Lb-Shell PLC Regulatory News (LBP)

Intelligent Energy Holdings plc

Dr Henri Winand, Chief Executive Officer

John Maguire, Chief Financial Officer

+44 (0)1509 271271

Tulchan Communications

James Macey White

Matt Low

Nick Hennis

+44 (0)207 353 4200

Description

Detail

Risk management

The Group is developing complex, innovative technology products which require further technical development and investment in infrastructure, along with significant adoption by customers. Material markets for fuel cell technology may never develop, or develop more slowly than the Group anticipates. In addition, fuel cells may never be as competitive as other competing technologies or direct competitors continue to evolve.

Due to the complex, innovative nature of this technology, projects and programmes may not be delivered on time or on budget or may fail to achieve expected performance criteria in new product launches or result in deficiencies in the products that are launched. Such delays could create an impression that fuel cell technology is not suitable or ready, in turn materially impacting on the adoption of the technology by customers.

Commercialisation of fuel cell products and technologies also depends upon the achievement of a suitable total cost of ownership of these products at volume and cost-effective implementation of the technologies, since currently fuel cell products at low volumes are more expensive than products based on existing technologies.

The Company may not be able to sufficiently reduce the cost of these products at volume without reducing their performance, reliability and durability, which could affect the willingness of customers to buy them.

The Group has dedicated Project Managers who control, monitor and manage identified work packages to meet predefined delivery criteria, or escalate material issues internally.

The Group has protected budget and resources for critical projects to ensure competitive advantage and increase the likelihood of the technology meeting the desired performance criteria and cost within the relevant timeframe to satisfy likely markets.

The Group operates a Project Management framework. This is a gated process to ensure all the required milestones within a given project have been performed satisfactorily before approval is given to progress to the next phase of the project.

The Group has an internal strategic procurement capability to identify and manage external contract manufacturing capability to target economic costs of functional production.

The Group is currently reliant on a small number of customers with various contractual obligations; failure to meet these commitments could result in penalties, contracts not being renewed, or termination of existing contracts.

The Group is reliant on revenue from a small number of customers and there can be no assurance that it will be able to obtain additional, or retain existing, customer relationships.

Intelligent Energy has a number of customer contracts requiring adherence to milestones and service level agreements. A failure to adhere to these contractual commitments could lead to financial penalties or in extreme scenarios the loss of future activity.

The Group's customers may experience adverse trading conditions which in turn may affect their ability to continue or do further business with the Group.

The Group has divisional Sales & Marketing teams to attract and retain both new and existing business, thereby reducing the reliance on a small number of customers.

Contractual commitments are closely monitored internally to underpin delivery and identify corrective action, if appropriate.

Due diligence processes are carried out where appropriate and prior to entering into agreements with new customers.

The Group aims to maximise revenue opportunities by seeking to enter into long-term commercial arrangements with multiple sources of value, for example power management services offered by the DP&G division.

The Group is dependent on a variety of third party providers both in the manufacture of its products and the supporting operations.

The Group is reliant on third parties to successfully manufacture its products in the required numbers and to the required specification. As a consequence, the Group is and will remain exposed to the risks relating to the contract manufacturer's ('CM') business. These include:

· CM ability to employ and retain suitably qualified staff;

· level of investment the CM makes in factory premises;

· CM ability to create and effectively manage the supply chain in order to successfully and consistently manufacture the Group's product to the required standards; and

· reputational risks to the Group if the CM fails to meet legal or regulatory standards.

The Group may fail to attract suitable third party providers that it wishes to work with. This is particularly relevant with regards to CMs where there may be reluctance due to the challenges and risks associated with introducing a new technology to market.

The Group will also continue to rely on third party service providers to deliver its business plan. For example, DP&G is dependent on third party subcontractors to provide field services for the tower sites under management.

Any failure by such third party service providers to meet their contractual obligations to the Group could have a material adverse effect on the Group's business, financial condition, results of operations or prospects.

The Group partners with industry-leading or specialist companies and has in place a detailed internal process to manage its key partners, which includes the Company's employees being heavily involved in the set up phase with the CM.

During the negotiation of commercial agreements, a balanced approach to apportioning risk is sought.

The Group seeks to develop long-term relations with its key suppliers in order to develop quality manufacturing systems which are flexible and scalable.

The Group is dependent on proprietary technology underpinned by intellectual property ('IP') and may not be able to obtain, maintain, defend or enforce those IP rights. The Group may also be exposed to litigation in the future in respect of IP infringement or product liability claims.

