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EX-31.2 - CERTIFICATION - CLEAN POWER TECHNOLOGIES INC.ex312.htm
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EX-32.2 - CERTIFICATION - CLEAN POWER TECHNOLOGIES INC.ex322.htm
EX-32.1 - CERTIFICATION - CLEAN POWER TECHNOLOGIES INC.ex321.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended August 31, 2009
   
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from __________ to __________

000-51716
Commission File Number
 
CLEAN POWER TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
   
Nevada
98-0413062
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
Unit 7(W) E-Plan Industrial Estate New Road, New Haven, East Sussex, UK
BN90EX
(Address of principal executive offices)
(Zip Code)
 
+44 1273-516013
(Registrant’s  telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Title of each class
Name of each exchange on which registered
n/a
n/a

Securities registered pursuant to Section 12(g) of the Exchange Act:
 
Title of  class
Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 
Yes
[   ]
No
[X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

 
Yes
[ ]
No
[X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 
Yes
[X]
No
[   ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 
Yes
[   ]
No
[   ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 
Yes
[   ]
No
[X]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
[   ]
Accelerated filer
[   ]
       
Non-accelerated filer
[   ]
Smaller reporting company
[X]
(Do not check if a smaller reporting company)
     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 
Yes
[   ]
No
[X]
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
 
As of February 28, 2009 the aggregate market value of voting common stock held by non-affiliates of the registrant is $30,102,365.   Shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST 5 YEARS:

Indicate by check mark whether the issuer has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 
Yes
[   ]
No
[   ]
 
APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
76,940,942 common shares outstanding as of November 18, 2009

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g. Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes.
 
None
 
 
 

 

CLEAN POWER TECHNOLOGIES INC.
TABLE OF CONTENTS

   
Page
 
PART I
 
     
Item 1
Business
  3
Item 1A
Risk Factors
  18
Item 1B
Risk Factors
  18
Item 2
Properties
  18
Item 3
Legal Proceedings
  19
Item 4
Submission of Matters to a Vote of Security Holders
  19
     
 
PART II
 
     
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  20
Item 6
Selected Financial Data
  22
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  22
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
  24
Item 8
Financial Statements and Supplementary Data
  24
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  25
Item 9A(T)
Controls and Procedures
  25
Item 9B
Other Information
  25
     
 
PART III
 
     
Item 10
Directors, Executive Officers and Corporate Governance
  26
Item 11
Executive Compensation
  28
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  33
Item 13
Certain Relationships and Related Transactions, and Director Independence
  34
Item 14
Principal Accounting Fees and Services
  36
     
 
PART IV
 
     
Item 15
Exhibits, Financial Statement Schedules
  37
     
 
SIGNATURES
  41

 
i

 

PART I

ITEM  1.   BUSINESS

The statements contained in this Annual Report on Form 10-K for the fiscal year ended August 31, 2009, that are not purely historical statements are forward–looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company’s expectations, beliefs, hopes, intentions or strategies regarding the future.  These forward-looking statements involve risks and uncertainties.  Our actual results may differ from those indicated in the forward-looking statements.  Please see  “Risk Factors that May Affect Future Results,” “Special Note Regarding Forward-Looking Statements” and the factors and risks discussed in other reports filed from time to time with the Securities and Exchange Commission.

General Development of Business

The Company was incorporated in the State of Nevada, United States of America on October 30, 2003 as Sphere of Language.  On June 13, 2006, the Company changed its name to Clean Power Technologies Inc. (the “Company”, “we”, “our”, or “us”). The Company incorporated Clean Energy and Power Solutions Inc. (“CEPS”) on May 12, 2006 in the State of Nevada as a wholly-owned subsidiary.

By agreement dated May 22, 2006, the Company agreed to issue 30,765,377 common shares for all the issued and outstanding common shares of Clean Power Technologies Inc. (“CPTI Private”), a privately held company, incorporated on March 14, 2006 in the State of Nevada.  CPTI Private was developing a project for a gas/steam or diesel/steam hybrid technology, and had incorporated a wholly-owned subsidiary, Clean Power Technologies Limited, (“CPTL-UK”) a company based in Great Britain and incorporated on May 10, 2006, to carry on all its research and development.  On April 24, 2006, CPTI Private entered a research and development agreement to fund all future costs for research, development, patenting, licensing and marketing for an alternative hybrid fuel technology that combines diesel and steam and gas (petrol) and steam technologies for a 100% ownership of the technology and any associated intellectual rights. CPTI Private and CEPS merged on June 20, 2006 with CEPS being the surviving entity. On July 10, 2006 CEPS became a wholly-owned subsidiary of the Company when the stockholders of CPTI Private tendered their remaining shares; CPTL-UK remains as a wholly-owned subsidiary of CEPS.

We undertake all of our business operations indirectly through CPTL-UK. These operations are presently focused on the research and development of our steam hybrid technology.

Plan of Operation

Our Company is committed to developing hybrid fuel technology and alternative fuel for a range of applications including landfill sites, locomotives, heavy trucks and light cars. The Company’s proprietary technology significantly reduces pollution through its Clean Energy Separation and Recovery (“CESAR”) system, which takes otherwise wasted heat from the exhaust of a conventional combustion engine and modifies it through a heat recovery system to generate clean power for vehicles.

The Company operates out of its development facilities in Newhaven, East Sussex, in the United Kingdom.

Our CESAR technology is designed to increase vehicle fuel economy and reduce emissions by capturing, storing, and reusing otherwise wasted heat from the exhaust of a conventional combustion engine. A heat exchanger captures waste energy, which is then stored in the form of steam in an accumulator, for ‘on demand’ use either in the same ‘primary’ engine, or in a secondary vapour engine. Power can be produced solely by the secondary vapour engine even after the primary combustion engine has shut down. Our CESAR system can be used to power auxiliary truck systems, such as trailer refrigeration and cab coiling or heating, in regulatory ‘no idle’ or ‘quiet’ zones. In addition to initial truck applications, CESAR can be further applied in our well developed passenger car program, as well as having longer term potential in the locomotive and marine sectors.

In 2006, testing of the CESAR system began on a Mazda RX8 passenger vehicle engine, with trials on a second identical engine commencing later that year. In June 2007, testing also began on a Caterpillar C15 diesel engine to explore applications, such as auxiliary power and trailer refrigeration, within the industrial vehicle and truck industries.

 
3

 
Throughout 2007, the Company carried out numerous tests on the accumulator that was provided by Doosan Babcock. After intensive testing, we believed that we had validated the theoretical predictions that were the foundation of the CESAR system. However the tests results also raised engineering issues which basically arose out of the design of the accumulator. As the accumulator was too wasteful of heat, with all the 70 litres of water to be heated and with its size it clearly could not be accommodated in any vehicle. It was decided to go for quick heat as in steam cars. It followed then that a burner was required to supplement the heat at tick over but we knew that there was sufficient heat available at cruise and also that a bypass was required on hill climbing. Also we knew that S/H tubes were needed to heat to about 390 C which is the temperature at which that all entrained water drops are eliminated. 
 
In November 2007, after substantive testing of our technology, we made a determination to redirect our research and development efforts.
 
Therefore, whilst development of the vehicle technology was to be continued, it was decided that the fastest route to market and revenue was to focus on the development of the refrigeration engines (also called the reefer engines) for grocery trucks.

The Company employed a CAD engineer in mid-January 2008 and work commenced on the development of the truck production and vehicle detail design and initial system configuration feasibility. The CAD engineer is experienced in all aspects of design and development. The Company has licensed UGS NX5 and S-IDEAS CAD software to achieve its design objectives.  The Company, as it continues to evolve from the research phase to that of testing and pre-production, continues to bring additional engineering expertise in-house.  Also acquired in January 2009 was a CNC milling machine, enabling more rapid and cost effective metal fabrication work on-site, rather than through a sub-contractor.
 
In August 2008, the Company entered into a collaboration agreement with Voith Turbo Gmbh & Co. KG to develop steam and heat energy recovery engines for Clean Power's proprietary heat recovery technology for refrigeration trailers for the grocery market. Under the terms of the collaboration agreement, Clean Power and Voith Turbo GmbH & Co. KG will analyse data from the testing of an existing refrigeration engine, results from which will be used to build and test a new engine that incorporates Clean Power's proprietary heat recovery technology. Voith is a multi-national company with significant interest in the development of expanders in engine and braking systems. As part of its own drive systems and components development programme Voith Turbo GmbH & Co. KG has already developed hybrid systems, waste recovery systems and expansion engines based on the internal combustion engine which is used on the road, on rail, on water and in other industries.

On December 12, 2008, the Company entered into a Memorandum of Understanding (“MOU”) with Farm Fresh Marketing Inc. (“Farm Fresh”).   The MOU sets out the high-level commercial principles of the collaboration between the Company and Farm Fresh whereby Farm Fresh will provide the Company with a Road Load Data Collection Vehicle for installation of the Company’s data gather systems to test the fuel and operating efficiencies of the Company’s heat recovery systems, noise and emission control.   The parties’ intent under the MOU is to prove the benefits of the Clean Power technology to Farm Fresh and upon successful testing, Farm Fresh and Clean Power shall enter into discussion to establish ongoing collaborations and commercial relationships.  Clean Power had agreed that for two years following completion of the test, it will make the Clean Power system (once in production) available to Farm Fresh in such quantities as Farm Fresh may order at prices and terms as favorable to Farm Fresh as those offered by the Company to any of its other customers.  Farm Fresh has acknowledged its intent to purchase at least 53 systems within the two year period, subject only to the proof of CPTI’s technology.

The first reefer engine system has been installed on the Company’s truck, which was acquired and delivered during the 2nd quarter of fiscal 2009.   The Company’s truck is similar to the trucks in the U.S. trucking company fleet. This truck is a Columbia CL120 Conventional Chassis with a Day Cab. This vehicle has the same specifications as the current U.S. fleet of vehicles on which we did our testing in mid 2008. The Company had conducted a series of tests in mid 2008 to collect data and validate test results to be used in this test vehicle.
 
Customer expectations are that any vehicle application will be fully reliable, continuously delivering the performance benefits promised in all conditions over a period of at least ten years. To this end the Company has recently made a major investment of approximately $170,000 in a rolling road dynamometer manufactured by Dynomite of New Hampshire USA. This substantial piece of equipment can accommodate a maximum weight double-drive axle truck which turns the dynamometer rollers against a variable load created by applying electrical inertia. This allows the simulation of all road conditions that a truck may encounter in its day to day operation such as hilly terrain, urban stop-start and interstate highway running.

 
4

 
Using field data collected in mid 2008 during a three week exercise with the U.S. grocery hauler operations in Canada it will be possible, with appropriate instrumentation, to simulate fleet routes, to develop and refine particular applications, and to deliver maximum fuel benefits with minimum emissions. The equipment will allow, under fully-controlled laboratory conditions, the speedy characterisation of any vehicle exhaust temperature, flow and constituency together with fuel usage.
 
The Rolling Road will provide the “hub” of the development and validation programme for the CESAR system ensuring optimum functionality for each vehicle application. The issue of durability will also be addressed by other recent investments such as multi-axis shaker test rigs which will be programmed to hone-in on harmful resonant frequencies for the system, as identified by data collected over specific proving ground surfaces. By running these shaker rigs on a 24 hour basis in environmental enclosures, capable of operating between -40 and +50 degrees Celsius, ten year life testing can be compressed into a period of only a few months.  This rigorous testing of our technology and associated refinements that ensure from the testing we believe will accelerate our technology from an advanced prototype to a commercially viable product.

The Rolling Road became fully operational in the quarter ended May 2009, with testing having commenced on our truck.  This bespoke truck, fitted with a Detroit Diesel engine and Eaton transmission, is designed to be used on highways, hectic city streets, narrow roads and can also be driven off-road.  The Rolling Road, which will be able to simulate all these conditions, will be a perfect test ground for the vehicle, and allow Clean Power to demonstrate how its CESAR technology improves the truck’s fuel efficiency in these conditions. This vehicle has been installed with a Prototype 2 CESAR system. The testing underway will reproduce the delivery routes used in the areas covered by the U.S. hauler. This will confirm the actual fuel savings to the major grocery hauler when compared against their current fuel usage. Typical routes we would use are Calgary to Banff and Calgary local area city routes.

Once the system is working on the truck with the Rolling Road, the vehicle will be used for data collection at Millbrook Proving ground (this is GM built, proving ground just outside Bedford). This data will be used for drive file creation for accelerated durability testing on our hydraulic fatigue testing machines in Newhaven. These tests will represent the equivalent to 10 years of road durability in the space of 4 weeks.

The Company hired its first CAD engineer in mid-January 2008 and work commenced on the development of the truck production and vehicle detail design and initial system configuration feasibility. The Company has licensed UGS NX5 and S-IDEAS CAD software to achieve its design objectives.  The Company, as it continues to evolve from the research phase to that of testing and pre-production, continues to bring additional engineering expertise in-house.  Also acquired in January 2009 was a CNC milling machine, enabling more rapid and cost effective metal fabrication work on-site, rather than through a sub-contractor.
 
For the reefer application, the Company expects to submit the CESAR technology for regulatory approval under various jurisdictions worldwide, including the US Environmental Protection Agency (“EPA”), with the hopes of achieving full commercialization by 2011.

As part of our new development, we are concurrently developing a system for use in land fill site electrical power generation. This will be installed on existing generator engines at landfill sites and will produce a continuous flow of electrical power for supply to the national electricity grid, providing revenue at ‘feed-in’ tariff rates. These installations are not subject to the arduous operating environment of a vehicle, or the stringent regulatory approvals, hence it is anticipated that these will now be the ‘first to market’ applications of the CESAR technology.

Our plan of operation is to further the research and development on our technology resulting in an advanced prototype and commercial application in mid 2010. If successful, we intend to license the technology or form partnerships for the use of the technology with any customers we may identify.

Recent Activities

Recent testing in the fully instrumented and controlled Laboratory at CPTI’s Newhaven, UK R&D Centre has demonstrated the significant potential from the patented CESAR heat energy recovery system:

 
5

 

From the waste exhaust heat of a 450HP Caterpillar C15 truck diesel engine running at 70% of its fully rated power, sufficient super heated steam was generated from CPTI’s patented Heat Exchanger to drive a compact Steam Expander to deliver 23HP from the Expander’s output shaft.

This supplementary power amounts to a 7.3% gain in the effective use of the fuel being supplied to the diesel engine allowing less fuel usage, with attendant reduction in emissions.

As the CESAR system can be applied to any internal combustion engine, whether in-vehicle or stationary as in Generator Sets, the same supplementary power and emissions benefits apply.    

Starting June 1, 2009, our CAD engineering team began preparing drawings for production, with drawing release expected in early 2010.
 
Michael Roberts, our Product Acceptability Engineer, started work on April 27, 2009. His role is to ensure that our product is suitable and acceptable to the end user / customer. He is responsible for the work content required to validate the system for the North American markets and the introduction to the EPA of our system and the market sectors that our product can enter.   He is also responsible for negotiations of available tax benefits for our customers installing our fuel saving environmentally friendly systems, and unique electronic control system, using Clean Power’s own Intellectual Property to ensure the maximum possible fuel efficiency and emissions reductions in all operating conditions.
 
Also recently joining the Company is Mr. Marco Cucinotta, a Control System Specialist.  Under Mr. Cucinotta, the Company is undertaking the development of a unique electronic control system, using Clean Power’s own Intellectual Property to ensure the maximum possible fuel efficiency and emissions reductions in all operating conditions.

During the quarter ended May 31, 2009, Clean Power engaged Cascade Sierra Solutions (“Cascade”) as potential advisors for the EPA and other Regulatory application processes (www.cascadesierrasolutions.org). Located in the State of Oregon, Cascade is a non-profit organization working with heavy duty truck operators to save fuel and reduce emissions. Cascade is well connected with Federal and State agencies, working especially closely with agenda-setting regulators in California.  The Company believes this will assist in optimizing the approval process, as well as benefitting from Cascade’s broad expertise in implementation of innovative technologies in the trucking industry.

Collaborative Partners

Doosan Babcock

Doosan Babcock is a multi-specialist energy services company operating in the thermal power, nuclear, petrochemical, oil & gas and pharmaceutical industries and are leading international steam generation equipment manufacturers. Doosan Babcock developed and manufactured the initial heat exchanger for the CESAR system.

