease term.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their current location and condition. Cost is calculated using the first-in, first-out method.

Net realisable value is calculated as the estimated selling price for an item of inventory less estimated costs of completion and the costs that would be incurred in the marketing, selling and distribution of an item of inventory.

Financial instruments

Financial assets and liabilities are recognised by the Group and recorded in the statement of financial position when the Group is contractually bound to the terms of the financial instrument. Financial assets and liabilities are derecognised when the Group is no longer bound by the terms of the financial instrument through settlement or expiry.

Financial assets

The classification of financial assets that the Group is party to is determined based on the nature of the underlying financial instrument and the characteristics of the contractual cashflows expected to be received under the terms of instrument.

Financial assets are not reclassified after their initial recognition unless there is a contractual change in the nature of the cashflows under the instrument or the business purpose of the instrument has changed.

A financial asset is recorded at amortised cost where it expected to be held to maturity and the objective of the Group is to collect the contractual cashflows under the financial instrument based on specified contractual terms, including the timing of receipt of cashflows.

Financial assets that the Group is party to are classified and measured as follows:

Financial asset	Measurement basis
Trade receivables and accrued income	Amortised cost
Other current assets	Amortised cost
Contract assets	Amortised cost
Cash and cash equivalents	Amortised cost

 

Amortised cost

On initial recognition, the Group measures amortised cost for financial assets based on the fair value of each financial asset together with any transaction costs that are directly attributable to the financial asset.

After initial recognition, amortised cost is measured for each financial asset held using the effective interest rate method less any impairment loss identified. Interest income is recognised for all financial assets, other than those that are classified as short-term, by applying the effective interest rate for the instrument. Interest income on short-term financial assets is not considered to be material. Short-term financial instruments are determined as those that have contractual terms of 12 months or less at inception.

Interest income, foreign exchange gains and losses, impairment, and any gain or loss on derecognition are recognised in profit or loss.

Impairment of financial assets

A loss allowance for financial assets is determined based on the lifetime expected credit losses for financial assets. Lifetime expected credit losses are estimated based on factors including the Group's experience of collection, the number and value of delayed payments past the average credit periods across the Group's financial assets. The Group will also consider factors such as changes in national or local economic conditions that correlate with default on receivables and financial difficulties being experienced by the counterparty.

Financial assets are impaired in full with a corresponding charge to profit or loss where there is no reasonable expectation of recovery.

Financial liabilities

The classification of financial liabilities is determined at initial recognition. Financial liabilities are classified and measured as follows:

Financial liability	Measurement basis
Trade and other payables	Amortised cost
Borrowings	Amortised cost
Lease  liabilities	Amortised cost

 

Amortised cost

At initial recognition, the Group measures financial liabilities at amortised cost using the fair value of the underlying instrument less transaction costs directly attributable to the acquisition of the financial liability.

Derecognition of financial liabilities

The Group derecognises financial liabilities when the Group's obligations under the relevant instrument are discharged, expire or are cancelled.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, deposits held with financial institutions that can be called on demand together with other short-term, highly liquid investments with maturities of three months or less and are readily convertible to known amounts of cash.

 

3. Revenue from contracts with customers and income from government grants

Segment information
The Group derives revenue from a single business segment, being the manufacture and sale of vanadium flow battery systems and related hardware together with the provision of services directly related to battery systems sold to customers.

The Group is organised internally to report on its financial and operational performance to its chief operating decision maker, which has been identified as the three executive directors as a group.

All revenues in 2020 were derived from continuing operations.

 

		Restated
	2020	2019
Revenue from contracts with customers	£'000	£'000
Battery systems and associated control systems	369	222
Integration, commissioning and other services	34	-
Other services	3	5
Total revenue in the consolidated statement of comprehensive loss	406	227
Analysed as:
Revenue recognised at a point in time	369	222
Revenue recognised over time	37	5
Total revenue in the consolidated statement of comprehensive loss	406	227

 

Geographic analysis of revenue

The Group's revenue from contracts with customers was derived from the following geographic regions:

		Restated
	2020	2019
	£'000	£'000
United Kingdom	15	199
Asia	206	-
United States of America	167	-
Other	18	28
Total revenue in the consolidated statement of comprehensive loss	406	227

 

The Group maintains its principal production and assembly facilities in Bathgate, Scotland, and Vancouver, Canada.  These facilities include office space for design, sales and administrative teams. The Group also has offices, operations and management based in London, England, and Oakland, California.

