Flowgroup plc Annual Report and Accounts for the year ended 31 December 2014 Stock code: FLOW.L. Energy reimagined

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1 Annual Report and Accounts for the year ended 31 December Stock code: FLOW.L Energy reimagined

2 Welcome to our report Annual Report provides a summary of our achievements and finances in. It explains the benefits of our patented technology platform and sets out our strategy for growth and for value creation both in the UK and internationally over the coming years. Welcome to Flow Flowgroup is a new kind of energy company. By delivering affordable microchp technology into the mass market for the first time, empowering millions of customers to generate their own low-cost, low-carbon electricity, we ll change the way people think about energy. In the UK we provide competitive home energy alongside our patented electricity-generating microchp boiler. In international markets we re leveraging our microchp technology platform to create partnerships and alliances with a vision of delivering over 1m sales a year, globally. In achieving our goals we live our values. We believe in people and their potential, the power of inspiration, creating the clever alternative, the importance of changing the game and in delivering clear benefits for customers, society, the environment and our shareholders. Why we re different Patented technology platform providing the world s first electricity-generating boiler with the potential to be priced for the mass market Close relationship with partner Jabil, leveraging their manufacturing expertise, global market access and product knowledge UK home energy brand with significant potential for growth Close, utility-based relationship with customers, facilitating potential cross-sell of additional products and services

3 Business and Strategy Performance Governance Financials Shareholder Information Contents HOW WE CREATE VALUE For consumers, society and our shareholders STRATEGY Energy, microgeneration, efficient products Business and Strategy 02 Group Overview Highlights 04 Group Overview Organisation 06 Group Overview Value Creation 08 Chairman s Statement 10 Marketplace 11 Strategy Performance 12 Strategic Report 19 Corporate Social Responsibility MARKETPLACE UK market and global opportunities OPERATING REVIEW was a year of achievement OUR ORGANISATION Delivering success across our Group CSR Flowgroup is a valuesdriven organisation Governance 20 Board of Directors 22 Directors Report 27 Directors Remuneration Report Financials 29 Independent Auditors Report (Group) 30 Group Income Statement 31 Group Statement of Changes in Equity 32 Group Statement of Financial Position 33 Group Statement of Cash Flows 34 Notes to the Group Financial Statements 59 Independent Auditors Report (Company) 60 Company Balance Sheet 61 Notes to the Company Balance Sheet Shareholder Information 69 Advisers and Company Information 70 Shareholder Notes Clare Spottiswoode, Chairman of Flowgroup. said: Following the launch of our electricity-generating Flow boiler we believe we are now in a position to take advantage of the commercial possibilities that this game-changing product presents. We believe we are well set for a year of good progress in Annual Report

4 02 03 Business and Strategy Group overview Highlights Financial Operational Post year end Revenue of 33.4m (: 13.8m) Operating loss of 10.0m (: 7.7m) reflecting infrastructure and resource costs to support business growth and commercialisation Cash at 31 December of 8.4m (31 December : 17.4m) Awarded CE Certification from the British Standards Institution (BSI), for the Flow boiler Increased the number of Flow boilers covered by our exclusive manufacturing agreement with Jabil from 390,000 to 500,000, and agreed to collaborate on future product development Opened dedicated installer training school with the capacity to train 3,000 installers a year Signed agreements with Zopa for the provision of personal finance to Flow customers and ongoing discussions with partners for national surveying and installation services Re-launched Flow s home energy proposition, growing the customer base to around 66,000 customer fuel accounts at year end Installed Flow Battery products in North American with Trane Canada and in the UK with National Grid UK Market launch of the Flow boiler during January 2015 Boiler production line received CE Type Approval during April 2015 Re-entered the energy market with the Connect tariff Raised 21.3m (net) in equity fundraise, including 7.4m from Jabil, to accelerate future growth Operational Manufacturing of the Flow boiler by Jabil began in Livingston, just outside Edinburgh, in November. Flowgroup signed testing agreements with NRG Energy in the US and with a large global utility for potential expansion into key international markets. Post year-end, the Flow boiler launched to the UK market in January 2015, supported by regional PR and marketing campaigns.