Voith

In August 2008, the Company entered into a collaboration agreement with Voith Turbo Gmbh& Co. KG to develop steam and heat energy recovery engines for Clean Power's proprietary heat recovery technology for refrigeration trailers for the grocery market. Under the terms of the collaboration agreement, Clean Power and Voith Turbo GmbH & Co. KG will analyze data from the testing of an existing refrigeration engine, results from which will be used to build and test a new engine that incorporates Clean Power's proprietary heat recovery technology. Voith is a multi-national company with significant interest in the development of expanders in engine and braking systems. As part of its own drive systems and components development program Voith Turbo GmbH & Co. KG has already developed hybrid systems, waste recovery systems and expansion engines based on the internal combustion engine which is used on the road, on rail, on water and in other industries.

DLM

In order to meet many challenges relating to the development of the steam technology, the Company appointed a Swiss steam technology specialist company called Dampflokomotiv-und Maschinenfabrik DLM AG (“DLM”) to act as its outside consultant for the further development of the Company’s CESAR technology. DLM will advise and use its in-house expertise to assist and facilitate the development of the next stage in our CESAR programme.

 
6

 
DLM has professionally qualified engineers with specialist experience. DLM will provide knowledge and experience in such areas as the design of the process to predict and analyse the heat transfer performance and issues associated with pressure losses for a range of thermal operations involving liquids and gases with and without change of phase. DLM has experience with stress analysis including pressure vessel design to European and British standards. DLM will work with the engineers of the Company on a routine basis. We intend to continue this development on an ongoing basis.

The first system has been installed on the Company’s truck, which was acquired and delivered during the 2nd quarter of fiscal 2009.   The Company’s truck is similar to the trucks in the U.S. trucking company fleet. This truck is a Columbia CL120 Conventional Chassis with a Day Cab. This vehicle has the same specifications as the current U.S. fleet of vehicles on which we did our testing in mid 2008. The Company had conducted a series of tests in mid 2008 to collect data and validate test results to be used in this test vehicle.

East West Express

In August 2008 the Company signed a Memorandum of Understanding with a Calgary, Alberta, Canada, based transportation company called East West Express Inc., a trans-Canadian freight trucking company.  Under the terms of the MOU, East West will provide Clean Power a Road Load Data Collection Vehicle (“the Vehicle”) for the purpose of detailed research on its existing refrigerated trailer fleet.

Farm Fresh

On December 12, 2008, the Company entered into a Memorandum of Understanding (“MOU”) with Farm Fresh Marketing Inc. (“Farm Fresh”).   The MOU sets out the high-level commercial principles of the collaboration between the Company and Farm Fresh whereby Farm Fresh will provide the Company with a Road Load Data Collection Vehicle for installation of the Company’s data gather systems to test the fuel and operating efficiencies of the Company’s heat recovery systems, noise and emission control.   The parties’ intent under the MOU is to prove the benefits of the Clean Power technology to Farm Fresh and upon successful testing, Farm Fresh and Clean Power shall enter into discussion to establish ongoing collaborations and commercial relationships.  Clean Power had agreed that for two years following completion of the test, it will make the Clean Power system (once in production) available to Farm Fresh in such quantities as Farm Fresh may order at prices and terms as favorable to Farm Fresh as those offered by the Company to any of its other customers.  Farm Fresh has acknowledged its intent to purchase at least 53 systems within the two year period, subject only to the proof of CPTI’s technology.

NewEnCo Renewable Power Systems

UK based NewEnCo and Renewable Power Systems are sister companies engaged in the development, marketing and operation of clean energy power generation systems. CPT will install the first operational CESAR landfill system at the Renewable Power Systems site in Abingdon, UK in early 2010.

Cascade Sierra Solutions

During the quarter ended May 31, 2009, Clean Power engaged Cascade Sierra Solutions (“Cascade”) as potential advisors for the EPA and other Regulatory application processes (www.cascadesierrasolutions.org). Located in the State of Oregon, Cascade is a non-profit organization working with heavy duty truck operators to save fuel and reduce emissions. Cascade is well connected with Federal and State agencies, working especially closely with agenda-setting regulators in California.  The Company believes this will assist in optimizing the approval process, as well as benefitting from Cascade’s broad expertise in implementation of innovative technologies in the trucking industry.

Principal Products or Services and Their Markets

Our Company is committed to developing the proprietary technology which significantly increases fuel efficiency and reduces pollution through its Clean Energy Separation and Recovery (“CESAR”) system. This system takes otherwise wasted heat energy from the exhaust of a conventional combustion engine and modifies it through a heat recovery system to generate clean power for electrical energy and vehicles. The Company operates out of its development facilities in Newhaven, East Sussex, in the United Kingdom.
 
 
7

 

Our CESAR technology is designed to increase vehicle fuel economy and reduce emissions through lowered fuel consumption by capturing, storing, and reusing otherwise wasted heat from the exhaust of a conventional combustion engine. A heat exchanger captures waste energy, which is then stored in the form of steam in an accumulator, for ‘on demand’ use either in the same ‘primary’ engine, or in a secondary vapour engine. Power can be produced solely by the secondary vapor engine even after the primary combustion engine has shut down.

We believe that we have validated the theoretical predictions that were the foundation of the CESAR system. A substantial development component of the programme has now commenced and will require appropriate augmentation of the engineering team, which the Company continues to undertake in 2009. This is essential for design studies of potential applications of the total system and will commence using the empirical data revealed by the research program undertaken.

Customer expectations are that any vehicle application will be fully reliable, continuously delivering the performance benefits promised in all conditions over a period of at least ten years. To this end the Company has recently made a major investment of approximately $170,000 in a rolling road dynamometer manufactured by Dynomite of New Hampshire USA. This substantial piece of equipment can accommodate a maximum weight double-drive axle truck which turns the dynamometer rollers against a variable load created by applying electrical inertia. This allows the simulation of all road conditions that a truck may encounter in its day to day operation such as hilly terrain, urban stop-start and interstate highway running.
 
Using field data collected in mid 2008 during a three week exercise with the U.S. grocery hauler operations in Canada it will be possible, with appropriate instrumentation, to simulate fleet routes, to develop and refine particular applications, and to deliver maximum fuel benefits with minimum emissions. The equipment will allow, under fully-controlled laboratory conditions, the speedy characterization of any vehicle exhaust temperature, flow and constituency together with fuel usage.
 
The Rolling Road will provide the “hub” of the development and validation program for the CESAR system ensuring optimum functionality for each vehicle application. The issue of durability will also be addressed by other recent investments such as multi-axis shaker test rigs which will be programmed to hone-in on harmful resonant frequencies for the system, as identified by data collected over specific proving ground surfaces. By running these shaker rigs on a 24 hour basis in environmental enclosures, capable of operating between -40 and +50 degrees Celsius, ten year life testing can be compressed into a period of only a few months.  This rigorous testing of our technology and associated refinements that ensure from the testing we believe will accelerate our technology from an advanced prototype to a commercially viable product.

The Rolling Road became fully operational in the quarter ended May 2009, with testing having commenced on our truck.  This bespoke truck, fitted with a Detroit Diesel engine and Eaton transmission, is designed to be used on highways, hectic city streets, and narrow roads and can also be driven off-road.  The Rolling Road, which will be able to simulate all these conditions, will be a perfect test ground for the vehicle, and allow Clean Power to demonstrate how its CESAR technology improves the truck’s fuel efficiency in these conditions. This vehicle has been installed with a Prototype 2 CESAR system. The testing underway will reproduce the delivery routes used in the areas covered by the U.S. hauler. This will confirm the actual fuel savings to the major grocery hauler when compared against their current fuel usage. Typical routes we would use are Calgary to Banff and Calgary local area city routes.
 
Prior to this a Prototype 1 CESAR system has been tested and validated within the test cell with the same vehicle package constraints being driven from our Caterpillar C15 engine.
 
Once the system is working on the truck with the Rolling Road, the vehicle will be used for data collection at Millbrook Proving ground (this is GM built, proving ground just outside Bedford). This data will be used for drive file creation for accelerated durability testing on our hydraulic fatigue testing machines in Newhaven. These tests will represent the equivalent to 10 years of road durability in the space of 4 weeks.
 
It is anticipated that the vehicle may require some electronic tuning in order for the system to work including steam valve optimization.  This testing is planned to commence in 2009. A successful completion of the test will assist in demonstrating the fuel savings for our potential customers.
 
The Company anticipates that a newly designed reefer engine will be ready for road testing by later 2009. Following a ten month road trial and analysis, and further design refinements, the Company expects to submit the CESAR technology for regulatory approval under various jurisdictions worldwide, including the US Environmental Protection Agency (“EPA”), with the hopes of achieving commercialization during late spring of 2010.

 
8

 

The captured waste heat from the exhaust is converted through the ‘CESAR’ system to create rotational energy of the steam engine crankshaft. This rotational energy can be utilised in a multitude of applications:

1.  
Landfill Power Generation - Landfill gas is the natural by-product of the decomposition of solid waste in landfills and is comprised primarily of carbon dioxide and methane. Many landfill sites are now utilising this gas to power large spark ignition engines driving electrical generators connected to the national electricity grid. The benefits of this are two fold in that electrical energy is produced from a free resource and methane emissions are substantially reduced. The CESAR system can be run from a landfill engine to provide an anticipated 12% increase in electrical power output.

2.  
Refrigerated Transporter (Reefer) Power System – Large refrigerated trucks use a refrigeration system powered by a separate diesel engine. This engine is running continually to provide refrigeration, consuming fuel and producing emissions. The CESAR system can be run from the trucks’ main engine to power the refrigeration unit without additional fuel or emissions.  Currently these reefer engines operate on diesel fuel and with approximately a litre an hour of fuel consumption, the fuel cost can add up to thousands of dollars per year. The project team determined that through  heat capture process and using it to create steam in the accumulator, an engine can be developed that will provide in excess of 50% fuel efficiency with corresponding reduction in the levels of emission.

   3.
Biomass Power Generation – Organic processing plants such as flour mills typically produce 10 tonnes per week of organic waste, which is disposed of on landfills. By using this waste as a fuel in a specifically designed burner, the CESAR system can be used to recover the heat energy and convert it into electricity for use at the plant, or to feed into the national grid, providing several economic and environmental benefits.

   4.
Further Transportation Developments – The CESAR system can be applied directly to large engines fitted to locomotives, ships and military vehicles to provide supplementary electrical power. The CESAR system could also be integrated easily into the power train of a diesel-electric ‘hybrid’ bus. The concept of a ‘hybrid’ engine (part steam/ part gasoline) has been investigated, and with development, is highly feasible for application to passenger cars.

Landfill application

Currently there are approximately 500 landfill gas energy projects operational in the United States. These 500 projects generate approximately 12 billion kilowatt-hours of electricity per year. There are also approximately 520 additional candidate landfills currently undeveloped.

Based on the current power generation levels alone, full application of the CPTI CESAR system could enable a generation of an additional 1.5 billion kilowatt-hours of electricity per year. CPTI anticipates the purchase cost to the customer of a single landfill CESAR unit will be $30,000. With negligible running costs this equates to a cost of $750 per net Kw based on a 40Kw output unit. At an electricity buyback rate of $0.10 per Kw this equates to a payback period of 7500 hours (less than 1 year).

CPTI has an agreement in place with UK based landfill energy company NewEnCo to install the first landfill generator system at their site in Oxfordshire, UK. Once installed and operating, the unit will be used to demonstrate the viability of the system to other energy companies in the UK and US. Suitable operating partners with landfill gas generation sites will be identified to enable installation and monitored operation of 5 development units. Once the technology is proven, these installations will be used to demonstrate the technology to operators to identify further prospective trial sites. CPTI will install and maintain 15 pilot landfill gas generator systems operating with energy companies. This will enable final development of a commercial CESAR system for application to gas generators at existing and proposed sites throughout the world.

 
9

 

Transport Refrigeration Unit (TRU) Reefer Application

There are currently an estimated 1 million TRUs in operation in the US. Application of the CESAR system will reduce the diesel fuel consumption by an estimated 85%. Market projections of 50,000 units in operation by 2020 would result in an annual savings of 85 million gallons of diesel fuel, with the consequent reduction of greenhouse gases and toxic emissions.

CPTI anticipates the purchase cost to the customer of a single TRU CESAR unit will be $20,000. Based on a saving of 85% diesel from TRUs which typically consume 2,000 gallons/year, using approximately 1 gallon/hour with average diesel fuel price of $3/gallon, the CESAR would save 1,700 gallons and $5,100 per year, with a payback period of less than four years excluding tax and other incentives.  (Carrier Corporation:  http://www.trucktrailer.carrier.com/Files/TruckTrailer/Local/US-en/trucktrailer/extramilefall2005.pdf)

CPTI will identify a suitable TRU operator and route to operate a TRU power unit development vehicle, built, supplied and fully supported by CPTI. Once the technology is proven, this vehicle will be used to demonstrate the technology to operators to identify 15 prospective trial users for pilot trials activity.

CPTI will install and maintain 15 reefer pilot power units on trucks operating on a variety of routes with different operators. These field trials will enable development and proving of a commercially available system, which will be marketed and distributed to operators in the US by CSS through their established outreach network.

Vehicle Data Collection:

During the July 2008 visit to Calgary, Alberta, the following data were collected from a refrigerated truck and is important for the energy balance calculations.
 
The exhaust temperatures measured were lower than expected, with a medium temperature of 350 °C and a maximum of 450°C. The load fluctuations were, as usual in road transport, considerable – around 20% of the time, the main diesel engine is idling or at very low power.   Higher exhaust gas temperatures of 550 °C were recorded during regeneration periods of the exhaust after treatment system.
 
Lower exhaust gas temperatures were measured under operating conditions such as idling and downhill running with engine braking.   To compensate for the fluctuation in heat temperature in the exhaust system for city and stationary situations, a burner is incorporated within the exhaust system, with a target temperature to accommodate every situation.  At times, where there is excessive heat within the system, a by-pass valve is incorporated into the exhaust.

The power requirement for the auxiliary engine to drive the refrigerator compressor is less than expected. An average of 15 kW with a peak of 23 kW was measured, even though the ambient temperature was high. Originally a nominal power of 35 kW was expected.

With the results of the vehicle data collection, it is now possible to work out a realistic energy balance and to determine, if the idea to drive a refrigerator compressor by means of a steam engine working on steam gained from waste heat recovered from the exhaust from the main diesel engine is suitable at all. The energy balance is worked out on a purely theoretical basis, e.g. without actually dimensioning the necessary components such as heat-exchanger, superheater, steam engine and so on. However, the calculations are based on figures and experience with existing equipment. It is therefore possible to calculate how much steam at which quality can be produced from the waste heat.

The analysis of this data and the energy balance equations conducted by DLM “shows that the idea to power a refrigerator compressor by means of a steam engine working on steam gained from the waste heat recovered from the exhaust main diesel engine is realistic”. Data from the data collection exercise has been handed over to Voith.

In August 2008 the Company signed a Memorandum of Understanding with a Calgary, Alberta, Canada, based transportation company called East West Express Inc., a trans-Canadian freight trucking company.  Under the terms of the MOU, East West will provide Clean Power a Road Load Data Collection Vehicle (the “Vehicle”) for the purpose of detailed research on its existing refrigerated trailer fleet.
 
 
10

 

Forward Plan:

Although the Company remains focused on completing this US reefer project on schedule, there is significant interest in its steam hybrid technology for broader applications (including automotive, marine and military) in a wide range of countries. The Company continues to respond to these expressions of interest and will pursue opportunities which may arise and which management believes to be in the best interests of the Company.   As part of our new development, we are developing a system for use in land fill site electrical power generation; our system will deliver an estimated 12% or greater extra power back to the national grid. The spark ignition engines are run using the methane gas from the land fill, our system will add to this via heat recovery from the otherwise wasted exhaust gases. The Company has already entered into preliminary discussions with a regional landfill site operator in the U.K. and will be meeting another larger UK player in the near future. Clean Power intends to install a prototype test engine at a landfill site by early spring 2010.
 
Our plan of operation over the next twelve months is to further the research and development on our technology resulting in an advanced prototype and commercial application in mid 2010. If successful, we intend to license the technology or form partnerships for the use of the technology with any customers we may identify.
 