The Group does not consider that the locations of its operations constitute geographic segments as they are managed centrally by the executive management team. The location of the manufacturing plants and business development activity is a function of time-zone when servicing customers both pre-sale and during product delivery. The geographic location of offices, facilities and management is not related to distinct markets or customer characteristics at the present time.

Significant customers and concentration of revenue

Revenue from contracts with customers was derived from four (2019: one) customers who each accounted for more than 10% of total revenue as follows:

	2020	2019
	£'000	£'000
Customer A	127	199
Customer B	82	-
Customer C	81	-
Customer D	44	-

 

Grant income other than revenue

The Group receives grant income to help fund certain projects that are eligible for support, typically in the form of innovation grants. The Group also received grant income related to operating costs under government subsidy programmes as part of national COVID response efforts. The total grant income that was received in the year was as follows:

	2020	2019
Grant income received	£'000	£'000
Business support grants against cost of sales - COVID-19	17	-
Business support grants against employee costs - COVID-19	240	-
Grants for research and development	203	366
Economic and social development	35	70
Total government grants	495	436

 

4. Contract related balances

The Group has recognised the following assets and liabilities related to revenue from contracts with customers that are in progress:

		Restated
	2020	2019
	£'000	£'000
Amounts due from contract customers included in trade receivables	33	62
Contract assets (accrued income for work done not yet invoiced)	5	58
Contract liabilities (deferred revenue related to contract advances)	(2,644)	(38)
Net position of sales contracts	(2,606)	82

 

No revenue was recognised in the current period (2019: £119,242) that was recorded as a contract liability at the end of the previous period.

The aggregate contract position included in the statement of financial position will change according to the number and size of contracts in progress at a given year-end as well as the status of payment milestones made by customers toward servicing those contracts. The Group structures payment milestones in contracts to cover upfront expenditure for parts and materials and other working capital requirements associated with the delivery of promises under sales contracts in order to better manage Group cashflow.

The timing of revenue recognition is based on the satisfaction of individual performance obligations within a contract and is not based on the timing of advances received. Customer advances are recognised as contract liabilities in the statement of financial position and are released to income progressively as individual performance obligations are met. The difference in timing between the receipt of contract advances and the timing of the satisfaction of performance obligations for revenue recognition can cause values to remain in deferred income. The quantum of such deferrals is related to both the overall size of the underlying contract and the planned pace of delivery in the related project work schedule. This is more likely to occur where satisfaction of performance obligations is evidenced by customer acceptance of the good or service that is the subject of the performance obligation.

Provisions related to contracts with customers

	Warranty provision	Provision for contract losses	Total
	£'000	£'000	£'000
At 1 January 2018	-	-	-
Charges to profit or loss:
Provision created in the year	95	-	95
At 31 December 2019	95	-	95
Acquisition of subsidiaries	1,011	39	1,050
Charges to profit or loss:
Provision created in the year	340	1,084	1,424
Unused amounts reversed	(51)	-	(51)
Amounts used in the year	(571)	(20)	(591)
At 31 December 2020	824	1,103	1,927

 

Warranty provision

The warranty provision represents management's best estimate of the costs anticipated to be incurred related to known warranty claims from customers in respect of products sold that remain in their warranty period. It also includes a best estimate of the costs expected to be incurred in respect of claims that may arise in the future related to products already sold to customers. The estimate of future warranty costs is updated periodically based on the Company's actual experience of warranty claims from customers.

The element of the provision that is related to potential future claims is based on management's experience and is judgemental in nature. As for any product warranty, there is an inherent uncertainty around the likelihood and timing of a fault occurring that would cause further work to be undertaken or the replacement of equipment parts.

A standard warranty of up to two years from the date of commissioning is provided to all customers on products sold and is included in the original cost of the product. Customers are also able to purchase extended warranties that extend the warranty period for up to a total of ten years.

Provision for contract losses

A provision is established for contract losses when it becomes known that a commercial contract has become onerous. A contract is onerous when the unavoidable costs of fulfilling the Company's obligations under a contract are greater than the revenue that will be earned from the contract.

The unavoidable costs of fulfilling contract obligations will include both direct and indirect costs. Any provision made for contract losses will similarly include provision for both direct and indirect costs to fulfil the Company's remaining obligations under a contract.