5 Business and Strategy Performance Governance Financials Shareholder Information Future benefits Delivering microchp technology into the mass market in the UK has the potential to completely change the heating industry Leveraging our technology internationally, we can create an organisation of global scope Growing our energy business in the UK would deliver significant benefits to the Group Creation of large customer base allows the potential to cross-sell other energy-efficient products Becoming a trusted brand for these products allows growth in one of the most exciting markets around Powering the connected future Flowgroup is a new kind of energy company and our vision reflects that. We want to change the way people think about energy by bringing them closer to it, by making them a part of it, by making energy real, understandable and valuable to consumers. To achieve their full potential, energy companies need to move beyond the simple provision of power to the provision of a broader range of products and service. That s why we believe the Flow boiler is so important. The electricity-generating Flow boiler will provide both heat and electricity, and in doing so it will become the heart of the home. In providing that product, we believe Flowgroup will be in the perfect position to then provide other energy-related products that offer comfort, safety and efficiency the connected home products that are now beginning to gain traction. This is the future of energy homes powered by microgeneration and optimised with a broad suite of energy products, adopted by customers who are genuinely engaged with the idea of energy. This is what we believe Flowgroup can deliver. Smart Phone Controlled Electric car Flow boiler Smart lighting Smart Thermostat Smart white goods Smart home hub Smart plugs Annual Report

6 04 05 Business and Strategy Group overview Organisation Flowgroup comprises Flow Products, Flow Energy and Flow Battery. Flow Products is behind the development of the Group s groundbreaking microchp technology platform. Flow Energy is the Group s UK domestic energy supply business. Flow Battery provides award-winning compressed air backup power products to the data centre and telecoms markets. Although these are separate entities, both the Group s home energy and microchp offers are provided under the same brand, simply Flow. Flow Products The game-changing, electricity-generating Flow boiler has now launched in the UK Flow Energy Flow Energy increased its UK home energy customer base by 32%, maintaining one of the industry s best reputations for customer service in the process Flow Battery Flow Battery installed product in North America, with Trane Canada, and in the UK under its three year framework agreement with National Grid UK Manufacturing began November Boiler launched January 2015 Grew to c.66,000 customer fuel accounts Generated revenue of 33.3m Replaced existing batteries in 29 National Grid substations

7 Business and Strategy Performance Governance Financials Shareholder Information The Flow Boiler How the Flow boiler works MicroCHP comes of age Flue out Scroll is driven Uses Organic Rankine Cycle technology quieter operation Fuel burns in the combustion chamber Electricity out Hot water out Cost reduction in key scroll technology allows affordable product Can generate around 40% of the electricity a larger household needs Heating System Reduces household carbon emissions by up to 20% Natural gas or LPG goes in Return Generates at peak making its generation potentially much more valuable Innovative launch offer the boiler that pays for itself To support the launch of the Flow boiler in the UK we have designed two packages that effectively provide a Flow boiler to our customers at no cost. This means the financial risk of installing a new technology is removed, so customers can concentrate on the benefits of the technology. Flow Finance Customers can completely avoid the cost of a Flow boiler with our innovative Flow Finance package Flow Freedom Customers buying a boiler with Flow Freedom also effectively receive the Flow boiler at no cost over five years partners Jabil world-class manufacturing partner Zopa innovative peerto-peer finance provider Annual Report