Our Technology:

Life on earth is almost totally dependent upon the unique properties of water. Among these, and in particular, for energy storage potential, is its very high latent heat associated with the change of phase between liquid and vapour at moderate temperatures. Our proposed technology utilizes these properties but could also use alternative fluids of acceptable thermal and chemical properties, probably in closed cycle form. The proposal is to use water, or other fluid as available, at its saturation (boiling) temperature to store energy for a hybrid vehicle in a pressurised container from which vapour is drawn to provide pollution-free motive power as required. Used energy is replaced from the exhaust heat of the associated combustion engine prime mover as circumstances allow, either in motion or at rest.

The combustion engine to supply power is prominent and could be petrol, diesel or gas turbine and away from urban restrictions, would provide traction power. The exhaust from the engine may be controlled either to pass direct to atmosphere or through the steam accumulator to charge or maintain pressure where pollution controls are relaxed. This represents a very attractive direct improvement in fuel consumption by retaining a substantial proportion of the engine exhaust heat (up to two-thirds of the fuel energy with engine cooling) which is otherwise discarded.

In strictly pollution-controlled environments, the combustion engine would be shut down and the traction power unit driven by steam drawn from the accumulator, in which the pressure will steadily fall while exhausting the vapour to atmosphere. As an indication of the potential of the steam accumulator, about 5 kWh of energy would be available from a single charge to 100 bar maximum pressure of a vessel of 100 litres volumetric capacity. The power would be available at widely variable and controllable rates and, depending on these, the vessel could be recharged several times on a single water filling.

As an option to improve power, fuel efficiency and range at the expense of weight, the exhaust vapour from the engine may be returned to the boiler after condensation in a heat exchanger cooled by atmospheric air and shown dashed in the figure as optional. Such a system would allow the use of working fluids other than water where this was required for thermodynamic or other reasons. Other important features of the system are the moisture separator, which may be contained as shown within the accumulator vessel to operate at reservoir pressure. Steam from the accumulator may in certain circumstances be efficiently used to enhance power output from the combustion engine. Such hybrid power plant systems, in addition to allowing pollution-free operation as demanded, would further enhance environmental acceptance through the high thermal efficiency of the cycle resulting from the unique utilisation of exhaust heat and the consequent reduced consumption of combustion engine fuel. A reciprocating steam engine would function as the auxiliary power unit, for which a computerised mechatronic unit would drive the valve system. This would replace economically and effectively the complex mechanical linkages traditionally associated with earlier generations of stream engines for precise control of power output.

Using the heat engine exhaust gas to charge the saturated liquid reservoir has been seen as one of the key features of this hybrid vehicle system so increasing substantially the thermal efficiency of internal combustion engines.

As modern engine cooling systems continue to be operated at ever higher temperatures, overall system design will be able to utilize a portion at least of this otherwise dissipated heat from the fuel with theoretical possible advances of up to 100 percent. A source of significant energy consumption in an automotive installation is through electrical power derived from the main engine. The small auxiliary vapour power unit of the saturated liquid hybrid could be run to generate electrical power as required even during charging periods. As has been noted, these may be repeated several times in a working day as the weight of liquid in the accumulator slowly reduces on each discharge.

 
11

 
 
This will reduce the frequency of the need to refill the reservoir with water specially treated to reduce fouling and deterioration of the accumulator heat transfer surfaces. There is much scope for optimizing the charging and discharging periods and, indeed, of the thermal cycling of the whole system. The saturated liquid hybrid will have its greatest attraction for heavier vehicles, hitherto seen as those intended for road use. There are, however, at least as great attractions for railway power – for locomotives – where the extra weight is wholly acceptable for significantly reduced fuel consumption and where there is long experience of vapour engines and re-supplying them with liquid even when in high speed motion.

The Steam Accumulator:

Our proposed technology is to use water, or other fluid as available, at its saturation (boiling) temperature to store energy for a hybrid vehicle in a pressurized container from which vapour is drawn to provide pollution-free motive power as required. Used energy is replaced from the exhaust heat of the associated combustion engine prime mover as circumstances allow, either in motion or at rest.
 
A possible general scheme is shown as Figure 2 directly below.
 
The combustion engine to supply power is prominent and could be petrol, diesel or gas turbine and away from urban restrictions, would provide traction power. The exhaust from the engine may be controlled either to pass direct to atmosphere or through the steam accumulator to charge or maintain pressure where pollution controls are relaxed. This represents a very attractive direct improvement in fuel consumption by retaining a substantial proportion of the engine exhaust heat (up to two-thirds of the fuel energy with engine cooling) which is otherwise discarded.

In strictly pollution-controlled environments, the combustion engine would be shut down and the traction power unit driven by steam drawn from the accumulator, in which the pressure will steadily fall while exhausting the vapour to atmosphere. As an indication of the potential of the steam accumulator, about 5 kWh of energy would be available from a single charge to 100 bar maximum pressure of a vessel of 100 litres volumetric capacity. The power would be available at widely variable and controllable rates and, depending on these, the vessel could be recharged several times on a single water filling.

As an option to improve power, fuel efficiency and range at the expense of weight, the exhaust vapour from the engine may be returned to the boiler after condensation in a heat exchanger cooled by atmospheric air and shown dashed in the figure as optional. Such a system would allow the use of working fluids other than water where this was required for thermodynamic or other reasons. Other important features of the system are the moisture separator, which may be contained as shown within the accumulator vessel to operate at reservoir pressure. Steam from the accumulator may in certain circumstances be efficiently used to enhance power output from the combustion engine. Such hybrid power plant systems, in addition to allowing pollution-free operation as demanded, would further enhance environmental acceptance through the high thermal efficiency of the cycle resulting from the unique utilisation of exhaust heat and the consequent reduced consumption of combustion engine fuel.

 
12

 

The figure below shows the calculated specific energy performance of the accumulator system to be comparable with that of conventional batteries. A reciprocating steam engine would function as the auxiliary power unit, for which a computerised mechatronic unit would drive the valve system. This would replace economically and effectively the complex mechanical linkages traditionally associated with earlier generations of stream engines for precise control of power output. There is considerable scope for optimising this and all aspects of the liquid-vapour accumulator hybrid cycle, which throughout would employ existing well-proven technology.

The Saturated Liquid Accumulator for Transportation Energy Storage

The inevitable economic pressures on the supply of liquid hydrocarbon fossil fuels, coupled with the no less inevitable social pressures against their consequential local and global pollution continue to demand increasing effectiveness in their utilization. Despite the continuing efforts to seek alternatives, the internal combustion engine, in petrol or diesel form, seems, for the immediately foreseeable future, destined to continue in transportation as the most effective converter of the intrinsic energy in a hydrocarbon fuel to useful purpose. This is justified when effectiveness is measured by the proportion of this energy usefully converted – the thermal efficiency; but less so when pollution by the products of combustion is taken into account. Restricting operation to areas away from urban centres would offer a significant advance in the acceptability of the internal combustion engine by lessening local pollution. At the same time increasing thermal efficiency would have an advantageous global effect. These objectives are achieved by the system described here.

The Hybrid Vehicle

Avoiding noxious emissions in densely populated urban areas may be achieved with a vehicle having a non-polluting power source for such areas even if combined with a conventional prime mover for use away from such centres – a ‘hybrid’ vehicle. A general form is shown in Figure 2 below with traction available from two sources, in this example a conventional prime mover and an auxiliary pollution-free unit receiving its energy from a storage device or energy reservoir.

This form is known as a ‘parallel hybrid’ system since it allows both a direct path from the engine prime mover to the traction unit and a parallel path through the energy storage system. This theoretically could take several forms as indicated, electrical, hydraulic, pneumatic or mechanical with a flywheel, and is clearly crucial to the attractions of the total system. The commonest such device, that most attractively provides pollution free electrical power, is the battery, and hybrid vehicles employing this format have received much attention. The electrical battery, however, continues to offer only a very limited performance in terms of energy storage per unit weight (about 50-70 Watt-hours per kilogram, compared with 12,000 Wh/kg for a liquid hydrocarbon). Further, specific power in Watts per unit weight is even more restricted in terms of transportation requirements at 50W/kg compared with 1000 W/kg for even unsophisticated internal combustion. As a consequence frequent recharging of batteries is required, and can be slow. Also, recharging requires explicit further consumption of fuel from the prime mover or elsewhere. It is the objective of this presentation to demonstrate an alternative energy storage source with striking advantages in specific power availability and comparability with batteries in specific energy resource. Further it offers a substantial improvement in overall fuel consumption efficiency by using the otherwise wasted prime mover exhaust heat for charging the reservoir, thus also contributing to a reduction of global pollution.

 
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A Hybrid Vehicle Power Plant For Pollution Control Using Steam Or Other Vapour From A Saturated Liquid Accumulator

In many countries and regions, legislation is extant or proposed to control and severely limit pollution of the environment by automotive vehicles, private and commercial cars, vans and lorries. Almost all such vehicles are currently propelled by prime movers burning a hydrocarbon fuel, some of the combustion products from which are a prime source of atmospheric pollution. Legislation is and will be increasingly used to reduce the amount of such pollution in all areas and effectively to zero in densely populated urban centres.

At present electric traction offers the only practicable possibility of a totally pollution free power source for vehicles, and although the fuel cell exhausting only water may offer, albeit expensively, a long-term prospect of self-contained continuous electrical energy, in realistic and immediate practice, an energy reservoir - a battery - is the only current source of such energy.

Battery performance has improved little in the just over hundred years since they were first used on a commercial scale, principally for the propulsion of under-water vehicles. In respect of energy per unit weight or specific energy, the commonest lead-acid batteries store about 50 Watt-hours (180 kJ) of energy per kg compared with 12,000 Wh (43,200 kJ) for petrol. No less critical is specific power, batteries yielding about 50W/kg or less compared with up to 500 for current combustion engines. The prospect of radical advances for batteries of even sophisticated design is remote, even with the support of modern science and technology. In recognition of this situation, in Los Angeles, one of the urban centres setting standards for the world-wide anti-pollution drive, the specified range of statutorily proposed electric vehicles has been reduced from the 250 km originally planned to 100 and the target date for implementation of the anti-pollution legislation postponed.

The limitations of battery performance have directed attention towards the so-called hybrid vehicle, in which electric power for use in urban regions with a zero polluting emission limit is provided from a reservoir of energy. This is charged, while in open areas with less restrictive pollution controls, from a conventional combustion engine albeit with improved emissions performance compared with average current engines. There are many variations available upon this general hybrid concept, one convenient form of which is shown in Figure 1 immediately below.

 
14

 

This is known as a ‘parallel hybrid’ system since it allows both a direct path from the combustion engine prime mover to the traction unit and a parallel path through the energy storage system. Theoretically this could take several forms but currently electricity with a battery as the energy storage element is regarded as the likely practicable form despite its limitations. The saturated liquid accumulator of this proposal avoids these limitations by offering energy storage with a specific energy comparable with batteries with their chemical and potentially polluting contents, a major increase in specific power availability and substantial fuel savings while maintaining pollution-free operation where the environment so demands.

Basic Fact Sheet on the Subject Of Hybrid Cars.

Hybrid vehicles are now generally accepted as offering the transportation industry a solution to the need for reducing fuel consumption in this age of high oil prices as well as for reducing atmospheric pollution on both the global and local scales. As a consequence, most manufacturers are at least considering the design of hybrid vehicles, comprised of a main internal combustion engine and a parallel auxiliary motor for either joint or separate operation, most commonly for use in especially urban areas in which pollution is closely controlled.

By far the greatest attention has been given to the use of electric power as the auxiliary in the hybrid vehicle and several are now in mass production and on the road from major manufacturers. Such systems will, for the foreseeable future, provide the major competition to our proposals. Electric batteries are however the only means of energy storage for these vehicles and have the major disadvantages of low specific energy and power, high cost, limited life and the need for main engine operation for charging with the high consequent fuel costs.

Our system uses otherwise dissipated combustion engine exhaust heat for charging the energy storage components at negligible recurrent cost and with high specific power availability from the saturated liquid energy accumulator.

The key to our process is the steam accumulator, which will truly create a hybrid fuel system. The competitive objectives will be to minimize additional weight of the auxiliary power system and to maximize fuel saving through sophisticated controls for “on-the-road”, as well as urban, low pollution operation. At present, the only competitor known to be considering a similar system is BMW-Rolls Royce, which has published an outline of an apparently more complex scheme than ours as part of a ten-year program to production. However, a closer examination of their project indicates that their system is designed to capture heat from the exhaust and re-cycle it in order to give fuel savings of approximately 15%. Our process is designed to provide fuel savings of between 30%-40% and reduce emissions by a corresponding amount, if not more.

As for the competition, a majority of auto manufacturers are developing alternative fuel technology vehicles and to that extent, must be considered as competitors. However, most of them are developing vehicles to replace gas (petrol) as fuel of choice. Moreover, the present alternative fuel technologies carry negative baggage such as higher costs, logistic problems, lack of mass availability of such alternative fuels at regular gas service stations, lack of adequate transportation systems and current oil prices.   Our hybrid fuel technology is expected to eliminate most of these problems.

 
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Sources and Availability of Raw Materials and the Names of Principal Suppliers

Our current suppliers are:
·  
SAMSON AG for steam and water valves;
·  
Poole Process Equipment Ltd. for the steam accumulator manufacture;
·  
RS Components Ltd. for electronic equipment;
·  
Rudgwick Metals Ltd. for steel raw material;
·  
Heltech 3 for the base engine management system; and
·  
Ekstroms Varmetekniska AB, Sweden supplies the tubes for the accumulator.
·  
VOITH for our Heat Expander engines

We do not anticipate any problems with availability from these suppliers.

Distribution Methods of the Products and Services

The Company is in the preliminary stage of sourcing potential marketing and distribution networks for its products, and does not currently have a distribution method under contract at this stage of development of the Company’s products.

Competitive Business Conditions and Our Competitive Position In The Industry and Methods of Competition

The market for the food trailers refrigeration engines is currently dominated by two major manufacturers, Thermo King (a subsidiary of Ingersoll-Rand) and Carrier (a subsidiary of United Technologies).  The present retail cost of these reefer engines is approximately between $18,000 and $30,000 per engine.  It is projected that our heat recovery based hybrid engines will cost approximately the same as these currently priced engines.  However, we believe that our engines will provide fuel efficiency of over 40% or better with corresponding reductions in emission levels.

According to the industry, currently there are over 10 million refrigeration engines in use.   Our business model is to sell these reefer engines through licensing arrangements.  Through this business model, we expect to be able to control the manufacturing and production costs more effectively.  As well, it is anticipated the prospective licensees will help market our reefer engines through their present marketing base and there sell our reefer engines to their current and repeat customers.

To the best of our knowledge no other entity is developing this technology anywhere in the world, and if true, we believe we will enjoy considerable market lead in this sector.

With the ever-present possibility for skyrocketing oil prices, combined with a growing interest in doing less harm to the environment, there has been a great deal of interest in hybrid cars over the past few years. Most major automobile manufacturers now have at least one model of a hybrid car in production, whereas just a short time ago they were a rarity. A number of alternative fuel technologies have been or are being developed at the present time. Fuel cell technology took a giant leap in the later part of  the 1990’s. But the technology has not yet come to the market due to technological and logistic problems. Ethanol, bio-diesel and other alternative fuel technologies are currently being marketed and all major auto manufacturers have one or more models in the market. However, there are costs, logistics, distribution and other related issues which must be confronted and resolved before wider acceptance of ethanol, bio-diesel and such other alternative fuel technologies can firmly secure its niche in the market place. Hybrid cars differ from electric cars and cars designed to run on alternative fuels, but are also an alternative fuel option themselves.

The Company considers most major automobile manufacturers to be competitors as each now have at least one model of a hybrid car in production. Each of these manufacturers is in the process of developing a number of alternative fuel technologies which may become the norm in a few years.

Dependence on One or a Few Major Customers

We presently do not have any customers for our technology as we are still in the development phase.