The creation of an additional provision is recognised immediately in profit and loss. The provision is used to offset costs that are incurred as the contract moves to completion.

 

5. Cost of sales

		Restated
	2020	2019
	£'000	£'000
Movement in inventories of finished battery systems	436	263
Production costs	374	45
Depreciation of production facilities, equipment and intangibles	107	15
Movement in provisions for warranty costs	304	(48)
Total cost of sales	1,221	275

 

 

6. Cashflows from operating activities

		Note		2020	2019
				£'000	£'000
Loss after income tax				(24,271)	(6,842)
Adjustments for:
	Depreciation and amortisation		577		380
	Impairment of property, plant and equipment		56		-
	Accelerated amortisation of intangible asset		6,138		-
	Loss on disposal of property plant and equipment		(6)		-
	Impairment of inventory		1,027		-
	Gain on disposal of scrap inventory		27		-
	Gain on sale of discontinued operations		-		578
	Taxation		-		5
	Equity settled share-based payment expenses		707		11
	Equity issued in lieu of service		68		-
	Equity settled transaction costs on acquisition of subsidiary		(456)		-
	Equity settled interest and transaction costs on convertible notes		(592)		-
	Fair value adjustment on convertible notes and warrants		300		-
	Net finance costs / (income)		2,297		(65)
	Net foreign exchange differences		(1,220)		-
			(15,348)		(7,089)
					-
Change in operating assets and liabilities
	(Increase) / decrease in inventories		(1,359)		290
	Decrease in contract assets		53		-
	(Increase) / decrease in trade receivables and other receivables		115		40
	(Increase) / decrease in other current assets		(750)		-
	Increase / (decrease) in trade and other payables		3,348		174
	Increase / (decrease) in warranty provision		(380)		95
	Increase in onerous contract provision		1,060		-
	Increase / (decrease) in contract liabilities		2,376		(170)
			(402)		429
Cash used in operations			(10,885)		(6,660)

 

 

7. Business combination

On 1 April 2020, the merger between the Company and Avalon completed with the Company acquiring 100% of the issued share capital and voting equity of Avalon in exchange for 1,735,397,545 €0.01 ordinary shares in the Company (prior to the 50:1 share consolidation).

Prior to, and in contemplation of, the completion of the merger, a loan in the amount of US$5.0 million had been advanced to Avalon by Bushveld Minerals Limited (Bushveld). The loan was used to fund expenses related to the merger and to provide additional pre-merger working capital to the Company and Avalon Battery Corporation. Half of the total amount advanced by Bushveld and amounting to US$2.5 million was loaned to the Company by Avalon prior to the merger between the companies.

On 1 April 2020, and concurrent with the completion of the merger, the Bushveld loan was discharged by the Company issuing 302,978,063 €0.01 ordinary shares (prior to the share consolidation) to Bushveld.

The market price of the Company's shares on 1 April 2020 was 1.05p per ordinary share (equivalent to 52.5p per share post-consolidation using the 50:1 consolidation ratio). The fair value of the total number of shares issued to effect the merger and to discharge the Bushveld loan was £21,402,944.

In addition to issuing ordinary shares related to the transaction, outstanding share options held by Avalon employees at the date of the merger were cancelled and replaced by the Company with new options to subscribe for shares in the combined Group.

The fair value of the replacement share options was assessed at the transaction date using a Black-Scholes methodology. The portion of the fair value of the replacement share options that was determined to relate to pre-merger service of legacy Avalon employees was assessed as £854,000 and was allocated to the equity purchase price as it represented value contributed by Avalon employees prior to the transaction date.

Details of the total purchase consideration used in accounting for the business combination and related transactions are as follows:

Fair value of shares issued and options granted related to the transactions	£'000
Consideration shares	18,222
Bushveld loan discharge	3,181
Replacement options issued to Avalon employees	854
	22,257

 

In purchase accounting, the consideration given is allocated to the fair value of assets acquired and liabilities assumed or discharged based on their assessed fair values. The fair value of the total consideration shares issued and options granted were allocated as follows:

Fair value of the transaction	£'000
Discharge of Bushveld loan held by Avalon, at fair value	4,999
Fair value the Avalon assets acquired and liabilities assumed	17,258
	22,257

 

Determining the acquirer for accounting purposes

Prior to the merger the assessed fair value of Avalon was higher than the assessed value for the Company. The share exchange ratio that was used to give effect the transaction was determined based on the assessed relative fair values of the two businesses prior to the combination. Notwithstanding the relatively higher fair value of Avalon, as part of the combination and in addition to the Bushveld loan, new convertible loan funds were advanced by a new private investor to provide additional funds to meet transaction costs and provide additional working capital.