8 06 07 Business and Strategy Group overview Value creation UK home energy Customer offer Joins Flow UK microchp Boiler generates boiler offer electricity International microchp Boiler boiler pays offer for itself Wider efficient energy Flow product keeps offer the customer Flowgroup is a leading competitor in the UK home energy market with its Flow Energy brand, and bundles the Flow boiler with home energy 01 electricity bills 02 and household to incorporate 03in their own 04 in a unique package. Designed and manufactured in the UK, the Flow boiler generates low-cost, low-carbon electricity in the home, slashing carbon emissions. We will design bespoke versions of the Flow boiler for international markets and also provide our core technology to partners products, significantly increasing our potential market size. Flow s position as a utility, with the close customer relationship that creates, facilitates the provision of not only the microchp boiler but a wider suite of energy-efficient products for the home. Customer value created Flow Energy provides some of the best priced home energy in the UK energy market, saving customers significant sums compared to the standard variable tariffs of the Big 6 suppliers. Flow maintains an excellent reputation for customer service, giving it a strong competitive advantage over other players. Bundling home energy with Flow s microchp boiler allows the customer to receive a Flow boiler at effectively no cost over five years. Flowgroup value created Flow Energy generated revenues of 33.3m in. Growing the energy customer base further would increase revenue and create a larger pool of customers to whom to market both the Flow boiler and other energy-efficient products. The provision of the Flow boiler and bundled home energy over five and potentially up to ten years creates a long term energy customer. Wider stakeholder value created As a small supplier looking to grow, Flow increases the competitiveness of the UK energy supply market. It saves customers money and improves the industry s reputation by providing excellent customer service. Flow s special launch offer returns 4,800 to each customer who installs a Flow boiler, through a fixed monthly reduction of 80 in their home energy bills, every month for five years. This is more than the cost of the boiler, providing a strong incentive for the customer and removing any financial risk for them. After five years, the Flow boiler can continue to reduce a customer s home energy bills by up to 500 a year for the lifetime of the boiler (this includes the value of the generation and Feed-in Tariff payments). The Flow boiler can reduce a customer s household carbon emissions by up to 20%. This is one of the biggest reductions a household can make by installing a single product. The deal effectively allows the customer to avoid the cost of one of the biggest single purchases they will make as a homeowner. Flow earns margin on home energy supply, the installation and sale of the boiler and on the electricity the boiler generates. We also retain Feed-in Tariff payments. We will also provide competitive warranty and servicing packages, a key revenue generator. Longer term, we will earn additional revenue from the provision of parts for repair through our installation network. Creating a successful UK home heating brand in our large and mature market will generate brand equity for the Group. Generating low-cost, low-carbon electricity in the home at times of peak demand is a significant benefit for the UK energy system, taking strain off the National Grid and helping the UK meet its carbon emission reduction targets. Empowering customers to generate their own electricity engages them with the energy industry, something they have long felt divorced from. In some countries, the gas used by the Flow boiler to generate electricity is similar in price to the UK market but electricity prices are much higher. This gives the electricity the boiler generates even more value in those countries. Wherever the Flow boiler is installed, it will play the same key role in reducing home energy bills and household carbon emissions. Many countries provide support to the uptake of microchp technology via similar mechanisms to the UK s Feed-in Tariff system. The UK market is large, with 1.7m installations a year, but the European market is much larger, with 8m installs a year. Asian and US markets provide further significant opportunity. Making our technology available to these markets expands the potential scale of our business. All the key international target markets for the Flow boiler share the same energy-related issues that the UK experiences: rising bills, the need to reduce emissions, the difficulty of meeting demand. As in the UK, the Flow boiler can help alleviate many of these problems. Connected, energy-efficient products have the potential to save customers significant sums of money on their energy bills by reducing consumption, increasing control and enhancing understanding of energy use. Intelligent thermostats, smart lighting, smart plugs and more can also provide additional comfort and convenience to users. Being able to remotely control home heating, for example, is a significant benefit. These products can be offered under innovative finance solutions, potentially allowing uptake with no outlay. The sale of energy-efficient products provides several potential revenue streams for the Group from their sale, lease and service. Providing a broad suite of these types of products cements the relationship between the customer and Flow, potentially making it more likely to continue. Increases home energy efficiency and reduces bills and emissions, benefitting the economy and the environment. Widespread adoption of these types of products normalises energy efficiency, playing an important role in reducing overall energy consumption.

9 Business and Strategy Performance Governance Financials Shareholder Information UK launch model the boiler that pays for itself model for introduction of the Flow boiler into the UK market is under an innovative proposition where the financial risk of adopting a new technology is removed from the customer and where the customer could effectively avoid the cost of a new boiler entirely. This model, where the customer receives back 4,800 over five years in reduced home energy bills, more than the cost of the boiler, encourages adoption and delivers a long term, profitable customer to Flow. Research shows that one of the biggest barriers to adoption of microchp technology in the past has been a combination of price and customer concern about the new technology. While we have reduced the price of a microchp boiler far below its previous level, we also needed to address customer concern. model does this. Two launch packages Flow Finance Customer avoids the upfront cost of a boiler by financing it Flow Freedom Customer buys the Flow boiler Customer switches their home energy to Flow and assigns Feed-in Tariff payments to Flow for five years Customer pays the finance payment every month but receives a fixed 80 reduction in their home energy bill, totalling 4,800 after five years Customer also receives a fixed 80 reduction in their home energy bill every month, equalling 4,800 after five years This exceeds the sale price of the boiler, representing an excellent deal for the customer After the initial five year period, the customer will receive a reduction in their home energy bill every month based on the amount of electricity their boiler generates, rather than by a fixed amount, for the lifetime of their boiler Annual Report

10 08 09 Business and Strategy Chairman s Statement We believe that our technology will allow us to take maximum advantage of change in the energy industry, both in the UK and internationally. Clare Spottiswoode Executive Chairman saw one of the most important moments in the history of the Group as the Flow boiler went into manufacture in Jabil s facility in Livingston, Scotland. This was closely followed by the launch of the Flow boiler in early Developing a genuinely game-changing technology is by no means easy and a huge amount of time and resource has rightly been invested in this project. That we now have the world s first affordable electricitygenerating boiler and the first genuine opportunity to commercialise microchp technology for the mass market, both in the UK and internationally, is a testament to the dedication and expertise of all our teams and I would like to thank them for all their effort in leading up to this pivotal moment. Following a successful equity fundraise post-year end we believe we are in a position to accelerate our growth plans in 2015 and to achieve significant success for the Group and for shareholders. Industry developments We believe that our microchp technology platform puts us at the forefront of two global shifts in the way energy industries work. The first is that, as with many industries, energy is becoming something people do rather than just corporations. This drive towards personal power - local, small scale solutions for the production of lower cost, lower carbon electricity - perfectly suits our technology. aim of allowing our customers to play an active role in the energy industry, by generating electricity in the home, chimes exactly with the growing expectation of empowerment from consumers everywhere. The second shift is that energy companies are moving beyond the simple supply of energy to a broader offer which includes products. The reality of the connected, efficient, tech-powered home is drawing closer and is in part driven by the relatively large scale adoption of intelligent thermostats by consumers. However, we believe that our technology platform has the potential to put us in a stronger position than those companies simply offering more accurate control of heating systems. By embedding such a fundamental product as a boiler in a customer s home, and one with the capability to generate electricity and play an important part in powering that customer s life, Flow becomes, even in an energy industry that is in flux, something entirely new. Both heating and powering a customer s home creates a strong bond of trust which, we believe, has the potential to deliver a close and enduring customer relationship. We therefore believe that our technology will allow us to take maximum advantage of change in the energy industry, both in the UK and internationally, delivering the clever alternative to customers and significant benefits for our shareholders.