 
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Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, Including Duration:

The general concept of an internal combustion engine hybridized with steam is in the public domain and cannot, in and of itself, and without significant specific enhancements or innovations, be patented under either a ‘first to invent’ or ‘first to file’ system. The implementations of the general concept as well as non-obvious variations will be the subject of patent applications and, when issued, these patents will be the primary assets of the Company. A patent application has been filed in the United States which claims both the concept of a Unitary Engine and an Energy Accumulation System. The application is based upon the technology and concepts that are currently available for patent protection. The U.S. parent application, Serial Number 12/214,835, was filed on June 23, 2008 and has a priority date of August 1, 2007. Corresponding applications have been prepared and are being filed under the Patent Cooperation Treaty.  It is anticipated that national phase examination and prosecution will be conducted in those countries which constitute the major world automotive markets in which vehicles are manufactured and sold. These will be determined by management but are currently intended to include, at least, the U.S., European states, Japan and other Asian states. We expect that we will require approximately $1,000,000 for patent filings and, prosecution.

Our agreement with Doosan Babcock treats the patents as follows: All technology and intellectual property developed in connection with the collaboration program or the accumulator technology that are patentable and/or patented or otherwise protected will at all times belong and be owned solely by the Company and Mitsui will require the prior written approval of the Company for the use of any such technology. Any technology or intellectual property which is not patentable or otherwise protected may be used by Doosan Babcock without the prior written consent of the Company.

If the Company is unable to reimburse Doosan on any call for reimbursement as allowed under the collaboration agreement then the Company will transfer an equal share of the intellectual property to Mitsui so that Mitsui and the Company will own the intellectual property equally.

On March 13, 2009, the Company and The University of Sussex (“Sussex”) entered into a binding letter of intent (the “Letter of Intent”) providing for (i) the assignment to the Company of Sussex’s existing patent application relative to its high energy storage system for motor vehicles (“HYSTOR”); and (ii) an understanding between the parties to collaborate on certain matters in connection with the HYSTOR project.   

Pursuant to the Letter of Intent, the Company will be responsible for filing and prosecuting, at its sole expense, territorial applications based upon the International Publication Number (“WIPO Application”) in Japan, the United States, Canada, and the European Union. Simultaneous with the execution of the Letter of Intent, the Company and Sussex executed an Assignment (Non-Provisional Patent Application) (the “Assignment”) to sell, assign, transfer and convey to the Company all right, title and interest in and to the WIPO Application. Further, pursuant to the Letter of Intent, the parties also agreed to enter into a separate collaborative relationship agreement providing for the parties to collaborate in good faith to secure funding to further develop the HYSTOR project.  The application has been filed in the United States and Canada and the Company’s foreign associates are undertaking to complete the filings in Japan and the European Union.

With respect to the intellectual property of the Company, as of August 31, 2009, patent applications will have been filed in five jurisdictions, with the intention to include additional jurisdictions. Additional embodiments and inventive concepts are the subject of one or more continuation in part applications which are being prepared and will be filed before the end of the years.  Furthermore, the Company has received the international search report and written opinion of the Searching Authority and understands that all of the claims were deemed to have industrial applicability and that 10 of the 19 claims were both novel and inventive. The Company intends to make certain revisions to the other claims and seek to get additional claims allowed. To further assist and accelerate this process, the Company has engaged US legal counsel specifically for patent management.

Need for Any Government Approval of Principal Products or Services

Our heat recovery based hybrid engine is not a new technology, although its application is new.  We believe that we will not be subject to compliance of any Government Regulations with respect to marketing and sale of our engines to end users.  However, prior to launching our product in the market place, we will require verification and certification by the United States Government Environmental Protection Agency (“EPA”) to ensure our compliance with all existing laws, rules and regulations.  Similar compliance may be required for sale of our products in other jurisdictions.  Preliminary discussions with the EPA are expected to commence in before the end of 2009.

 
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Effects of Existing or Probable Government Regulations On Our Business

In the U.S., states are legislating for a reduction in the use of auxiliary power units (“APUs”), which may impact on our business. APU emissions are not currently regulated but we believe that it is becoming increasingly likely that the quality of APU emissions will be regulated.

Our technology will address the requirements for cleaner emissions which may be regulated.

Research and Development Activities and Costs

All of our research and development activities are presently borne by the Company, except for an amount of $400,000 which was expended by Mitsui on behalf of the Company based on our collaboration agreement. For fiscal 2008, we expended a total of $152,585 on research and development, net of salaries and wages.  For the fiscal year ending August 31, 2009, we expended a total of $519,409 on research and development, net of salaries and wages.

Our business plan calls for us to expend a total of approximately $4,000,000 over a twenty-one month period for research and development. We do not presently have sufficient funds to complete the development of the technology. Management is seeking alternative sources of funding either by the way of equity financing or loans.

Costs and Effects of Compliance with Environmental Laws

We do not expect any environmental laws to give rise to additional costs to our business. We believe, although no assurance can be given, that our technology, if successful will comply with any environmental regulations already enacted or which may be enacted in the future.

Employees

As of August 31, 2009, the Company had a total of 14 employees of whom 11 are full-time employees. We have employment agreements with Abdul Mitha, our Chief Executive Officer, and Mike Burns, a director of our Company and an officer of our UK Subsidiary.
 
The Company has also retained a consultant who is a steam specialist to advise on the steam and technical issues pertaining to the development of the reefer engine and a marketing consultant for advice on marketing strategies.

We believe our employee relations are generally good.   Our employees are not represented by a collective agreement.


The Company is a smaller reporting company and is not required to provide this information.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

The Company is a smaller reporting company and is not required to provide this information.

ITEM  2.    PROPERTIES

All of the operations of the Company are currently undertaken by our wholly-owned U.K. subsidiary, CPTL-UK, with whom the Company shares office space.  On July 26, 2006 CPTL–UK entered into a three year lease agreement for an office and research facility located in Newhaven, United Kingdom.  The lease expired on July 25, 2009 and is currently operating on a month to month basis.  The monthly rental payable is total $2,441(£1,500) plus applicable taxes.
 
Effective November 13, 2008 the Company entered into a five (5) year lease for office and warehouse space in a property located in New Haven, East Sussex, U.K., adjacent to its current leased facilities at an annual rate of $24,412.50 (£15,000) payable quarterly commencing March 2009.  Concurrently the Company entered into an option to purchase the aforementioned property, exercisable March through August 2010, for a purchase price the greater of (i) the price stated in an Independent Valuation or (ii) £425,000 less any reductions previously specified and agreed in a former option agreement.

 
18

 
 
Effective February 1, 2009 the Company entered into a six (6) year lease for office and warehouse space in a property located in New Haven, East Sussex, U.K., adjacent to its current leased facilities at an annual rate of $26,040 (£16,000) plus taxes and expenses, payable monthly in advance, commencing January 30, 2009.  Concurrently the Company entered into an option to purchase the aforementioned property during the period April 30, 2014 through January 29, 2015, for a purchase price of £230,000.


ITEM 3.     LEGAL PROCEEDINGS.

The Company is not a party to any legal proceedings and is not aware of any pending legal proceedings as of the date of this Report.
 

The Annual General Meeting of Shareholders was held on June 13, 2009, at which the following items were voted upon:

a) The following directors were elected to the board of directors to hold such position until the next annual meeting of the shareholders or until their successor is duly elected and qualified:

Voting Results
Elected or Re-elected
For
Against
Abstain
Abdul Mitha
Re-elected
41,673,863
0
0
Diane Glatfelter
Re-elected
41,673,863
0
0
Michael Burns
Re-elected
41,673,863
0
0
David Anthony
Re-elected
41,673,863
0
0
Peter J. Gennuso
Re-elected
41,673,863
0
0

b) The shareholders ratified the re-appointment of Child, Van Wagoner & Bradshaw, PLLC as the Company’s auditors for the fiscal year 2009, and authorized the Board of Directors to approve the auditor’s remuneration.

Voting Results
For
Against
Abstain
To re-appoint Child, Van Wagoner & Bradshaw, PLLC as the Company’s auditors, and have the Board approve remuneration
41,673,863
0
0

c) The shareholders approved the 2009 Stock Option and Stock Award Plan (the “Plan”) of up to 4,000,000 shares of the Company’s common stock in the form of stock options and stock awards as compensation to employees, officers, directors and/or consultants of the Company.

Voting Results
For
Against
Abstain
To approve the 2009 Stock Option and Stock Award Plan
41,673,863
0
0

There were no abstentions or broker non-votes on any matters put before the Annual Meeting.

 
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PART II
 

Market Information, Holders and Dividends

The Company's common stock is presently quoted on the Over the Counter Bulletin Board (OTC/BB) under the symbol "CPWE".  Our shares of common stock began trading during the third quarter ending May 31, 2006.

Following is a report of high and low closing bid prices for each quarterly period for the fiscal years ended August 31, 2009 and August 31, 2008.

Year 2009
High
Low
4th Quarter ended 8/31/2009
0.23
0.20
3rd Quarter ended 5/31/2009
0.25
0.155
2nd Quarter ended 2/28/2009
0.28
0.11
1st Quarter ended 11/30/2009
0.57
0.10
     
Year 2008
   
4th Quarter ended 8/31/2008
0.60
0.36
3rd Quarter ended 5/31/2008
0.57
0.35
2nd Quarter ended 2/28/2008
1.05
0.51
1st Quarter ended 11/30/2008
1.00
0.45

The information as provided above for the fiscal years ended 2009 and 2008 was provided by Pink Sheets.  The quotations provided herein may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions and have not been adjusted for stock dividends or splits.

As of November 18, 2009, there were 461 record holders of the Company’s common stock (which number does not include the number of stockholders whose shares are held by a brokerage house or clearing agency, but does include such brokerage houses or clearing agencies as one record holder).

The Company has never paid a cash dividend on its common stock and does not intend to pay cash dividends on its common stock in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans

     
Number of securities
     
remaining available for
 
Number of securities to
Weighted-average
issuance under equity
 
be issued upon exercise
exercise price of
compensation plans
 
of outstanding options,
outstanding options,
(excluding securities
 
warrants and rights
warrants and rights
reflected in column (a))
Plan Category
(a)
(b)
(c)
Equity Compensation Plans approved by security holders
 
-0-
N/A
5,743,000
Equity Compensation Plans  not approved by security holders
 
  6,000,000(2)
 
$0.59
 
-0-
Total
6,000,000
$0.59
5,743,000

(1) The Company is authorized to issue up to 8,500,000 shares under its stock option and award plans; as at August 31, 2009, 2,000,000 have been issued or reserved for issuance out of a total 2,000,000 from the 2007 Plan, and757,000 have been reserved for issuance out of a total of 2,500,000 from the 2008 Plan.  1,743,000 and 4,000,000 remain available for issuance under the 2008 and 2009 Plans, respectively.
(2) These options were issued pursuant to an employment agreement between the Company and Mr. Abdul Mitha, its Chief Executive Officer.  Under the terms of the Agreement, the Company has agreed to enter into a stock option agreement with Mr. Mitha, granting Mr. Mitha the option to purchase at the end of each anniversary of the Agreement 1,000,000 shares of the Company’s common stock at an  exercise price of the average 90 days trading price immediately preceding the anniversary date of the Agreement  The options vest immediately upon issuance of the underlying agreement at each anniversary date, and the option shares shall be exercisable by Mr. Mitha within 5 years from the date of grant.

 
20

 
 
 
Following is a table outlining the number of options required to be granted as fully vested under the Agreement at each anniversary date and the term of said options:

Date
Number of options
Expiry date
May 1, 2009
1,000,000
April 30, 2014
May 1, 2010
1,000,000
April 30, 2015
May 1, 2011
1,000,000
April 30, 2016
May 1, 2012
1,000,000
April 30, 2017
May 1, 2013
1,000,000
April 30, 2018
May 1, 2014
1,000,000
April 30, 2019
 
6,000,000
 

Recent Sales of Unregistered Securities

Except as identified below, there were no other unregistered securities sold or issued by the Company without the registration of these securities under the Securities Act of 1933 in reliance on exemptions from such registration requirements, within the period covered by this report, which have not been previously included in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.  There were no underwriting discounts or commissions paid in connection with the sale of the identified securities.

Name & Address
Number of Shares Issued
Reason for Issuance
Gersten Savage LLP
600 Lexington Ave, 9th Floor
New York, NY 10022
2,160,000 shares of common stock
Pursuant to two agreements for the provisioning of various patent related legal services
Steve Wilson
435 - 36th Avenue NW
Calgary, Alberta T2K 0C1
Canada
25,000 shares of common stock
Stock Award pursuant to an employment agreement.
Quercus Trust
1835 Newport Boulevard
A109-PMB 467
Costa Mesa, CA  92627
470,725 shares of common stock
Payment of annual interest on Secured Convertible Debenture

The shares of common stock issued to Gersten Savage and Quercus Trust were restricted stock and may only be resold pursuant to an effective registration statement or pursuant to applicable provisions of Rule 144.

The Company claims an exemption from the registration requirements of the Securities Act of 1933, as amended,  for the issuance of shares to Gersten Savage and The Quercus Trust pursuant to Section 4(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transaction does not involve a public offering, the purchasers are “accredited investors” and/or qualified institutional buyers, the purchasers have access to information about the Company and its purchase, the purchasers will take the securities for investment and not resale, and the Company is taking appropriate measures to restrict the transfer of the securities.

 
21

 

The shares of common stock issued to Steve Wilson were issued under the Regulation S exemption in compliance with the exemption from the registration requirements found in Regulation S promulgated by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended.  The offer and sale to the purchasers was made in an offshore transaction as defined by Rule 902(h). No directed selling efforts were made in the U.S. as defined in Rule 902(c).  The offer and sale to the purchasers was not made to a U.S. person or for the account or benefit of a U.S. person. The following conditions were present in the offer and sale:  a) The purchaser of the securities certified that it is not a U.S. person and did not acquire the shares for the account or benefit of any U.S. person; b) The purchaser has agreed to resell the securities only in compliance with Regulation S pursuant to a registration under the Securities Act, or pursuant to an applicable exemption from registration; and has agreed not to engage in hedging transactions with regard to the securities unless in compliance with the Securities Act; c) The purchaser has acknowledged and agreed with the Company that the Company shall refuse registration of any transfer of the securities unless made in accordance with Regulation S, pursuant to a registration statement under the Securities Act, or pursuant to an applicable exemption from registration; and d) The purchaser has represented that it is acquiring the shares for its own account, for investment purposes only and not with a view to any resale, distribution or other disposition of the shares in violation of the United States federal securities laws. Neither the Company nor any person acting on its behalf offered or sold these securities by any form of general solicitation or general advertising.  The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom.

ITEM 6.     SELECTED FINANCIAL DATA

The Company is a smaller reporting company and is not required to provide this information.

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


This annual report contains forward-looking statements relating to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as "may", "should", "intends", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of these terms or other comparable terminology.  These statements are only predictions and involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance.  You should not place undue reliance on these statements, which speak only as of the date that they were made.  These cautionary statements should be considered with any written or oral forward-looking statements that we may issue in the future.  Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results, later events or circumstances or to reflect the occurrence of unanticipated events.

In this annual report unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares of our capital stock.

The management’s discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Liquidity and Capital Resources

As of August 31, 2009, we have a total of $29,346 in cash on hand.  This is insufficient to meet our immediate and projected commitments, as well as insufficient to further our business plan in the absence of additional funding.

The Company commenced the fiscal year with $1,203,030 in cash, and expended $2,183,581 in operating activities together with $570,166 in investing activities, for a total of $2,753,747 during the year.  A total of $1,592,907 was provided by  financing activities during the fiscal year, which resulted in a final cash position of $29,346 after foreign exchange effects amounting to $(12,844) as at the end of the fiscal year.

 
22

 
 
The Company also issued common stock for services in the amount of $1,211,380 and $160,000 for interest accrued on senior convertible notes, together with $851,802 in stock based compensation, which collectively amounted to $2,223,182 in stock based expenditures.
 
In order to continue to meet identified commitments, as well as to further the business plan and objectives of the Company, it is anticipated that a similar level of cash expenditures will be required in fiscal year 2010, together with the settlement of certain expenses with the common stock of the Company.  This would require approximately $700,000 in cash each quarter, for a total cash requirement of $2,800,000, together with an estimated $2,200,000 in stock based payments, based on the most recent fiscal year.

The Company will therefore be required to raise additional funds to continue planned operations, and expects to do so by way of additional shareholder loans and equity placements, which efforts to secure are ongoing.  The Company is anticipating obtaining first revenue from the sale of commercial or pre-commercial units in the forthcoming fiscal year; however these amounts are not presently expected to be significant.

