Ceramic Fuel Cells Limited Half Yearly Report -2- 3 March 2014

The Company's component outsourcing programme has progressed well with high quality, lower cost parts being received from its suppliers. Strategies are now in place to outsource further manufacturing of components in China which will further reduce the cost of production. In addition, our major suppliers have indicated that there will be significant cost savings once production volumes increase to reasonable levels. Unfortunately, with the SI agreement defaulting, these benefits will not be forthcoming in the short term. The Company works closely with its key supply chain partners and believes that they are both ready and capable of meeting the Company's future production volumes and required pricing levels.

At the time of writing, the Company no longer intends to increase production, until it secures orders which merit such an increase in capacity.

Technology

During this reporting period the Company continued to develop its technology further to improve the lifetime, reliability and robustness of its fuel cell stacks. Significant technical progress has been made on reducing the stacks' degradation rates. An enhanced product with these attributes is due to be released to the market in the last quarter of FY2014. In addition, substantial progress has been made on the ability of the stack to thermal cycle and modulate. These thermal cycling improvements are planned to be introduced to production in the first quarter of FY2015. Further work on improving the product will continue during the second half of this financial year.

Refund from Taxation Office for expenditure on research and development

The Company received A$4.0M (GBP2.2M) from the Australian Taxation Office during November for research and development expenditure incurred during FY2013. A further refund is likely to be received in November 2014 for FY2014.

Sale of powder plant assets and transfer of staff

In December the Company sold its powder plant assets in Bromborough, UK, for GBP1.1M (circa A$2.1M). A change in production process had resulted in CFCL no longer using the powder from the plant, hence, it realised a surplus asset which will have no detrimental effect on the production or financial operations of the Company. All the staff employed by CFCL at the powder plant have been transferred to the purchaser of the assets.

Financial Operating Results

During the half-year the number of units sold increased by 38 per cent over the comparative prior year period, and the overall level of revenue increased from A$2.6M (GBP1.5M) to A$3.4M (GBP2.0M). Revenue per unit sold is down from the prior period owing to the sales of the integrated units to EWE which were at a lower price in order to generate the sales and to enable the development of the integrated mCHP units with our integration partner, Bruns Heiztechnik. In order to promote sales, the Company sold units at close to standard cost price with the expectation that it will be able to reduce the cost of production and thus improve its gross margin in the future.

Over the comparative half-year period the average manufactured cost of the unit has reduced by approximately 15 per cent. Reduction of the manufactured cost continues to be a key strategic focus for the Company and the cost down programme that is in place is expected to achieve further significant cost reductions over the coming year.

The cost of warranty expense for the half-year was steady at A$1.0M (GBP0.6M) compared to A$1.1M (GBP0.7M) for the prior half-year. The Company is cognisant of the need to maintain an appropriate and conservative level of warranty provisioning and the provision at 31 December 2013 was A$3.3M (GBP1.9M) compared to A$1.8M (GBP1.0M) at 31 December 2012 and A$2.6M (GBP1.5M) at 30 June 2013. This increase is predominantly due to the greater number of units sold and the length of the service contracts.

Operating costs during the half-year were A$11.5M (GBP6.7M) compared to A$11.4M (GBP6.6M) for the comparative period last year. The prior year's figure included A$0.9M (GBP0.5M) of costs directly associated with the restructure of the Company's activities in late-2012. Research & Product Development costs have decreased by A$0.4M (GBP0.2M) from the corresponding period due to the afore-mentioned restructure and the consequential reduction in expenditure on core research & product development activities.

Manufacturing costs have been disclosed separately, as production in Germany is now a major activity for the Company. The increase in Manufacturing costs of A$0.6M (GBP0.3M) above the corresponding period is due to the increased production volumes in Germany and the under absorption of overheads.

General & Administration costs have decreased by A$0.8M (GBP0.5M) compared to last year due to the afore-mentioned restructure.

Sales & Marketing costs have increased by A$0.7M (GBP0.4M) over the corresponding period owing to the Company's previously disclosed strategy of increasing resources to target direct sales.