The Group's success will depend in part on its ability to obtain, maintain, defend and enforce its patents and other IP rights that underpin its proprietary technologies and products. There is no assurance that, for example:

· any currently pending or future patent will be granted;

· the Group's patent applications will not be challenged by third parties;

· where patents have been issued to the Group, others will not be able to design around such patents to create a competing technology or product;

· competitors will not develop similar products which are not within the scope of the Group's patents; and

· our IT systems can fully prevent a loss of IP through a cyber-attack

The business carried on by the Group means that it faces inherent risks in respect of IP infringement and product liability claims, any of which could materially adversely affect the Group's business, results of operations or financial condition.

Intelligent Energy identifies and registers its IP where appropriate to aid enforcement of its rights, and protects and challenges infringement, where appropriate. It also looks to regularly extend its proprietary knowledge through acquisition with continued ongoing research activities.

IP boundaries and ownership are an integral part of the contracts which the Group enters into at all levels in the business.

As part of a new employee's induction, IP training is given which emphasises the importance and relevance of IP to the Group's activities.

We have specialist in-house IP capability that oversees all IP activity including the management of external IP service providers.

We have an IT security framework and roadmap in place which highlights the highest cyber risks. The roadmap is being implemented with priority on highest risk items. As new cyber risks develop the roadmap and priorities adjust accordingly.

The Group will need to raise additional funds to meet its growth and shareholder return aspirations.

Delay or failure to raise additional funds to meet the Group's growth aspirations could limit returns available to shareholders.

The Group regularly monitors the level of potential future financing requirements and engages where appropriate with financing advisers to review options for raising additional funds, where required.

The Group engages with banks and investors from around the world to diversify potential sources of future investment.

The Group will seek to recover technology development costs from its partners when entering into a Joint Development Agreement.

The Group models alternative business scenarios if there are significant delays in raising additional funds.

The Group's growth strategy involves operating in fast-growing economies of the world, where there may be additional complexities in delivering the business plan.

The Group's growth strategy relies in part on the expansion of its businesses in parts of the world which are less developed. The costs, risks and competition associated with maintaining a foothold in such markets may be higher than expected.

The Group understands its business may face a range of risks and challenges in its initial target markets, including:

· difficulties in managing overseas operations;

· overcoming cultural differences in business;

· difficulties and delays in contract enforcement and the collection of receivables under the legal systems of foreign countries;

· regulatory and legal requirements affecting its ability to enter new markets through joint ventures with local entities;

· changes or inconsistent application of laws and regulations; and

· overcoming the logistical challenges of the supply and delivery of hydrogen.

The Group employs where appropriate relevant personnel who have strong international backgrounds.

Where appropriate, recruitment also takes place locally to ensure these businesses understand local markets, customs and working places.

External advisers are sourced locally to ensure legal and regulatory compliance.

The Group is exposed to foreign currency exchange risk.

The majority of the Group's business is carried out in currencies other than Sterling, in particular for the DP&G division. As the Group's financial statements are prepared in Sterling, it is exposed to both translational and transactional foreign exchange risk.

The Group monitors foreign exchange rates on a weekly basis and enters into forward rate agreements where large-value obligations exist at a known date, where deemed suitable.

During the year, a new Treasury function has been established which helps to manage foreign exchange exposure.

The Group faces risks in executing the GTL deal and delivering the business plan thereafter as envisaged.

A number of conditions precedent are required in order to complete the acquisition of the energy management business from GTL; the most significant of which relates to external fundraising. There is a risk of failing to complete this process, as well as not achieving the other required conditions, meaning a delayed completion, or the transaction not completing at all.

If all of the conditions precedent are successfully achieved the Group may face a range of risks and challenges post acquisition, for example:

· loss of key personnel currently involved in the delivery of the energy management contracts and of sub-contracted services;

· delivering the strategy at scale to deliver margin growth;

· revenue volatility caused by market price of diesel and electricity; and

· ensuring all banking covenants are met.

Fundraising, where appropriate, is conducted using strong banking advisory relationships to help to deliver the required funding outcome.

There has been a thorough pre-transaction review of the business and through the operation of the interim contract with GTL, Essential Energy has acquired operational experience of the GTL energy management business and has been able to develop key relationships.

Key members of the Essential Energy team have prior experience of working in the telecom tower industry.

The majority of the cost-base is diesel and grid electricity consumed at tower sites. Whilst consumption volume risk will be managed by Essential Energy, revenue is calculated using the market price of both diesel and electricity, thus protecting margins.

· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

· the Strategic report includes a fair review of the development and performance of the business and the position of the issuer, and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.