Results of Operations

The Company had no revenues for the period from inception to August 31, 2009.  The Company reported a net loss from its operations for the fiscal year totaling $5,771,980 as compared to a loss from operations totaling $6,443,127 in 2008.   Despite the decrease in losses in the current fiscal year, the Company expects to continue to incur significant operational losses while remaining in the development stage.
 
Office and administration expenses decreased by $261,534 compared to fiscal year 2008, as a result of cost reductions found in travel related items, amounting to $134,000, as well as reduced investor relation costs associated with the Abchurch Communications contract.

The Company’s interest expense increased by $386,183 year over year, inclusive of interest amounts settled with shares, to $537,836.  This was as a result of amounts settled with stock relative to the $2,000,000 financing, as well as increased costs associated with the related party debt.  This expense is expected to be maintained at a similar level in fiscal 2010, subject to increases or decreases in the level of the Company’s debt.

Professional fees settled with shares were $1,176,000 compared to nil in the prior year, as a result of the payment of certain legal services associated with substantial work being undertaken in enhancing the Company’s intellectual property rights.

Salary and consulting fees of $2,391,790 in fiscal year 2009 represents a decrease of $1,553,736 compared to the prior year. The significant decrease is mainly due to a one-time compensation cost of $2,600,000 incurred for the services provided by Mr. Mitha to the Company from April 27, 2004 through May 28, 2008.  Otherwise, salaries and consulting fees increased by $673,700 compared to fiscal year 2008 primarily as a result of the hiring new employees, increased salaries related to new employment agreements with key personnel, as well as stock-based compensations to employees.

Research and development costs increased from $152,585 in 2008 to $519,409 in 2009, as a result of substantial addition work undertaken in moving the Company’s key technologies closer to commercial readiness.  Subject to the Company obtaining additional funding, this amount is expected to further increase in 2010 as further prototype development is undertaken.

As a result of the period end revaluation of the Company’s financial instruments, the Company’s derivative income was $3,581,773 in fiscal year 2009, compared to derivative expense of $3,526,591 in fiscal year 2008. As a result, the Company’s net loss of $2,820,543 in fiscal year 2009 decreased by $7,314,328 over the prior year’s net loss $10,134,871.

 
23

 

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
This Company is a smaller reporting company and is not reuired to provide this information.
 
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements and supplementary data required by this Item 8 are listed in Item 15(a) (1) and begin on page F-1 of this Annual Report on Form 10-K.

 
24

 

CLEAN POWER TECHNOLOGIES INC.
 
 (A Development Stage Company)
 
REPORT AND CONSOLIDATED FINANCIAL STATEMENTS
 
August 31, 2009
 
(Stated in US Dollars)
 
 
 
F-1

 

Child, Van Wagoner & Bradshaw, PLLC

A PROFESSIONAL LIMITED LIABILITY COMPANY OF CERTIFIED PUBLIC ACCOUNTANTS

1284 W. Flint Meadow Dr., Suite D, Kaysville, UT 84037                                                                                                           PHONE: (801) 927-1337 FAX: (801) 927-1344
5296 S. Commerce Dr., Suite 300, Salt Lake City, UT 84107                                                                                                         PHONE: (801) 281-4700 FAX: (801) 281-4701
 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors
Clean Power Technologies Inc.

We have audited the consolidated balance sheets of Clean Power Technologies Inc. (the “Company”) as of August 31, 2009 and 2008, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficiency and cash flows for the years then ended, and for the period from May 12, 2006 (date of inception) to August 31, 2009.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, and for the period from May 12, 2006 (date inception) to August 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has cash flow constraints, an accumulated deficit, and has suffered recurring losses from operations. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Child, Van Wagoner & Bradshaw, PLLC
Child, Van Wagoner & Bradshaw, PLLC

Salt Lake City, Utah

November 25, 2009

 
F-2

 

CLEAN POWER TECHNOLOGIES INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
August 31, 2009 and 2008
 (Stated in U.S. Dollars)

ASSETS
 
August 31,
2009
   
August 31,
2008
 
Current
           
Cash
  $ 29,346     $ 1,203,030  
Amounts Receivable - Note 3
    38,637       15,071  
Prepaid expense
    95,100       18,938  
      163,083       1,237,039  
                 
     Plant and equipment - Note 4
    831,168       506,983  
Deferred financing costs, net of accumulated amortization
of $107,705 as of  August 31, 2009 and $15,205 as of August 31, 2008
    77,295       169,795  
Total Assets
  $ 1,071,546     $ 1,913,817  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
               
Current
               
Accounts payable and accrued liabilities
  $ 561,492     $ 194,908  
Accounts payable – related party
    159,427       -  
Prepaid deposit
    84,000       -  
Wages payable
    56,098          
Wages payable - related party - Note 5
    499,582       126,667  
Loan payable
    84,000          
Stock option liability - Note 9(ii)
    718,836       380,290  
Total current liabilities
    2,163,435       701,865  
                 
Due to related party - Note 5
    445,690       139,521  
Secured convertible notes payable - including $22,594 accrued interest - Note 7
    264,898       47,342  
Embedded derivative liability - Note 7
    779,193       1,933,002  
Warrant liability - Note 7
    1,667,173       3,372,000  
Total Liabilities
    5,320,389       6,193,730  
                 
Stockholders' Deficiency
               
Preferred stock:  100,000,000 Class "A"   preferred shares authorized with zero  shares outstanding;   100,000,000 Class "B"   preferred shares authorized with zero shares outstanding;
    -       -  
Common Stock, $0.001 par value: 350,000,000 shares authorized;
   72,220,695 and 65,785,748 shares issued and outstanding
   at August 31, 2009 and August 31, 2008, respectively.
    72,221       65,786  
Additional paid in capital
    12,255,573       9,403,842  
Accumulated other comprehensive loss
    (58,221 )     (51,668 )
Accumulated deficit during the development stage
    (16,518,416 )     (13,697,873 )
Total Stockholders' Deficiency
    (4,248,843 )     (4,279,913 )
Total Liabilities and Stockholders' Deficiency
  $ 1,071,546     $ 1,913,817  

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
F-3

 

CLEAN POWER TECHNOLOGIES INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the years ended August 31, 2009 and 2008 and for the period May 12, 2006 (Date of Inception) to August 31, 2009
(Stated in U.S. Dollars)

   
August 31,
       
Expense
 
2009
   
2008
   
May 12, 2006
 (Date of Inception) to August 31, 2009
 
Depreciation
  $ 253,653     $ 157,115     $ 514,726  
Office and administration
    673,279       934,813       2,084,219  
Organization costs
    -       -       2,500  
Research and development
    519,409       152,585       1,295,740  
Foreign exchange loss (gain)
    12,158       85       12,243  
Amortization of stock option benefits
    338,546       380,290       718,836  
Professional fees
    1,583,145       364,713       2,833,132  
Salaries and consulting fees - Note 6, Note 10
    2,391,790       3,945,526       7,504,736  
Directors' fees
    -       250,000       430,000  
Administrator fees
    -       258,000       258,000  
(Loss) from operations
    (5,771,980 )     (6,443,127 )     (15,654,132 )
                         
Other income and expense:
                       
Interest expense
    (537,836 )     (151,653 )     (813,466 )
Derivative income (expense) – Note 8
    3,581,773       (3,526,591 )     55,182  
Deferred financing amortization costs
    (92,500 )     (13,500 )     (106,000 )
Total other expense:
    2,951,437       (3,691,744 )     (864,284 )
                         
                         
Net income (loss) for the period
    (2,820,543 )     (10,134,871 )     ( 16,518,416 )
                         
Other comprehensive loss:
                       
Unrealized foreign exchange on transactions
    (6,553 )     (6,470 )     (58,221 )
                         
Comprehensive gain (loss) for the period
  $ (2,827,096 )   $ (10,141,341 )   $ (16,576,637 )
                         
Basic and diluted loss per share
  $ (0.04 )   $ (0.17 )        
                         
Basic and diluted weighted average number of shares
    68,595,057       60,446,890          

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
F-4

 
CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
For the years ended August 31, 2009 and 2008 and for the period from May 12, 2006 (Date of Inception) to August 31, 2009
(Stated in U.S. Dollars)

   
Common Stock
         
 
   
Accumulated Deficit
   
Total
 
   
Number of Shares
   
Amount
   
Additional
Paid-in Capital
   
Accumulated Other
Comprehensive Loss
   
During the Development Stage
   
Stockholders' Deficiency
 
Balance at May 12, 2006
    -     $ -     $ -     $ -     $ -     $ -  
Issuance of common stock:for cash at $.001
    28,765,477       28,766                               28,766  
Issuance of common stock:pursuant to technology acquisition agreement at $0.001
    2,000,000       2,000                               2,000  
Clean Energy and Power Solutions Inc.:common shares prior to reverse acquisition
    (30,765,477 )     (30,766 )     30,766                       -  
Clean Power Technologies Inc. common shares prior to reverse acquisition
    14,680,000       14,680       (14,680 )                     -  
Issuance of common stock pursuant to share exchange agreements
    30,765,377       30,766       9,579                       40,345  
Imputed interest
                    5,748                       5,748  
Stock-based compensation
                    32,333                       32,333  
Unrealized foreign exchange on transaction
                            (12,404 )             (12,404 )
Net loss for the period
                                    (311,435 )     (311,435 )
Balance at August 31, 2006
    45,445,377       45,446       63,746       (12,404 )     (311,435 )     (214,647 )
Issuance of common stock: for cash
    3,600,000       3,600       896,400                       900,000  
Imputed interest
                    41,970                       41,970  
Issuance of common stock for professional services
    408,785       408       633,201                       633,609  
Issuance of common stock for consulting services
    400,000       400       611,100                       611,500  
Issuance of common stock for director services
    100,000       100       179,900                       180,000  
Issuance of common stock for R&D
    4,000,000       4,000       396,000                       400,000  
Beneficial conversion - related party note payable
            -       265,764                       265,764  
Unrealized foreign exchange on transaction
            -               (32,794 )             (32,794 )
Net loss for the period
                                    (3,251,567 )     (3,251,567 )
Balance at August 31, 2007
    53,954,162       53,954       3,088,081       (45,198 )     (3,563,002 )     (466,165 )

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
F-5

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
For the years ended August 31, 2009 and 2008 and for the period from May 12, 2006 (Date of Inception) to August 31, 2009
(Stated in U.S. Dollars)

   
Common Stock
         
 
   
Accumulated Deficit
   
Total
 
   
Number of Shares
   
Amount
   
Additional
Paid-in Capital
   
Accumulated Other
Comprehensive Loss
   
During the Development Stage
   
Stockholders' Deficiency
 
Balance at August 31, 2007
    53,954,162       53,954       3,088,081       (45,198 )     (3,563,002 )     (466,165 )
Issuance of common stock: for cash
    3,260,000       3,260       811,740                       815,000  
Issuance of common stock for prior period salary
    4,000,000       4,000       2,596,000                       2,600,000  
Issuance of common stock for consulting services
    700,000       700       524,300                       525,000  
Issuance of common stock for director services
    250,000       250       249,750                       250,000  
Issuance of common stock for administrator
    600,000       600       257,400                       258,000  
Conversion of note payable to common stock, net unamortized discount
    3,021,586       3,022       1,288,848                       1,291,870  
Beneficial conversion - related party note payable
                    366,135                       366,135  
Placement agent warrants
                    221,588                       221,588  
Unrealized foreign exchange on transaction
                            (6,470 )             (6,470 )
Net loss for the period
                                    (10,134,871 )     (10,134,871 )
Balance at August 31, 2008
    65,785,748       65,786       9,403,842       (51,668 )     (13,697,873 )     (4,279,913 )
Issuance of common stock: for cash
    2,222,222       2,222       274,641                       276,863  
Issuance of common stock for legal services
    2,160,000       2,160       1,173,840                       1,176,000  
Issuance of common stock for consulting services
    82,000       82       35,298                       35,380  
Issuance of common stock for interest
    470,725       471       160,046                       160,517  
Issuance of common stock for stock based compensation
    650,000       650       342,350                       343,000  
Conversion of note payable to common stock, net unamortized discount (Note 5(iii))
    850,000       850       238,036                       238,886  
Beneficial conversion - related party note payable (Note 5(iii))
                    118,718                       118,718  
Stock awards
                    508,802                       508,802  
Unrealized foreign exchange on transaction
                            (6,553 )             (6,553 )
Net loss for the period
                                    (2,820,543 )     (2,820,543 )
Balance at August 31, 2009
    72,220,695     $ 72,221     $ 12,255,573     $ (58,221 )   $ (16,518,416 )   $ (4,248,843 )

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
F-6

 

CLEAN POWER TECHNOLOGIES INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended August 31, 2009 and 2008 and for the period May 12, 2006 (Date of Inception) to August 31, 2009
(Stated in U.S. Dollars)

   
August 31,
       
   
2009
   
2008
   
May 12, 2006
 (Date of Inception) to
 August 31, 2009
 
Cash flows from operating activities:
                 
Net income (loss)
  $ (2,820,543 )   $ (10,134,871 )   $ (16,518,416 )
Adjustments to reconcile net income (loss) to cash
 used in operating activities:
                       
Depreciation
    253,653       157,115       514,726  
Amortization of stock option benefit
    338,546       380,290       718,836  
Amortization of debt discount
    345,669       104,477       474,840  
Amortization of deferred financing costs
    92,500       15,205       107,705  
Interest accrued on debt
    27,268       11,496       138,172  
Interest accrued on senior convertible notes
    160,000       23,111       183,111  
Derivative (income) expense
    (3,581,773 )     3,526,591       (55,182 )
Issuance of common stock for professional services
    1,176,000       -       1,809,609  
Issuance of common stock for director services
    -       250,000       430,000  
Issuance of common stock for consulting services
    35,380       525,000       1,171,880  
Issuance of common stock for prior period salary
    -       2,600,000       2,600,000  
Issuance of common stock for administrative services
    -       258,000       258,000  
Issuance of common stock for R&D
    -       -       402,000  
Issuance of stock award for consulting services
    13,750       -       13,750  
Stock-based compensation
    838,052       -       870,385  
Changes in assets and liabilities:
                       
Amounts Receivable
    (24,213 )     15,517       (34,235 )
Prepaid expenses and other current assets
    (74,801 )     90,691       (87,068 )
Prepaid deposit
    84,000       -       84,000  
Accounts payable and accrued expense
    952,931       280,026       1,273,984  
Net cash used in operating activities:
    (2,183,581 )     (1,897,352 )     (5,643,903 )
                         
Cash flows from investing activities:
                       
Acquisition of plant and equipment
    (570,166 )     (281,170 )     (1,322,464 )
Cash acquired from business combination
    -       -       62,070  
Net cash used in investing activities:
    (570,166 )     (281,170 )     (1,260,394 )
                         
Cash flows from financing activities:
                       
Proceeds from issuance of senior convertible notes
    -       1,815,000       1,815,000  
Proceeds from issuance of common stock
    1,000,000       815,000       2,743,766  
Proceeds from short-term loan
    84,000       -       84,000  
Due to related party
    508,907       436,060       2,338,077  
Net cash provided by financing activities:
    1,592,907       3,066,060       6,980,843  
                         
Effect of foreign exchange on transactions
    (12,844 )     (15,787 )     (47,200 )
                         
Net increase (decrease) in cash
    (1,173,684 )     871,751       29,346  
Cash at beginning of period
    1,203,030       331,279       -  
Cash and cash equivalents at end of period
  $ 29,346     $ 1,203,030     $ 29,346  

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
F-7

 

CLEAN POWER TECHNOLOGIES INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended August 31, 2009 and 2008 and for the period May 12, 2006 (Date of Inception) to August 31, 2009
 (Stated in U.S. Dollars)

   
August 31,
       
   
2009
   
2008
   
May 12, 2006
 (Date of Inception) to
 August 31, 2009
 
Supplemental schedule of cash flows:
                 
Cash paid during the period for interest
  $ -     $ -     $ -  
                         
Supplemental schedule of non-cash financing
 and investing activities:
                 
Conversion of note payable to common stock
  $ 238,886     $ 1,291,870     $ 1,530,756  
Total:
  $ 238,886     $ 1,291,870     $ 1,530,756  

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
F-8

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009
(Stated in U.S. Dollars)

Note 1     Nature and Continuance of Operations

(a)  
Organization

Clean Power Technologies Inc. (the “Company”) was incorporated in the State of Nevada, United States of America on October 30, 2003 as Sphere of Language.  On June 13, 2006, the Company changed its name to Clean Power Technologies Inc.