11 Business and Strategy Performance Governance Financials Shareholder Information Business overview While initiating both manufacturing and sales of the Flow boiler were undoubtedly our biggest achievements, we also expanded our manufacturing agreement with Jabil. Exclusivity with Jabil has been increased from 390,000 to 500,000 units. Both parties also formalised a plan to collaborate on future product development. The relationship between our two companies was further strengthened when during the recent fundraising Jabil invested 7.4m to take an 8.14% shareholding. In addition, we signed testing agreements for the US market with NRG Energy Inc. and for the European market with one of the world s biggest utilities. A successful conclusion of these trials has the potential to deliver ongoing commercial relationships. Flow Energy re-entered the energy market in April. Growing organically rather than paying commission for acquisitions we increased our customer base by around 32%, taking revenues for the year to 33.3m. We maintained our allimportant reputation for customer service, regularly delivering one of the lowest levels of complaints across the UK energy industry. Flow Battery built its infrastructure base in anticipation of increased business and installed two units in Canada for a large telecommunications client through Trane Canada, further growing its position in the high power and North American markets. Battery also completed its first installations under its National Grid framework agreement. Board and management changes During the year I became Non Executive Chairman reflecting the increased executive resource now available to the Group. Nigel Canham joined the Group as Chief Financial Officer in December from Danaher Corporation where he was Finance Director of several of Danaher s businesses. He has brought leadership experience from across a broad range of businesses in both developed and emerging global markets and has the skills and experience to help us grow our business both in the UK and abroad. Funding On 18 May 2015 shareholders approved the firm placing and open offer raising 21.3m (net of expenses). The funds raised are to be used to: accelerate product development of the combination boiler to increase the addressable market in the UK from the current 400,000 to 1.7m units per year and provide early entry into European markets; reduce supply chain costs and upgrade systems to reduce production costs; expand the existing sales team to turn installers into resellers; upgrade systems and processes to enable management of a wide range of UK boiler installers; develop integrated smart home connectivity, to be included in the combination boiler from the outset; and exploit intellectual property through licensing. Business prospects Following the launch of our electricitygenerating Flow boiler we believe we are now in a position to take advantage of the commercial possibilities that this game-changing product presents. We believe we are well set for a year of good progress in Clare Spottiswoode 26 May ,000 Manufacturing exclusivity to Jabil increased from 390,000 to 500,000 Flow boilers US & EUROPE The markets in which we have initiated technology testing agreements Annual Report

12 10 11 Business and Strategy Marketplace Flowgroup sees significant changes in the global energy market, with a move towards local, smallscale electricity generation and mass market adoption of a new generation of in-home energyefficient devices. The Group believes its experience and position in the UK home energy market, its patented microgeneration technology platform and its relationship with its manufacturing partner, Jabil, who can provide access to a broad suite of additional products, puts it in a strong position to take advantage of these changes. UK ENERGY MARKET Represents significant opportunities for standalone growth as the market recalibrates towards smaller suppliers GLOBAL BOILER MARKET Traditionally a market with low levels of innovation, the Flow boiler represents a new generation of home heating technology Targeting potentially significant growth of energy business 1.7m UK boiler sales per annum 8m European boiler sales per annum

