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Powerhouse Energy Group Plc

Chairman’s Report in full for PowerHouse Energy Group plc, Keith Allaun

Engineering is an exacting, demanding, and precise science. Designing from first principles, constructing from scratch, and commissioning the only modular ultra-high temperature gasification reactor system available is a time-consuming process. For our company 2016 was taken up almost exclusively by this effort.

I am therefore pleased to report success with both product development and funding in the year under review. This momentum has continued into the first few months of 2017 leaving our Company stronger, commercially and financially, than it has been in the past 5 years.

Waste market Background

According to a World Bank study, it is anticipated that the amount of waste we generate will double from 2013 to 2025.  The MacArthur Foundation reports that by 2050 the plastic waste in our Oceans will weigh more than all of the fish combined. We are beginning to do a better job at managing that waste through rigorous recycling and reuse efforts.  But more must be done in order to avert an ecological crisis in our children’s lifetimes.

Energy recovery has been a major objective of waste management for over 50 years. PowerHouse is taking energy recovery to the next level. We believe that with traditionally difficult-to-manage or hazardous waste, and certainly with non-recyclable plastics – the plastics ending up in our Oceans – our Distributed Modular Gasification© (“DMG”) technology allows us to recover the energy value of the waste stream in the most efficient, and environmentally rigorous, manner available.

We do not pretend to be all things to all people and DMG is part of a waste management ecosystem with numerous components, each playing a valuable role. For example, there is anaerobic digestion, composting combined with methane recovery, other thermal conversion technologies, and of course, recycling and re-use wherever possible. We applaud all innovators who are, like us, doing their part to make waste management as green as possible. DMG is however, in our opinion, the best option in many cases.

The waste-to-energy landscape continues to be an evolving and growing market. According to a just-released report by Global Market Insights, it is expected that the waste-to-energy market will grow from $20.6bn in 2015 to over $35.5bn in 2024. Demand in the market for alternatives to incineration and landfill is increasing significantly.

In addition to the EU landfill directive, 18 countries are implementing stringent landfill taxes immediately. These taxes are already high (c£85 per tonne in the UK) and are expected to continue to grow making alternatives like ultra high temperature DMG very attractive. While incinerators are still being approved in some geographies, deployment of that aging technology is slowing as more environmentally friendly alternatives (such as the G3-UHt unit) are coming to market.

Our opportunity

Distributed Modular Gasification© is, in our estimation, a truly disruptive technology – philosophy even – that will fundamentally change the waste-to-energy market.

Local waste, local energy…

DMG enables the thermal molecular conversion of waste into an energy-rich, non-polluting, synthesis gas (“syngas”). The syngas is used immediately to generate emission-free energy which can be utilised locally, thereby leveraging private line or micro-grid connections on-site. If appropriate, it can be sold into the National Grid.

Importantly, not only can DMG utilise a range of waste – including that which would normally head to landfill – by siting a G3-UHt unit where the waste is located, it removes the need to transport it over long distances to either a processing plant (or to landfill).

…and clean energy with a lower CO2 footprint

The advantages of DMG are multiple. In addition to a reduced carbon dioxide footprint compared to incineration, ultra high temperature DMG can result in no leachable residue or ash – a significant problem faced by pyrolysis and lower temperature combustion-based systems. Low temperature alternatives produce significant levels of highly toxic and potentially carcinogenic cyclic molecules. Those toxins are imbued in the residues and ashes of lower temperature systems and require that the ash and residue be land-filled for hygiene and safety.

Our ultra high temperature DMG is designed to completely decompose the complex molecules in the waste-stream, capture the vast majority of the calorific value therein, detoxify or sequester the residue, and allow us to capture and recycle components of the waste-stream like sulphur, zinc, or other minerals or metals

Local hydrogen “on tap” is a game changer

The conversion of waste to hydrogen is a cornerstone for any future hydrogen economy. Some think this is “blue sky thinking”, however, we have already demonstrated our ability to generate a syngas that is nearly 70% hydrogen.

This nearly pure hydrogen can be diverted from the syngas with existing, off-the-shelf technology, compressed, stored at site and delivered to appropriate infrastructure in what is perhaps the single most economical, and environmentally responsible manner possible. For example, by generating hydrogen in multiple locations, from a feedstock for which we are paid, we can use it to recharge fuel cells and become the road fuel of the future in fuel cell vehicles.