 
The Company incorporated Clean Energy and Power Solutions Inc. (“CEPS”) on May 12, 2006 in the State of Nevada as a wholly-owned subsidiary.

 
By agreement dated May 22, 2006, the Company agreed to issue 30,765,377 common shares for all the issued and outstanding common shares of Clean Power Technologies Inc. (“CPTI private”), a privately held company, incorporated on March 14, 2006 in the State of Nevada.  CPTI private is developing a  gas/steam or diesel/steam hybrid technology. CPTI private has incorporated a wholly-owned subsidiary, Clean Power Technologies Limited, (“CPTL-UK”) a company based in, and incorporated under the laws of the United Kingdom on May 10, 2006, to carry on all its research and development.  On April 24, 2006, CPTI private entered a research and development agreement to fund all future costs for research, development, patenting, licensing and marketing for an alternative hybrid fuel technology that combines diesel and steam and gas (petrol) and steam technologies for a 100% ownership of the technology and any associated intellectual rights (see Note 6).  CPTI private and CEPS merged on June 20, 2006 with CEPS being the surviving entity. On July 10, 2006 CEPS became a wholly-owned subsidiary of the Company when the stockholders of CPTI private tendered their remaining shares.

 
The Company’s fiscal year-end is August 31.

         (b)  Development Stage Activities

The Company is in the development stage and has not yet realized any revenues from its planned operations.

The primary operations of the Company are presently undertaken by CPTL-UK. Initially, the primary focus of the Company was to develop two vehicles in order to prove their concept.  The first vehicle was to be a prototype to demonstrate the technology and the second vehicle was to be an engineered vehicle to be unveiled to the auto industry.  In November 2007, the Company decided to re-prioritize its development program.  While development on the automobiles continued, it was decided that the fastest route to market was to focus on the development of refrigeration units for grocery trucks.

 
These audited consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.  Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern.  At August 31, 2009, the Company had not yet achieved profitable operations, has accumulated losses of $16,518,416 since inception, has negative working capital of $2,000,352 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to continue as a going concern.  The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.  Management has no

 
F-9

 


CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
(Stated in U.S. Dollars)

Note 1     Nature and Continuance of Operations – (Cont’d)

 (b)  
Development Stage Activities – Continued

 
formal plan in place to address this concern but considers that the Company will be able to obtain additional funds by equity financing and/or related party advances; however there is no assurance of additional funding being available.

Note 2     Summary of Significant Accounting Policies

 
These audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and are stated in US dollars except where disclosed otherwise.  Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgments.  Actual results may vary from these estimates.

 
The audited consolidated financial statements have, in management’s opinion, been properly prepared within the framework of the significant accounting policies summarized below:

Principles of Consolidation

The audited consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries CEPS and CPTL-UK.  All inter-company transactions have been eliminated.

Development Stage Company

The Company is a development stage company as defined in Statement of Financial Accounting Standards No. 7.  The Company is devoting substantially all of its present efforts to establish a new business and none of its planned principal operations have commenced.  All losses accumulated since inception have been considered as part of the Company’s development stage activities.

Plant, Equipment and Depreciation

 
Plant and equipment is recorded at cost.  Depreciation has been provided in amounts sufficient to relate the costs of depreciable assets to operations over their estimated useful lives on a straight-line basis over four years for vehicle and machinery, five years for office equipment, two years for computers and three years for leasehold improvements.

Impairment of Long-lived Assets

 
The Company reports the impairment of long-lived assets and certain intangibles in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”.  Certain long-lived assets and identifiable intangibles held by the Company are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  Accordingly, the impairment loss is recognized in the period it is determined.

 
F-10

 

CLEAN POWER TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
(Stated in U.S. Dollars)

Note 2     Summary of Significant Accounting Policies  - (Cont’d)

                        Foreign Currency Translation

 
The functional currency of the Company and CEPS is the US Dollar. The functional currency of CPTL-UK is the British Pound.  Accordingly, assets and liabilities of CPTL-UK are translated into US dollars at the exchange rate in effect at the balance sheet date and capital accounts are translated at historical rates.  Income statement accounts are translated at the average rates of exchange prevailing during the period.  Translation adjustments arising from the use of differing exchange rates from period to period are included in the accumulated other comprehensive gain (loss) account in Stockholders’ Deficiency.

 
Transactions undertaken in currencies other than the functional currency of the entity are translated using the exchange rate in effect as of the transaction date.  Any exchange gains and losses are included in the Statement of Operations.

Basic Loss Per Share

 
The Company reports basic loss per share in accordance with SFAS No. 128, “Earnings Per Share”.  Basic loss per share is computed using the weighted average number of shares outstanding during the period.  Fully diluted earnings per share are not presented because they are anti-dilutive.  At the end of the period presented, the Company had no other common stock equivalents, save a convertible debenture between the Company and an officer and director whereby amounts advanced are convertible to shares of common stock at $0.50 per share over the term of the loan at the election of the Board of Directors and a convertible debenture discussed in detail in Note 7 below.

Financial Instruments

Financial instruments, as defined in Financial Accounting Standards No. 107 Disclosures about Fair Value of Financial Instruments (FAS 107), consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, amounts receivable, accounts payable, accrued liabilities, notes payable, derivative financial instruments, and convertible notes payable.

We carry cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities at historical costs; their respective estimated fair values approximate carrying values due to their current nature. We also carry notes payable and convertible debt at historical cost; however, fair values of debt instruments are estimated for disclosure purposes (below) based upon the present value of the estimated cash flows at market interest rates applicable to similar instruments.

As of August 31, 2009, the estimated fair value and carrying value of our secured convertible notes payable is as follows:

Secured Convertible Notes Payable:
 
Carrying Value
   
Fair Value
 
$2,000,000 face value secured convertible notes due July 10, 2010
  $ (242,304 )   $ (2,005,361 )
                 


 
F-11

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 2     Summary of Significant Accounting Policies  - (Cont’d)

Financial Instruments - Continued

Derivative financial instruments, as defined in Financial Accounting Standard No. 133, Accounting for Derivative Financial Instruments and Hedging Activities (FAS 133), consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as debt financing arrangements, and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by FAS 133, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.

The following table summarizes the components of derivative liabilities as of August 31, 2009:

Our financing arrangements giving rise to
derivative financial instruments:
 
Compound
Embedded
Derivative
   
Warrant
Derivatives
   
Total
Derivatives
 
$2,000,000 face value secured convertible notes due July 10, 2010
  $ (779,193 )   $ (1,666,429 )   $ (2,445,622 )
$1,000,000 common stock purchase agreement
    -       (744 )     (744 )
    $ (779,193 )   $ (1,667,173 )   $ (2,446,366 )

We measure the fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton option valuation technique, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, and risk free rates) necessary to fair value these instruments. For complex derivative instruments, such as embedded conversion options, puts and redemption features embedded in hybrid debt instruments, we generally use the Monte Carlo Simulation valuation technique because it embodies all of the requisite assumptions (including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weightage to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

 
F-12

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 2     Summary of Significant Accounting Policies  - (Cont’d)

Financial Instruments - Continued

The following table summarizes the effects on our income (expense) associated with changes in the fair values of our derivative financial instruments by type of financing for the three months ended August 31, 2009.

Our financing arrangement giving rise to
derivative financial instruments and the income effects:
 
Compound
Embedded
Derivative
   
Warrant
Derivatives
   
Total
Derivatives
 
$2,000,000 face value secured convertible notes due July 10, 2010
  $ 183,540     $ 946,428     $ 1,129,968  
$1,000,000 common stock purchase agreement
    -       721,536       721,536  
    $ 183,540     $ 1,667,964     $ 1,851,504  

The following table summarizes the effects on our income (expense) associated with changes in the fair values of our derivative financial instruments by type of financing for the twelve months ended August 31, 2009.

Our financing arrangement giving rise to
derivative financial instruments and the income effects:
 
Compound
Embedded
Derivative
   
Warrant
Derivatives
   
Total
Derivatives
 
$2,000,000 face value secured convertible notes due July 10, 2010
  $ 1,153,808     $ 1,705,572     $ 2,859,380  
$1,000,000 common stock purchase agreement
    -       722,393       722,393  
    $ 1,153,808     $ 2,427,965     $ 3,581,773  

The following table summarizes the effects on our income (expense) associated with changes in the fair values of our derivative financial instruments from inception through the year ended August 31, 2009.

Our financing arrangement giving rise to
derivative financial instruments and the income effects:
 
Compound
Embedded
Derivative
   
Warrant
Derivatives
   
Total
Derivatives
 
$2,000,000 face value secured convertible notes due July 10, 2010
  $ 770,552     $ 1,103,428     $ 1,873,980  
$1,000,000 common stock purchase agreement
    -       743,496       743,496  
    $ 770,552     $ 1,846,924       2,617,476  
                         
Day-one derivative losses:
                       
$2,000,000 face value secured convertible notes due July 10, 2010
                    (2,541,191 )
$1,000,000 common stock purchase agreement
                    (21,103 )
Total derivative income (expense):
                  $ 55,182  

 
F-13

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 2     Summary of Significant Accounting Policies  - (Cont’d)

Financial Instruments - Continued

Our derivative liabilities as of August 31, 2009, our derivative gains during the quarterly period August 31, 2009 and our derivative losses from inception through August 31, 2009 are significant to our consolidated financial statements. The magnitude of derivative income (expense) reflects the following:

· The market price of our common stock, which significantly affects the fair value of our derivative financial instruments, experienced material price fluctuations. To illustrate, the closing price of our common stock decreased from $0.55 on July 10, 2008 to $0.45 on August 31, 2009. The lower stock price on August 31, 2009 had the effect of significantly decreasing the fair value of our derivative liabilities and, accordingly, we were required to adjust the derivatives to these lower values with charges to derivative income.

· In connection with our accounting for the secured convertible note financing we encountered the unusual circumstance of a day-one derivative loss related to the recognition of derivative instruments arising from the arrangement. That means that the fair value of the bifurcated compound derivative and warrants exceeded the proceeds that we received from the arrangement and we were required to record a loss to record the derivative financial instruments at fair value. The loss that we recorded amounted to $2,541,191. We did not enter into any other financing arrangements during the periods reported that reflected day-one loss.

The following table summarizes the number of common shares indexed to the derivative financial instruments as of August 31, 2009:

 
Our financing arrangement giving rise to derivative
financial instruments and indexed shares:
 
Compound
Embedded
Derivatives
   
Warrant
Derivatives
   
Total
Derivatives
 
$2,000,000 face value secured convertible notes due July 10, 2010
    5,714,286       7,142,858       12,857,144  
$1,000,000 common stock purchase agreement
    --       2,777,778       2,777,778  
      5,714,286       9,920,636       15,634,922  

ASC 82520 Registration Payment Arrangements (preCodification FASB Staff Position No. EITF 00192 Accounting for Registration Payment Arrangements) provides for the exclusion of registration payment arrangements, such as the liquidated damage provisions that are included in the financing contracts underlying the convertible debt financing arrangements, from the consideration of classification of financial instruments. Rather, such registration payments are accounted for pursuant to ASC 45020 Loss Contingencies (preCodification FAS No. 5 Accounting for Contingencies), which is our current accounting practice. That is, all registration payments will require recognition when they are both probable and reasonably estimable. As of August 31, 2009, our management concluded that registration payments are not probable.
 
 
F-14

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 2     Summary of Significant Accounting Policies - (Cont’d)

Income taxes

 
The Company is subject to United States income taxes.  The Company’s subsidiary, CPTL-UK, is subject to taxes in the United Kingdom.  Income taxes are accounted for under the asset and liability method.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.  The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain.

Research and Development Costs

Research and development costs are expensed in the year in which they are incurred.
 
                        Stock-based Compensation
 
In December 2002, the Financial Accounting Standards Board issued Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”), an amendment of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”).  The purpose of SFAS No. 148 is to: (1) provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, (2) amend the disclosure provisions to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation, and (3) to require disclosure of those effects in interim financial information.

The Company has adopted  SFAS No. 123 (revised 2004) (“SFAS No. 123R”), “Share-Based Payment,” which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. In January 2005, the Securities and Exchange Commission issued SAB No. 107, which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and instead generally requires that such transactions be accounted for using a fair-value-based method. We use the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair-value of stock-based awards under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS No. 123.  We have elected the modified prospective transition method as permitted by SFAS No. 123R and accordingly prior periods have not been restated to reflect the impact of SFAS No. 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options, restricted stock, restricted stock units, and employee stock purchase plan shares that are ultimately expected to vest as the requisite service is rendered beginning on December 1, 2006.


 
F-15

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 2     Summary of Significant Accounting Policies - (Cont’d)

Stock-based Compensation - Continued

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18.  Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable.  The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.

The Company has also adopted the provisions of the Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation – An Interpretation of APB Opinion No. 25 (“FIN 44”), which provides guidance as to certain applications of APB 25.

New Accounting Standards

Recently Issued Accounting Pronouncements

In June 2009 the FASB established the Accounting Standards Codification ("Codification" or "ASC") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.

Statement of Financial Accounting Standards ("SFAS") SFAS No. 165 (ASC Topic 855), "Subsequent Events", SFAS No. 166 (ASC Topic 810), "Accounting for Transfers of Financial Assets-an Amendment of FASB Statement No. 140", SFAS No. 167 (ASC Topic 810), "Amendments to FASB Interpretation No. 46(R)", and SFAS No. 168 (ASC Topic 105), "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162" were recently issued. SFAS No. 165, 166, 167, and 168 have no current applicability to the Company or their effect on the financial statements would not have been significant.

Accounting Standards Update ("ASU") ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures - Overall, ASU No. 2009-13 (ASC Topic 605), Multiple-Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and various other ASU's No. 2009-2 through ASU No. 2009-15 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.

 
F-16

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 2     Summary of Significant Accounting Policies - (Cont’d)

Use of Estimates in the preparation of the financial statements

The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.

Note 3     Amounts Receivable

Amounts receivable of $38,367 consists of refundable tax credits for the Value Added Tax (“VAT”) paid on purchases with respect to the operations of CPTL-UK in the United Kingdom.  CPTL-UK files quarterly returns with respect to the VAT transactions.

Note 4     Plant and Equipment

   
August 31, 2009
 
   
Cost
   
Accumulated
Amortization
   
Net Book
 
Vehicles
  $ 105,719     $ (53,529 )   $ 52,190  
Machinery
    761,269       (287,157 )     474,112  
Computer and office equipment
    222,500       (107,918 )     114,582  
Leasehold improvements
    252,547       (62,263 )     190,284  
    $ 1,342,035     $ (510,867 )   $ 831,168  

Note 5     Related Party Transactions

a)  
On April 24, 2006 CPTI entered a research and development agreement (the “Agreement”) to fund all future costs for research, development, patenting, licensing and marketing for an alternative hybrid fuel technology that combines diesel and steam and gas (petrol) and steam technologies for a 100% ownership of the technology and any associated intellectual rights with two directors and officers of CPTL-UK.  Under the terms of the Agreement, the Company agreed to retain one director as the Company’s project director at a fee of £3,000 (US$5,972) per month for a period of 36 months commencing May 2006 and the second director as the Company’s project manager at a fee of £6,000 (US$11,945) per month for a period of 36 months commencing May 2006.  During March 2008 the monthly fee for the project manager was increased to £10,000 (US$19,908).   On August 8, 2008 the project director and the project manager resigned as directors of CPTL-UK. Concurrently, the project manager entered into a new employment agreement (the “Employment Agreement”) with the Company for a term of four (4) years.  Under the terms of the Employment Agreement, from March 1, 2009 and on each subsequent anniversary during the term of the Employment Agreement, the project manager is entitled to an annual salary increase of 10%, as well as the following performance based compensation:

·  
500,000 shares of common stock when the Refrigeration Compact Heat Exchanger (the “Refrigeration Unit”) for the grocery truck/trailer is successfully tested;
·  
1,000,000 shares of common stock when the first Refrigeration Unit is commercially sold;
·  
1,000,000 shares each time when the heat recover system for the Marine application or An Auxiliary Steam Engine for Trucks or similar engines based on the Heat recovery and/or Steam technology is developed and commercially sold to the first customer;


 
F-17

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 5     Related Party Transactions (Cont’d)

·  
1,000,000 shares of common stock when the first automobile which is developed on the heat recovery system is successfully tested and verified by the E.P.A; and
·  
1,000,000 shares of common stock when the first automobile heat recovery system is commercially sold.

On July 23, 2009 the Company determined it had successfully achieved the first benchmark in its development program whereby the Refrigeration Compact Heat Exchanger (the “Refrigeration Unit”) for the grocery truck/trailer was successfully tested.  As a result, under the terms of Mr. Burn’s employment agreement, the Company reserved a total of 500,000 shares of the Company’s common stock and recorded an expense totalling $275,000 to stock based compensation during the fourth quarter of the current fiscal year.  The shares were subsequently issued on September 24, 2009.

Using the guidance provided in SFAS 123R the Company has not recorded compensation cost in respect of these unearned performance-based awards as at August 31, 2009 due to the uncertainty surrounding realization of the benefit of the awards.

On February 1, 2009, the Company entered into an addendum to accelerate the annual salary increase permitted under the contract upon achieving certain development benchmarks.  As a result, starting March 1, 2009 Mr. Burn’s monthly salary was adjusted to a base of £12,100.  During the fiscal year ended August 31, 2009, Michael Burns, the project manager who is also a member of the Board of Directors of the Company and an officer of wholly-owned subsidiary CPTL-UK was paid $209,160 (£133,600) under the terms of his employment agreement.

Additionally under the terms of the original April 24, 2006 Agreement, the Company agreed to fund all future costs for research, development, patenting, licensing and marketing of the technology in exchange for the transfer of all rights and interests in technology to the Company.  As payment for this technology, the Company’s subsidiary issued 2,000,000 shares of its common stock at $0.001, which shares were exchanged for 2,000,000 shares of the Company’s common stock.  The Company also agreed to fund up to £2,000,000 (US$4,027,800) towards the development of the technology.

b)  
On July 26, 2006, CPTL-UK entered into a lease agreement with an officer of CPTL-UK to lease the office and laboratory premises for a term of three years. (see Note 6 – (a)).  Under the terms of the lease, an expense of $29,400 (£18,778.40) was charged during the year ended August 31, 2009 by an officer of CPTL-UK as rent. Upon expiration of the lease the officer agreed to continue to provide month to month use of the premises at a rate of (£1,500) per month, plus certain taxes, until such time as a long-term lease can be negotiated.

c)  
Pursuant to an employment agreement dated May 22, 2008, between the Company and its CEO, Mr. Abdul Mitha, Mr. Mitha invoiced the Company $533,333 with respect to his monthly salary obligation for the twelve month period ended August 31, 2009.  During the twelve month period Mr. Mitha received payments against his accrued salary totaling $160,418, leaving $499,582 due and payable to Mr. Mitha in salary obligations as at August 31, 2009.

On July 23, 2009, the Company determined it had successfully achieved the first benchmark in its development program whereby the Refrigeration Compact Heat Exchanger (the “Refrigeration Unit”) for the grocery truck/trailer was successfully tested.  Under the terms of Mr. Mitha’s employment contract, he is entitled to be issued 200,000 shares to be issued each time a formal test for an industry application is successful.  As a result, the Company reserved a total of 200,000 shares of the Company’s common stock and recorded an expense totalling $110,000 to stock based compensation during the fourth quarter of the current fiscal year.  The shares were subsequently issued on September 24, 2009.

 
F-18

 
CLEAN POWER TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 5     Related Party Transactions (Cont’d)

During the fiscal year ended August 31, 2009 Mr. Mitha advanced $508,907 (2008 -$436,060) for operations, under the terms of a convertible debenture approved September 28, 2006.  In respect of these advances, during the twelve months ended August 31, 2009 the Company recorded amortization of loan discount in the amount of $127,596  (2008 - $80,246).  Unamortized discount at August 31, 2009, which has been applied to additional paid in capital with respect to the beneficial conversion feature associated with the loan proceeds advanced to the Company during the twelve months ending August 31, 2009, totalled $118,718 (2008 - $366,134), which amount is being amortized over  the term of the note(s) or until conversion.  During the quarter ended February 28, 2009, the Company issued 850,000 shares of common stock to Mr. Mitha to retire $425,000 of the cumulative loans as at that date, including all accrued interest as at the date of settlement, at $0.50 per share, less an unamortized discount upon conversion totaling $(186,114).  As at August 31, 2009 the balance sheet reflects notes payable to Mr. Mitha of $445,690 which amount reflects convertible loans totaling $558,732, net an unamortized discount of $113,042.

Note 6
Commitments

 
(a)
On July 26, 2006 CPTL –UK entered into a three year lease agreement for an office and research facility located in Newhaven, United Kingdom.  The lease expired on July 25, 2009 and is currently operating on a month to month basis.  The monthly rental payable is total $2,441(£1,500) plus applicable taxes.  During the fiscal year 2009, the Company paid a total $29,085 (£18,578), and in 2008 a total of $33,080 (£16,616) in respect of this lease, plus applicable taxes.

(b)  
The Company entered into a collaboration agreement dated October 11, 2006 for the development of a steam accumulator and other related technologies in partnership for use with the Company’s petrol (gas)/steam and diesel/steam hybrid technologies project.  The agreement called for funding of approximately US$400,000 by the partner.  As consideration, the Company was required to issue 4,000,000 common shares of the Company.

 
The agreement further provides that within 18 months from the first vehicle being publicly unveiled, the partner will have the option of either seeking cash reimbursement of its development costs from the Company or retaining the previously issued shares of common stock of the Company.  Should the partner seek cash reimbursement then the partner shall return a total of 3,000,000 shares of common stock to the Company.  Should development costs exceed US$400,000 then the Partner has the option to either receive cash reimbursement of the amount in excess of US$400,000 or to receive additional shares of the Company at a price to be negotiated.  Should the Company be unable to reimburse the partner on any call for reimbursement as allowed under the collaboration agreement, the Company will transfer an equal share of the intellectual property to the Partner so that the Partner and the Company will own the intellectual property equally.  On June 13, 2007, the Company issued a total of 4,000,000 shares of restricted Common Stock to Doosan Babcock Energy Ltd. (“Doosan”) pursuant to the terms and conditions of a subscription agreement, received May 21, 2007 (the “Subscription Agreement”). The Subscription Agreement was executed pursuant to the terms and conditions of that Collaboration Agreement entered into between the parties on October 11, 2006.
 
The Company provided an additional 100,000 common shares to Doosan, which shall be used at their discretion to reward any of their employees who have helped in the development of the technologies project.  The term of the agreement is three years.

 
F-19

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 6     Commitments (continued)

(c)  
On July 1, 2007, CPTL –UK entered into a six month renewable lease agreement for a corporate apartment located in Surrey, United Kingdom.  The initial lease expired on December 31, 2007, and was last renewed on July 1, 2008.  The lease called for monthly rent in the amount of $2,986 (£1,900) plus applicable taxes.  The lease expired without renewal during the quarter ended November 30, 2008.  During the fiscal year ended August 31, 2009 the Company paid $25,520 (£3,800) (2008 - $45,395 (£22,800) plus applicable taxes and utilities.

(d)  
 During the year ended August 31, 2007, the Company entered into an agreement with Abchurch Communications Limited to provide certain integrated financial and corporate communications services.  Under the terms of the agreement, Abchurch will provide four (4) phases of services to assist the Company in securing a listing on the AIM Exchange in London.  Fees payable under the agreement include a project fee of £40,000 (approximately U.S. $80,000), of which, the Company has remitted a total of £35,000 (approximately U.S. $70,000).  The agreement also provided for quarterly consulting fees of £12,000 (approximately U.S. $24,400). The Company renegotiated the quarterly payments required under the contract effective April 1, 2008 whereby quarterly fees were reduced to £3,000 per month for the period January to March 2008, and thereafter to £2,000 per month for the remaining term of the contract.  During the fiscal year ended August 31, 2009 the Company has remitted a total of $21,038 in respect of these fees, with $16,275 remaining due and payable at the end of August 31, 2009.

(e)  
On March 17, 2008, the Company entered into an agreement with steam technology specialist Dampflokomotiv-und Maschinenfabrik DLM AG ("DLM") to act as a consultant for the further development of the Company's Clean Energy Separation and Recovery (“CESAR”) technology. Under the terms of the agreement DLM was to provide a preliminary study to the Company at a cost of 34,375 Euros (approximately U.S. $52,000) payable in 3 installments as follows:
             · 25% of the total sum upon signing of the engagement;
·  
25% of the total sum upon presentation of the first results but not later than three (3) months after engagement date; and
· Balance upon completion of work scope payable within 30 days of delivery of final invoice

 
During the first quarter ended November 30, 2008, the Company received the preliminary study report and remitted all remaining payments under the terms of the engagement and entered into a further agreement regarding prototype specifications for a Heat Exchanger at a total cost of 12,340 Euros (then approximately US$15,680), which amount was remitted at the time of the engagement.

(f)  
On July 28, 2008, the Company entered into an agreement with Mr. George McLaine whereby Mr. McLaine agreed to serve as a consultant to assist the Company with introductions to transportation companies in the Province of Alberta, Canada, and abroad with a purpose of locating collaborative partners to test the Company’s heat recovery systems in trucks and trailers.  In consideration for this service, Mr. McLaine shall receive 32,000 shares of the Company’s common stock for each introduction that results in a collaboration agreement.  Further, Mr. McLaine shall receive 25,000 shares of the Company’s common stock per annum for serving as a consultant to the Company.  The contract is for a period of two (2) years and may be renewed by mutual consent.  Mr. McLaine is to also receive a 30% commission for any advance purchase orders received on the advance deposit required of 1% of the total purchase or $100 per unit ordered. 32,000 shares were issued under the Company’s 2007 Stock Option and Stock Award Plan as of September 8, 2008.  On July 28, 2009 under the

 
F-20

 
CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 6     Commitments (continued)

 
terms of the agreement, Mr. McLaine reached his first service related benchmark and the Company expensed a total of $13,750 to stock based compensation in respect of an annual award of 25,000 shares of common stock.  The shares were subsequently issued on September 24, 2009.

(g)  
On June 1, 2008, the Company’s subsidiary CPTL-UK entered into an employment contract with an IT specialist whereunder the employee will receive 25,000 shares of the Company’s common stock after the initial three (3) months, and 25,000 shares of the Company’s common stock each year on the anniversary of the completion of certain work projects up to a maximum of 100,000 shares.  25,000 shares were issued under the Company’s 2007 Stock Option and Award Plan as of September 8, 2008. As to the remaining 75,000 shares of common stock available for issue under the above-noted contract, due to the fact that they are service based awards, the Company has recognized a stock-based compensation expense which is being amortized over the period of service.  On June 30, 2009 the Company issued the second service related award of 25,000 common shares and expensed an additional amount of $1,750 as stock based compensation to record the discrepancy between the market value of the common shares on the date of the original expense, and the market value of the shares on the issuance date.  Refer to Note 9(ii) – Restricted Stock Awards for additional details.
 
(h)  
On October 27, 2008 the Company’s subsidiary CPTL-UK entered into an employment agreement with Marco Cucinotta whereby Mr. Cucinotta will receive an annual salary of $146,475 (£90,000) as well as the following performance based compensation:
 
·  
200,000 shares of the Company’s common stock on commencement of employment;
·  
100,000 shares of the Company’s common stock on completion of the first complete system in test cell;
·  
100,000 shares of the Company’s common stock on completion of the first truck based system;
·  
100,000 shares of the Company’s common stock on sale of the first system; and
·  
100,000 shares of the Company’s common stock upon establishing a UK consultancy firm and generating £100,000 in gross revenue.

 
The Company issued a total of 200,000 shares in respect of the above agreement under its 2007 Stock Option and Award Plan as to 100,000 shares on January 9, 2009 and 100,000 shares on March 3, 2009, respectively.  On July 23, 2009 the Company determined it had successfully achieved the first benchmark in its development program whereby the Refrigeration Compact Heat Exchanger (the “Refrigeration Unit”) for the grocery truck/trailer was successfully tested.  As a result, under the terms of Mr. Cucinotta’s employment agreement, whereby he is entitled to receive 100,000 shares of the Company’s common stock on completion of the first complete system in test cell, the Company reserved 100,000 shares of the Company’s common stock and recorded an expense totalling $55,000 to stock based compensation during the fourth quarter of the current fiscal year.  The shares were subsequently issued on September 24, 2009.

 
Using the guidance provided in SFAS 123R the Company has not recorded compensation cost in respect of the unearned performance-based awards as at August 31, 2009 due to the uncertainty surrounding realization of the benefit of the awards.

(i)  
 In August 2008, the Company entered into a collaboration agreement with Voith Turbo Gmbh& Co. KG (the “VTG”) to develop steam and heat energy recovery engines for Clean Power's proprietary heat recovery technology for refrigeration trailers for the grocery market. Under the terms of the collaboration agreement, Clean Power and Voith Turbo GmbH & Co. KG will analyse data from the testing of an existing refrigeration engine, results from which will be used to build and test a new engine that incorporates Clean Power's proprietary heat recovery technology. Voith is a multi-national company with significant interest in the

 
F-21

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009
(Stated in U.S. Dollars)

Note 6     Commitments (continued)

 
development of expanders in engine and braking systems. As part of its own drive systems and components development programme Voith Turbo GmbH & Co. KG has already developed hybrid systems, waste recovery systems and expansion engines based on the internal combustion engine which is used on the road, on rail, on water and in other industries. Under the collaboration agreement, the VTG invoiced the Company USD $255,398 (EUR 178,500). On October 27, 2009, the Company paid off the invoiced amount.

(j)  
During the fiscal year ended August 31, 2009 and prior, the Company’s wholly-owned subsidiary CPTL-UK entered into various employment contracts which call for a total of 5,150,000 shares of the Company’s common stock to be issued as stock awards upon completion of certain technology development benchmarks.  On July 23, 2009, the first of these benchmarks was reached and the Company has recorded a stock based compensation expense totalling $330,000 as it relates to the issuance of 600,000 common shares. Using the guidance provided in SFAS 123R the Company has not recorded compensation cost in respect of the remaining unearned performance-based awards as at August 31, 2009.  The Company has determined it is currently doubtful that employees will earn the right to benefit from the remaining awards. Additionally, under the above noted contracts the Company agreed to certain service based awards which shall be earned annually.  In total the Company granted 450,000 service-based awards, in respect of which the Company has recognized a stock-based compensation expense.  Refer to Note 9 (ii) – Restricted Stock Awards for additional details.
 
 
(k)  
Effective November 13, 2008 the Company entered into a five (5) year lease for office and warehouse space in a property located in New Haven, East Sussex, U.K., adjacent to its current leased facilities at an annual rate of $24,412 (£15,000) payable quarterly commencing March 2009.  Concurrently the Company entered into an option to purchase the aforementioned property, exercisable March through August 2010, for a purchase price the greater of (i) the price stated in an Independent Valuation or (ii) £425,000 less any reductions previously specified and agreed in a former option agreement.  During the fiscal year 2009, the Company paid total $21,987 (£14,044) plus applicable taxes.

 
The lease payments for each of the five succeeding fiscal years are as follows:

2010
  $
24,412
2011
24,412
2012
24,412
2013
24,412
2014
12,206
       Total:
  $
109,854

(l)  
On November 18, 2008 CPTL–UK entered into a six month renewable lease agreement for a corporate housing facility located in Surrey, United Kingdom for use by the Company’s CEO, Abdul Mitha.  The lease called for monthly rent in the amount of $2,034 (£1,250) plus applicable taxes and expired May 17, 2009.  The lease was renewed subsequent to the quarter for a term of 12 months, expiring in May, 2010.   During the fiscal year 2009, the Company paid total $19,570 (£12,500) plus applicable taxes and utilities. The lease payments for each of the two succeeding fiscal years are as follows:

2010
    18,309  
       Total:
  $ 18,309  

 
F-22

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009
(Stated in U.S. Dollars)

Note 6     Commitments (continued)

(m)  
 Effective February 1, 2009 the Company entered into a six (6) year lease for office and warehouse space in a property located in New Haven, East Sussex, U.K., adjacent to its current leased facilities at an annual rate of $26,032 (£16,000) plus taxes and expenses, payable monthly in advance, commencing January 30, 2009.  Concurrently the Company entered into an option to purchase the aforementioned property during the period April 30, 2014 through January 29, 2015, for a purchase price of £230,000. During the fiscal year 2009, the Company paid total $16,700 (£10,667) plus applicable taxes.