The Company also entered a further convertible loan note arrangement, the Riverfort Facility, that provided up to an additional £3.0 million of working capital funding.

The conversion features in these instruments at the date of the combination had the effect that, if the debt holders chose to convert the outstanding debt to new ordinary shares of the Company, then the shareholders of Avalon immediately prior to the combination would hold less than 50% of the share capital of the combined Group and therefore control of the combined Group would not have transferred to the former Avalon shareholders.

The composition of the board can also be a determinant of whether control has passed. The former directors of Avalon represented two of the seven post-combination board seats with former directors of redT occupying four of those seats and a newly appointed, independent, director making up the balance of the board. In addition, due to the conversion of certain merger-related financing arrangements that resulted in the issue of new shares to third parties, the overall control of the combined Group did not pass to the former Avalon shareholders on conclusion of the merger.

Based on the composition of the board of directors and the relative shareholdings in the combined Group held by legacy shareholders, redT has been identified as the accounting acquirer for the purposes of accounting for the combination transaction.

The fair value of the merger consideration of £17.3 million is therefore allocated to the assets and liabilities of Avalon that, for purchase accounting purposes, were acquired or assumed by the Company as follows:

Assets acquired and liabilities assumed At 1 April 2020	Fair value £'000
Non-current assets
Property, plant and equipment	472
Right-of-use assets	1,160
Intangible assets	205
Current assets
Inventories	364
Other current assets	370
Trade receivables	86
Cash and cash equivalents	1,264
Current liabilities
Trade and other payables	(2,596)
Contract liabilities	(268)
Lease liabilities	(150)
Provisions	(1,153)
Non-current liabilities
Lease liabilities	(702)
Net identifiable liabilities acquired	(948)
Goodwill	18,206
Consideration for acquisition of Avalon	17,258

 

The assets acquired and liabilities assumed in the purchase price allocation, that was included in the interim Financial Statements at 30 June 2020, were based on book values. The purchase price allocation has been revised to reflect the assessed fair value of certain assets and liabilities.

Fair value adjustments made

The book values of current assets and current liabilities were determined to be equivalent to their fair value due to the short-term nature of the balances and the expectation that they would be settled or received at their book value within 12 months of the date of the business combination.

The principal component of property, plant and equipment relates to the stack-line at the Group's Vancouver premises used to assemble vanadium flow batteries. The fair value of the line was assessed by reference to third-party quotes for the construction of a new stack-line in Vancouver.

Right-of-use assets principally relate to the Group's production and development premises in Vancouver. The fair value of the right-of-use asset has been assessed by reference to quotes obtained for the rental of similar sized properties with similar amenities, square footage and in a similar location to the existing facility.

The fair value of patent rights and certifications has been assessed by reference to the original cost of applying for relevant patent rights and other protections.

Goodwill recognised in the merger

Goodwill has been determined to relate to the greater opportunities afforded to the combined Group from shared technologies and know-how and greater presence and potential penetration in key markets.

The carrying value of goodwill has been assessed using a fair value less costs to sell methodology and primarily based on the quoted market capitalisation of the combined Group using the 31 December 2020 share prices of 230 pence per share. No impairment was identified at 31 December 2021 or in the period to the publication of the Annual Report and Financial Statements.

Revenue and profit contribution

Avalon contributed revenues of £401,308 and a net loss of £3,780,538 to the Group for the period from 1 April 2020 to 31 December 2020.

If the merger had taken place on 1 January 2020, consolidated pro-forma revenue and net loss for the year ended 31 December 2020 would have been £586,072 and £8,171,977, respectively.

These amounts have been calculated using Avalon's results and adjusting them for the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property plant and equipment and intangible assets had been applied from 1 January 2020, together with the consequential tax effects.