With this in mind, we announced earlier in 2017 that we expected the delivery of an AFC Fuel Cell unit to our Thornton Facility. We are confident that our G3-UHt unit will perform as it has in the past, and that our unique ability to generate a hydrogen-rich gas will lead to a successful trial of the fuel cell.

Major energy and transportation companies have made public commitments to significantly expanding the hydrogen infrastructure, with Shell stating recently that they expect 400 hydrogen filling stations in the UK by 2023. Toyota – which has developed the Mirai – has opened its hydrogen-filling related patent portfolio to all comers in its commitment to driving forward the nascent hydrogen economy. Fuel cell vehicles are proven to be more robust than current battery powered vehicles; they can travel much greater distances between refuellings, and are not simply shifting the CO2 impact from the vehicle back to the ultimate source of electrical generation.

We are convinced that DMG will be able to play a role, and possibly a major role, in the creation of ubiquitous Hydrogen filling stations across the nation.

We believe this is the future and is the pinnacle for which we are striving.

Our technology’s progress

During 2016, the Company successfully completed the development of the Company’s G3-UHt unit and undertook its initial testing program in Brisbane, Australia. The work was carried out through the work-for-hire program by OrePro pty Ltd (“OrePro”), a company associated with one of our shareholders Hillgrove.

Consistent with research and market analysis it became clear during 2016 that due to a variety of competitive and political reasons, the Company’s ideal initial target markets are located in the UK and Europe. In continuing our engineering and R&D efforts exclusively in Australia, too great a stress was placed on the limited resources of the Company. After assessing the most appropriate course of action we determined to relocate the preponderance of our R&D, engineering, development, design, and Corporate operations to the UK.

I am pleased to report – in April 2017 – the safe arrival, reassembly, and initial phase of re-commissioning of the G3-UHt reactor at the prestigious Thornton Science Park, in Chester, in the North West of England. This will be the new base of technical operations and process demonstration for PowerHouse.

The PowerHouse team has been working diligently to build a gasification system from first principals; one that could stand up to the rigors of real-world operation, and one that could be easily, and modularly deployed.

While the demonstration G3-UHt unit is a nominal 1-3 tonne per day (“tpd”) system, scaling it up is, to a large degree, a linear step function.

The benefits of scale

Historically, scaling a system from demonstration and pilot size has posed significant risks for technology developers.  However, we have actual experience with our previous 25tpd unit.  In dismantling the G3-UHt unit, we were able to clearly identify the specific components that made it non-viable as a commercial unit.

The G3-UHt unit was designed with expansion in mind. Effectively interlocking and leveraging both front-end and back-end balance of plant components, the latest designs of the G3-UHt system allow us to scale with reduced risk. We know that the 25tpd redesign works, and we are in the process of initiating the engineering work for our first commercial DMG system, based on the success of the G3-UHt.

With the advent of significant advances in material science, our revised heating design is substantially more efficient – improving the thermal efficacy of the system as a whole. The specially formulated and manufactured reactor chambers are immune to the corrosive threats previous technologies faced- thus increasing the lifespan of a reactor vessel.

The simplification of the control systems, using advances in programmable logic controller knowledge, and the understanding of total system operation, has led to a dramatic reduction in manufacturing expense. This has also led to an increased ease of operation, the elimination of potential points of failure, and enhanced safety features for the system as a whole.

The modular G3UHt units, with smaller footprints than other commercial technologies, remain ideally suited for local, or neighbourhood, transfer stations, and are appropriately sized for integration into the community and the expansion of the distributed Grid, and the unlocking of the hydrogen economy.

The Directors are enthusiastic about the DMG technology and recognize that the G3-UHt system has the potential to be one of the most robust, cost-effective, operationally efficient, and flexible gasification systems on the market.

Project Development

PowerHouse is not only a technology company – we have developed a technology that we believe is superior to others in the market.  However, we are project developers and it is our intent to develop long-term projects in partnership with others, like Waste2tricity, and to build annuity streams of income, year on year. Our intent is not to sell or license our technology, but to integrate it into a partnership that continues to deliver revenue streams for years to come. Unique opportunities may present themselves over time in which we may consider a unit-sales model, however, our latest economic models have convinced us that owning and operating the facility is the most lucrative option in both the near and long-term.