13 Business and Strategy Performance Governance Financials Shareholder Information Strategy The Group has a three-pronged strategy. Leverage its patented technology platform Offer a wider energy-efficient product suite Grow its energy business in the UK Firstly, to leverage its patented technology platform wherever a market for home heating exists. The Group will continue to target the UK market and will deliver bespoke versions of its technology for other key markets and also create a Flow inside model, where its technology can be incorporated into its partners existing products. Combining the creation of additional products with an aggressive cost reduction programme will allow the Group s technology the opportunity to flourish as a mass market product globally. Secondly, to offer a wider energy-efficient product suite to existing home energy and boiler customers. As a utility and an existent provider of energy-efficient technology, the Group believes it is well placed to curate additonal products for its customer base. The Group s relationship with Jabil, one of the world s leading manufacturing solutions partners, gives it access to existing products and allows the potential to design and build new ones, with a clear route to market. Thirdly, to grow its energy business in the UK. Some estimates suggest that small suppliers could capture nearly a third of the UK home energy market by This represents an opportunity to create a domestic supply business of significant size, creating both strong revenue and a large database of customers to whom to market the Flow boiler and additional products. Strategic aim Performance Future priorities Leverage the Group s patented technology platform in the UK and international markets Launched in the UK and signed testing agreements in the US and European markets. Produced a clear product roadmap Accelerate cost reduction and product development programmes in conjunction with Jabil Offer a broad energy-efficient product suite to our customers Potentially grow the UK home energy supply business with favourable wholesale arrangements in place Agreement with Jabil on a closer product relationship and work begun on first additional product Added 32% more customers in, relaunched with a competitive tariff post year-end in April 2015 Deliver a product plan and innovative customer offers to encourage adoption Accelerate growth while continuing to invest in customer service provision Annual Report

14 12 13 Performance Strategic Report CEO Q&A There is no other microchp product available anywhere in the world at a price near ours. Tony Stiff Group Chief Executive Officer Q: What is your assessment of for Flowgroup? A: I believe we have hit our major milestones. We started the year with a central goal of creating a production model of the Flow boiler which can be manufactured and sold. We have done that. We wanted to launch the boiler to the market and we achieved that in early We built our installation and servicing infrastructure and opened our principal installer training school in the North West of the UK. We have a clear product road map for future expansion that allows us to grow both in the UK and abroad. We grew Flow Energy and Flow Battery. All in all, it was a good year. Q: Have you delivered your pays for itself boiler proposition? A: The provision of a boiler that pays for itself has always been a key part of our strategic plan and with our launch packages customers can now effectively receive a Flow boiler at no cost and with no risk. Under our finance proposition, customers effectively won t pay a penny for their Flow boiler. Alternatively, if a customer wants to buy a Flow boiler and opts for our Freedom package, they ll receive back more than its cost in fixed reductions in their home energy bills over five years. These are attractive packages to encourage adoption of our groundbreaking technology. They are explained in detail on our website uk.com Q: Is this product a genuine world s first? A: We believe it is. There is no other microchp product available anywhere in the world at a price anywhere near ours. Many fuel cells retail in excess of 15,000. Stirling engine technology has its traditional issues of large size with noise and vibration and is priced at around 7,000. We plan to continue to develop and expand our product offering with the launch of our combination boiler in This will allow our microchp technology Flow boiler to become a genuinely mass market product. Q: What routes to market do you have for your ground-breaking boiler? A: The majority of customers rely on their local installer when looking for a new boiler. That s why we dedicated significant time and resource to building our installer infrastructure and opening our training school in July. We expect the majority of our sales to come from our Flow trained installer network where we will have hundreds of installers going out on a daily basis and recommending the Flow boiler to their customers. We are also in negotiations with several leading brands around partnership opportunities. While direct sales are not traditional in this industry, our in-house boiler sales team continue to secure orders from the significant levels of traffic our contact centre and website now receive. Q: Why have there been delays? A: When creating and developing ground-breaking technology you will always be faced with unique challenges and we have broken new ground probably hundreds of times. Every time you do that, every time you push the boundaries of what has been done before, you are essentially stepping into the relative unknown and that can regularly throw up new challenges. So there have been delays, as there are in the development of any revolutionary technology. But this is not a short term proposition and the size of the opportunity is immense. technology will change the heating and energy markets in the UK, and around the world. Therefore, while short term delays can be frustrating, they should be seen in the light of what we are achieving, and our ability to deliver our strategy remains unchanged.