 

8. Goodwill and intangible assets

	Goodwill	Development costs	Patents and certifications	Software and domain names	Total
	£'000	£'000	£'000	£'000	£'000
At 1 January 2019
Cost	7,362	6,129	-	-	13,491
Accumulated amortisation	-	-	-	-	-
Net book amount	7,362	6,129	-	-	13,491
Year ended 31 December 2019
Opening net book amount	7,362	6,129	-	-	13,491
Effect of movement in foreign exchange	(391)	(311)	-	-	(702)
Closing net book amount	6,971	5,818	-	-	12,789
At 31 December 2019
Cost	6,971	5,818	-	-	12,789
Accumulated amortisation	-	-	-	-	-
Net book amount	6,971	5,818	-	-	12,789

 

	Goodwill	Development costs	Patents and certifications	Software and domain names	Total
	£'000	£'000	£'000	£'000	£'000
At 1 January 2020
Cost	6,971	5,818	-	-	12,789
Accumulated amortisation	-	-	-	-	-
Net book amount	6,971	5,818	-	-	12,789
Year ended 31 December 2020
Opening net book amount	6,971	5,818	-	-	12,789
Effect of movement in foreign exchange	(1,233)	320	-	1	(912)
Acquisition of subsidiaries	18,206	-	203	2	18,411
Additions	-	-	-	9	9
Amortisation charge	-	-	(30)	(2)	(32)
Accelerated amortisation	-	(6,138)	-	-	(6,138)
Closing net book amount	23,944	-	173	10	24,127
At 31 December 2020
Cost	23,944	-	203	29	24,176
Accumulated amortisation and impairment			(30)	(19)	(49)
Net book amount	23,944	-	173	10	24,127

 

Acquisition of subsidiaries

Goodwill and intangible assets acquired in 2020 relate to the business combination transaction with Avalon that completed on 1 April 2020 (note 7).

Goodwill

The opening goodwill balance on 1 January 2020 represents goodwill recognised in the year ended 31 December 2015 on the completion of the step acquisition by the company of Renewable Energy Dynamics Holdings Limited (REDH), the holding company for the redT energy storage business. All goodwill is tested annually for potential impairment. At 31 December 2020, goodwill was tested for impairment using a fair value less costs of disposal methodology by reference to the Company's quoted market capitalisation using the price of 230 pence per share at that date. No impairment loss was identified in relation to goodwill.

Patents and certifications

Patents and certification acquired in merger transaction with Avalon were stated at their assessed fair value in the purchase price allocation used for consolidation accounting. There have been no events or circumstances since the merger that would indicate thar the carrying value of patents and certifications may be impaired at 31 December 2020.

Development Costs

The development costs at 31 December 2019 represent costs associated with the redT Gen 3 vanadium flow battery that has been superseded by the Invinity VS3 battery system and, accordingly, the intangible asset has been impaired in full by recording an accelerated amortisation charge in the period.

 

9.  Administrative expenses

		Restated
	2020	2019
	£'000	£'000
Staff costs	5,811	3,266
Research and non-capitalised development costs	1,099	846
Professional fees	960	716
Sales and marketing costs	96	71
Facilities and office costs	787	859
Other administrative costs	840	807
Total administrative expenses	9,593	6,565

 

 

10. Other items of operating income and expense

The following items are Included in other comprehensive loss:

	2020	2019
	£'000	£'000
Income
Gain on disposal of scrap inventory and equipment	27	-
Expense
Merger transaction costs	(1,412)	(500)
Provision for onerous contracts, net of amounts used	(1,064)	(332)
Impairment of inventory to net realisable value	(1,019)	-
Accelerated amortisation of development costs	(6,138)	-
Impairment of plant, property and equipment	(56)	-
Impairment of obsolete inventory and disposal of scrap inventory	(8)	-
Abnormal unabsorbed production overhead costs	(152)	-
Total other operating income and expenses (net)	(9,822)	(832)

 

Merger transaction costs include tax advisory, audit related assurance services, reporting accounting services and legal and advisory costs.

Abnormal unabsorbed production overhead includes temporary reduction in production hours due to COVID-19 and materials quality.

 

11. Staff costs and headcount

Staff costs

	2020	2019
	£'000	£'000
Wages and salaries	5,053	3,174
Employer payroll taxes	365	358
Other benefits	225	159
Share-based payments	854	11
Total staff costs	6,497	3,702

 

Average headcount

	2020	2019
	£'000	£'000
United Kingdom	52	62
Canada	33	-
United States of America	6	-
Other	2	2
Total	93	64

 

The increase in staff costs and headcount is mainly because of the merger with Avalon that completed on 1 April 2020.