The impairment reversal of A$2.0M (GBP1.2M) for the half-year is a partial reversal, upon sale, of the A$2.6M (GBP1.5M) impairment charge recognized for the year ended 30 June 2012 on the full impairment of the plant and equipment of the Group's UK powder production plant.

Financing Activities

In December 2013 the Company completed a capital raising of A$5.8M (GBP3.3M) before expenses. This raising consisted of a Share Purchase Plan offer to qualifying shareholders in Australia and New Zealand that raised A$4.2M (GBP2.4M) and an Overseas Offer made to qualifying shareholders outside of Australia and New Zealand (and certain other territories) that raised A$1.6M (GBP0.9M). The Share Purchase Plan was undertaken at a price of 3.84 cents per share and the Overseas Offer was at a price of 2.14 pence per share (the equivalent of 3.84 cents). This pricing was designed to give eligible shareholders the ability to subscribe for ordinary shares at the same price as the investors who subscribed for the equity issue and convertible loan notes in May 2013. The Share Purchase Plan resulted in the issue of 109.3 million ordinary shares and the Overseas Offer resulted in the issue of a further 41.1 million ordinary shares.

As was disclosed in the Share Purchase Plan and Overseas Offer documentation, if the total amount raised was less than A$8.0M (GBP4.6M) the Company would be required to seek further funding in the first quarter of CY2014. It also stated that the Company would be unable to undertake the proposed capital expansion at its manufacturing facility and it would have to reduce the engineering work being done to lower the manufactured cost of BlueGEN units. The Directors believe this has resulted in a slower move down the manufacturing cost curve and, as a result, the Company has had to maintain a higher selling price which has reduced demand for the Company's products.

Matters Subsequent to the End of the Half-Year

As announced by the Company on 28 November 2013, CFCL had reached an agreement with Synergy International OÜ ("SI") whereby SI agreed to purchase a minimum of 1,000 BlueGEN mCHP units. The agreement stipulated a minimum order of 500 units per year on a take-or-pay basis for two years with an option to extend to a third year. The total sales value of the transaction was estimated to be in excess of EUR20 million.

Unfortunately, SI has reneged on the agreement reached in November 2013 as they have not made the upfront payments. This is a major setback for the Company as it had made significant financial investment in order to gear up its production to meet the sales order. Whilst dialogue between CFCL and SI continues, the Board has taken the decision that it is unlikely that SI will honour the agreement.

Partly as a consequence of SI's payment default, the Company has had to review the finances it has at its disposal. The Board has approved a fundraising of at least GBP3 million pounds to occur during March 2014, GBP1 million of which will be contributed by the Company's Chairman, Alasdair Locke. Discussions with prospective parties are significantly advanced and further details of the capital raise will be announced to the market in the near future. This capital raise will require approval by Shareholders at an Extraordinary General Meeting. Depending on the amount of capital raised and the success of both the Company's sales programme and its restructuring activities, a further capital raise is likely to be required in the second half of CY2014.

The Board is in the process of restructuring the Company with a view to altering its direct sales strategy and removing significant cost from the operations. It is also pursuing joint venture possibilities with partners who are willing to pay for the Company's technology in order to produce systems of differing output.

On 28 February 2014, the Company received an order for 100 BlueGEN units, for delivery within the next twelve months, from the German company Avilos GmbH ("Avilos"). Under the terms of the agreement, Avilos will purchase 100 BlueGEN units on a take-or-pay basis and sell them to private and small commercial customers. Avilos had previously signed up as regional, non-exclusive BlueGEN distribution partner and have received formal training in sales and installation from CFCL.

Avilos has locations both close to Munich (Southern Germany) and in Bremen (Northern Germany) and provides energy solutions for residential buildings and small commercial businesses. Based on the combination of fuel cells, PV solar systems, heat pumps and batteries, Avilos has developed intelligent energy management systems to offer customers a high level of self-sufficient power supply.

No other matter or circumstance has arisen since 31 December 2013 which has significantly affected, or may significantly affect: