annual report and accounts for the year ended 31 … · compression ignition engines 5,673,673...

Enabling Heavy Duty Trucks to Run On Natural Gas

ANNUAL REPORT AND ACCOUNTSfor the year ended 31 December 2012

Stock code: CAP

Stock code: CAP

CLEAN AIR POWERAnnual Report and Accounts 2012 01

CLEAN AIR POWER HIGHLIGHTS

REASONS TO INVEST

CLEAN AIR POWERAnnual Report and Accounts 2012

www.cleanairpower.comwww.cleanairpower.com

Clean Air Power is at the forefront of the move towards natural gasbecoming the road transport fuel of choice for heavy goods vehicles. Dual-Fuel™ technology maintains diesel engine performance and efficiency whiledelivering significant fuel cost savings and reductions in carbon emissions.

• The adoption of natural gas as a road fuel is accelerating worldwide drivenby its growing availability, low cost and reductions in carbon emissions

• Natural gas is the only real alternative to diesel for heavy goods vehiclesdue to torque and power requirements

• In key target markets significant cost savings can be derived by operatingDual-Fuel™ vehicles due to the lower cost of gas relative to diesel

• Dual-Fuel™ technology enables engines to run on 100% diesel if gas is notavailable reducing any risk associated with gas availability

• Clean Air Power has clear first mover advantage and strong patentprotection for its technology which has already been proven in over 2,200vehicles

• Clean Air Power has already achieved significant traction in Europe wheresales of its Dual-Fuel™ system are increasing

• Clean Air Power has established an OEM agreement with a major Europeanvehicle manufacturer which has begun production of trucks incorporatingits Dual-Fuel™ technology

�<<� Front cover imageClean Air Power,

Poway, USA

FINANCIAL HIGHLIGHTS

DUAL-FUEL™ REVENUE

09 10

Clean Air Power, Leyland, UK

OPERATIONAL HIGHLIGHTS

POST PERIOD END

CORPORATE GOVERNANCE

17 Corporate Information

18 Board of Directors

20 Corporate Social Responsibility

21 Directors’ Report

23 Report on Directors’ Remuneration

26 Statement of Directors’ Responsibilities

27 Corporate Governance Statements

29 Independent Auditor’s Report to the Members

of Clean Air Power Limited

FINANCIALS

30 Consolidated Income Statement

31 Consolidated Statement of Comprehensive Income

32 Consolidated Statement of Financial Position

33 Company Statement of Financial Position

34 Consolidated Statement of Cash Flows

35 Company Statement of Cash Flows

36 Consolidated Statement of Changes In Equity

37 Company Statement of Changes in Equity

38 Notes to the Consolidated Financial Statements

BUSINESS REVIEW

12 Financial Review

14 KPIs

15 Risks and Uncertainties

OVERVIEW

01 Highlights

02 Group Overview

04 Dual-Fuel™ Technology

06 Market Overview

09 Chairman’s Statement

10 Chief Executive’s Operating Review

• Group revenue increased by 73% to £7.94m, (2011: £4.59m)

• Revenue from Dual-Fuel™ division increased by 101% to £6.64m,

(2011: £3.30m)

• Gross profit increased to £3.52m (2011: £2.56m), driven by Dual-Fuel™

systems and development revenue

• £3.20m in cash at 31 December 2012, (£2.42m as at 31 December 2011)

• £3.35m (before expenses) successfully raised through equity issue in

September 2012

• Increasing interest in our European products resulted in a total of 300 sales

of our Dual-Fuel™ systems (70 system sales in 2011)

• Major European Manufacturer commenced factory production of Heavy

Duty trucks incorporating Clean Air Power Dual-Fuel™ engine

management software

• Successful evaluation of Genesis-EDGE product for the North American

market

• Successful development and launch of Renault Magnum Genesis-EDGE

Dual-Fuel™ variant for the European market

• Order delivered for 49 Genesis-EDGE Dual-Fuel™ systems to Sainsbury’s

• Order delivered for 27 Genesis-EDGE Dual-Fuel™ systems for a major

logistics organisation in the UK

• Order received for 82 Genesis-EDGE Dual-Fuel™ systems for HAM

Criogénica

• Payment received from Navistar for $1.3m for work done in 2010 on the

Concept Ready Phase of a Dual-Fuel™ development project

• Euro 6 prototype R&D funding awarded by Niche Vehicle Network for after-

treatment packaging development in partnership with Eminox Limited

• Agreed two year funded research project in partnership with Brunel

University aimed at developing the next generation of advanced Dual-Fuel™

combustion systems using natural gas and diesel. The project will be carried

out at Brunel University’s Centre for Advanced Powertrains and Fuels

£1.8

1m

£2.7

1m

£3.3

0m

£6.6

4m

11 12

COMPANY BACKGROUNDDual-Fuel™ engines can run primarily on natural gas and this provides anumber of important cost and environmental benefits to an operatorwithout sacrificing the original diesel engine's characteristic efficiencyor reliability. Due to the lower cost of natural gas compared to diesel,Dual-Fuel™ engines can substantially reduce an operator’s fuel costs.Furthermore, by substituting diesel with up to 80% clean natural gas,greenhouse gas emissions produced by heavy goods and commercialvehicles are substantially reduced. The increasing abundance of naturalgas and the rollout of natural gas refuelling infrastructure in Europe andNorth America is further driving the growth of the Company.

The Boards of many major operators have set clear objectives to reducethe carbon produced by their road transport fleet but without increasingcosts. Clean Air Power’s technology provides a solution to these carbonreduction objectives, while still reducing their operating overheads.Governments throughout the world are faced with the need to reducecarbon emissionswhich will only beachieved by usingalternate fuels suchas natural gas.

Over £50m hasbeen invested inthe Company todevelop the enginemanagementsoftware since1991 with theresult that 69patents are currentlyheld or pending. The Company operates from facilities in the UK and USwith the holding Company of the Group based in Bermuda. The Groupwas admitted to the AIM market of the London Stock Exchange inFebruary 2006.

STRATEGYClean Air Power is established as a leader in the development and deliveryof Dual-Fuel™ engine management systems based on the experience,knowledge and patents held within the Company.

The Company’s technology is aimed at the heavy-duty vehicle marketwhich demands the power and torque characteristics offered by itsDual-Fuel™ system and where the fuel cost savings and carbon reductionbenefits are most significant.

Clean Air Power’s main objective is to enter into agreements withmanufacturers of heavy duty vehicles, whereby our technology is installedon their vehicles as an OEM (Interfaced) option and distributed throughtheir normal sales channels. This strategy is designed to provide widemarket access and the opportunity for rapid volume growth.

The Company has already established one such OEM agreement with amajor European vehicle manufacturer which began factory production ofheavy duty trucks incorporating Clean Air Power’s Dual-Fuel™ technologyin 2012. Clean Air Power Dual-Fuel™ technology is currently the only suchtechnology incorporated into an OEM production line in Europe.

In parallel, Clean Air Power continues to expand sales of its own brandGenesis-EDGE retrofit product after a successful 2012 which saw itsincreasing adoption by a number of major European fleet operators.A development program for a US Genesis-EDGE retrofit product is alsounderway. Genesis-EDGE gives Clean Air Power greater control overdevelopment, provides revenues and validates the technology to futureOEMs.

Sales of natural gas vehicles in Europe, North America and Brazil, Russia,India and China (BRIC) countries are projected to grow and this presents

a tremendous opportunityfor Clean Air Poweras well as for vehiclemanufacturersthemselves. Naturalgas is cheaper thandiesel in these targetmarkets and vehicleemissions are reducedwhen using natural gasas a road fuel. Together,these twin drivers createa compelling case for theadoption of Clean Air

Power’s Dual-Fuel™

technology by manufacturers and fleet operators as part of theirstrategies in these rapidly growing markets.

Having begun to gain traction in the European market, Clean Air Powernow intends to replicate this strategy in the important North Americanmarket which is particularly attractive due to abundant domestic naturalgas resources, together with powerful economic, environmental andenergy security drivers. These factors have encouraged gas providers tomake significant investments in the provision of gas refuellinginfrastructure and as a result the level of interest in and adoption ofnatural gas vehicles is growing rapidly.

Whilst the heavy duty vehicle markets in Europe, North America and BRICcountries remain the Company’s primary focus in the short to mediumterm, as volumes increase, sufficient economies of scale are expected tobe achieved to facilitate access to the market for medium and light dutyvehicles.

In the long-term further important opportunities also exist in othermarkets including industrial engines, locomotives, marine and mining.

02

GROUP OVERVIEW


www.cleanairpower.comwww.cleanairpower.com Stock code: CAP


Clean Air Power is a developer and Tier 1 supplier of Dual-Fuel™

engine management systems for heavy duty diesel engines.DUAL-FUEL™

Clean Air Power designs and delivers natural gas injectors and filters for the production of natural gas engines, as well as

innovative hydraulic valves. These components enable automotive and engine manufacturers to build low-emission natural gas

vehicles that meet worldwide emissions regulations.

ENTERING THE PRODUCTION PHASE

COMPONENTS

Dual-Fuel™: Clean Air Power’s patented Dual-Fuel™ system and management software enables heavy duty engines to operate

primarily on natural gas, delivering diesel engine performance, alongside fuel cost savings and low carbon emissions.

Clean Air Power’s patented Dual-Fuel™ system is available in Europe in two main variants; an interfaced OEM product and the

Company’s own branded Genesis-EDGE retrofit product. A proprietary engine management software platform is a central

component of Clean Air Power’s Dual-Fuel™ technology.

Pictured: Tractor unit showing Clean Air Power Dual-Fuel™ key components

PRODUCTS

Clean Air Power has two major commercial divisions; Dual-Fuel™ systems and Components

• First Dual-Fuel™ Patent held since 1995

• 69 Patents held or pending worldwide

• Strong patent protection covering

key systems

• Application know-how gained in

OEM applications

• 200 man years of Dual-Fuel™

know-how with the Company

Stock code: CAP


DUAL-FUEL™ TECHNOLOGY



MÜLLER WISEMAN DAIRIES

During 2007, Wiseman validated and field tested 2 Genesis systems from CleanAir Power, this was followed up with an order for a further 20 Genesis systems

In 2013, Muller Wiseman Dairies ordered a further 40 dual-fuel trucks.

Sainsbury’s is one of the largest

Supermarkets in the UK, a

household name and leader

in logistic operations.

SAINSBURY’S

Sainsbury’s successful ‘Running on Rubbish’ trial saw 5 trucks run in its fleet fuelledby bio-methane gas which has been generated by landfill waste provided by Gasrec.

As a result of the successful trial, during which Sainsbury’s validated the system’semission reductions, fuel savings and operational acceptability, Sainsbury’s ordered afurther 49 Genesis-EDGE systems during 2012 and 4 Methane Diesel systems in 2013.

CASE STUDIES

DIFFERENT TECHNOLOGY

DUAL-FUEL™

Patent No. Description

5,450,829 Electronically Controlled

Pilot Fuel Injection of

Compression Ignition

Engines

5,673,673 Method and Apparatus

for the High Internal

Combustion Engine

6,598,584 Gas-Fueled, Compression

Ignition Engine with

Maximised Pilot Ignition

Intensity

6,694,242 Dual-Fuel Engine having

Multiple Dedicated

Controllers connected

by a Broadband

Communications Link

2004/0118116 Multi-Fuel Compression

Ignition Engine

DUAL-FUEL™ VEHICLE SYSTEMS:Clean Air Power’s flagship technology is its

patented Dual-Fuel™ system, which enables

heavy duty diesel engines to operate primarily

on natural gas, with diesel fuel acting as an

ignition source. The diesel engine is

basically unchanged and retains its high

performance and high efficiency 4-stroke

diesel cycle. By efficiently burning up to 80%

natural gas, in certain applications, customers

benefit from lower fuel costs and a lower

carbon footprint. Dual-Fuel™ can operate

normally on bio-methane and bio-diesel,

giving it the potential to be carbon-neutral.

If the natural gas supply runs out, the

Dual-Fuel™ system changes seamlessly to

operate on 100% diesel, giving complete

diesel operational back-up, a crucial feature

in attracting risk averse operators to a new

technology.

INTERFACED

• Diesel and Dual-Fuel™ control system

software is interfaced

• Ultimate performance 70-80%

methane and low emissions capability

• Requires OEM support

• Installed post production or on line

GENESIS

• Delivers greenhouse gas & fuel

cost savings

• No emissions certification

• Gas substitution up to 60%

• Installed on an after market basis

INTERFACED VEHICLE SYSTEM:

In this solution our technology is interfaced

with the manufacturer’s electronic engine

management system. This requires the

cooperation of the vehicle manufacturer to

integrate the Clean Air Power software with

the vehicle’s existing Electronic Control Unit.

This integration increases the flexibility with

which the engine fuelling can be managed

and, as a result, maximises the product

benefits in terms of carbon emissions and

fuel cost savings. Between approximately

70% and 80% of the diesel normally used by

the vehicle is substituted for natural gas in

our interfaced products.

‘GENESIS-EDGE’ AFTER MARKET VEHICLE

SYSTEM:

The ‘Genesis-EDGE’ system was developed

specifically to be an after market product which

can be installed without the need for formal

cooperation of the engine manufacturer. The

solution does not interface directly with the

vehicles own engine management system and up

to 60% of the diesel normally used by the vehicle

is substituted with natural gas. The emissions and

fuel savings are therefore lower than would be

expected on a fully interfaced system, but are still

commercially attractive in the target markets,

particularly with recent oil price increases.

Clean Air Power Dual-Fuel™ Direct Injection Natural Natural Gas (SparkGas + Diesel Ignited)

Diesel Replacement with 60-80% >90% 100%Natural Gas (NG)

Fuel Flexibility between Can operate on 100% diesel or Dedicated NG full operation Dedicated 100% NG Diesel & NG diesel-NG combination only. Limited “limp-home/ operation only

service-mode” on diesel

Technology acceptance Well established on Established in over Well established in manyover 2,200 systems 500 systems thousands of installations

NG infrastructure Independent of mature NG Dependent on mature Dependent on maturerequirements infrastructure & comprehensive NG & comprehensive NG

infrastructure infrastructure

Economics Lowest installation cost & High cost installation & High cost retro fit but ultimatelyattractive payback. less attractive payback. lowest cost option in volumeRetains diesel residual value. Uncertain/low residual value. production. Uncertain residual Most rapid route to market No retro-fit option. Higher value. Higher service & introduction via retro-fit service & maintenance costs maintenance costs

Engine Technology Requires no change to base engine. Requires major engine Requires major engineEnables full reversion to conversion or new-engine conversion or new-engine100% diesel design. Dedicated to NG only design. Dedicated to NG

permanently permanently

Performance and Efficiency Closely matches diesel power, Closely matches diesel power, Lower engine performance & torque and efficiency torque and efficiency efficiency. Increased fuel

consumption offsets NG cost saving

Durability Minimum change leads to Complex NG & diesel injection Not fully proven on high-mileageproven diesel-like durability system. Complex LNG & heavy-duty operation

containment/delivery

Gas Fuel used CNG or LNG LNG only CNG or LNG

Environmental attributes Low regulated emissions and Low regulated emissions and Very low regulated emissionsreduction in green-house gases reduction in green-house but potential increase in(GHGs) gases (GHGs) green-house gases (GHGs)

Government Grant Helps dual-fuelPartnership Drive Sustainability.

Stobart Group and BOC have beenselected by the Government toreceive funding to stimulate themarket for more environmentally-friendly dual-fuel trucks.

STOBART GROUP

Eddie Stobart's reputation for industry-leading innovation, combined with theworld-class experience of the BOC Group, will raise awareness of the industry'squest for low-carbon transport options, provide evidence and promote theopportunities to UK business and policymakers, to help accelerate the use ofsustainable vehicles and alternative fuel systems.

PATENT HIGHLIGHTS

INTELLECTUAL PROPERTYHIGHLIGHTS

Müller Wiseman Dairies is the

UK’s largest dairy supply and

distribution operation with a

fleet of over 1,500 heavy

commercial vehicles.



FORECAST INCREASED DIESEL V NATURAL GAS DELTA

Stock code: CAP


MARKET OVERVIEW

1.7m Heavy Duty trucks over 16 tonnes were sold worldwide during2011. Powerful economic and environmental drivers are seeingNatural Gas (NG) replace Diesel in many applications.

The adoption of natural gas as a road fuel is accelerating worldwide,driven by cost savings, reductions in carbon emissions and theexpansion of refuelling infrastructure.

FORECAST SALES OF VEHICLES OVER 16T

COST SAVINGS

• Lower operating cost than a diesel engine

• Better fuel economy than a dedicated natural

gas engine

• Average in-service gas substitution rates:

60-80%

• Favourable payback periods

• Can be converted back to dedicated diesel,

protecting its resale value

FORECAST DIESEL V FLEET LNG TRANSPORTATIONFUEL PRICES IN THE HD SECTOR 2010 -2035

2011 2015 2020 2025 2030 2035

1.7m

2.2m

2.5m

2.6m

2.7m

2.9m

GLOBAL HD TRUCKS

PROJECTED GROWTH OF NATURAL GAS VEHICLES

POTENTIAL FUEL SAVINGS

Energy supply

Business

Transport

Public

Residential

Agriculture

Industrial process

Waste Management

VALUE OF USA CRUDE OIL IMPORTS

Source: JD Power, Ricardo Analysis

Ideal

Application for

technology

Not suitable

for technology

Potential for

technology

Source: NGV Global

Source: AEA

Source: EIA

Source: EIA 2012

US Transportation

Energy Price

Forecast. Diesel V

Fleet LNG

ALTERNATIVES TO OIL IN ROAD TRANSPORT

CARBON DIOXIDE EMISSIONS

Long Haul

Regional delivery

Construction

Fuel

Salaries

Vehicle

Maintenance

Other

NG REDUCES CARBON EMISSIONS

• Transport accounts for 26% of the UKscarbon emissions

• Of these emissions 45% are associatedwith diesel fuelled long-haul vehicles

• Dual-Fuel engines can significantly reducethe carbon emitted by long-haul vehicles

• Increasing adoption of dual-fuel vehicleswill help the UK meet its carbonemissions reduction targets

NG REDUCES DEPENDENCE

ON OIL IMPORTS

• The value of oil imported by the US hasincreased significantly since 2000

• President Obama has vowed to reduce oilimports by one third over the next decade

• NG offers a clean alternative to oil forroad transport

• Increasing adoption of dual-fuel vehicleswill help to reduce the US’s oil import bill

·

• Oil usage in transport has increased

• Electric power and hybrid offers solutions for passenger

cars and light, medium duty vehicles

• HGVs typically consume over 11,000 imperial gallons of

diesel per year, equivalent to the capital cost of the truck

• No current alternatives to Diesel Performance in HD sector

• By using a dual-fuel system a HGV retains the power,

torque and range characteristics of a heavy-duty diesel

engine while achieving the cost savings and emissions

reductions of NG

A typical UK operator travelling 100,000 miles per

annum will spend around £55-60,000 on diesel fuel.

OPERATOR FLEET COSTS

($)

per

Die

sel G

allo

n E

qu

ival

ent

UK CO2 EMISSIONS BY SECTOR

Urban

Municipal

RANKING OF DUTY CYCLES BY

CO2 EMISSIONS SHARE

NG REDUCES FUEL COSTS

COMPARED TO DIESEL

• The price of LNG has been significantlylower than that of diesel

• Cost savings achieved using LNG aredriving adoption of dual-fuel vehicles

• The price of LNG is forecast to remainlower than diesel for at least the next20 years

Heavy Duty Trucks are Clean Air Power’s Initial Target Market

ELECTRIC

HYBRID

SPARK-IGNITED (NG)

DUAL-FUEL

CAR LIGHT DUTY URBAN

KEY

HD TRUCKS

08

CHAIRMAN’S STATEMENT



Clean Air Power is a supplier of market leadingtechnology that delivers proven reductions incarbon emissions, along with significant fuel costsavings to operators of trucks and other vehicles.

Having successfully entered the European

market with an OEM partnership and a Euro

5 emissions compliant Genesis-EDGE

product, the current priority is to access the

important North American market by

applying the same business model. North

America has abundant domestic natural gas

resources and powerful economic,

environmental and energy security drivers.

In August 2012 the Board approved an 18

month development program to bring a

Genesis-EDGE product to the North American

market. Significant progress has since been

made developing the Genesis-EDGE product

and the Company will exhibit the first

prototype vehicle at the Alternative Clean

Transportation (ACT) EXPO in June 2013.

Six months into the project, the Company

expects the project costs to be slightly higher

than first considered although the timing of

trial vehicle and product launch remains

broadly in line with the original plan. The

Company’s plans include a significant grant

that is anticipated to be received towards the

development activity and the fleet trials for

our US Genesis-EDGE program. The

Company has already received interest from a

number of major fleet customers and

anticipates that the first trial vehicles will be

on the road and undergoing validation by the

end of 2013, with production commencing in

early 2014.

2012 has been a year of strong progress for

Clean Air Power with Group revenues

increasing to £7.94 million and revenues

from sales of our Dual-Fuel™ systems

increasing to £6.64 million. Growing interest

in our European products resulted in a total

of 300 sales of our Dual-Fuel™ systems, a

combination of both our own Genesis-EDGE

product and sales to our European OEM

partner.

The year began with the achievement of a

key strategic milestone when, in January

2012, our major European vehicle

manufacturing partner began factory

production of heavy-duty trucks

incorporating our patented Dual-Fuel™

engine technology.

This OEM (Original Equipment Manufacturer)

product provides strong validation of Clean

Air Power’s Dual-Fuel™ engine management

system which underwent a process of

detailed testing and verification before being

accepted by one of the most quality

conscious manufacturers in the world.

We are also pleased with the progress made

with our Genesis-EDGE product in Europe

where increasing interest amongst fleet

operators has resulted in significant sales of

Genesis-EDGE to customers in the UK and

Spain during the year. Our Genesis-EDGE

product can be retrofitted directly onto

customers’ existing vehicles and whilst the

focus to progress with further OEM

relationships remains, Genesis-EDGE gives

the Company greater control over the time to

market and helps to validate the technology

to future OEMs.

While we are excited by the prospect of

addressing the North American demand with

our Genesis-EDGE product, our broader

strategy remains to establish OEM

partnerships in North America to integrate

our Dual-Fuel™ engine management system

on to their future engine platforms.

The equity fundraising in September of this

year, which raised a further £3.35m before

expenses, demonstrated continuing investor

confidence in our technology and commercial

progress.

Our momentum has continued into the start

of 2013 with customers having already

placed more than 150 new orders either with

Clean Air Power or our European OEM

partner for Dual-Fuel™ systems. Factory

production by our European OEM partner has

also increased and we have delivered 20 of

our Genesis-EDGE branded systems to a

customer in Spain.

The goal for 2013 will be to continue the

significant progress made in 2012 by growing

sales of our Dual-Fuel™ system in Europe and

other target markets and by completing the

development of our Genesis-EDGE product

for the North American market. At the same

time we will continue our discussions with

partners aimed at future OEM products.

In conclusion I would like to thank John

Pettitt and the team for making 2012 such a

successful year in terms of revenue growth

and building a platform for further growth in

2013 and beyond.

Rodney Westhead

Stock code: CAP


DEVELOPMENTS

US

Clean Energy

• Clean Energy installed 70 stations

during 2012

• Similar number planned for construction

in 2013

Shell

• Royal Dutch Shell to invest $300m

setting up LNG pumps at 100 locations

• Guarantee natural gas price to be

30% cheaper than diesel over the

life of the truck

UK & EUROPE

Gasrec

• Europe’s only producer of Liquefied

Biomethane (LBM), will open the first

public Bio-LNG facility at DIRFT, during

May 2013

• The facility will be the first of 7 planned

public stations situated at strategic

locations throughout the UK

• Each site will have the capacity to

fuel around 700 trucks per day

MARKET OVERVIEW CONTINUED

• The introduction of LNG filling stations will create a cheaper and cleaner wayfor long-distance freight transport along the main European transit routes

• The EU Commission proposes a maximum of 400km between LNG fillingstations by 2020

AMERICA’S NATURAL GAS HIGHWAY

EU LNG BLUE CORRIDOR PROJECT

Dual-Fuel trucks powered by cleaner and cheaper natural gas are travelling across

the country on America’s ‘Natural Gas Highway’

Blue Corridor Project will create networks of LNG refuelling stations for

heavy-duty vehicles between key strategic points across Europe

• America’s natural gas refuelling network spans from coast tocoast and is growing fast

• Demand for LNG and dual-fuel vehicles has led to companieslike Shell investing heavily in new LNG fuelling stations

The natural gas refuelling network is expanding rapidly to meet thegrowing demand for LNG and dual-fuel vehicles in the US and in Europe.

Impact

Existing LNG stations

Approx. 16 additional LNG stations

2009 2010 2011 2012

Stock code: CAP

CLEAN AIR POWERAnnual Report and Accounts 2012 1110 CLEAN AIR POWER

Annual Report and Accounts 2012


existing and potential customers in North

America. To this end, Genesis-EDGE trucks

are expected to be commercially available in

early 2014 and discussions with potential US

partners continue.

In Europe we are delighted to have made

such good progress with our OEM partner

and we continue to discuss cooperation

opportunities with other potential partners

in respect of future engine platforms in this

market.

We also intend to continue to grow sales of

our Genesis-EDGE product following the

success of 2012 and will be working to

maintain the increased momentum in

orders from our OEM partner.

In order to access the 2014 target markets

for our existing Euro 5 product, including

Russia and Eastern Europe, we also expect

to undertake some engineering activity to

develop our technology in line with

enhancements made to the manufacturer’s

base diesel truck, for both our

Genesis-EDGE and OEM products.

The progress made in 2012 has

demonstrated the strength of our business

model and demand for our products at a

time when there is exciting growth in the

markets for natural gas vehicles. We have a

proven product offering and a strong team

with excellent experience that ensures that

the Company is well placed to deliver the

North American Genesis-EDGE project and

capitalise on other opportunities for the

future.

John Pettitt

Chief Executive

COMPONENTS DIVISION

In 2012 sales remained steady at £1.30m

from £1.28m in 2011, which was in line with

expectations. 2013 has begun positively and

forward orders in hand already total

approximately £0.54m. Sales and operational

activities in relation to the former Emissions

Division have now been consolidated into our

Components Division following a relocation

of this business from Houston, Texas to our

US facility in Poway.

OUTLOOK

A key milestone in 2012 was the start of

OEM factory production and Clean Air Power

beginning to realise the benefits of a large

multinational manufacturer promoting and

distributing our Dual-Fuel™ engine

management software. Increased sales levels,

in many cases to important and influential

operators, have increased product awareness

in a number of markets and recognition of

the ability of our product to reduce emissions

and fuel costs for operators.

Clean Air Power’s primary goal for 2013 is

to begin to replicate our success in Europe

in the large and growing North American

market where the availability and relatively

low cost of natural gas is driving customer

demand for natural gas vehicles. Our ultimate

strategy is to develop an OEM product with a

US partner, as we have in Europe. However,

in the shorter term we are moving forwards

with our US Genesis-EDGE program which

will provide the Company with better control

over the development activity and timings of

a US product launch. This product will allow

Clean Air Power to meet demand from both

KEY OBJECTIVES FOR 2013

US Genesis-EDGE

The key objective for 2013 will be to

deliver a Genesis-EDGE product for the

US market

Secure OEM/Tier 1 Agreement

To enter a relationship with a second

OEM or Tier 1 supplier

Achieve revenue target

Revenue for sales of Dual-Fuel™

systems and from engineering

development activity are the key areas

of focus

Zero quality defects

Already ISO compliant, the Company

has increased focus on quality in order

to ensure continuous improvement

COMPANY OBJECTIVES

CHIEF EXECUTIVE’S OPERATING REVIEW

The start of production with our EuropeanOEM partner represents a major achievementfor the Company and demonstrates the successof the strategy to target supply agreementswith global truck manufacturers.

DUAL-FUEL™ DIVISION

There are four revenue streams derived from

this division: sales of Dual-Fuel™ systems

to a manufacturer for installation on their

production lines, complete conversions of

customer’s vehicles on a retrofit basis carried

out by Clean Air Power, Dual-Fuel™ system

kits sold direct to approved installation

partners and revenue from engineering

services provided to manufacturers or

third parties.

2012 was a successful year for the division as

revenues increased to £6.64m compared with

£3.30m in 2011. This represents a 101%

increase mainly due to revenue from our

European OEM partner and Genesis-EDGE

vehicle system sales. In addition to increasing

OEM volumes and orders from existing

customers including Sainsbury’s, we secured

new orders from a major logistics company

and a European logistics operator to supply

our Renault Magnum Genesis-EDGE variant

into Spain. Engineering development revenue

increased following receipt of $1.3m for

work completed during 2010.

The January 2012 European OEM production

commencement has seen Clean Air Power

become a tier one system supplier under a

Supply Agreement for an initial period up to

July 2015. This achievement has been

complemented by commercial success in

Europe with our Genesis-EDGE product,

including the delivery of 49 systems to

Sainsbury’s and further deliveries to other

major fleet operators in the UK and Spain.

The Dual-Fuel™ division’s sales increased by

101% during 2012, which was mainly

supported by revenue from sales of our

European OEM product and Genesis-EDGE

Dual-Fuel™ system sales which totalled 300

during the year. Strong margins have been

maintained despite a change in sales mix

during the year.

SALES REVIEW

Clean Air Power has two commercial

divisions: Dual-Fuel™ vehicle systems and

Components. Operations take place in the

US and UK.

SYSTEM SALES

300

702821

Stock code: CAP




GROSS PROFIT AND COST OF SALES

The gross profit margin for the Group for the

year reduced to 44% (2011: 56%) whilst

gross profit increased to £3.52m (2011:

£2.56m). This decrease in % margin was due

to the change in sales mix and increase in

Dual-Fuel™ system sales.

ADMINISTRATION COSTS

Administration costs increased to £5.71m

(2011: £4.67m). Depreciation and

amortisation represented £0.70m of this

increase, due to the amortisation of the OEM

Dual-Fuel™ product.

SHARE-BASED PAYMENTS

The share-based payments charges for the

Group were £0.03m (2011: £0.14m).

TOTAL OPERATING LOSS BEFORE

NON-CASH ITEMS

Operating loss before non-cash items

reduced to £1.06m (2011: £1.66m).

OPERATING LOSS

Operating losses for the year reduced to

£2.22m (2011: £2.24m).

TAXATION

Due to continued losses the Group reports no

tax charge for 2012 (2011: nil).

DIVIDEND

The Directors do not recommend a dividend in

respect of the current financial year (2011: nil)

and no interim dividend was paid (2011: nil).

STATEMENT OF FINANCIAL POSITION

AND LIQUIDITY

Explanations of the most significant items in

the Statement of Financial Position during the

year are as follows:

INTANGIBLE ASSETS

Intangible assets are carried at £3.66m

(2011: £3.84m). This reflects product

development costs capitalised in accordance

with IAS 38 ‘Intangible Assets’. Intangible

assets are tested annually for impairment and

at 31 December 2012, no impairments were

identified in 2012 (2011: £nil).

TRADE AND OTHER RECEIVABLES

The value of trade and other receivables

increased to £1.10m (2011: £0.82m),

principally due to increased revenues.

CASH FLOWS

Cash and cash equivalents was £3.20m

(2011: £2.42m). Further analysis of this

movement is included in the consolidated

cash flow statement on page 34.

TRADE AND OTHER PAYABLES

The value of trade and other payables was

£1.72m (2011: £1.03m).

TREASURY POLICY AND FINANCIAL RISK

The Group’s treasury operation is managed

within formally defined policies which are

reviewed by the Board. The Group finances

its activities with cash and overnight deposits.

Other financial assets and liabilities, such as

trade receivables and trade payables, arise

directly from the Group’s operating activities.