Key management compensation

	2020	2019
	£'000	£'000
Short-term employee benefits	1,410	523
Post-employment benefits	14	18
Termination benefits	75	211
Total key management compensation	1,499	752

 

As of 1 April 2020, the key management of the Group has been determined to comprise the members of the executive management committee. For the year ended 2019 key management was comprised of the Board of Directors and the then CEO.

 

12. Net finance income and costs

	2020	2019
	£'000	£'000
Finance income
Interest on bank deposits and money market funds	1	1
Finance costs
Interest on borrowings	(422)	(19)
Fair value adjustment on convertible notes	(1,162)	-
Finance charges for loan financing	(682)	-
Finance charges for lease liabilities held at fair value	(27)	(6)
Finance charges for liabilities held at amortised cost	(5)	(3)
(Losses) / gains on foreign currency transactions	(1,744)	92
Net finance (costs) / income	(4,041)	65

 

13. Loss per share

Loss per share attributable to the equity holders of the Company is calculated as follows:

		Restated
	2020	2019
Basic loss per share	pence	pence
From continuing operations	(41.0)	(40.6)
From continuing and discontinued operations	(41.0)	(37.6)

 

	2020	2019
Diluted loss per share	pence	pence
From continuing operations	(41.0)	(40.6)
From continuing and discontinued operations	(41.0)	(37.6)

 

	2020	2019
Loss used in calculation of basic and diluted loss per share	£'000	£'000
From continuing operations	(24,271)	(7,385)
From continuing and discontinued operations	(24,271)	(6,842)

 

All operations in the year ended 31 December 2020 are continuing operations.

Earnings per share in respect of the year ended 31 December 2019 have been restated to give effect to the 50:1 share consolidation that took place in 2020 and to aid comparability.

		Restated
	2020	2019
Weighted average number of shares used in calculation	Number	Number
Basic	59,205,798	18,174,431
Diluted	59,636,887	18,174,431

 

The number of shares used to calculate earnings per share for the year ended 31 December 2019 have been adjusted to reflect the 50:1 share consolidation that took place in 2020. The restatement of the number of shares provides better comparability of EPS over the periods presented.

Additional potential shares used in the calculation of diluted earnings per share primarily relate to potential shares that may be issued in satisfaction of in-the-money employee share options. In addition, potentially dilutive shares also relate to warrants to subscribe for ordinary shares in the Company that were issued for services or related to financing transactions that have an exercise price lower than the quoted share price and remain outstanding at 31 December 2020.

Where additional potential shares have an anti-dilutive impact on the calculation of loss per share calculation, such potential shares are excluded from the weighted average number of shares used in the calculation.

Additional potential shares are anti-dilutive where their inclusion in the calculation of loss per share results in a lower loss per share. The weighted average number of shares not included in the diluted loss per share calculation because they had an anti-dilutive effect on the calculation, was 5,475,305 (2019: 887,235 - restated for 50:1 share consolidation).

Weighted average number of shares used in loss per share calculation - basic and diluted.

		Restated
	2020 Number	2019 Number
In issue at 1 January 2020	19,025,799	15,824,383
Shares issued in the year - weighted average	40,180,789	1,296,958
Weighted average shares in issue 31 December	59,205,798	17,121,341
Effect of employee share options and other warrants not exercised	-	-
Weighted average number of diluted shares at 31 December	59,636,887	17,121,341

 

14. Other current assets

	2020	2019
	£'000	£'000
Prepayments and deposits	1,108	127
Government grants receivable	-	125
Tax credits - recoverable	127	80
Due from joint venture	168	-
Other receivables	11	-
Due from Avalon (recharge of merger transaction costs)	-	394
Total other current assets	1,414	726

 

15. Cash and cash equivalents

	2020	2019
	£'000	£'000
Cash at bank and in hand	21,760	1,243
Short-term investments	193	-
Total cash and cash equivalents	21,953	1,243

 

Short term investments

Term deposits are presented as cash equivalents if they have a maturity of three months or less from the date of acquisition and are repayable with 24 hours' notice with no loss of interest.