Upon completion of the UK certification process we will be ready for launch. We are confident that the demonstrations which we intend to undertake will lead to significant commercial opportunities for PowerHouse.

It is likely that as commercial engineering and business development continues we will choose to pursue additional funding options including equity, debt, or possible project financing models.

Strategic alliances

Hillgrove

Hillgrove Investments Pty Ltd (“Hillgrove”) has been a key partner to the Company since 2010.  Hillgrove was responsible for funding all Company operations for over a three-year period from mid-2012 to 2016 and providing personnel for the design, development, engineering, construction, and testing of the system in Brisbane, Australia. In addition, much of the development work on the G3-UHt system was undertaken by OrePro pty Ltd, an associate of Hillgrove.

Inevitably that reliance on Hillgrove’s financial and operational support resulted in a substantial financial commitment on the part of the Company, which was threatening to become inappropriate in the context of a publicly quoted entity.

We were therefore delighted to announce the restructuring of these arrangements in February 2017, with the assistance of Hillgrove, as detailed below under Funding. We look forward to working together with Hillgrove in the future development of the Company.

Peel Environmental

The Company remains in active discussions with Peel Environmental regarding potentially siting our first commercial facility at Protos, their energy park adjacent to the Thornton Science Park.

Waste2tricity

PowerHouse stands today upon a wealth of information that is being put to good use by world-class professionals in a growing team. Our partnership with Waste2tricity has led to tremendous opportunities, several of which are at a scale never before envisaged by the Company. The synergy present across the team is beginning to generate the results that we’ve been predicting for years – and it all starts with Distributed Modular Gasification©.

Yady

Yady Worldwide, S.A. (“Yady”), an investor in the Company, has further supported PowerHouse with the contribution of £500,000 in the fundraise announced in February 2017. Yady also agreed to a 12 month lock-in period with the Company.

AFC Energy

In March 2017, PowerHouse confirmed its order of a small-scale fuel cell system originally ordered in 2014 from AFC Energy plc (“AFC”) but delayed awaiting the completion of the construction and testing of the G3-UHt Unit.  Upon delivery of the fuel cell, expected in Q4 2017, PowerHouse anticipates having a high quality hydrogen stream (a component of the syngas produced) from the G3-UHt to successfully integrate with the fuel cell, to provide production of electrical power. Receipt of the fuel cell is contingent upon the G3-UHt unit being capable of producing a hydrogen stream compatible with the fuel cell.

Having seen AFC’s commitment to developing the “Hydrogen Economy” in Germany and elsewhere, PowerHouse is delighted to work closely with AFC in the development of DMG to deliver hydrogen where, and when, it is needed. The successful integration of these two technologies could create significant new markets in clean distributed power generation and continue to grow the increasing prominence of the hydrogen economy in the UK and overseas.

Nominated Advisor

In March of 2016, WH Ireland was appointed the Company’s new Nominated Advisor.  The Company continues to work closely and cooperatively with WHI to ensure the highest standards of Corporate Governance and AIM Regulation Compliance.

Board appointments

Executive Directors / Management

One is a lonely number. I was therefore delighted in February 2017 to be joined by David Ryan as Executive Director for Programme Development.

David has over 30 years of increasingly complex engineering, business development, and project management experience. He is an expert in sophisticated design engineering and will bring a breadth of project delivery, international business management, and general engineering acumen to the management team.

Previously David was the CEO and Managing Director of Thyssenkrupp Industrial Solutions’ Oil & Gas Business Unit for the UK. Prior to his employment with Thyssenkrupp, he founded and built a successful engineering consulting organisation, Energy & Power Limited, which was acquired by Thyssenkrupp in 2012.

In March 2017 Chris Vanezis joined the management team as Chief Financial Officer. Chris trained with Deloitte and Coopers & Lybrand, qualifying as a chartered accountant in 1990. He has over 15 years’ experience in the energy sector, with a strong track record in Waste-to-Energy, and major infrastructure projects both in the UK and internationally.

Prior to joining PowerHouse, Chris worked as an independent consultant, providing his expertise to a number of companies in renewable energy. Chris will take the lead in implementing strong financial controls at a time of planned growth.

Together this team is driving the UK Health, Safety and Environmental certification process as well as initiating the commercial development and engineering process for the building of our first 25 tonne per day unit at a site currently being negotiated.