Surplus funds of the Group are invested

through the use of short-term deposits with

the objective of maximising fixed interest rate

returns whilst still providing the flexibility to

fund on-going operations when required.

It is not the Group’s policy to engage in

speculative activity or to use complex

financial instruments. Further analysis

can be found on pages 58 to 60.

FINANCING

In September 2012, the Company successfully

raised approximately £3.35m from a

combination of new and existing investors.

Further analysis can be found in note 29.

GROSS PROFIT

EBITDA

FINANCIAL REVIEW

The Company has benefited from a strongperformance from the flagship Dual-Fuel™

division during this financial year. Sales ofvehicle systems and revenue from productdevelopment increased by 101% to £6.64m.

The Group’s financial and non financial highlights of the year were as follows:

2012 2011 Change

£’000 £’000

Group Revenue 7,942 4,585 73%

Total Operating Loss before Non-Cash items for period* (1,062) (1,663) -36%

Loss for Period (2,220) (2,240) -1%

Shareholders’ Funds 7,131 6,223 15%

Cash and Cash Equivalents 3,204 2,422 32%

Net Current Assets 3,292 2,194 50%

Loss per Share 1.53p 2.13p -28%

Average no. of employees 60 57 5%

No. of System Installations 300 70 329%

*Non-cash items including depreciation £0.11m (2011: £0.12m), amortisation £1.02m (2011:

£0.31m) and share-based payments £0.03m (2011: £0.14m).

SUMMARY OF FINANCIAL REVIEW• Strong growth from OEM revenues and Genesis-EDGE Dual-Fuel™ sales

• Strong gross margins despite change in sales mix

• Operating loss before non-cash items reduced to £1.06m, representing a £0.60mimprovement

• Revenue substantially increased for the Group during the period. Dual-Fuel™

Vehicle Systems division’s revenue increased by 101% to £6.64 in 2012, mainly as aresult of systems sold increasing by 230 systems to 300 system sales

• The Components division revenue increased by 2% to £1.30m, compared with£1.28m in 2011, incorporating revenue for Emissions Reduction

• Total operating loss before non-cash items for the period decreased by 36% to£1.06m from £1.66m, following the growth from Dual-Fuel™ sales

• Total net loss reduced to £2.22m from £2.24m

• Shareholders’ funds increased in 2012 due to the Company issuing new sharecapital during the period

• Net current assets at 31 December 2012 were £3.29m (2011: Net current assets£2.19m), mainly due to higher cash balances following equity raise in September2012

• Loss per share reduced to 1.53p (2011: 2.13p), following the issue of new capital

• The average number of employees increased to 60 (2011: 57)

DUAL-FUEL™ REVENUE

COMPONENTS REVENUE

2011 2012

£6.6

4m

£3.3

0m

2011 2012

£3.5

2m

£2.5

6m

2011 2012

£1.0

6m

£1.6

6m

2011 2012

£1.3

0m

£1.2

8m

Stock code: CAP


RISK AND UNCERTAINTIES



STRATEGIC RISK MITIGATION

Additional Capital requirements

The Directors believe that based on the current level of cash, further funding in thefuture may be required to commercialise the engine management software with futureOEM agreements or other product development activity.

The Group is seeking to maximise theextent to which development activitywith OEM partners fund developmentprograms and are exploring debtfinance solutions.

Manufacturer Cooperation

The Directors anticipate that the Supply Agreement with OEMs will lead to productsbeing sold in 2013. Any instances where the production or demand was adverselyaffected would seriously damage the Group’s ability to generate revenues.

The Group ensure that adequateresources are in place so that productsare reliable and comply withspecification.

Fuel Volatility

The degree of financial saving that is generated by the product depends on thedifference between the price of diesel and gas. Indications are that the natural gas priceswill remain lower than that of diesel. If the delta between the two fuels becomes tooclose, then the financial incentive to use Dual-Fuel™ will become less attractive.

The Group actively monitors itsexposure to this risk and has beenworking with Gas providers tounderstand the long term pricingstrategy. Ultimately the risk is outsidethe control of the Company Directors.

In-House Product Development

The Group has worked to develop in-house ‘Genesis-EDGE’ solutions which can be retro-fitted to Euro 5 vehicles. The product has met emissions and compliance regulations.There is a risk that the product will have to meet regulations in each territory that theGroup may pursue. There is also a risk that operators will wait for a manufacturer backedproduct, or that a manufacturer could discourage adoption by customers, therefore theability to earn revenue from this would be impaired.

The Group is working with local dealersand directly with customers to builddemand and to ensure the product canbe marketed successfully.

Engine Management Software / Product Development The Group’s current Genesisdevelopment is targeted towards theproduction of a US2010 compliantproduct and the Company is indiscussions with manufacturers withregard to a Euro 6 development projectand initial discussions have commencedregarding a US 2013 OEM product.

Gas Supply

The natural gas infrastructure across the world is much less developed than for existingroad fuels. The Company is aware of a number of potential suppliers prepared to enterthe market. The Company also anticipates, from discussions with such suppliers, that thesuppliers will be prepared to provide capital to install gas refuellers and recover the costover time via a levy in the fuel price. The Company may consider undertaking partneringarrangements with such suppliers. Should either the gas or the capital not be available,the ability to grow sales will be affected.

The Group has been working closelywith Gas providers to support thesales process.

The Group has to maintain a product range that complies with the prevailing emissionsstandards in the target markets. With Euro 5 compliant products addressing the currentEuropean market until the end of 2013/early 2014 and potentially other markets untilaround 2020, the group will require a Euro 6 compliant product to address the Europeanmarket from 2014. Additionally a product compliant with the US2010 emissionsrequirements will be required to access the US retro fit market and compliance withUS2013 for the US market, where the Company does not have a current product. Withoutsuch products, the Company’s ability to generate revenue would be significantly impeded.

KEY PERFORMANCE INDICATORS

FINANCIAL

The Group uses the following primary measures to assess its performance and propositions.

The following factors may affect the Group’s operating results, financial condition and/or the trading price of the Company’s shares. The risk

factors below are those the Directors believe are potentially significant, but this should not be regarded as a complete and comprehensive

statement of all potential risks and uncertainties related to an investment in the Group.KPI TARGET FOR 2013

Dual-Fuel™ Revenue Revenue and revenue growth derived from the Group’s core Dual-Fuel™ enginemanagement software are used for internal performance analysis and byinvestors to assess progress against projections in the market.

Operating Result BeforeNon-Cash items*

Operating result and profitability trends are used for internal performanceanalysis and by investors to assess progress against projections in the market.The measure used excludes non-cash items including depreciation (£0.11m),amortisation (£1.02m) and share-based payments (£0.03m).

Gross Margin Gross profit and revenue as reported in the consolidated income statement inthe financial statements used for internal performance analysis and by investorsto assess progress against projections in the market.

EPS Cash and cash equivalent balances are used for internal performance analysisand by investors to assess progress against projections in the market.

Number of vehicle Systems The Group’s development of its customer base with a view to installing itsequipment on customer vehicles is a key objective. The number of systems andassociated trends, is therefore a very important measure of progress.

Personnel Clean Air Power values its staff very highly and recognises that the success ofthe Group is largely due to the dedication and knowledge of its employees.Personal development is important and there is a HR strategy in place.

OEM Cooperation The Group’s main objective remains to enter into agreements withmanufacturers, whereby our engine management software is installed on theirvehicles as an OEM (Interfaced) option and distributed through their normalsales channels.

NON-FINANCIAL

16 CLEAN AIR POWERAnnual Report and Accounts 2012

www.cleanairpower.comwww.cleanairpower.com Stock code: CAP


RISK AND UNCERTAINTIES CONTINUED

STRATEGIC RISK MITIGATION

Regulatory Framework

The Group’s products fall within a number of heavily regulated areas. In order to prosper,the Group’s technological solutions must keep pace with the increasingly stringentemissions legislation in order to be allowed into the market. Depending on the route tomarket, in some cases the product may require homologation or approval. Failure to meetsuch regulations could lead to an adverse effect on demand for the product.

The Group takes advice to ensureadherence to compliance guidelines andhas increased its in-house resources tofocus on quality and process.

Competition / Intellectual Property

Employees

The relatively small size of the Group, an average of 60 employees during 2012 createsthe risk that key knowledge of certain aspects of the business is concentrated in arelatively small number of employees.

Competitive compensation packages forkey staff, including long-term incentiveschemes are in place to retain theirservices. Recruitment and training plansare in place to mitigate this risk.

Trading and Economic Risks

The trading performance of the Group could be affected by a number of factors outside itscontrol, including currency risk. A significant proportion of the Group’s activities will takeplace in the USA, Europe and Australia and there is the potential for exchange rate variancesto impact on the profitability of the Group. The potential economic turmoil in Europe couldaffect the Company’s activities and results in a number of areas including credit risk.

Financial controls are in place to ensurethat exposures are adequatelymanaged.

Sales to the Company’s European OEMpartner are made in sterling.

Adaptation of the Core Engine Management Software

While the core engine management software has now been fitted on more than 2,200vehicles across the world, a number of new product variants are in the process ofdevelopment. Each new variant requires the adaptation of the core technology to eachspecific engine platform and emissions compliance dictates that engine platforms areconstantly developing. If such adaptations are not able to be completed in line with thetiming anticipated in Group plans, then the ability to meet sales expectations will beadversely affected.The Company’s OEM partner plans to update certain elements of the base truck uponwhich the majority of sales are made. In order to continue to sell its Dual-Fuel™ systemon Euro 5 vehicles from 2014, the Company and the OEM will need to complete anengineering project to update both the truck and Dual-Fuel™ system software.Any delays or inability to complete this activity would affect expected sales levels.

The Group has an experiencedengineering team whose knowledgebase continues to grow. Developmentprojects are only undertaken followingtechnical due diligence and feasibilitystudies designed to assess their likelysuccess.

The OEM partner plans to assess thework required and prepare a projectplan. The Company’s engineers areaccustomed to working closely with theOEM.

The Group is making endeavours to stayahead of the technology and uses itspatents to help maintain barriers toentry. It also carries out ongoing reviewsof competitive activity with regard topotential infringements on the coretechnology.

In the majority of markets the Group has historically experienced relatively low levels ofcompetition mainly due to the degree of technological development and patents that applyto the Group’s engine management software. The demand to reduce fuel costs and carbonemissions has attracted new competitors to the market. Competition has been increasingwith some competitors making progress. Should they succeed in entering these marketsand gaining commercial traction, with or without infringing the Company’s patents, thensuch competitive pressure could significantly affect the ability of the Group to achieve salesand satisfactory margins.

CORPORATE INFORMATIONCORPORATE INFORMATION

DIRECTORS

Non-Executive Chairman – Rodney Westhead “#

Non-Executive Deputy Chairman – Bernard Lord “*+#

President & Chief Executive – John Pettitt

Group Financial Director – Peter Rowse

Non-Executive Director – Prof Dr. Karl Victor Schaller *+#

Non-Executive Director – Dr. Ulrich Wöhr “*+#

SECRETARY

Codan Services Limited

REGISTERED OFFICE

Clarendon House

2 Church Street

Hamilton HM11

Bermuda

AUDITORS

Ernst & Young LLP

100 Barbirolli Square

Manchester

M2 3EY

SOLICITORS

Pillsbury Winthrop Shaw Pittman LLP

Tower 42, Level 23

25 Old Broad Street

London

EC2N 1HQ

NOMINATED ADVISOR AND

JOINT BROKER

Cantor Fitzgerald Europe

One America Square

17 Crosswall

EC3N 2LS

JOINT BROKER

Peat & Co

11-12 St James Square

London

SW1Y 4LB

REGISTRARS AND TRANSFER OFFICE

Capita IRG (Offshore) Limited

Victoria Chambers, Liberation Square

1/3 The Esplanade

St Helier

Jersey

PRINCIPAL BANKER

HSBC Bank Plc

1 Forest Green Road

Off Caxton Road

Fulwood

Preston

PR2 9LJ

FINANCIAL PUBLIC RELATIONS

Citigate Dewe Rogerson

3 London Wall Buildings

London Wall

London EC2M 5SY

* Member of the Audit Committee

+ Member of the Remuneration Committee

# Member of the Nomination Committee

“ Independent

Stock code: CAP




BOARD OF DIRECTORS

BERNARD LORDNON-EXECUTIVE DEPUTY CHAIRMAN,CHAIRMAN OF THE REMUNERATIONCOMMITTEE

JOINEDJuly 2007

CURRENT ROLESBernard Lord is a solicitor and lives inMoncton, New Brunswick, Canada. Sincecompleting his second term as Premier ofthe Province of New Brunswick inOctober 2006, he is currently Presidentand CEO of the Canadian WirelessTelecommunication Association.

BACKGROUNDPrior to his role with the CanadianWireless Telecommunication Association,Bernard was with the leading Canadianlaw firm McCarthy Tétrault LLP as SeniorCounsel. His interest in transportation wasevident during his tenure as Premier,during which time major investment ininfrastructure of the road network of NewBrunswick was made. His commitment tothe environment was demonstrated bythe creation of Efficiency New Brunswick,an agency dedicated to the reduction ofenergy consumption and costs, andimproving the environment.He holds a bachelor’s degree in socialscience with a major in Economics, abachelor’s degree in common law fromthe Université de Moncton, an honorarydoctorate of laws from the University ofNew Brunswick and honorary doctoratedegrees from the Université de Monctonand St. Thomas University. He was electedfour times as the MLA for Moncton East.

DR. ULRICH WÖHRNON-EXECUTIVE DIRECTOR,CHAIRMAN OF THE AUDIT COMMITTEE

JOINEDJanuary 2006

CURRENT ROLESChairman of the Supervisory Board ofBorgWarner BERU Systems GmbH inLudwigsburg, Germany, DeputyChairman of the Supervisory Board ofEAN European AvionicsNavigationssysteme GmbH & Co. KG,Weilderstadt, Germany and advisor toseveral large and medium sized nonlisted and privately held companies, aswell as shareholder and partner in thefamily owned Otto Wöhr GmbH,Friolzheim, a leading and worldwidesupplier of mechanical and automatic carparking devices.

BACKGROUNDOver 20 years in the German industry, heserved for almost 20 years as CEO/CFO ofVDO Adolf Schindling AG, an importantworldwide operating partner of theautomotive industry.Thereafter he was CFO of the thentroubled Metallgesellschaft AG, Frankfurtam Main, followed by the CEO functionin GEA AG Bochum, a company acquiredby Metallgesellschaft AG in 1999. Heretired in the year 2000 and from 2002to 2004 he was responsible for therestructuring of Bundesdruckerei GmbH,Berlin, a former privatised Germangovernment printing body.

PROF. DR. KARL VIKTOR SCHALLERNON-EXECUTIVE DIRECTOR

JOINEDOctober 2010

CURRENT ROLESViktor is an advisor and lives in Munich,Germany. He is the Chairman of theBoard of Hofer AG in Oberboihingen,Germany, and a Non-Executive Directorat Vicura AB of Trollhättan, Sweden. Healso consults Tier 1 suppliers, OEM andanalysts in the field of commercialvehicles with his firm KVS Consulting.

BACKGROUNDBetween 1990 and 2009 Viktor workedat MAN Commercial Vehicles AG, oneof Europe's leading industrial players intransport related engineering, headingvarious departments including thoseresponsible for development ofalternative drive systems (batteries,various hybrids, natural gas, hydrogen incombustion engines and fuel cells) andheavy trucks. In 2006 became a fullboard member of MAN CommercialVehicles AG at that time responsible forproduct development, purchasing andplanning. He holds a diploma and adoctorate in mechanical engineeringfrom the Technical University of Munich.In 2006 he was awarded honoraryprofessor at this university for his lecture‘commercial vehicles’.