15 Business and Strategy Performance Governance Financials Shareholder Information Q: Some might say you re taking a cautious approach. Do you think that s fair? A: I do. The temptation is to get this ground-breaking technology into the market as quickly as possible and go for huge sales volumes from the outset. But the sensible thing to do is ensure that everything is absolutely right before we start to install, and to gradually build towards volume installs that will occur in the latter part of 2015, with the winter period being the demand peak in what is a relatively cyclical demand curve. This gives us the opportunity to bed in our installation and sales processes and build capability so that we re running as efficiently and effectively as possible in preparation for winter Q: How is your relationship with Jabil developing? A: relationship with Jabil is very strong as we work together on the current boiler model, and drive together to our volume sales targets. At the same time, we are leveraging Jabil s advanced technology teams, utilising their experience and skills as we work on developing various product platforms and maximising efficiencies in production costs. Jabil has also invested 7.4m in the recent fundraising and now owns 8.14% of Flow. Jabil is a valued manufacturing partner and a key investor in the Group as we move forward. Q: How many boilers do you plan on installing in 2015? A: plan is to expand our sales network during this year, so we will be in a strong position for the winter months when customers look again to replacement of their boilers is a critical year for us as we establish the Flow boiler in the market place. Although the installation programme has been held back as the initial production boilers were subject to rigorous testing the business has challenging internal targets particularly during Q This is why we have placed so much emphasis on establishing our training centre and signing up installers, getting them accredited as both surveyors and installers to support our installation plans. Q: What is your product strategy? A: We are developing additional product types to address more of the UK market and the larger European boiler market. We are working on several combination boiler models and also an additional condensing boiler. These new products will enable us to target a larger market share and bring in new smart technologies at the same time. We are also exploring the Flow inside concept, where other heating manufacturers could use our technology under licence in their products. We are not looking to have a large number of varying products; instead we are managing our product range to allow us to address the largest market share with a limited number of Flow boiler variants. We are also investigating smart thermostats, wireless control, optimised room heating, integration with Solar Thermal systems and other complementary energy saving products. Case study Flow Energy customer service case study The energy industry has always been infamous for the overall level of customer service it provides. Flow always set out to buck that trend and we have delivered on that goal. Despite rapid growth in our first year and continuing growth since we have consistently delivered one of the most impressive customer service records in the industry. In every quarter in we recorded one of the lowest levels of customer complaints, receiving up to 90% less complaints per 100,000 customers compared to other suppliers. We intend on continuing to supply this level of service as we grow our energy business and ensure it remains a strong differentiator in this competitive marketplace. Flow Finance success story Annual Report

16 14 15 Performance Strategic Report continued Initiating manufacturing with Jabil was a major achievement. The first production boiler came off the assembly line in November. Group performance saw us build towards our ultimate goal of the launch of the game-changing Flow boiler, which we achieved just after year end in January This was a significant achievement for the Group although our success was not confined to the Products side of our business Flow Energy performed well and Flow Battery made progress. Flow Products Manufacture of the Flow boiler began in Jabil s Livingston facility in November. Receiving product CE Certification earlier in the year, along with BSI G83/2 compliance for the boiler s in-house power electronics control system, allowed us to move forward with plans for production with Jabil. We completed a detailed planning phase in which we sourced several new European suppliers to improve component quality and secure volume capacity. We then moved into the manufacturing phase. Initiating manufacturing with Jabil was a major achievement. The first production boiler came off the assembly line in November, thus proving the end to end manufacturing process. As a late addition to this process we took the long-term view that Jabil should also build the scroll assembly, requiring additional work at this stage, but strategically the right decision. It was necessary to initiate a limited initial build to gain CE Type Approval for the production line and the boilers, which we duly obtained in April However, this did not delay the launch of the Flow boiler to consumers in January This was a soft launch where we published full details of our boiler packages, including prices, on our website and started to take reservations for the Flow boiler in advance of receiving CE Type Approval. Following CE Type Approval, 50 preproduction models were produced on the line and were subject to verification and validation testing. This is, appropriately, an extremely rigorous process which is taking longer than expected but must be satisfactorily completed before Flow boilers are released for customer installations.the testing is now approaching completion and the first customer installations will take place during June We are now building towards peak period capability in the later months of this year. sales forecast remains heavily loaded towards the end of the current year in the peak boiler sales period of September onwards, allowing us to build further capacity on the sales and installation side, refine processes following our first installs and continue to grow, develop and strengthen our teams. Earlier in the year, we had further cemented our relationship with Jabil by expanding our exclusive manufacturing agreement from 390,000 to 500,000 Flow boilers and agreeing to collaborate closely on both future product development and our cost reduction programmes. We believe this will continue to be our most important strategic relationship as we look to create new products and expand into additional markets. The development teams have concentrated on production readiness of the current boiler over the last few months. The additional equity fundraising allows us to accelerate the development of the combination boiler and bring forward its launch from H to H International expansion goal of international expansion was brought closer as we signed testing agreements in the US and Europe. Signing an agreement with NRG Energy represents the first step into the US retail energy market, linking up with one of the leading players in US energy, a company with considerable vision for the energy businesses of the future and one which

17 Business and Strategy Performance Governance Financials Shareholder Information has already demonstrated leadership in this sector. Following the successful conclusion of NRG s testing of our technology, we would expect to move to commercial discussions. We also signed a similar agreement with one of the world s biggest utilities with a focus on the European market. The European market is a key target for the Group and conducting this initial test and evaluation of a Flow boiler with a major energy player, at their facility, supports the objective of launching the Group s unique electricity-generating products across Europe. The market for gas fired heating products in Europe is around 8 million units per year, with many key markets such as Germany, Italy, France and the Netherlands providing incentives and regulations for low carbon heating. This results in attractive market conditions for microchp in these geographies. Discussions with other interested parties are ongoing. goal is to create partnerships with a range of providers in international markets, both by providing bespoke versions of our boiler to organisations to retail to their customer base and by providing our technology to augment existing heating products a Flow inside approach. UK installer network While we are pleased to be making progress internationally, the focus of the business remained on the UK. One of the key routes to market for any boiler is via installers, who the majority of customers go to for advice on home heating. In July we opened our state of the art training facility in Cheshire where Gas Safe registered engineers now undertake surveying, installation and aftercare training programmes to become accredited installers of the Flow boiler. The 9,000 square foot centre is strategically placed just off the M56, close to the junction with the M6 at Preston Brook, Runcorn. The training facility has the capacity to train up to 64 installers a week, allowing in excess of 3,000 installers to be accredited on an annual basis. In order to attract installers to work with Flow, we put together a dedicated installer sales team who visit installers across the country, generating significant interest in our product and brand and creating an engaged network of installers who will both install the Flow boiler and act as sales agents. It is these brand ambassadors who under the leadership of our industry experienced Sales Director will help drive Flow boiler sales and we are investing significant time and resource in ensuring they are of the highest quality. Partnership development The creation of a strong surveying, installation and service / aftercare infrastructure is important to the future growth of the business. We are working with a number of installer networks across the UK in order to broaden our capability. We have a memorandum of understanding with both Mears Group and Entu but also took the decision to go direct to the larger installer groups in the UK which will further facilitate the infrastructure and fulfilment capability once completed. We have contracted with Zopa Limited, Europe s largest peer-to-peer lending platform, to provide finance to our Flow boiler customers. It is a key part of our strategy to enable customers to finance the cost of a Flow boiler with a personal loan and to have a fixed reduction in their home energy bill, thus the agreement with Zopa was an important one. Both Flow and Zopa share a belief in the necessity of innovating and providing an enhanced customer offering in order to drive growth so we believe this is a natural partnership. In order to allow this partnership to function most effectively, we also applied for and were granted FCA authorisation for limited scope credit broking. Boiler that pays for itself model The plan for the Flow boiler was always to launch it under a model which entirely removed the financial risk of adopting a new technology. We achieved that with our Flow Finance and Flow Freedom packages. Flow Finance allows the customer to avoid the upfront cost of the Flow boiler completely by taking a personal loan through Zopa and then receiving every month a fixed reduction in their home energy bill that exceeds the monthly finance payment. Flow Freedom requires the customer to pay for their boiler, they then receive the same monthly discount on their home energy which, in total after five years, exceeds the amount they paid for their boiler. We believe that no other boiler package returns as much to a customer as ours and these packages achieve our aim of removing any financial risk for our customer in installing a Flow boiler. These packages perfectly complement our innovative technology and we believe were the right way to enter the market. Launch of the Flow boiler We started to take actionable sales enquiries at the end of January 2015, when we published our prices and full details of our packages on our website. We significantly expanded our customer services operation, creating a dedicated Flow boiler sales team, who initially targeted the database of customers who had previously expressed interest in our boiler. We then began to drive new enquiries via regional marketing campaigns initially focused on the North West. We have taken customer confirmed reservations for Flow boilers in line with our sales plan for April and May and our first installs will occur in June. We will move to volume sales through our installer network as we move through summer 2015 in preparation for the winter sales period. Annual Report

18 16 17 Performance Strategic Report continued The creation of a strong surveying, installation and service / aftercare infrastructure is important to the future growth of the business. Technology In order to maximise the potential of our technology platform, we will now move forward with a structured cost reduction and product development programme. This will allow us to reduce the cost of the Flow boiler and to create different versions, both for the UK and for international markets. Flow Energy After the significant success we enjoyed in with the launch of our home energy business, we entered the market again in April. However, we took a different approach. In we grew quickly by paying commissions to price comparison sites for new customers (the traditional route to growth for energy businesses). In we did not pay commissions and instead attracted customers organically through general visibility for our competitive tariff thus growing the customer base without any acquisition costs. We grew our energy business to over 66,000 customer fuel accounts and generated revenues for the year of 33.3m. While delivering growth we retained our excellent reputation for customer service. The energy industry releases quarterly complaint statistics which show the number of complaints per 100,000 customers. We consistently reported amongst the lowest levels of complaints in the entire industry, receiving 90% fewer complaints than some of our competitors. This is important. As the truly competitive domestic energy market continues to mature, and prices begin to converge, factors such as service begin to play a key role in attracting customers. reputation for good service, as well as our ability to deliver keen prices and the brand benefits that come from association with our low carbon microgeneration technology, puts us in a strong position to win customers in a market that looks attractive. We therefore believe that opportunities may exist to grow the business from the current level to over 800,000 customer fuel accounts in the next three years. In order to achieve this, Flow Energy would need to enter into a contractual relationship with an energy trading party where the current high level of trading collateral lodged per customer would be reduced significantly. We are exploring options for a new energy purchasing contract whereby security is provided by a charge taken over our energy customers. Growing our energy customer base would increase revenue and create a large pool of customers to whom to market both the Flow boiler and other energy efficient products. Flow Battery Flow Battery continued to develop its customer base and established the infrastructure to service its anticipated growth as relationships, in particular with National Grid, mature through In March, Flow Battery received an initial order for two compressed air battery units from Trane Canada. Trane, a world leader in air conditioning systems, is part of Ingersoll Rand, a global company with revenues of $14 billion. The units were procured by Trane for a major Canadian telecommunications company. The units were installed in a telephone exchange outside Toronto, part of the company s extensive national network. This order further strengthened Flow Battery s position within the high power market and within the North American market, where we believe excellent sales potential exists. Developing a relationship with Trane, a large company that embraces new technology solutions, should also, we believe, open up many more opportunities. also saw the first installs under the National Grid UK framework agreement, announced in late. The brief is to replace lead-acid backup power units as they reach the end of their service life in National Grid s network of 303