 

16. Inventories

	2020	2019
	£'000	£'000
Raw materials and consumables	698	93
Work in progress	207	-
Finished goods	-	143
Total inventories	905	236

 

Inventories recognised as an expense during the current year amounted to £436,461 (2019: £332,000).  These were included in cost of sales.

Write-downs of inventories to net realisable value amounted to £1,045,232 (2019: £nil). These were recognised as an expense and included in other items of operating income and expense.

 

17. Trade and other payables

	2020	2019
	£'000	£'000
Trade payables	498	246
Accrued liabilities	653	1,261
Accrued employee compensation	1,010	16
Government remittances payable	307	-
Total trade and other payables	2,468	1,523

 

Trade payables are unsecured and are usually paid within 30 days.

The carrying amounts of trade and other payables are considered to be the same as their fair values due to the short-term nature of the underlying obligation representing the liability to pay.

 

18. Borrowings

	2020	2019
	£'000	£'000
Borrowings	-	1,143
Total borrowings	-	1,143

 

Bushveld 12% fixed rate convertible loan notes

On 1 November 2019, Avalon entered a convertible loan note instrument with Bushveld Vametco Limited under which Avalon issued 50 convertible loan notes of US$100,000 each to Bushveld. The loan notes bore interest at 12% annually and, through a separate agreement with the Company, were convertible into ordinary shares of the Company, contingent on the successful completion of the merger between the Company and Avalon. Conversion to equity was at the noteholder's option and, if not exercised by the noteholder, the Company would have been required to settle any outstanding balance at the repayment date in cash. On completion of the merger, the agreement also provided that Bushveld became entitled to a 20% commitment fee in relation to amounts advanced under the facility.

The loan was given by Bushveld as a bridge facility to fund the costs incurred by the Company and Avalon in respect of the merger transaction and to provide funds for general working capital purposes in the period to the completion of the merger. The agreement between Bushveld and Avalon contemplated that 50% of the proceeds received by Avalon under the loan notes would, in turn, be advanced by Avalon to the Company.

On completion of the merger on 1 April 2020, the loan notes together with accrued interest and commitment fees were converted into 302,978,063 ordinary shares in the Company that were issued to Bushveld, discharging the Company's obligations to Bushveld in full.

12% working capital facility with Avalon

On 1 November 2019, the Company entered a loan agreement with Avalon under which US$2.5 million was made available to the Company using proceeds received by Avalon related to the convertible loan notes issued by it to Bushveld.

Consistent with the loan instrument entered by Avalon with Bushveld, the purpose of the loan facility advanced to the company by Avalon was to provide funds to satisfy expenses expected to be incurred related to the combination transaction and for general working capital purposes.

The facility bore interest at 12% annually and was secured against the ordinary shares of the Company's subsidiaries. At 31 December 2019, the Company had drawn US$1,500,000 (GBP£1,142,677) under the facility with the facility fully drawn by the merger date.

On 1 April 2020, the merger between the Company and Avalon completed and the loan advanced by Avalon became an intercompany facility as of that date. Accordingly, no balance in respect of the loan facility from Avalon is presented in these consolidated Financial Statements.

Riverfort Capital/ Yorkville Advisors Investment Agreement

On 13 March 2020, the Company entered an investment agreement with Riverfort Global Opportunities PCC Limited (Riverfort) and YA II PN Ltd (Yorkville). The investment agreement was amended by deed of variation on 1 July 2020.

Under the investment agreement, three funding tranches of £1,000,000 each were made available to the company to provide additional working capital funding over the merger integration period. The facility carried an implementation fee of £225,000 and bore interest at 12% annually.

The agreement provided that interest would not accrue on advances for a given month if the average daily traded value of the company's shares over the 20-trading day period preceding the month was greater than £100,000.

Amounts drawn under the facility, together with any accrued interest, were convertible at the noteholder's option into ordinary shares in the company. The conversion price was calculated as the lower of (i) 90% of the lowest daily volume-weighted average price for the company's shares measured over the 10-day period prior to the issuance of the conversion notice and, (ii) 130% of the average daily volume weighted average price for the five days immediately before the advance date of the relevant tranche.

In total the Company drew two tranches of £1,000,000 each under the investment agreement. Both tranches and associated accrued interest have been converted to equity by the noteholders in the year to 31 December 2020. The implementation fee was settled through the issue of 210,575 €0.50 ordinary shares at £1.0685 per share and based on the subscription price for shares in the April 2020 fundraise.

Had the two tranches drawn under the facility not been converted to equity by the noteholders then the Company had two options to settle amounts drawn under the facility.

Each tranche together with any accrued interest would have become repayable in cash 24 months after the date of the initial drawdown and calculated separately for each tranche drawn. The Company also had the option to prepay each tranche drawn at any time provided that certain conditions related to VWAP were satisfied. The prepayment option was on a tranche-by-tranche basis with any prepaid tranche being repaid in full including accrued interest and subject to a 10% prepayment fee.

Neither of these options were exercised by the Company.

In addition, the Company issued warrants to Riverfort and Yorkville for a total of 1,818,818 ordinary shares in the Company at a subscription price of £1.0725 per €0.50 ordinary share. The warrants were issued under a warrant deed that is separate to the investment agreement that allowed each of Riverfort or Yorkville to exercise warrants granted to them over a period not exceeding 48 months from the date of grant.

In total, 909,091 warrants were issued to Riverfort with the remaining 909,090 issued to Yorkville. All of the warrants issued to Yorkville have been exercised. The warrants issued to Riverfort remain outstanding.

 

19. Events occurring after the report period

Joint Development and Commercialisation Agreement with Gamesa Electric S.A.U.

On 11 May 2021, the Company announced it had entered a Joint Development and Commercialisation Agreement (JDCA) with Gamesa Electric S.A.U. (Gamesa Electric), a wholly owned subsidiary of Siemens Gamesa Renewable Energy (SGRE).

The objective of the agreement is threefold:

-      to jointly develop a grid-scale vanadium flow battery (VFB) using Invinity's proven technology and incorporating advanced power conversion systems developed by Gamesa Electric

-      to cooperate in the manufacture of the grid-scale VFB following completion of the development phase that will culminate in a jointly validated design for the VFB

-      to use the established sales and marketing channels of both the Group and Gamesa Electric to jointly market and commercialise the VFB

 

The detailed development programme for the next generation VFB is expected to take approximately two years to reach commercialisation. Gamesa Electric has agreed to fund an aggregate of up to US$4.62 million of the Company's activities within the joint development programme and based on milestones achieved. The JDCA may be terminated by Gamesa Electric if predetermined development activities and milestones are not achieved.

Concurrent with the JDCA, Invinity and Gamesa Electric entered an option agreement under which Gamesa Electric was granted an option to acquire new shares in Invinity in an amount equivalent to it having held a 9.99% interest in the ordinary share capital of the Company at 11 May 2021. The subscription price for new shares under the option agreement is £1.75 per ordinary share and is set at the same price achieved by the Company in the December 2020 placing and open offer.

Should the option be exercised, Gamesa Electric, or its nominee, would have the right to appoint a director to the Company's board of directors, subject to minimum 5% shareholding in the Company being held by Gamesa Electric or its nominee. Notwithstanding, the exercise of the option is subject to shareholder approval.

0.5 MWh sale in California, United States

On 17 May 2021, the Company announced that it had concluded contracting on another project awarded funds by the California Energy Commission (CEC). This follows the Company's announcement in Q4 2020 that it has been selected for a number of projects funded by the CEC, California's primary energy policy and planning agency.

 

Invinity has entered into a contract with Webcor, a leading Californian construction firm, to provide a vanadium flow battery (VFB) for a project developed by Indian Energy LLC, a 100% Native American-owned utility-scale and microgrid development and systems integration firm with approximately 4 GW of solar PV and wind and 6 GWh of energy storage projects under development.

 

The project, located on a US Marine Corps base in Southern California, will couple three of Invinity's VS3 vanadium flow batteries with solar PV to provide resilience and energy security in the case of Public Safety Power Shutoff (PSPS) events, wildfires or other outages. The Invinity system will apply recent technological advancements developed by Invinity's team to extend battery storage duration to up to ten hours with an option to operate in either grid-connected or off-grid modes. This ensures round-the-clock energy resiliency for the site while reducing overall energy costs through demand shaving and Time of Use (TOU) energy shifting.

 

The 0.5 MWh system is expected to be delivered during Q4 2021 and to contribute revenue of approximately £450,000 to the Company, relating to the Invinity VS3 vanadium flow battery, ancillary components and associated services.