RODNEY WESTHEADCHAIRMAN

JOINEDJanuary 2006

CURRENT ROLESSenior Independent Directorand a Non-Executive Director ofTransens Technology plc.Non-Executive Director of ACTA plc.Member of Council at Brunel University,appointed in August 2011

BACKGROUNDDuring his career in the Britishautomotive industry, Rodney served asthe Group Chief Executive of Ricardoplc, where he was responsible formanaging a global range of companiesengaged in automotive strategic andtechnology consulting. Rodney led theGroup in strategic acquisitions ofcompanies in the UK and Europe andestablished offices throughout theworld. Ricardo is the largest automotiveconsultancy company in Europe withapproximately ₤200million in annualturnover. Prior to serving as ChiefExecutive, Rodney served as the GroupFinance Director. Rodney Westhead wasa partner in Grant Thornton and hadserved as Managing Partner of theLondon office.

JOHN PETTITTPRESIDENT AND CHIEF EXECUTIVE

JOINEDAugust 2005

CURRENT ROLESPresident and Chief Executive

BACKGROUNDJohn has over twenty five years seniorlevel experience in GeneralManagement, Sales & Marketing withinthe business-to-business services sector.A successful track record of businessdevelopment has been built onrecruiting and developing strongmanagement teams at all levels andproviding clear direction and leadership.His career started with Thomson YellowPages and Thomson Directories reachingthe position of Sales Controller with astaff of 350. Leaving Thomson after 13years, he joined Lex Service plc as SalesDirector of Lex Vehicle Leasing andhelped that company grow from 15,000to 50,000 vehicles in five years,becoming the UK’s leading vehicleleasing company. He left to becomeManaging Director of Fraikin Limited,the UK division of Europe’s largestindependent truck leasing business.After roles with TLS Truck Rental andIveco-Ford Truck Limited, he rejoined LexService and remained there for five yearsbefore joining Clean Air Power. His lastrole was managing Lex Transfleet AirsideSolutions, a company employing over400 staff and maintaining 6,500 piecesof equipment and vehicles for BritishAirways at four UK airports.

PETER ROWSEGROUP FINANCE DIRECTOR

JOINEDJanuary 2006

CURRENT ROLESGroup Finance Director

BACKGROUNDPreviously he served as Chief FinancialOfficer of DeLonghi America, Inc., theUSA subsidiary of the Italian appliancecompany, where he was responsible forfinance, IT management anddevelopment, human resource functionsand logistics. Peter was integrallyinvolved in all commercial areas andstrategic planning and was instrumentalin the company’s turnaround. Peter ledseveral initiatives at DeLonghi to improveinternal controls and played an activerole in managing relationships withCanadian and Mexican operations. Peteralso served as Controller, and later,Finance Director of DeLonghi Limited inthe UK. During his tenure, the companygrew revenue from £5 million to £50million GBP. Prior to DeLonghi, he heldfinancial and management accountingroles at Alexon Group plc and TNTExpress Europe (UK) Limited. Peter isFCMA qualified.

Stock code: CAP


DIRECTORS’ REPORT



RESULTS AND DIVIDENDS

The results of the Group are set out on page

30. The retained loss for the year is £2.22m

(2011: £2.24m).

The Directors do not recommend the

payment of a dividend in respect of the

current financial year (2011: nil) and no

interim dividend was paid (2011: nil).

EMPLOYMENT

The Group recognises and places

considerable value on the contribution made

by all employees to the development of the

Group and the achievement of its goals. The

Group seeks to keep all its employees

informed on matters affecting them as

employees and affecting the Group as a

whole. We seek to consult with all levels of

employee, regular team meetings, Group

staff forums and a performance assessment

system, encourage open communication and

feedback at all levels.

FINANCIAL STATEMENTS

The Directors present their Annual Report

and Group financial statements for the year

ended 31 December 2012.

PRINCIPAL ACTIVITIES AND

REVIEW OF THE BUSINESS

Clean Air Power continues to develop and

market Dual-Fuel™ solutions to power heavy

goods vehicles. In addition, the Group sells

specialised components used in the

automotive industry.

The Group results are set out in the

Consolidated Income Statement on page 30

and are explained in the Financial Review on

pages 12 to 16. A review of the Group’s

business and future development is

contained in the Chairman’s Statement on

page 9 and the Chief Executive’s Review on

pages 10 to 11.

Applications for employment by disabled

persons are always given a full and fair

consideration. In the event of members of

staff becoming disabled, every effort is made

to ensure that their employment within the

Group continues and that appropriate

training is arranged. It is the policy of the

Group that the training, career development

and promotion of disabled persons should, as

far as possible, be identical with that of other

employees.

SUBSTANTIAL SHAREHOLDERS

On 31 December 2012 the following

persons had reported an interest of 3%

or more in the issued ordinary share capital

of the Group.

No. of Percentage of issued

shares ordinary share capital

CSFB Strategic Partners Holdings II, L.P. 25,841,989 14.60%

FIL Investments International 12,316,749 6.96%

Legal & General Investment Management 11,750,000 6.64%

Hargreave Hale Ltd 8,000,000 4.52%

Emerson Family 7,736,693 4.37%

Joseph Henry and family 7,652,500 4.32%

Enertech Capital Partners 7,387,546 4.17%

Royal Bank of Canada Capital Partners 5,980,743 3.38%

No other person has reported an interest of 3% or more in the issued ordinary share capital.

CORPORATE SOCIAL RESPONSIBILITY

SOCIALLY RESPONSIBLE GOALS

Clean Air Power aims to make a major contribution towards the

challenge of addressing climate change by enabling the use of more

efficient utilisation of natural resources and to contribute to the

creation of a low-carbon economy by providing cleaner, more

efficient solutions for the transport industry.

EMPLOYEES

We continue to create high-skill employment, aiming to recruit the

best talent and acting as an equal opportunities employer at all

times, by valuing the diversity of our workforce and ensuring that

people remain safe from discrimination and harassment in the

workplace. Clean Air Power conducts regular surveys of our

employees to monitor satisfaction and to encourage feedback. We

have in-house personnel resource in both the UK and USA to ensure

high standards of employment practice while developing and

retaining our most critical asset – our people.

SAFETY FIRST

Clean Air Power remains committed to achieving high standards in

Health and Safety practice. We invest in Health and Safety training

and work positively to ensure that an open culture towards safety is

maintained. We commission regular reviews of our Health and

Safety arrangements by external experts, to ensure that we benefit

from external developments in this specialism and secure continuous

improvement in this vital area.

Health & Safety is a standard agenda item at all Main Board

Meetings.

ENVIRONMENTAL AWARENESS

We aim to operate while minimising our use of resources and

environmental impact in terms of waste. We seek to recycle in all

areas – from office supplies to production waste.

In 2010 the UK facility achieved ISO 14001: 2004 status, with the

US facility achieving the same status in 2011 and these have been

subsequently maintained successfully.

ETHICAL STANDARDS

Clean Air Power actively strives to achieve high ethical standards in

all activities. We seek to ensure that all our business partners apply

similarly high standards, including our supply chain partners and

customers.

Stock code: CAP


REPORT ON DIRECTORS’ REMUNERATION



INTRODUCTION

The members of the Group’s remuneration

Committee are Bernard Lord, Dr. Karl Victor

Schaller and Ulrich Wöhr.

The Remuneration Committee is responsible

for considering and making

recommendations to the Board on:

• The Company’s general policy on executive

and senior management remuneration;

• The specific remuneration packages for

Executive Directors of the Company,

including basic salary, performance-based

incentives, pensions and other benefits;

and

• The design and operation of the

Company’s share schemes.

The remuneration of each Executive Director

is determined on behalf of the Board by the

Remuneration Committee. The remuneration

of the Non-Executive Directors is determined

by the Executive Directors.

REMUNERATION POLICY

Remuneration packages aim to attract, retain

and motivate high calibre managers and

reward individual performance. On

appointment and periodically thereafter, the

Committee benchmarks the executive

remuneration packages against appropriate

comparators. The reward structure comprises

the following elements:

Basic Salary and Benefits

In accordance with the remuneration policy

outlined, the salaries of the Executive

Directors are reviewed annually.

Consideration is also taken of an Executive

Director’s experience, responsibilities and

performance. Performance is assessed both

from an individual and business perspective.

Benefits in kind comprise of private medical

insurance benefits and a fully expensed

motor vehicle for Peter Rowse. John Pettitt

received benefit in respect of rental of a

property as part of a relocation package and

an expensed motor vehicle.

Pensions

The Company does not have a contributory

pension scheme. All pension payments are

paid directly into the Directors’ personal

pension plans.

Fees

The fees of the Non-Executive Directors are

determined by the Executive Directors.

Performance Related Bonus

This is based on a fixed formula which is

determined at the beginning of each financial

year by the Remuneration Committee.

The formula measures specified personal

objectives and measures the Group’s

performance to specified targets principally

relating to earnings before interest and tax.

The amount of bonus is dependent on the

level of performance achieved.

Share Option Schemes

Clean Air Power Limited has operated Share

Option Schemes since February 2006 under

which Executive Directors, managers and

staff of the Company are granted options

over shares in Clean Air Power Limited at

prevailing market prices at the date of the

grant.

Under the Executive Share Option Schemes,

options are granted to Executive Directors

and employees at the discretion of the

Remuneration Committee and on the basis

of their performance. Options are granted

at the full market value of the Company’s

shares at the time of the grant and are

exercisable between one year and ten years

from the date of the grant.

Further information on the options issued to

the Executive Directors is detailed below.

At 31 December 2012, the price of the

Company’s shares quoted on the AIM of the

London Stock Exchange was 7.00p and the

highest and lowest prices during the year

ended 31 December 2012 were 20.13p

and 6.50p respectively.

The Group has long-term relationships with a

number of customers and suppliers in

different countries and industries which

provide an element of comfort to support the

prospects for different areas of the business.

However, it is acknowledged that, in the

current economic climate, it is difficult to

predict the timing and extent of future

revenues with certainty for a Company at this

stage of potentially rapid growth.

After making enquiries and preparing

forecasts of trading results which consider

the potential effect on cash of reasonably

foreseeable sales variances, the Directors

have a reasonable expectation that the

Company and the Group have adequate

resources to continue in operational existence

for the foreseeable future. Accordingly, they

continue to adopt the going concern basis in

preparing the annual report and financial

statements.

FUTURE DEVELOPMENTS

The Directors aim to maintain the

management policies which have resulted in

the Group becoming a tier 1 system supplier

to a European OEM. They consider the best

possibilities for growth in 2013 to be from

sales of the Dual-Fuel™ engine management

software and from income from product

development activity.

RESEARCH AND DEVELOPMENT

The Company continues to undertake

research and development to ensure a supply

of future products, where possible, new

technology is patented.

CORPORATE GOVERNANCE

The Company’s statement on Corporate

Governance can be found in the Corporate

Governance Report on pages 27 to 29 to

these Financial Statements. The Corporate

Governance Report forms part of the

Director’s Report and is incorporated into it

by cross reference.

DIRECTORS AND DIRECTORS’ INTERESTS

The names and brief biographical details of

Directors at the date of this report are set out

on page 18 & 19.

CREDITOR PAYMENT POLICY

It is the Group’s policy to settle terms of

payment with suppliers when agreeing the

terms of the transaction, to ensure suppliers

are aware of these and abide by them.

Normally, suppliers will be advised as soon as

practicable of a dispute and payment will be

made of that part of the invoice not in dispute

unless good reason exists. Total creditor days

for the period ending 31 December 2012

were 50 days (2011: 37 days).

DONATIONS

The Group made charitable donations in the

year of £nil (2011: £nil).

GOING CONCERN

The Group’s business activities, together with

the factors likely to affect its future

development, performance and position are

set out in the Chief Executive’s Review on

page 10 to 11 and the risks and uncertainties

which are described on pages 15 to 16. The

financial position of the Group, its cash flows

and financing are described on page 12 to 16.

Note 24 to the financial statements includes a

description of the Group’s policies and

objectives for managing capital and financial

risk, details of financial instruments and its

exposures to credit risk and liquidity risk.

In September 2012, the Company

successfully raised approximately £3.35m

from a combination of new and existing

investors. Further analysis can be found in

note 29.

FINANCIAL INSTRUMENTS

The Group’s objectives and policies in respect

of financial instruments are disclosed in Note

24 in the financial statements.

DISCLOSURE OF INFORMATION TO THE

AUDITORS

So far as each person who was a Director at

the date of approving this report is aware,

there is no relevant audit information, being

information needed by the auditor in

connection with preparing its report, of

which the auditor is unaware. Having made

enquiries of fellow Directors and the Group’s

auditor, each Director has taken all the steps

that he is obliged to take as a Director in

order to made himself aware of any relevant

audit information and to establish that the

auditor is aware of that information.

AUDITORS

A resolution proposing the re-appointment

of Ernst & Young LLP as auditors of the

Company will be put to the forthcoming

Annual General Meeting.

Signed on behalf of the Board of Directors

Peter Rowse

Director

3 April 2013

DIRECTORS’ REPORT CONTINUED

Stock code: CAP




DIRECTORS’ INTERESTS

Set out below are the beneficial interests of the Directors and their families in the share capital of the Company at the beginning and end

of the year.

DIRECTORS’ INTERESTS IN THE GROUP’S SHARE OPTION SCHEMES

Set out below are the beneficial interests of the Directors and their families in the share capital of the Company at the beginning and end of the

year. At 1 Granted Surrendered At 31

January during during the December Date of Exercise Date first Expiry

2012 the year year 2012 grant price exercisable date

Director:

John Pettitt 1,620,000 - - 1,620,000 6 Dec 2011 6p 6 Dec 2014 6 Dec 2021

John Pettitt 1,080,000 - - 1,080,000 6 Dec 2011 8.5p 6 Dec 2014 6 Dec 2021

Peter Rowse 300,000 - - 300,000 6 Dec 2011 6p 6 Dec 2014 6 Dec 2021

Peter Rowse 200,000 - - 200,000 6 Dec 2011 8.5p 6 Dec 2014 6 Dec 2021

On behalf of the Board

Peter Rowse

3 April 2013

Number of ordinary shares

Shares Options

31.12.2012 01.01.2012 31.12.2012 01.01.2012

or later or later

appointment appointment

John Pettitt 2,376,567 1,880,067 2,700,000 2,700,000

Peter Rowse 298,908 255,158 500,000 500,000

Rodney Westhead 360,609 298,109 - -

Bernard Lord 571,897 446,897 - -

Dr Ulrich Wöhr 367,359 304,859 - -

Prof. Dr. Karl Viktor Schaller 68,381 49,631 - -

SERVICE CONTRACTS

The service contracts and letters of appointment of the Directors include the following terms:

Unexpired term Notice

Date of (months) or period

contract rolling contract (months)

Non-Executive Directors

John Pettitt 01.08.05 Rolling 12

Peter Rowse 01.01.06 Rolling 6

Non-Executive Directors*

Rodney Westhead 11.01.06 * -

Bernard Lord 04.07.07 * -

Dr.Ulrich Wöhr 14.09.06 * -

Prof. Dr. Karl Viktor Schaller 19.10.10 * -

* Contracts for service initially for three years with an annual review thereafter.

There are no special provisions for compensation in the event of loss of office.

DIRECTORS’ REMUNERATION

Salary/ Annual Total Total Pension Pension

Fees Consultancy Bonus Benefits 2012 2011 2011 2011

£ £ £ £ £ £ £ £

Executive Directors:

John Pettitt 254,295 - - 61,295 315,590 283,921 - -

Peter Rowse 118,832 - - 12,726 131,558 125,218 7,050 6,600

Non-Executive Directors:

Rodney Westhead 39,375 - - - 39,375 37,800 - -

Bernard Lord 19,077 - - - 19,077 19,541 - -

Dr Ulrich Wöhr 19,023 - - - 19,023 19,541 - -

Prof. Dr Karl Viktor Schaller 20,376 4,022 - - 24,398 30,274 - -

Total 470,978 4,022 - 74,021 549,021 516,295 7,050 6,600

REPORT ON DIRECTORS’ REMUNERATION CONTINUED

Stock code: CAP


CORPORATE GOVERNANCE STATEMENTS



Corporate governance, in general terms, is

the way in which a Company is controlled

and directed and in particular, is concerned

with the role of the Board of Directors, how

the Board and Committees of the Board

operate, and accountability within a

Company.

The Company’s shares are listed on the

Alternative Investment Market (‘AIM’) of the

London Stock Exchange. The Company is

subject to the AIM Admission Rules of the

London Stock Exchange and is consequently

not required to comply with best practice

corporate governance provisions contained

within Section 1 of the revised UK Corporate

Governance Code which applies to

accounting periods beginning on or after 29

June 2010 (‘the New Code’) appending to

the Listing Rules of the Financial Services

Authority. However, the Directors believe

good corporate governance is essential.

Having considered the provisions of the New

Code, the Directors set out below the

principles of the New Code and how the

Company has applied those principles. The

current size of the Company means that full

compliance with the provisions of the New

Code is not practical or cost effective.

However, in areas where the Board of

Directors believe that the provisions set out in

the New Code are paramount to corporate

governance, procedures for compliance have

been established.

THE BOARD

The Board of Directors is usually structured

such that it includes a balance of Executive

and Non-Executive Directors. As at 31

December 2012, the Board compromised

one Non–Executive Chairman, one

Non–Executive Deputy Chairman, two

Non-Executive Directors and two Executive

Directors including the Chief Executive

Officer. The Executive Directors and the

Non-Executive Directors bring a wide range

of business expertise to the Board’s

discussions and decision making. The Board

of Directors has put in place an

organisational structure with clearly defined

responsibilities and delegation of authority.

Biographical details of all the Directors are set

out on page 18 and 19.

The Board considers that the Non-Executive

Chairman and two of the Non-Executives are

independent of management. One of the

Non-Executive Directors provides consultancy

services relating to corporate development

for which he is rewarded on a time spent

basis.

The full Board meets formally at least three

times each year to consider all matters of

significance for the Company as they arise, as

well as matters reserved specifically for their

consideration. These matters include

development of business strategy and policy,

the review and approval of operating

budgets and monitoring business

performance against objectives, the approval

of significant financing and capital

expenditure programmes, the approval of

interim and annual financial statements and

consideration of matters relating to internal

control. The Board is supplied in a timely

manner with all relevant information to assist

in the discharge of its duties.

All the Directors have access to the advice

and services of the Company Secretary who

is responsible to the Board for ensuring that

Board procedures are followed and that

applicable rules and regulations are complied

with.

Senior Management meet on a regular basis

and discuss all major issues affecting the

Company which do not require Board

discussion or approval by other Board

Committees. It is the Company’s policy to

appoint Non-Executive Directors for specified

terms, subject to re-election. All Directors are

subject to re-election by shareholders at the

first opportunity after their initial

appointment, and to re-election thereafter in

accordance with the Company’s By-laws.

REMUNERATION COMMITTEE

The Remuneration Committee seeks to

ensure that its policies on remuneration are

such that the Company is able to attract and

retain high calibre executives, and those

executives are rewarded in a way consistent

with the interest of shareholders.

Remuneration and incentive packages are

awarded according to the individual’s

performance, experience and responsibility.

The Remuneration Committee comprises

three Non-Executive Directors and is chaired

by Mr Bernard Lord. The Executive Directors

attend meetings of the Committee by

invitation. The Committee meets at least

annually and is responsible for making

recommendations to the Board on the

remuneration policy of the Executive

Directors and senior staff, and for

determining salaries, incentive payments and

longer term incentives in the form of share

options. Shareholders would be invited to

approve any new long-term incentive

schemes which might give rise to a significant

dilution in their equity. The Remuneration of

the Non-Executive Directors is set by the

Executive Directors ensuring that no Director

is responsible for the determination of his

own remuneration.

In determining the level of remuneration,

individual performance and competitiveness

within the sector is considered when setting

or reviewing the remuneration package of

Executive Directors. Details of the Directors’

emoluments are disclosed at Note 9 to the

financial statements and in the Report on

Directors’ Remuneration.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing

the Annual Report, the Group and Company

financial statements in accordance with

International Financial Reporting Standards

(IFRSs) as adopted by the European Union.

The Directors are required to prepare Group

financial statements for each financial year

which present fairly the financial position of

the Group and the financial performance and

cash flows of the Group for that period. In

preparing those Group financial statements,

the Directors are required to:

• select suitable accounting policies in

accordance with IAS 8: ‘Accounting

Policies, Changes in Accounting Estimates

and Errors’ and then apply them

consistently;

• present information, including accounting

policies, in a manner that provides

relevant, reliable, comparable and

understandable information;

• provide additional disclosures when

compliance with the specific requirements

in IFRSs is insufficient to enable users to

understand the impact of particular

transactions, other events and conditions

on the Group’s financial position and

financial performance; and

• state that the Group has complied with

IFRSs, subject to any material departures

disclosed and explained in the financial

statements

The Directors are responsible for keeping

adequate accounting records that are

sufficient to show and explain the Group’s

and Company’s transactions and disclose

with reasonable accuracy at any time the

financial position of the Group and Company.

They are also responsible for safeguarding

the assets of the Group and hence for taking

reasonable steps for the prevention and

detection of fraud and other irregularities.

The Directors are responsible for the

maintenance and integrity of the corporate

and financial information included on the

Group's website. Legislation in the United

Kingdom governing the preparation and

dissemination of financial statements may

differ from legislation in other jurisdictions.

Stock code: CAP


INDEPENDENT AUDITOR’S REPORT TO THE MEMBERSOF CLEAN AIR POWER LIMITED



We have audited the financial statements of

Clean Air Power Limited for the year ended

31 December 2012 which comprise the

Consolidated Income Statement, the

Consolidated Statement of Comprehensive

Income, the Consolidated and Company

Statements of Financial Position, the

Consolidated and Company Statements of

Cash Flow and the Consolidated and

Company Statements of Changes in Equity

and the related notes 1 to 29. The financial

reporting framework that has been applied in

their preparation is International Financial

Reporting Standards (IFRSs) as adopted by

the European Union.

This report is made solely to the company’s

members, as a body, in accordance with our

engagement letter dated 6 September 2011.

Our audit work has been undertaken so that

we might state to the company’s members

those matters we are required to state to

them in an auditor’s report and for no other

purpose. To the fullest extent permitted by

law, we do not accept or assume

responsibility to anyone other than the

company and the company’s members as a

body, for our audit work, for this report, or

for the opinions we have formed.

RESPECTIVE RESPONSIBILITIES OF

DIRECTORS AND AUDITOR

As explained more fully in the Directors’

Responsibilities Statement set out on page

26, the directors are responsible for the

preparation of the financial statements and

for being satisfied that they give a true and

fair view.

Our responsibility is to audit and express an

opinion on the financial statements in

accordance with International Standards on

Auditing (UK and Ireland). Those standards

require us to comply with the Auditing

Practices Board’s Ethical Standards for

Auditors.

SCOPE OF THE AUDIT OF THE FINANCIAL

STATEMENTS

An audit involves obtaining evidence about

the amounts and disclosures in the financial

statements sufficient to give reasonable

assurance that the financial statements are

free from material misstatement, whether

caused by fraud or error. This includes an

assessment of: whether the accounting

policies are appropriate to the company’s

circumstances and have been consistently

applied and adequately disclosed; the

reasonableness of significant accounting

estimates made by the directors; and the

overall presentation of the financial

statements. In addition, we read all the

financial and non-financial information in the

Highlights, Chairman’s Statement, Chief

Executive’s Operating Review, Financial

Review, Board of Directors, Corporate Social

Responsibility, Directors’ Report, Report on

Director’s Remuneration and Corporate

Governance Statements to identify material

inconsistencies with the audited financial

statements. If we become aware of any

apparent material misstatements or

inconsistencies we consider the implications

for our report.

OPINION ON FINANCIAL STATEMENTS

In our opinion the financial statements:

• give a true and fair view of the state of

the Group and Company’s affairs as at

31 December 2012 and of the Group’s

loss for the year then ended; and

• have been properly prepared in

accordance with International Financial

Reporting Standards (IFRSs) as adopted

by the European Union

Ernst & Young LLP

Manchester

3 April 2013

NOMINATION COMMITTEE

The Nomination Committee comprises three

Non-Executive Directors and is chaired by Mr

Rodney Westhead. Its role is to ensure that

appropriate procedures are in place for the

nomination and selection of candidates for

appointment to the Board, having regard for

the balance and the structure of the Board. In

appropriate cases, recruitment consultants

are used to assist the process. The

Committee also makes recommendations to

the Board regarding the re-election of

Directors, succession planning and Board

composition.

ACCOUNTABILITY

All the Directors are equally accountable

under the law for the proper stewardship of

the Company’s affairs. The Board acts in a

way which allows all Directors to bring their

independent judgement to bear on issues of

strategy, performance, resources, including

key appointments and standard of conduct.

AUDIT COMMITTEE

The Audit Committee comprises three Non-

Executive Directors and is chaired by Dr.

Ulrich Wöhr. The Committee will review the

Company’s interim and annual financial

statements before submission to the Board

for approval. The Committee will also review

regular reports from management and the

external auditors on accounting and internal

control matters. Where appropriate, the

committee will monitor the progress of

action taken in relation to such matters. The

Audit Committee will also recommend the

appointment of and review the fees of the

external auditors.

INTERNAL CONTROL

The Board of Directors is responsible for

ensuring that the Company maintains an

adequate system of risk management and

internal control. Due to the relatively small

size of the Company, the processes it has

employed to identify, evaluate and manage

significant business risks have been informal,

and have depended upon close business

involvement of Senior Management,

including the Executive Directors in all aspects

of the Company’s operations.

The Company maintains an adequate system

of risk management and internal control, and

an internal control environment which, in the

opinion of the Directors, is appropriate for

the Company’s size and complexity. These

controls include a budgeting process with an

annual operating budget approved by the

Board of Directors, a comprehensive financial

reporting system, comparing actual results to

budget (with variations to budget being

thoroughly investigated with corrective action

taken by the Directors as appropriate), the

provision of monthly management accounts,

annual budgets and forecasts, and

operational limits on the delegation of

financial authority.

Full management accounts are normally

issued within twelve working days following

the month end. Full financial forecast

updates are produced bi-annually and the

Company reports to shareholders bi-annually.

The Company does not currently have an

internal audit function. The Board believes

that this is appropriate given the current size

of the Company.

RELATIONS WITH SHAREHOLDERS

The Company seeks to maintain and enhance

its good relationship with it’s shareholders.

This is achieved through the provision of

interim and annual reports; through meeting

with shareholders and presentations to

them in general meetings and after major

Company announcements; by responses

to individual enquiries; and through the

Company’s website, www.cleanairpower.com.

The Annual General Meeting is the primary

opportunity to meet individual shareholders,

to make presentations to them, to encourage

their participation through questions and to

talk informally to them after the formal

proceedings. Separate resolutions are

proposed at the Annual General Meeting on

each substantially separate issue. The Board is

always ready, where practicable, to enter into

dialogue with institutional and individual

shareholders based on mutual understanding

of objectives.

CORPORATE GOVERNANCE STATEMENTS CONTINUED

Stock code: CAP


CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME



Year ended Year ended

31 December 31 December

2012 2011

Notes £’000 £’000

Revenue 3 7,942 4,585

Cost of sales (4,424) (2,022)

Gross profit 3,518 2,563

Administrative expenses (5,710) (4,668)

Share-based payments charge 26 (29) (140)

Operating loss 4 (2,221) (2,245)

Loss on ordinary activities before finance revenue, finance costs and taxation (2,221) (2,245)

Finance revenue 6 2 5

Finance costs 7 (1) -

Loss on ordinary activities before taxation (2,220) (2,240)

Tax expense 10 - -

Loss for the year attributable to Equity holders of the parent (2,220) (2,240)

Basic and diluted loss per share 11 (1.53p) (2.13p)

All items dealt with in arriving at operating loss above relate to continuing operations.



2012 2011

Notes £’000 £’000

Loss for the year 3 (2,220) (2,240)

Exchange differences on translation of foreign operations (113) (9)

Other comprehensive loss for the year (113) (9)

Total comprehensive loss for the year (2,333) (2,249)

Attributable to:

Equity holders of the parent (2,333) (2,249)

Stock code: CAP


CONSOLIDATED STATEMENT OF FINANCIAL POSITION





2012 2011

Notes £’000 £’000

Assets

Non-current assets

Plant and equipment 12 235 190

Intangible assets 13 3,658 3,839

3,893 4,029

Current assets

Inventories 16 1,208 670

Trade and other receivables 17 1,102 816

Cash and cash equivalents 18 3,204 2,422

5,514 3,908

TOTAL ASSETS 9,407 7,937

Equity and liabilities

Equity attributable to equity holders of the parent

Ordinary share capital 19 109 83

Share premium 28 22,346 19,160

Translation reserve 28 962 1,075

Other reserves 28 33,504 33,504

Accumulated loss (49,790) (47,599)

TOTAL EQUITY 7,131 6,223

Non current liabilities

Trade and other payables 23 11 -

Provisions 21 43 -

54 -

Current liabilities

Trade and other payables 20 1,715 1,027

Provisions 21 425 393

Deferred revenue 22 82 294

2,222 1,714

TOTAL LIABILITIES 2,276 1,714

TOTAL EQUITY AND LIABILITIES 9,407 7,937

The financial statements were approved by the Board of Directors on 3 April 2013 and were signed on its behalf by:

Peter Rowse

Director

3 April 2013



2012 2011

Notes £’000 £’000

Assets

Non-current assets

Investments 14 1,801 1,772

Other financial assets 15 21,958 18,815

23,759 20,587

TOTAL ASSETS 23,759 20,587

Equity and liabilities

Equity attributable to equity holders of the parent

Ordinary share capital 19 109 83

Share premium 28 22,346 19,160

Accumulated profit 1,304 1,344

TOTAL EQUITY 23,759 20,587

TOTAL LIABILITIES - -

TOTAL EQUITY AND LIABILITIES 23,759 20,587

The financial statements were approved by the Board of Directors on 3 April 2013 and were signed on its behalf by:

Peter Rowse

Director

3 April 2013

COMPANY STATEMENT OF FINANCIAL POSITION

Stock code: CAP


CONSOLIDATED STATEMENT OF CASH FLOWS



COMPANY STATEMENT OF CASH FLOWS



2012 2011

Notes £’000 £’000

Cash flows from operating activities

Loss on ordinary activities before taxation (2,220) (2,240)

Adjustments for:

Net finance revenue (1) (5)

Depreciation of plant and equipment 12 111 119

Amortisation of intangibles 13 1,019 311

Share-based payments 26 29 140

(Increase)/decrease in trade and other receivables (286) 526

Increase/(decrease) in trade and other payables 665 (105)

(Increase)/decrease in inventories (538) 169

Increase/(decrease) in provisions 75 (67)

(Decrease)/increase in deferred revenue (212) 137

Other non-cash movements 14 4

Net cash outflow (1,344) (1,011)

Investing activities

Interest received 6 2 5

Payments to acquire plant and equipment 12 (141) (49)

Sale of plant and equipment 12 (6) 4

Payments to acquire intangible assets 13 (954) (1,915)


Financing activities

Interest expense (1) -

Proceeds from the issue of ordinary share capital 29 3,357 3,129

Share issue costs 29 (145) (149)

Net increase 3,211 2,980

Net increase in cash and cash equivalents 768 14

Net foreign exchange differences 14 (2)

Cash and cash equivalents at 1 January 2,422 2,410

Cash and cash equivalents at 31 December 18 3,204 2,422



2012 2011

Notes £’000 £’000

Cash flows from operating activities

Loss before taxation (69) (83)

Net cash outflow (69) (83)

Investing activities

Increase in funding loans to subsidiary undertakings (3,143) (2,897)


Financing activities

Proceeds from the issue of ordinary share capital 29 3,357 3,129

Share issue costs 29 (145) (149)

Net cash inflow 3,212 2,980

Net increase in cash and cash equivalents - -

Cash and cash equivalents at 1 January - -

Cash and cash equivalents at 31 December - -

For the year ended 31 December 2012 For the year ended 31 December 2012

Stock code: CAP


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY



COMPANY STATEMENT OF CHANGES IN EQUITY

Ordinary Share Translation Other Accumulated Total

share capital premium reserve reserves loss equity

£’000 £’000 £’000 £’000 £’000 £’000

Balance at 1 January 2011 44 16,219 1,084 33,504 (45,499) 5,352

Comprehensive income

Loss for the year - - - - (2,240) (2,240)

Other comprehensive income

Exchange differences on retranslation - - (9) - - (9)

of overseas operations

Total comprehensive loss for the year - - (9) - (2,240) (2,249)

Share-based payments - - - - 140 140

On issue of new shares 39 3,090 - - - 3,129

Share issuance costs - (149) - - - (149)

Balance at 31 December 2011 83 19,160 1,075 33,504 (47,599) 6,223


Loss for the year - - - - (2,220) (2,220)

Other comprehensive income

Exchange differences on retranslation - - (113) - - (113)

of overseas operations

Total comprehensive loss for the year - - (113) - (2,220) (2,333)

Share-based payments - - - - 29 29

On issue of new shares 26 3,331 - - - 3,357

Share issuance costs - (145) - - - (145)

Balance at 31 December 2012 109 22,346 962 33,504 (49,790) 7,131

For the year ended 31 December 2012 For the year ended 31 December 2012

Ordinary Share Accumulated Total

share capital premium loss equity

£’000 £’000 £’000 £’000

Balance at 1 January 2011 44 16,219 1,330 17,593


Loss for the year - - (83) (83)

Total comprehensive loss for the year - - (83) (83)

Share-based payments - - 97 97

On issue of new shares 39 3,090 - 3,129

Share issuance costs - (149) - (149)

Balance at 31 December 2011 83 19,160 1,344 20,587


Loss for the year - - (69) (69)

Total comprehensive loss for the year - - (69) (69)

Share-based payments - - 29 29

On issue of new shares 26 3,331 - 3,357

Share issuance costs - (145) - (145)

Balance at 31 December 2012 109 22,346 1,304 23,759

Stock code: CAP


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



1. AUTHORISATION OF FINANCIAL STATEMENTS AND STATEMENT OF COMPLIANCE WITH IFRSs

The Group and Company financial statements of Clean Air Power Limited for the year ended 31 December 2012 were authorised for issue by

the Board of Directors on 3 April 2013 and the Statements of Financial Position were signed on the Board’s behalf by Peter Rowse. Clean Air

Power Limited is a public limited Company incorporated in Bermuda whose shares are publicly traded on the AIM market of London.

The Group and Company’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as

adopted by the EU as they apply to the financial statements of the Group for the year ended 31 December 2012.

All of the revenue and profits and operating assets relate to the Group’s principal business activities, being vehicle conversion sales, sales of

components and an emissions reduction business. Revenue is stated net of value added tax. For further analysis please refer to the Directors’

Report on pages 21 to 22.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PREPARATION

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards

(‘IFRS’) as adopted by the European Union. The consolidated financial statements have been prepared under the historical cost convention

except where indicated below. The preparation of financial information in conformity with IFRS requires the use of certain critical accounting

estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas

involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial

information are disclosed in the critical accounting estimates and judgements section.

The accounting policies that follow set out those policies that apply in preparing the financial statements for the year ended 31 December

2012. The Company and the Group have applied the same policies throughout the current and proceeding year.

Under the Bermuda Companies Act 1981 the Company is able to waive the presentation of the financial statements of the Company subject

to the agreement in writing (or at a general meeting) of all the shareholders and Directors of the Company. Accordingly, the Company has

not presented its own income statement as part of these financial statements. The Company made a loss for the year after taxation and

before dividends of £69K (2011: £83K).

The Group and Company financial statements are presented in sterling and all values are rounded to the nearest thousand pounds (£’000)

except where otherwise indicated.

GOING CONCERN

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the

Chief Executive’s Review on page 10 and the risks and uncertainties which are described on pages 15 to 16. The financial position of the

Group, its cash flows and financing are described on page 12 to 13. Note 24 to the financial statements includes a description of the Group’s

policies and objectives for managing capital and financial risk, details of financial instruments and its exposures to credit risk and liquidity risk.

In September 2012, the Company successfully raised £3.35m from a combination of new and existing investors. Further analysis can be found

in note 29.

The Group has long-term relationships with a number of customers and suppliers in different countries and industries which provide an

element of comfort to support the prospects for different areas of the business. However, it is acknowledged that, in the current economic

climate, it is difficult to predict the timing and extent of future revenues with certainty for a company at this stage of potentially rapid growth.

After making enquiries and preparing cash flow projections taking account of reasonably expected changes in trading results, for the

foreseeable future the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in

operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report

and financial statements.

BASIS OF CONSOLIDATION

The Group financial statements consolidate the financial statements of Clean Air Power Limited and its subsidiary undertakings drawn up to

31 December each year.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group, and deconsolidated from the date that control

ceases. The financial statements of subsidiaries used in the preparation of the consolidated financial statements are prepared for the same

reporting period of the parent Company and are based on consistent accounting policies. Intragroup transactions, balances and unrealised

gains on transactions between Group companies are eliminated, including unrealised profits or losses.

The following new and amended IFRS and IFRIC interpretations as of 1 January 2012 did not have any impact on the accounting policies,

financial position or performance of the Group.

IAS 1 Presentation of Items of other Comprehensive Income – Amendment to IAS 1 (Early adopted from effective date 1 July 2012)

IAS 12 Income Taxes (Amendment) – Deferred Taxes: Recovery of Underlying Assets

NEW STANDARDS AND INTERPRETATIONS NOT APPLIED

IASB and IFRIC have issued the following standards and interpretations with an effective date after the date of these financial statements.

International Accounting Standards (IAS/IFRS) Effective date

IFRS 1 Government Loans – Amendments to IFRS 1 1 January 2013

IFRS 7 Disclosures – Offsetting Financial Assets and Financial Liabilities 1 January 2013

IFRS 9 Financial Instruments Classification and Measurement 1 January 2015

IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements 1 January 2013

IFRS 11 Joint Arrangements 1 January 2013

IFRS 12 Disclosures of Interest in Other Entities 1 January 2013

IFRS 13 Fair Value Measurement 1 January 2013

IAS 19 Employee Benefits (Revised) 1 January 2013

IAS 32 Offsetting Financial Assets and Financial Liabilities - Amendment 1 January 2014

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine 1 January 2013

IFRS 1 ‘Government Loans – Amendment to IFRS 1’ give first time adopters the same relief that existing preparers of IFRS financial statements

had on the first-time application of IAS 20. There will be no impact on the Group.

IFRS 7 Disclosures – Offsetting Financial assets and Financial Liabilities’ require an entity to disclose information about rights of set-off and

related arrangements. The information would provide users the information to evaluate the effect of any netting arrangements.

Amendments are to be applied retrospectively but are not expected to impact the Group.

IFRS 9 ‘Financial Instruments: Classification and Measurement’ reflects the first phase of the IASBs work on replacement of IAS 39 and applies

to classification and measurement of financial assets as defined in IAS 39. In subsequent phases, the IASB will address classification and

measurement of financial liabilities, hedge accounting and derecognition. The adoption of the first phase of IFRS 9 will have an effect on the

classification and measurement of the Group’s financial assets. The Group will quantify the effect in conjunction with the other phases, when

issued, to present a comprehensive picture.

IFRS 10 ‘Consolidated Financial Statements’ IFRS 10 replaces the guidance of control and consolidation in IAS 27. The core principle that a

consolidated entity presents a parent and its subsidiaries as if they were single entity remains unchanged, as do the mechanics of the

consolidation.

IFRS 11 ‘Joint Arrangements’ requires joint arrangements to be accounted for as a joint venture depending on the rights and obligations of

each party to the arrangement. Proportionate consolidation for joint ventures will be eliminated and equity accounting will be mandatory.

IFRS 12 ‘Disclosure of Interest in Other Entities’ requires enhanced disclosures of the nature, risks and financial effects associated with the

group’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities.

Stock code: CAP




2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

IFRS 13 ‘Fair Value Measurement’ explains how to measure fair value and aims to enhance fair value disclosures. The standard does not

change the measurement of fair value but codifies in one place.

IAS 19 ‘Employee Benefits’ changes a number of disclosure requirements for post employment arrangements and restricts the options

currently available on how to account for defined benefit pension plans. There will be no impact on the Group.

IAS 32 ‘Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32’ entities will need to review legal documentation and

settlement procedures, only when an entity has a legal enforceable right to set off the recognised amounts and must not be contingent on a

future event. There will be no impact on the Group.

IFRIC 20 ‘Stripping Costs in the Production Phase of a Surface Mine’ applies to waste removal incurred in surface mining activity, during

production phase. There will be no impact on the Group.

The effective dates stated above are those given in the original IASB/IFRIC standards and interpretations. As the Group prepares its financial

statements in accordance with IFRS as adopted by the European Union (EU), the application of new standards and interpretations will be

subject to their having been endorsed for use in the EU via the EU Endorsement mechanism. In the majority of cases this will result in an

effective date consistent with that given in the original standard or interpretation but the need for endorsement restricts the Group’s

discretion to early adopt standards.

The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s financial

statements in the period of initial application.

PLANT AND EQUIPMENT

Plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line

basis over the expected useful life of the asset using the following rates:

• Plant and equipment – 3 to 5 years

The carrying values of plant and equipment are reviewed for impairment either annually, or when events or changes in circumstances indicate

the carrying value may not be recoverable (whichever is earlier). If any such indication exists and where the carrying values exceed the

estimated recoverable amount, the assets are written down to their recoverable amount.

An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the

continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal

proceeds and the carrying amount of the item) is included in the income statement in the year the item is derecognised.

Residual values and estimated remaining lives are reviewed annually.

INVENTORIES

Inventories are stated at the lower of cost and net realisable value. Cost includes all costs incurred in bringing each product to its present

location and condition on a moving weighted average cost basis. Net realisable value is the estimated selling price in the ordinary course of

business, less any further costs expected to be incurred to completion and disposal.

WORK IN PROGRESS

Work in progress is the cost of direct materials and labour.

LEASES

Leases are classified as finance lease whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the

Group. All other leases are classified as operating leases.

Assets held under finance lease are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum

lease payments, each determined at the inception of the lease. The corresponding liability is to be included in the statement of financial

position as a finance lease obligation. The interest element of leasing payments represents a constant proportion of the capital balance

outstanding and is charged to the income statement over the period of the lease.

Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received

and receivable as an incentive to enter into an operating lease are also spread on a straight line basis over the lease term.

FOREIGN CURRENCY

The Group’s consolidated financial statements are presented in sterling, which is also the parent Company’s functional currency. Each entity

in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that

functional currency. Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange rate at

the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate

of exchange ruling at the balance sheet date. All differences are taken to the income statement, except for differences on monetary assets

and liabilities that form part of the Group’s net investment in a foreign operation. These are taken directly to equity until the disposal of the

net investment, at which time they are recognised in profit or loss.

The assets and liabilities of foreign operations are translated into sterling at the rate of exchange ruling at the balance sheet date. Income

and expenses are translated at weighted average exchange rates for the year. The resulting exchange differences are taken directly to a

separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular

foreign operation is recognised in the income statement.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates

of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the

date when the fair value was determined.

INTANGIBLE ASSETS

RESEARCH AND DEVELOPMENT COSTS

Research costs are expensed as incurred. An intangible asset arising from development expenditure on an individual project is recognised only

when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its

intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the ability of resources to

complete and the availability to measure reliably the expenditure during the development. Following the initial recognition of the

development expenditure as an asset, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation

and accumulated impairment losses. During the period of development, the asset is tested annually for impairment. Amortisation of the asset

begins when development is complete and the asset is available for use. It is amortised evenly over the period of expected future benefit

estimated as follows:

• Development expenditure – 18 months to 5 years.

COMPUTER SOFTWARE

Computer software is carried at cost less accumulated amortisation. Computer software has a finite life with no residual value and is

amortised on a straight line basis over the expected useful life as follows:

• Computer software – 3 years.

The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying value

may not be recoverable. In addition, the carrying value of capitalised development expenditure is reviewed for impairment annually before

being brought into use.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSCONTINUED

Stock code: CAP





CASH AND CASH EQUIVALENTS

Cash and cash equivalents in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original

maturity date of three months or less.

INVESTMENTS

Investments in subsidiary undertakings are stated at cost less any provision for any impairment that the Directors consider necessary.

PROVISIONS

Provisions are recognised when the Group has a present legal or constructive obligation and it is probable that an outflow of economic

benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time

value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the

liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

DEFERRED INCOME TAXES

Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of

assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary differences, except:

• where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a

business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the

timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in

the foreseeable future

Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses,

to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward

of unused tax credits and unused tax losses can be utilised except:

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer

probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.

Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become

probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the

liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss.

PENSIONS

The Group contributes on behalf of its employees to individual personal defined contribution plans. The contributions made by the Group are

recognised as an expense in the period they fall due.

SHARE-BASED PAYMENT TRANSACTIONS

The cost of equity settled transactions with employees is measured by reference to the fair value at the date on which they are granted. The

fair value is determined by an external valuer using an appropriate pricing model. In valuing equity-settled transactions, no account is taken

of any performance conditions, other than conditions linked to the price of the shares of the Company (‘market conditions’), if applicable.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition,

which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions

are satisfied.

At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has

expired and management’s best estimate of the achievement or otherwise of non-market conditions number of equity instruments that will

ultimately vest or in the case of an instrument subject to a market condition, be treated as vesting as described above. The movement in

cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the cost

based on the original award terms continues to be recognised over the original vesting period. In addition, an expense is recognised over the

remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value of the

original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is recognised if this

difference is negative.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the

income statement for the award is expensed immediately. Any compensation paid up to the fair value of the award at the cancellation or

settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement.

The cost of share options granted by the Company for the benefit of employees of its subsidiaries is recorded as an increase in the cost of the

Company’s investment in the shares of its subsidiary. A corresponding credit is recorded in equity.

ORDINARY SHARE CAPITAL

Ordinary share capital is held in US$ and translated at spot rate when shares are issued.

TRADE AND OTHER RECEIVABLES

Trade receivables, which generally have 30 day terms, are recognised and carried at original invoice amount less an allowance for any

uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable, bad debts are

written off when identified.

TRADE PAYABLES

Trade payables are not interest bearing and are stated at their nominal value.

FINANCIAL LIABILITIES AND EQUITY INSTRUMENTS

Financial liabilities and equity instruments are all instruments that are issued by the Group as a means of raising finance, including shares,

loan notes, debentures, debt instruments and options and warrants that give the holder the right to subscribe for or obtain financial liabilities

and equity instruments. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of

its liabilities. All equity instruments are included in shareholders’ funds. The finance costs incurred in respect of an equity instrument are

charged directly to the income statement. Other instruments are classified as financial liabilities if they contain a contractual obligation to

transfer economic benefits.


Stock code: CAP





REVENUE RECOGNITION

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably

measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or

duty. The following criteria must also be met before revenue is recognised.

SALE OF GOODS

Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer,

usually on despatch of the goods.

RENDERING OF SERVICES

Revenues from development programmes are recognised as development work is performed during the contractual term, as measured by

performance milestones. Revenue is not recognised where there is uncertainty regarding the achievement of milestones.

INTEREST INCOME

Revenue is recognised as interest accrues using the effective interest method. The effective interest rate is the rate that exactly discounts

estimated future cash receipts through the expected life of the financial instrument to its net carrying amount.

CRITICAL ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATES

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported for

assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during the year. The nature of

estimation means that actual outcomes could differ from those estimates. Key sources of estimation, uncertainty and critical accounting

judgements are as follows:

DEFERRED TAXATION

In the preparation of the financial statements, the Group estimates the income taxes in each of the taxing jurisdictions in which the Group

operates as well as any deferred taxes based on temporary differences. Deferred tax assets relating to tax loss carry-forwards and temporary

differences are recognised in those cases when future taxable income is expected to permit the recovery of those tax assets. Changes in

assumptions in the projections of future taxable income, as well as changes in tax rates could result in significant differences in the valuation

of deferred taxes.

INTANGIBLE ASSETS

Development costs are capitalised in accordance with the accounting policy. Initial capitalisation of costs is based on management’s

judgement that technology and economical feasibility is confirmed, usually when project development has reached a defined milestone. In

determining the amounts to be capitalised, management makes assumptions regarding the expected future cash generation of the assets,

discount rates to be applied and the expected period of benefits over which to amortise the costs. These assumptions are reviewed on a

periodic basis to determine whether the asset has become impaired.

PROVISIONS

The Group recognises a provision for liabilities associated with vehicle and parts warranty. The Group has made assumptions in relation to

historical claims and the expected cost of claims. In relation to future claims, the Group has made assumptions based on the warranty expiry

dates and the history of previous claims.

SHARE-BASED PAYMENTS

The estimation of share-based payment costs requires the selection of an appropriate valuation model, consideration as to the inputs

necessary for the valuation chosen and the estimation of the number of awards that will ultimately vest, inputs which arise from judgements

relating to the continuing participation of employees.

3. SEGMENT INFORMATION

REVENUE BY BUSINESS SEGMENT

For management purposes the Group is organised into business units based on their products and services, and has two reportable operating

segments as follows:

The Vehicle systems (Dual-Fuel™) segment allows a standard diesel engine to operate on natural gas without any major changes to

the engine.

The Components segment designs and delivers innovative Hydraulic Valves and Natural Gas Injector Components for natural gas engines

that enable automotive and truck manufactures’ to build low-emission gasoline, natural gas and diesel vehicles that meet worldwide

emissions regulations.

Transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions with third parties.

Year ended 31 December 2012 £’000

Dual-Fuel™ Components (9) Adjustments and Total

eliminations

Revenue

Third party sale of goods (1)(8) 5,400 1,305 - 6,705

Third party rendering of services (1)(8) 1,237 - - 1,237

Inter-segment (2) 918 - (918) -

Total revenue 7,555 1,305 (918) 7,942

Depreciation and amortisation (3) (1,125) (24) 19 (1,130)

Operating loss (4) (2,381) 196 (36) (2,221)

Net finance income 1

Loss for the year (2,220)

Assets

Operating assets (5) 5,329 234 (49) 5,514

Provisions (6) 400 75 (7) 468

Operating liabilities including provisions (6) 1,988 284 (7) 2,265

Other disclosures

Capital expenditure (7) 1,087 31 - 1,118

1. Dual-Fuel™ conversion segment includes revenue arising from development activity

2. Inter-segment revenues are eliminated on consolidation (£918,000)

3. Depreciation eliminated (£19,446) following transfer of intangible assets to Clean Air Power Inc.

4. Elimination of intragroup management charges (£63,759) and intragroup foreign exchange gains and losses (£22,094)

5. Adjustment to profit in inventory (£48,536)

6. Adjustment to provisions (£7,210)

7. Capital expenditure consists of additions to plant and equipment and intangible assets

8. Revenue from one customer amounted to £2,265,108 arising from sales related to the Dual-Fuel™ and Components segment

9. During the year the Emissions Reduction segment merged with the Components segment





4. OPERATING LOSS

3. SEGMENT INFORMATION CONTINUED

Year ended 31 December 2011 £’000

Dual-Fuel™ Components (9) Adjustments and Total

eliminations

Revenue

Third party sale of goods (1)(8) 2,474 1,281 - 3,755

Third party rendering of services (1)(8) 830 - - 830

Inter-segment (2) 516 - (516) -

Total revenue 3,820 1,281 (516) 4,585

Depreciation and amortisation (3) (399) (37) 6 (430)

Operating loss (4) (1,717) (394) (134) (2,245)

Net finance income 5

Loss for the year (2,240)

Assets

Operating assets (5) 2,306 1,645 (43) 3,908

Provisions (6) 216 186 (9) 393

Operating liabilities including provisions (6) 1,256 467 (9) 1,714

Other disclosures

Capital expenditure (7) 1,939 25 - 1,964

1. Dual-Fuel™ conversion segment includes revenue arising from development activity

2. Inter-segment revenues are eliminated on consolidation (£516,000)

3. Depreciation eliminated (£6,367) following transfer of intangible assets to Clean Air Power Inc.

4. Elimination of intragroup management charges (£77,000) and intragroup foreign exchange gains and losses (£53,027)

5. Adjustment to profit in inventory (£42,602)

6. Adjustment to provisions (£9,244)

7. Capital expenditure consists of additions to plant and machinery and intangibles

8. Revenue from one customer amounted to £1,843, 953 arising from sales related to the Dual-Fuel™ and Components segment

9. In 2012 the Emissions Reduction segment merged with the Components segment. All prior year results have been restated within the

Components segment

GEOGRAPHICAL INFORMATION

2012 2011

£’000 £’000

Revenues from external customers:

UK 2,115 385

USA 1,969 965

Australia 103 1,072

Rest of Europe 3,749 1,996

Rest of World 6 167

7,942 4,585

The revenue information is based on the location of the customer.

NON-CURRENT ASSETS Year ended Year ended


2012 2011

£’000 £’000

Revenues from external customers:

UK 1,633 1,338

USA 2,257 2,685

Australia 3 6

3,893 4,029

Non-current assets for this purpose consist of plant and equipment and intangible assets.

Loss on ordinary activities before taxation is stated after charging:

2012 2011

£’000 £’000

Inventory expensed in the year 4,032 1,899

Depreciation of plant and equipment 111 119

Amortisation of capitalised development and software expenditure 1,019 311

Foreign exchange differences 12 (2)

Operating lease rentals

- Other 73 188

- Land and buildings 402 376

Research and development expensed to income statement 974 534

5. AUDITORS’ REMUNERATION

2012 2011

£’000 £’000

Group audit fees 51 49

Other services – interim review fees 11 11

62 60

In 2012 there were no other fees (2011: £nil).

Stock code: CAP




2012 2011

£’000 £’000

Analysis of charge in the year

Corporation tax at 24.5% / 26.5% - -

Deferred tax - -

- -

Stock code: CAP




6. FINANCE INCOME

2012 2011

£’000 £’000

Bank interest receivable 2 5

7. FINANCE COSTS

2012 2011

£’000 £’000

Interest on obligations under finance lease 1 -

8. STAFF COSTS

The average monthly number of employees of the Group during the year, including Executive Directors, was as follows:

2012 2011

Number Number

Operational 34 37

Administrative 26 20

60 57

Staff costs for all employees, including Executive Directors, consist of:

2012 2011

£’000 £’000

Wages and salaries 2,959 2,791

Social security costs 254 229

Other pension costs 53 95

Expense of share-based payments 29 140

3,295 3,255

The Group operates money purchase (defined contribution) pension schemes. The assets of these schemes are held separately from those

of the Group in independently administered funds. The pension cost for the year represents contributions payable by the Group to these

funds and amounted to £52,636 (31 December 2011: £94,585). Unpaid pension costs at the year end amounted to £19,370 (2011:

£19,732).



2012 2011

£’000 £’000

Emoluments:

Remuneration for management/non-executive services 545 507

Consultancy paid to Non-Executive Director 4 9

Defined contribution pension payments 7 7

556 523

At the year end, there were £1,080 unpaid pension contributions (2011: £990).

Pension contributions were made to personal plans of one of the Executive Directors (2011: one).

9. DIRECTORS’ EMOLUMENTS



2012 2011

£’000 £’000

Highest paid Director:

Emoluments 316 284

Defined contribution pension payments - -

316 284

Disclosure of Directors’ renumeration, share options and pension contributions are on pages 23 to 25 within the renumeration report.

10. TAXATION




2012 2011

£’000 £’000

Deferred tax asset/(liability)

Plant and equipment (549) (912)

Short term temporary differences 320 577

Tax losses 229 335

- -

At the balance sheet date the Group has a deferred tax asset measured at rates of tax between 23% and 34% in relation to unused tax

losses of £15.6m (2011: £15.8m) available to offset against future profits. The amount recognised as a deferred tax asset is £229k (2011:

£335k). Remaining tax losses have not been recognised as an asset due to the unpredictability of future profit streams.

As at the balance sheet date, the main rate of UK corporation tax substantively enacted from 1 April 2013 was 23% and therefore

deferred tax has been provided for at this rate. A further reduction to the main rate was also proposed to reduce it by 2% per annum to

21% by 1 April 2014 and to 20% from 1 April 2015. These further changes had not been substantively enacted at the balance sheet date

and, therefore, are not included in these financial statements. To the extent that the deferred tax reverses more quickly than this the

impact on the net deferred tax asset will be reduced.

The proposed rate change will also impact the amount of future cash tax payments to be made by the Company. The effect of the proposed

changes to the UK tax system will be reflected in the financial statements of the Company in future years as appropriate, once the proposal

has been substantively enacted. For every 1% reduction in tax rate the unrecognised UK deferred tax asset will reduce by £32k.

Stock code: CAP




Year ended Year ended Year ended Year ended

31 December 31 December 31 December 31 December

2012 2012 2011 2011

£’000 % £’000 %

Reconciliation of tax charge

Loss on ordinary activities before tax (2,220) 100 (2,240) 100

Tax at 24.5% / 26.5% (544) 24.5 (594) 26.5

Tax effect of expenses that are not deductible 12 (0.5) 26 (1)

in determining taxable profit

Losses arising in the year not recognised in deferred tax 530 (24) 616 (28)

Movement in temporary differences in the year 96 (4) (78) 3.5

not recognised in deferred tax

Tax losses utilised (4) - - -

Effect of different tax rates of group companies (90) 4 30 (1)

operating in other jurisdictions

Tax for the year - - - -

Deferred tax

The deferred tax asset/(liability) recognised/(provided) at 31 December is as follows:

Unrecognised tax losses carried forward against certain future UK and overseas corporation tax liabilities have the following expiration dates:

2012 2011

£’000 £’000

2012 - -

2013 21 -

2014 4,957 5,184

2015 1,892 1,979

2016 and later 46,609 47,376

Available indefinitely 14,666 13,932

Tax losses available to carry forward 68,145 68,471

Amount of tax losses recognised in the deferred tax asset 587 859

Total gross tax losses available to carry forward 68,732 69,330

At the balance sheet date Clean Air Power Limited (Bermuda) had unused tax losses of £23k (2011: £28k) available to offset against

future profits.

BASIC

Basic loss per share is calculated by dividing net loss for the year attributable to equity holders of the parent by the weighted average number

of Common Shares in issue during the year.



2012 2011

£’000 £’000

Loss for the year (2,220) (2,240)

Weighted average number of shares 145,321,900 104,983,416

Basic and diluted loss per share (1.53p) (2.13p)

The loss for the year and the weighted average number of ordinary shares for calculating the diluted earnings per share for the year to 31

December 2012 are identical to those used for the basic earnings per share. This is because the outstanding share options (note 26) would

have the effect of reducing the loss per ordinary share and would therefore not be dilutive.

11. LOSS PER SHARE


10. TAXATION CONTINUED

Stock code: CAP




Plant and

equipment Total

£’000 £’000

Cost

At 1 January 2011 1,258 1,258

Additions 49 49

Disposals (23) (23)

Exchange differences 1 1

At 31 December 2011 1,285 1,285

Additions 164 164

Disposals (59) (59)

Exchange differences (50) (50)

At 31 December 2012 1,340 1,340

Depreciation

At 1 January 2011 989 989

Depreciation charge for the year 119 119

Disposals (19) (19)

Exchange differences 6 6

At 31 December 2011 1,095 1,095

Charge for the year 111 111

Disposals (56) (56)

Exchange differences (45) (45)

At 31 December 2012 1,105 1,105

Net book value

At 31 December 2012 235 235

At 31 December 2011 190 190

At 1 January 2011 269 269

The carrying value of plant and equipment held under finance leases and hire purchase contracts at 31 December 2012 was £24,007

(2011: £1,110).

12. PLANT AND EQUIPMENT – GROUP

Capitalised

development

expenditure Software Total

£’000 £’000 £’000

Cost

At 1 January 2011 3,840 202 4,042

Additions – Internal development 1,867 48 1,915

Exchange differences 4 - 4

At 31 December 2011 5,711 250 5,961

Additions – Internal development 888 66 954

Impairment (17) - (17)

Exchange differences (194) (9) (203)

At 31 December 2012 6,388 307 6,695

Amortisation

At 1 January 2011 1,622 179 1,801

Charge for the year 289 22 311

Exchange differences 9 1 10

At 31 December 2011 1,920 202 2,122

Charge for the year 984 35 1,019

Exchange differences (96) (8) (104)

At 31 December 2012 2,808 229 3,037

Net book value

At 31 December 2012 3,580 78 3,658

At 31 December 2011 3,791 48 3,839

At 1 January 2011 2,218 23 2,241

Capitalised development expenditure mostly relates to the Group’s Dual-Fuel™ products, which is amortised over periods between 18

months and 5 years.

The largest 2012 addition of £335,928 relates to the European OEM, the carrying value at the end of the year was £511,001. The project

will be completed in March 2013 at the start of European OEM production. Expenditure will be amortised over a period of 2.5 years.

Amortisation expenses are charged through administration expenses in the consolidated income statement.

13. INTANGIBLE ASSETS – GROUP


Stock code: CAP




Total

£’000

At 1 January 2011 1,649

Increase in respect of share based payments 123

At 31 December 2011 1,772

Increase in respect of share based payments 29

At 31 December 2012 1,801

The cost of share options granted by the Company for the benefit of employees of its subsidiaries has been recorded as an increase in the

cost of the Company’s investment in the shares of its subsidiary.

The following unlisted subsidiary undertakings at the end of the period have all been included in the consolidated accounts.

Proportion of voting rights

Name Country of registration and ordinary share capital Nature of business

Clean Air Power Limited England and Wales 100% Vehicle Conversions and

Product Support

Clean Air Power Inc USA 100% Vehicle Conversion, Components

and Product Support

Clean Air Power Pty Ltd Australia 100% Vehicle Conversions and

Product Support

14. INVESTMENTS – COMPANY



2012 2011

£’000 £’000

Amounts owed by subsidiary undertakings 21,958 18,815

Amounts due from 1 January 2014 with an option to extend this deadline. 21,958 18,815

The amounts are not interest bearing. Amounts due from subsidiary undertaking are recorded at amortised cost.

15. OTHER FINANCIAL ASSETS (NON-CURRENT) – COMPANY



2012 2011

£’000 £’000

Raw materials 1,087 598

Work in progress 75 20

Finished goods 46 52

1,208 670

There is no significant difference between the replacement value of stock and the amount at which it is stated in the financial statements.

During 2012 the amount of inventories write back is £18,887 which has been credited to cost of sales, following sales of legacy products

during the year. In 2011 £31,850 was written down and expensed to cost of sales.

16. INVENTORIES – GROUP

2012 2011

Group Company Group Company

£’000 £’000 £’000 £’000

Trade receivables 717 - 565 -

Prepayments and accrued income 325 - 234 -

VAT receivables 60 - 17 -

1,102 - 816 -

Trade receivables are non-interest bearing and are generally on 30-day terms, apart from vehicle conversions which are settled on

collection of the vehicle conversion. The credit quality of trade receivables that are neither past due nor impaired is assessed on an

individual customer basis by the Group’s credit control procedures.

As at 31 December 2012, trade receivables at nominal value of £nil (2011: £10,407).

Movements in the provision for impairment of receivables were as follows:

Total

£’000

At 1 January 2012 10

Additional provision in year -

Utilised during the year (10)

At 31 December 2012 -

As at 31 December, the ageing analysis of trade receivables that were past due but not impaired is as follows:

Neither past

due nor impaired

Total <30 days 30 – 60 days 61 – 90 days 91 – 120 days >120 days

£’000 £’000 £’000 £’000 £’000 £’000

2012 717 296 75 319 27 -

2011 565 505 24 36 - -

17. TRADE AND OTHER RECEIVABLES (CURRENT) – GROUP


Year ended Year ended Year ended Year ended

31 December 31 December 31 December 31 December

Group Company Group Company

2012 2012 2011 2011

£’000 £’000 £’000 £’000

Trade payables 783 - 296 -

Taxation and social security 3 - 18 -

Other payables 174 - 91 -

Accruals 745 - 622 -

Obligations under finance lease 10 - - -

1,715 - 1,027 -

Terms and conditions of the above financial liabilities:

• Trade payables are non-interest bearing and are normally settled on 30-day terms.

• For terms and conditions relating to related parties, refer to Note 27.

Stock code: CAP




18. CASH AND CASH EQUIVALENTS Year ended Year ended


2012 2011

£’000 £’000

Cash at bank and on hand

Sterling 3,089 1,884

US Dollar 98 446

Australian Dollar 17 92

3,204 2,422

Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates.

19. SHARE CAPITAL Year ended Year ended


2012 2011

£’000 £’000

Authorised

200,000,000 (31 December 2011: 150,000,000 Common Shares of US$0.001)

Common Shares of US$0.001 each 125 94

Issued and paid up

177,053,469 (31 December 2011: 135,089,619 Common Shares of US$0.001)

Common Shares of US$0.001 each 109 83

For details of shares issued, refer to note 29.

20. TRADE AND OTHER PAYABLES (CURRENT) – GROUP AND COMPANY

Engine

maintenance

Dilapidations provisions Total

£’000 £’000 £’000

At 1 January 2012 - 393 393

Additional provisions in year 43 388 431

Utilisation of provisions - (151) (151)

Unused amounts reversed - (193) (193)

Exchange differences - (12) (12)

At 31 December 2012 43 425 468

Dilapidations provisions relate to property and will be utilised during the lease period.

Engine maintenance provisions relate to warranties given by the Group in respect of products sold. The warranty period in most cases is 12

months or 250,000 miles, whichever comes first. In certain cases, the customer may negotiate a period longer than 12 months. This

expenditure arises over different times over the life of the product and is expected to be fully utilised within one year.

The Group has made assumptions in relation to historical warranty claims and the expected cost of settling such claims. In relation to

future claims, the Group has made assumptions based on warranty expiry dates and the history of previous claims.

Engine

maintenance

Dilapidations provisions Total

£’000 £’000 £’000

Non-current (greater than 1 year) 43 - 43

Current (less than 1 year) - 425 425

At 31 December 2012 43 425 468

21. PROVISIONS – GROUP

22. DEFERRED REVENUE – GROUPYear ended Year ended


2012 2011

£’000 £’000

Deferred revenue 82 294

The deferred revenue refers to development revenue that has been invoiced but not completed at 31 December 2012.

23. OTHER PAYABLES (NON CURRENT) – GROUP



2012 2011

£’000 £’000

Obligations under finance lease 11 -


Stock code: CAP




24. FINANCIAL INSTRUMENTS

In the normal course of business, the Group uses certain financial instruments including cash, equity rights and various items such as trade

debtors and trade creditors that arise directly from its operations. The main purpose of these instruments is to provide finance for the Group’s

operations.

All financial assets are classified as ‘loans and receivables’ under IAS 39 and all financial liabilities are carried at amortised cost.

CAPITAL RISK MANAGEMENT

The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in

order to support its business and maximise shareholder value. Capital represents share capital, share premium and other reserves. The Group

manages its capital structure and makes adjustments to it, in light of changes in economic conditions and the Group’s resource requirements.

To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders or issue new shares. No changes

were made in the objectives, policies or processes during the years ended 31 December 2012 and 31 December 2011.

The main risks arising from the Group’s financial instruments are market price risk, liquidity risk, foreign currency risk and interest rate risk.

The Group’s policies and objectives in each of these areas are noted below.

Treasury Policies and Financial Risk

Surplus funds are intended to support the Group and Company’s short-term working capital requirements. These funds are invested through

the use of overnight deposits and the policy is to maximise fixed interest returns as well as provide the flexibility required to fund on-going

operations. It is not the Group’s policy to invest in financial derivatives.

Market price risk

The Group’s main exposure to market risk is currency risk due to the different countries it operates in. It constantly monitors these risks by

analysing interest rates and exchange rates in the different markets.

Liquidity risk

The Group had no borrowing facilities at 31 December 2012 (2011: £nil).

As described on page 22, the Directors believe that the delivery of additional equity funds in September 2012 has ensured that the Group

has adequate resources to continue in operational existence for the foreseeable future.

The Group seeks to manage financial risk, and in particular liquidity risk, ensuring that sufficient liquidity is available to meet foreseeable

requirements and to invest surplus cash in low risk overnight deposits with reputable institutions.

Foreign currency risk

Foreign currency is mitigated wherever possible by matching the currency that purchases are made with receipts from debtors denominated

in that currency. The Group hedges its foreign currency position by operating non-sterling currency bank accounts. This policy is regularly

reviewed.

The table below shows the Group’s net foreign currency monetary assets which give rise to net currency gains and losses recognised in

the group income statement. At 31 December 2012, these currency exposures, excluding the net assets of foreign operations were as

follows:

Net foreign currency monetary assets

AUS Dollar US Dollar Euro Total

£’000 £’000 £’000 £’000

2012

Sterling 12 7 7 26

Total 12 7 7 26

2011

Sterling 29 6 - 35

Total 29 6 - 35

The sensitivity to a possible change in the pound against the AUS Dollar, US Dollar and Euro, with all variables held constant, of the

Group’s profit before tax due to foreign exchange translation of these monetary assets and liabilities is not material. The Group’s equity is

not sensitive to such changes as there are no forward currency hedges or net investment hedges.

Interest rate risk

The Group finances its operations through cash reserves and issuance of shares. The interest rate policy depends on economic and market

conditions. Surplus cash deposits are held on overnight deposit with a view to maximising the return on surplus funds.

The following table demonstrates the sensitivity to a possible change in the interest rate with all variables held constant, of the Group’s

profit before tax and the Group’s equity:

Increase/decrease Effect on Effect on

in interest rate profit before tax equity

£’000 £’000

2012

Increase in base rate of interest 1% 27 27

Decrease in base rate of interest -1% (5) (5)

2011

Increase in base rate of interest 1% 22 22

Decrease in base rate of interest -1% (5) (5)

Credit risk

There are no significant concentrations of credit risk within the Group unless otherwise disclosed. The maximum credit risk exposure

relating to financial assets is represented by carrying value as at the balance sheet date.

The Group has established procedures to minimise the risk of default by trade debtors including detailed credit checks undertaken before

a customer is accepted. Historically, these procedures have proved effective in minimising the level of impaired and past due debtors.

Borrowing facilities

The Group has no borrowing facilities available to it at 31 December 2012 (2011: nil).




2012 2011

£’000 £’000

Land and buildings - Less than 1 year 331 260

- After 1 year but no more than 5 years 754 667

- More than 5 years - 93

1,085 1,020

Plant and Machinery - Less than 1 year 59 34

- After 1 year but no more than 5 years 104 29

163 63

Vehicles - Less than 1 year 25 15

- After 1 year but no more than 5 years 16 -

41 15

Stock code: CAP




Floating rate

financial assets

£’000

2012

Sterling 3,089

US Dollar 98

AUS Dollar 17

3,204

2011

Sterling 1,884

US Dollar 446

AUS Dollar 92

2,422

Fair values of financial instruments

In the opinion of the Directors, the book value of the financial instruments is not materially different from their fair values. The book value ofthe financial assets is considered equal to their fair value because of the short maturity period.

All financial liabilities are expected to be settled at their carrying amount within the next 12 months, except for certain obligations underfinance leases which are detailed in note 23.

24. FINANCIAL INSTRUMENTS CONTINUED

Interest rate risk profile of financial assets

The interest rate profile of the interest bearing financial assets (only cash and cash equivalents) of the Group at 31 December 2012 is as follows:

No operating leases have any escalation clauses or purchase options attached to the leases.

FINANCE LEASE AND HIRE PURCHASE COMMITMENTS

The Group has entered into a hire purchase contract for one item of equipment. Future minimum lease payments under hire purchase

contracts together with the present value of the net minimum lease payments are as follows:

2012 2011

Minimum Present value Minimum Present value

payments of payments payments of payments

£’000 £’000 £’000 £’000

Within one year 10 10 - -

After one year but no more than five years 12 12 - -

Total minimum lease payments 22 22 - -

Less amounts representing finance charges (1) - - -

Present value of minimum lease payments 21 22 - -

26. SHARE–BASED PAYMENTS

The Group operates an Incentive Plan under which employees of the Group are granted options to subscribe for new ordinary shares of the

Company. Options are exercisable at a price equal to the average quoted market price of the Company’s shares at the date of the grant.

Options are forfeited if the employee leaves the Group before the options vest. The contractual life of each option granted is ten years and

the vesting conditions relate to the service periods of employees (non-market related) and performance conditions relating to the number of

systems sold and future cooperation agreements. The vesting period is three years. There are no market related performance conditions

attached to the options.

On 10 April 2012, 30,000 share options were granted. These options were subject to service periods of employees (non-market related) and

performance conditions relating to the number of systems sold and future cooperation agreements. The vesting period is three years. There

are no market related performance conditions attached to the options.

The Group recognised total expenses of £29,464 (2011: £139,610) related to equity-settled share-based payments transactions during the

year, of which £21,549 (2011: £126,418) has been expensed in Clean Air Power Limited UK, £7,915 (2011: £13,192) has been expensed in

Clean Air Power Inc and £nil (2011: £nil) has been expensed in Clean Air Power Pty Ltd.

The fair value of the options is estimated at the grant date using Black-Scholes pricing model, taking into account the terms and conditions

upon which the instruments were granted.

Movements in share options granted post 28 February 2006 and outstanding at the balance sheet date, together with weighted average

exercise price were as follows:


25. COMMITMENTS AND CONTINGENCIES

OPERATING LEASE COMMITMENTS – GROUP AS LESSEE

The Group had entered into commercial leases on certain properties, motor vehicles and items of equipment.

The leases have an average life of between 3 and 5 years. There are no restrictions on the Group by entering into these leases.

OPERATING LEASES

The future minimum rentals payable under non-cancellable operating leases at 31 December 2012 are as follows:

Stock code: CAP




26. SHARE–BASED PAYMENTS CONTINUED

2012 2011

Weighted Weighted

Number of average exercise Number of average exercise

shares price £ shares price £

Outstanding at the beginning of the year 6,057,238 0.07 6,354,662 0.41

Granted during the year 30,000 0.18 5,961,119 0.07

Surrendered during the year - - (5,968,244) 0.40

Forfeited during the year (20,000) 0.07 (290,299) 0.45

Exercised during the year - - - -

Outstanding at the end of the year 6,067,238 0.085 6,057,238 0.07

Exercisable at the end of the year - - - -

The estimated fair value of the options granted is as follows:

£’000

6 December 2011 73,918

10 April 2012 4,038

77,956

The weighted average remaining contractual life for the share options outstanding as at 31 December 2012 is 8.92 years

(2011: 9.92 years).

The weighted average fair value of options granted during the year was £0.18 (2011: £0.07).

The range of exercise prices for options outstanding at the year end was £0.06-£0.22 (2011: £0.06-£0.085).

The following table lists inputs to the model used for the years ended 31 December 2012 and 31 December 2011.

2012 2011

Expected volatility (%) 93.41% 68.54%

Expected life (months) 36 36

Risk free rate (%) 0.54% 0.58%

Expected dividends Nil Nil

Model used Black-Scholes Black-Scholes

27. RELATED PARTY DISCLOSURES

The financial statements include the financial statements of Clean Air Power Limited (Bermuda) and the subsidiaries in the following table:

% equity % equity

Country of interest interest

Name incorporation 2012 2011

Clean Air Power Inc. United States 100 100

Clean Air Power Limited England & Wales 100 100

Clean Air Pty Ltd Australia 100 100

Clean Air Power Limited (Bermuda) is the ultimate parent of the Group. Transactions and balances made on an arms’ length basis with

Group entities are eliminated in the consolidated financial statements.

During the year Clean Air Power Inc. sold £907,670 (2011: £263,771) of vehicle components to Clean Air Power Limited (UK).

During the year Clean Air Power Inc. sold £341 (2011: £98,990) of vehicle components to Clean Air Power Pty Ltd.

During the year Clean Air Power Ltd (UK) sold £12,264 (2011: £2,855) of vehicle components to Clean Air Power Inc.

During the year Clean Air Power Ltd (UK) sold £1,940 (2011: £150,697) of vehicle components to Clean Air Power Pty Ltd.

The following table provides the total balances, which have been entered into with related parties for the relevant financial year.

Amounts owed to related parties 2012 £’000

Clean Air Power Clean Air Power Clean Air Clean Air

Limited (Bermuda) Limited Power Inc. Power Pty Ltd Total

Amounts owed by related parties

Clean Air Power Limited (Bermuda) - 21,870 42 46 21,958

Clean Air Power Limited (21,870) - 863 594 (20,413)

Clean Air Power Inc. (42) (863) - 707 (198)

Clean Air Power Pty Ltd (46) (594) (707) - (1,347)

Total (21,958) 20,413 198 1,347 -

The terms relating to amounts owed by Clean Air Power Limited to Clean Air Power Limited (Bermuda) are described in note 15. Other

intragroup balances are expected to be settled in a normal trading cycle.

Amounts owed to related parties 2011 £’000

Clean Air Power Clean Air Power Clean Air Clean Air

Limited (Bermuda) Limited Power Inc. Power Pty Ltd Total

Amounts owed by related parties

Clean Air Power Limited (Bermuda) - 18,747 36 32 18,815

Clean Air Power Limited (18,747) - 1,010 498 (17,239)

Clean Air Power Inc. (36) (1,010) - 778 (268)

Clean Air Power Pty Ltd (32) (498) (778) - (1,308)

Total (18,815) 17,239 268 1,308 -


Expected volatility was found by using a historical volatility calculator applied to the Company’s Share Price over 12 months and assumes that

historical volatility is indicative of future trends. The expected life used in the model is a weighted average based on the vesting period of the

options.

Stock code: CAP






2012 2011

COMPENSATION OF KEY MANAGEMENT PERSONNEL £’000 £’000

Short-term employee benefits 645 598

Post-employment benefits 18 17

Share-based payments 17 115

680 730

Details of the directors’ interests are included in the Directors’ Remuneration Report on pages 23 to 25.

TRANSACTIONS WITH RELATED PARTIES

The Group receives consultancy services from Prof. Dr. Karl Victor Schaller, Non-Executive Director of Clean Air Power Limited (Bermuda)

and Gary Ireson, the Director of Clean Air Power Pty Ltd.

The following table provides the total amount of transactions, which have been entered into on an arms length basis with related parties

for the relevant financial year.

28. DESCRIPTION OF RESERVES

Issued Capital

The balance classified as share capital includes the total net proceeds on issue of the Company’s equity share capital, comprising of $0.001

ordinary shares.

Share Premium

The balance on the share premium reserve represents the fair value of the consideration given in excess of the nominal value of the ordinary

shares issued in an acquisition made by the issue of shares.

Translation Reserve

The translation reserve contains all foreign exchange differences arising from the translation of the Group’s net investment in overseas subsidiaries.

Other Reserves

Other reserves mainly relates to the additional paid in capital following the reorganisation of the Group in 2006. This amount is the excess of par

paid by the original investors of Clean Air Power Inc.

2012 2011

£’000 £’000

Gary Ireson

Services received from related parties 20 19

Amounts owed to related parties 3 -

2012 2011

£’000 £’000

Prof Dr. Karl Victor Schaller

Services received from related parties 5 9

Amounts owed to related parties - -

29. FINANCING

In September 2012, the Company successfully raised approximately £3.35m from a combination of new and existing investors; this increased

the ordinary share capital to £108,765 by the creation of an additional 41,963,850 Ordinary Shares with a nominal value of $US0.001 each

and a market price of 8.00 pence per share.


27. RELATED PARTY DISCLOSURES CONTINUED

Aston Way

Leyland

Lancashire

PR26 7UX

United KIngdom

www.cleanairpower.com

annual report and accounts for the year ended 31 … · compression ignition engines 5,673,673...

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