19 Business and Strategy Performance Governance Financials Shareholder Information substations in England and Wales. Flow Battery has now replaced time expired equipment in 29 National Grid installations with a mixture of compressed air battery units and some conventional systems. With a number of sites already being surveyed for replacement systems, we expect to receive additional work under this agreement as we move through 2015 and beyond. People Headcount across the Group increased significantly as we strengthened many of our teams, taking headcount at the end of the year to just below 200. We invested heavily in our people on both the product and energy sides of the business, ensuring we have the people in place who share and can deliver our vision. We firmly believe in people and their potential, and as well as recruiting experienced specialists we also ensure that career progression is a genuine possibility within our organisation. We have many examples of team members moving across departments to develop their skills and we will continue to develop the most important part of our business our people. has been a year of progress which would not have been achieved without the commitment of all who work within the Group. The Directors appreciate all the efforts of our employees and look forward to working with them as the business strengthens and grows through Fundraising On 18 May 2015 shareholders approved the firm placing and open offer raising 21.3m after share issue costs. This share issue was supported by our manufacturing partner Jabil who subscribed for 25.8m ordinary shares giving them an 8.14% interest in the Company. The funds raised are to be used to: accelerate product development of the combination boiler to increase the addressable market in the UK from the current 400,000 to 1.7m units per year and provide early entry into European markets; reduce supply chain costs and upgrade systems to reduce production costs; expand the existing sales team to turn installers into resellers; upgrade systems and processes to enable management of a wide range of UK boiler installers; develop integrated smart home connectivity, to be included in the combination boiler from the outset; and exploit intellectual property through licensing. The Directors have produced business forecasts, which indicate that the Group has sufficient resources to operate for the foreseeable future continuing the development of the energy services and backup power businesses and taking the boiler through from initial installations during Summer 2015 to volume sales with cash generation in Q and profitability during Q Accordingly, the Directors have adopted the going concern basis in the preparation of the Financial Statements. Financial Review Set out below is an extract of the Group Financial Statements for the years ended 31 December and together with an analysis of the Group s key performance indicators Revenue 33,359 13,790 Gross profit 2,222 1,808 Gross profit % 6.7% 13.1% Operating loss (9,963) (7,675) Loss before income tax (10,096) (10,240) Loss attributable to equity shareholders (9,439) (10,032) Intangible fixed assets 17,268 14,665 Tangible fixed assets Cash at 31 December 8,357 17,361 Results Revenue during the year ended 31 December of 33,359,000 arose primarily from the energy business and compares to 13,790,000 during. Gross margin during the year was 6.7% (: 13.1%) with a reduction in margins arising from weather variations and energy market conditions during the year. Operating losses continued to increase due to increased staffing levels within all business areas as they geared up for the forecast growth in 2015 and the launch of the Flow boiler during January Tax The Group accounts for the receipt of tax relief on research and development expenditure when the amount to be received can be assessed with reasonable certainty. During amounts received in respect of 2011 and receivable in respect of 2012 have been recognised. Further claims are in preparation, and in accordance with the Group s accounting policy will be recognised when receipt can be assessed with reasonable certainty. Trading losses of 45,492,000 (: 32,522,000) are being carried within the Group and are available for offset against future taxable trading profits. Loss for the year and loss attributable to equity shareholders The loss attributable to equity holders of amounts to 9,439,000 (: 10,032,000) giving a loss per share of 3.94p (: 7.43p). Investment in intangible fixed assets Investment in intangible assets being the continued development costs of the microchp boiler, amounted to 3,162,000 (: 3,232,000). These comprise capitalised internally generated development costs and the production and installation costs of the initial production standard Flow boilers. Annual Report