Additionally we have begun the recruitment and interviewing process for our first team hires to fully staff our Thornton Science Park offices.

Non-executive directors

In May 2016 Clive Carver, was appointed to the board as a non-executive director. Clive is a Chairman / non-executive director of a number of AIM companies and has spent many years advising and fund raising in the AIM market. Clive completed his service with the Company in May of 2017 to pursue other endeavours. We appreciate the contribution he made during his time on the Board.

As always, Brent Fitzpatrick, MBE and James Greenstreet have continued to guide the Company’s development as non-executives throughout the year under review and subsequently providing wise and timely advice to the board.

To raise the profile of the Company, help maintain the pace of development and in keeping with the best principles of Corporate Governance, the Board has decided to separate the role of Chairman and CEO at an appropriate time.  We expect to announce the appointment of a leading figure in the Waste-to-Energy sector in the coming months.

Recently, the Company announced the formation of a Commercial, Scientific, and Engineering Advisory Panel.  The Advisory Panel currently consists of industry stalwarts Peter Jones OBE, Keith Riley, Miles Kitcher, Howard White, and Rudi Baroudi. It should be noted that none of the Advisory Panellists are Directors of the Company, and while Management, and the Board, may well seek their counsel on particular matters pertaining to their individual expertise, the governance and decision making authority for the Company rests solely with the Board of Directors.

Funding

During 2016 and to date in 2017 the Company has raised a total of £3.3 million.

In February 2017, the Company raised £2.5 million through the issue of 312,500,000 new ordinary shares. The placing was completed at a price of 0.8p per Share and was in conjunction with the partial conversion of the loan note signed between the Company in Hillgrove in October 2012 (the “Note”).

The terms of the Hillgrove Note were such that the Company was accruing 15% interest against the loan. Hillgrove had extended a total of £3,402,155 to the Company, including accrued interest, and accepted a £2 million cash pay-out, and conversion of the remaining £1,402,155 into newly issued share capital of the Company at the previously agreed 0.5p conversion price, amounting to 280,430,920 shares. Hillgrove now holds a total of 300,430,920 ordinary shares in the Company. Hillgrove has committed to a 12 month lock-in period for its newly issued shares.

The proceeds have been used principally to repay the balance of the Note not otherwise converted to shares, and for operating capital. By virtue of the conversion and pay-out, the Company will eliminate the Hillgrove Note, and the Debenture over the Company’s assets, held by Hillgrove, will be released, pending receipt by Hillgrove of £2m and 280,430,920 Shares. A further announcement regarding the elimination of the Hillgrove Note and release of the debenture is expected in due course.

Yady Worldwide, SA also invested £500,000 to the equity fundraise in February 2017, having previously invested £250,000 in January 2017.

Other fundraisings in 2016 amounted to £700,512.

Financial results

The Company financial statements for the year ended 31 December 2016 are set out on pages 18 to 29. The Company loss for the year after taxation amounted to £1,334,009 (2015: Loss of £781,647).

Current Trading

The Company is on a firm footing for the foreseeable future. Cash-on-hand as at the date of this report is approximately £235,000, with an additional approximate £60,000 in VAT and Customs Duties recovery.  This represents sufficient resources to enable the Company to meet its obligations as they fall due. Our relationship with Waste2tricity is based on payment converted to equity and is therefore not a drain on the Company’s cash resources. Similarly, no member of the Advisory Panel is receiving any cash compensation for their participation with the company.

Outlook

Through the creation of DMG, PowerHouse is not only on the cusp of redefining the waste-to-energy industry – we believe we also hold one of the keys to unlocking the hydrogen economy.

The Company has been making tremendous strides as a newly minted, commercial, entity. The G3-UHt technology is, in our opinion, unparalleled in its capability, its efficiency, its economy, and its environmental contribution.

We now have the technology, we are building the team necessary to achieve our commercial endeavours and we are eager to begin growing our office at Thornton, and demonstrating our technology, with the conversion and repayment of the Hillgrove convertible note, the Company is now fully focused on moving forward aggressively with its commercialisation phase.

DMG is a disruptive philosophy – PowerHouse has created it, and now is the time to disrupt.

As always, we are grateful for your continued support.

Keith Allaun

Chairman

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.