 
The lease payments for each of the five succeeding fiscal years are as follows:

2010
    $ 26,040  
2011
      26,040  
2012
      26,040  
2013
      26,040  
After 2013
      36,890  
       Total:
    $ 141,050  

 
 (n)
On March 12, 2009 and May 5, 2009 the Company entered into two agreements with Gersten Savage LLP, the Company’s attorneys, in connection with the filing and prosecution of certain foreign patent applications with respect to the Unitary Engine and Reservoir Engine Inventions as well as additional refrigeration types; and, prosecution and filing of additional United States applications for the Reefer Control System, In-line Automotive Auxiliary Power System and Land-fill/Waste Heat Auxiliary Power Generation System.  Under the terms of the retainer agreements, the Company agreed to pay fixed fees as follows:

§  
$810,000 worth of the Company’s restricted common shares with a deemed value of $0.375 per share. The Company issued a total of 2,160,000 shares in full and final settlement of this provision and a total of  $1,176,000, [$600,000 as to 1,200,000 common shares with a market value of $0.50 on the date of the agreement, and $576,000 as to 960,000 common shares with a market value of $0.60 on the date of the agreement], has been expensed in respect of the issuance of these shares on the Company’s income statement during the year;

§  
$450,000 in cash payments due under the March 12, 2009 agreement and $240,000 in cash payments due under the May 5, 2009 retainer agreement for a total of $690,000 in cash payments, which amount is payable as follows: $35,000 and $10,000, respectively, due  upon signing of the individual retainer agreements; $15,000 per month commencing 120 days from March 12, 2009 and $7,500 per month commencing 120 days from May 5, 2009 until such time as the balance of the required cash amounts are settled in full.  During the quarter the Company did not make any cash payments in respect of the two retainer agreements;

§  
In the event the Company should obtain additional financing in an amount of $3 million US Dollars, there shall be an acceleration as to monthly amounts to be invoiced under the May 5, 2009 retainer agreement such that there will be an immediate settlement of $200,000 in outstanding fees, with a further settlement of $100,000 in fees with each subsequent $1,000,000 raised.

§  
Under the terms of the retainer agreements the Company further agrees to grant piggyback registration  and/or S-8 rights and shall include the Designees’ shares of restricted common stock in its next registration statement.

 
F-23

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009
(Stated in U.S. Dollars)

Note 6     Commitments (continued)

(o)  
On April 29, 2009 the Company’s wholly-owned subsidiary CPTL-UK entered into an employment contract which calls for a total of 25,000 shares of the Company’s common stock to be issued as stock awards upon completion of certain technology development benchmarks.    Using the guidance provided in SFAS 123R the Company has not recorded compensation cost in respect of this performance-based award as at August 31, 2009.  The Company has determined it is currently doubtful that employees will earn the right to benefit from the performance based awards. Concurrently under this employment contract the employee is entitled to receive a total of 50,000 service-based awards which are granted over a three year period on the anniversary date of the contract.  In respect of these awards, the Company has recognized a stock-based compensation expense.  Refer to Note 9(ii) – Restricted Stock Awards for additional details.

(p)  
On June 29, 2009 the Company entered into a five (5) year lease for additional office and warehouse space in a property located in New Haven, East Sussex, U.K., adjacent to its current leased facilities at an annual rate of $24,412 (£15,000) payable quarterly commencing June 2009.   Concurrently the Company entered into an option to purchase the aforementioned property, exercisable June 2009 through December 2010, for a purchase price the greater of (i) the price stated in an Independent Valuation or (ii) £425,000 less any reductions previously specified and agreed in a former option agreement.  During the fiscal year 2009, the Company paid total $4,150 (£2,650) plus applicable taxes.

 
The lease payments for each of the five succeeding fiscal years are as follows:

2010
  $ 24,412  
2011
    24,412  
2012
    24,412  
2013
    24,412  
2014
    12,206  
       Total:
  $ 109,854  

(q)  
On July 17, 2009, the Company entered into a four months loan agreement (the “Note”) with an unrelated third party for the amount $84,000. The loan had an interest rate of 1% per month,  payable in advance for the duration of the Note and deducted from the proceeds of the Note on funding. The Note was subsequently paid in full on November 10, 2009.

Note 7     Secured Convertible Note Financings

Secured Convertible Notes consist of the following financings as of August 31, 2009:

   
Carrying Value
 
8% face value $2,000,000 secured convertible notes issued July 10, 2008 and due on July 10, 2010
  $ (242,304 )

On July 10, 2008 we entered into a financing arrangement with The Quercus Trust.  The financing arrangement involved the issuance of $2,000,000 of 8.0% secured convertible notes payable, due July 10, 2010 plus warrants to purchase 4,285,715 (Class A Warrants) and 2,857,143 (Class B Warrants) shares of our common stock with strike prices of $0.60 and $0.80, respectively, for a period of five years from the date of issuance. The secured convertible notes are convertible into our common shares based upon a fixed conversion price of $0.35 and provide for customary conversion price adjustments. The holder has the option to redeem the secured

 
F-24

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 7     Secured Convertible Note Financings (Continued)

convertible notes for cash in the event of defaults and certain other contingent events, including a change in control event and events related to the common stock into which the instrument was convertible, registration and listing (and maintenance thereof) of our common stock and filing of reports with the Securities and Exchange Commission (the “Default Put”). Further, the Company may, at its option, choose to redeem the convertible notes at any time prior to the one (1) year anniversary of issuance.  Any such redemption shall be at one hundred & twenty percent (120%) of the principal amount of the Note. Moreover, interest on the convertible note is payable at the option of the Company to the holder annually either in cash or in common stock. In addition, we granted registration rights to the holder that requires registration and continuing effectiveness thereof; we would be required to pay monthly liquidating damages of 1.0% for defaults under this provision.

We received net proceeds of $1,815,000 from the July 10, 2008 financing arrangement. Incremental, direct financing costs of $185,000 (including placement agent warrants valued at $221,588 using the Black-Scholes-Merton valuation technique) are included in deferred financing costs and are subject to amortization using the effective method. Accumulated amortization of deferred financing costs, which is included in interest expense, during the current quarterly period, amounted to $23,315.

In our evaluation of the financing arrangement, we concluded that the conversion features were not afforded the exemption as a conventional convertible instrument due to the anti-dilution protection; and it did not otherwise meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, we were required to bifurcate the embedded conversion feature and carry it as a derivative liability, at fair value. We also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events, noted above, that are not associated debt instruments. We combined all embedded features that required bifurcation into one compound instrument that is carried as a component of derivative liabilities. We determined that placement agent warrants met the conditions for equity classification.  However, the investor warrants did not meet the conditions for equity classification. Therefore, the investor warrants are also required to be carried as a derivative liability, at fair value. Derivative financial instruments are carried initially and subsequently at their fair values.

We estimated the fair value of the compound derivative on the inception dates, and subsequently, using the Monte Carlo valuation technique, because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex, compound derivative instruments. We estimated the fair value of the warrants on the inception dates, and subsequently, using the Black-Scholes-Merton valuation technique, adjusted for the effect of dilution because that technique embodies all of the assumptions (including, volatility, expected terms, and risk free rates) that are necessary to fair value freestanding warrants.

The following tabular presentation sets forth the derivative fair values as of the inception date of the financing transaction, year ended August 31, 2008 and August 31, 2009:

   
Compound Embedded
Derivatives
   
Warrant
Derivative
   
Total
Derivatives
 
Inception date (July 10, 2008)
  $ (1,549,746 )   $ (2,769,857 )   $ (4,319,603 )
August 31, 2008
  $ (1,933,002 )   $ (3,372,000 )   $ (5,305,002 )
August 31, 2009
  $ (779,193   $ (1,667,173   $ (2,446,366
 
 
F-25

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 7     Secured Convertible Note Financings (Continued)

Information and significant assumptions embodied in our valuations (including ranges for certain assumptions during the subject periods that instruments were outstanding) as of the inception date of the financing are illustrated in the following tables:
   
Compound
Embedded
Derivative
 
$2,000,000 face value secured convertible notes due July 10, 2010:
     
  Conversion price
  $ 0.35  
  Volatility
    78.96 %
  Equivalent term (years)
    1.82  
  Credit-risk adjusted yield
    8.50 %
  Interest-risk adjusted rate
    9.48 %
  Dividends
    -  

   
Class A Warrant
Derivative
   
Class B Warrant
Derivative
 
Warrants to purchase common stock:
           
  Strike price
  $ 0.60     $ 0.80  
  Volatility
    98.83 %     98.83 %
  Term (years)
    5.00       5.00  
  Risk-free rate
    3.10 %     3.10 %
  Dividends
    -       -  

Information and significant assumptions embodied in our valuations (including ranges for certain assumptions during the subject periods that instruments were outstanding) as of August 31, 2008 are illustrated in the following tables:

 
Compound Embedded Derivative
$2,000,000 face value secured convertible notes due July 10, 2010:
 
  Conversion price
$0.35
  Volatility
77.12%
  Equivalent term (years)
1.63
  Credit-risk adjusted yield
9.21%
  Interest-risk adjusted rate
9.49%
  Dividends
-

   
Class A Warrant
Derivative
   
Class B Warrant
Derivative
 
Warrants to purchase common stock:
           
  Strike price
  $ 0.60     $ 0.80  
  Volatility
    100.83 %     100.83 %
  Term (years)
    4.86       4.86  
  Risk-free rate
    3.10 %     3.10 %
  Dividends
    -       -  

 
F-26

 
CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 7     Secured Convertible Note Financings (Continued)

Information and significant assumptions embodied in our valuations (including ranges for certain assumptions during the subject periods that instruments were outstanding) as of August 31, 2009 are illustrated in the following tables:

$2,000,000 face value secured convertible notes due July 10, 2010:
 
Compound Embedded Derivative
 
  Conversion price
  $ 0.35  
  Volatility
    63.88 %
  Equivalent term (years)
    0.855  
  Credit-risk adjusted yield
    9.28 %
  Interest-risk adjusted rate
    7.14 %
  Dividends
    -  

   
Class A Warrant
Derivative
   
Class B Warrant
Derivative
 
Warrants to purchase common stock:
           
  Strike price (1)
  $ 0.45     $ 0.45  
  Volatility
    88.39 %     88.39 %
  Term (years)
    3.86       3.86  
  Risk-free rate
    2.39 %     2.39 %
  Dividends
    -       -  
                 
(1) The strike price of the Class A and Class B Warrants were reduced from their contractual exercise price of $0.60 and $0.80, respectively, because the warrant agreements contain down-round protection features and we subsequently issued warrants with a strike price of $0.45.
 

Note 8      Stock Purchase Agreement

On February 10, 2009 we entered into a stock purchase agreement with The Quercus Trust. The stock purchase agreement involved the issuance of 2,222,222 shares of common stock plus warrants to purchase 1,666,667 (Investor Series A Warrants) and 1,111,111 (Investor Series B Warrants) shares of our common stock with strike prices of $0.60 and $0.85, respectively, for a period of one year from the date of issuance. The stock purchase agreement resulted in gross proceeds of $1,000,000. In connection with the purchase agreement, the placement agent received warrants to purchase 133,333 (Agent Series A Warrants) and 88,889 (Agent Series B Warrants) shares of our common stock with strike prices of $0.60 and $0.85, respectively, for a period of one year from the date of issuance. Incremental, direct financing costs (placement agent warrants valued at $55,129) were allocated to the common stock and warrants based on their relative fair values in accordance with Accounting Principles Board Opinion No. 14 Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants (APB 14). In connection with our accounting for the Common Stock Purchase Agreement we recorded a day-one derivative loss related to the portion of the placement agent costs that were allocated to the warrants.
 
 
F-27

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 8
Stock Purchase Agreement (Continued)

The following table illustrates how the proceeds arising from the stock purchase agreement were allocated on the inception date:

Classification
 
Allocation
 
Day-one derivative loss
  $ (21,103 )
Common Stock (par value)
    2,222  
Paid-in Capital (Common Stock)
    274,641  
Derivative Liabilities (Warrants)
    744,240  
Proceeds
  $ 1,000,000  

In our evaluation of the purchase transaction, we concluded that the Common Stock issued met equity classification. There were no terms and conditions associated with the Common Stock that warranted classification outside of stockholders’ equity pursuant to either Statement of Financial Accounting Standards No. 150 Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (FAS 150) or Emerging Issues Task Force Consensus No. D-98 Classification and Measurement of Redeemable Securities (EITF D-98). However, the investor warrants and agent warrants did not meet the conditions for equity classification. The warrant contracts embody a provision whereby the placement warrants fall within the scope of FAS 150. Although the redemption event is conditional in nature, the standards require liability classification as a written put warrant under FAS 150 and must be recorded at fair value each reporting period.

Information and significant assumptions embodied in our valuations (including ranges for certain assumptions during the subject periods that instruments were outstanding) as of the inception date is illustrated in the following tables:

 
Series A
Warrant Derivative
 Series B
Warrant Derivative
Warrants to purchase common stock:
   
  Strike price
$0.60
$0.85
  Volatility
161.85%
161.85%
  Term (years)
1.00
1.00
  Risk-free rate
0.60%
0.60%
  Dividends
-
-

Information and significant assumptions embodied in our valuations (including ranges for certain assumptions during the subject periods that instruments were outstanding) as of August 31, 2009 are illustrated in the following tables:

   
Series A
Warrant
Derivative
   
Series B
Warrant
Derivative
 
Warrants to purchase common stock:
           
  Strike price
  $ 0.60     $ 0.85  
  Volatility
    38.45 %     38.45 %
  Term (years)
    0.45       0.45  
  Risk-free rate
    0.24 %     0.24 %
  Dividends
    -       -  
 
 
F-28

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 8
Stock Purchase Agreement (Continued)

ASC 820105562 Fair Value Measurements and Disclosures (pre Codification FAS No. 157 Fair Value
Measurements) provides that for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, a reconciliation is required of the beginning and ending balances.

The reconciliation of our derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of August 31, 2009 is as follows:

   
Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)
 
   
Compound
Embedded
Derivative
   
Warrant
Derivative
   
Total
 
Beginning balance
  $ (962,733 )   $ (3,335,137 )   $ (4,297,870 )
   Total (gains) or losses including in earnings
    183,540       1,667,964       1,851,504  
Ending balance
  $ (779,193 )   $ (1,667,173 )   $ (2,446,366 )

Note 9     Common Stock

(a)  
During the fiscal year ended August 31, 2009, the Company issued shares of common stock as follows:
 
   (i)  850,000 shares with respect to the conversion of certain outstanding related party debt due to the Company’s CEO, Abdul Mitha. Refer to Note 5 – Related Party Transactions, above.
     
   (ii)  2,222,222 shares in respect of a stock purchase agreement. Refer to Note 8 – Stock Purchase Agreement, above.
     
   (iii)  2,160,000 shares with respect to a retainer agreement with the law firm of Gersten Savage LLP, the Company’s attorneys. Refer to Note 6 – Commitments, above.
     
   (iv)  732,000 shares to employees and consultants under its 2007 Stock Option and Award Plan as compensation for services rendered.
     
   (v)  470,725 shares in respect of an annual interest payment due with respect to a certain Secured Convertible Note Financing.  Refer to Note 7 – Secured Convertible Note Financing above.
     
   (vi)  25,000 shares reserved for issuance to a consultant as compensation for services rendered up to July 28, 2009 (shares issued on September 24, 2009);
     
   (vii)  800,000 shares reserved for issuance to employees, officers and consultants as stock based awards for achieving the first benchmark in the Company’s development program on July 23, 2009 (shares isued on September 24, 2009).
     
 
 
F-29

 
CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 9     Common Stock (Continued)

(b)  
Stock-based compensation:

(i)  
Executive Stock Options
 
 
On May 22, 2008, the Board of Directors approved an Employment Agreement (the “Agreement”) with Mr. Abdul Mitha, a director and executive officer of the Company.  Under the terms of the Agreement, the Company has agreed to enter into a stock option agreement with Mr. Mitha, granting Mr. Mitha the option to purchase on each anniversary of the Agreement 1,000,000 shares of the Company’s common stock at an exercise price of the average 90 days trading price immediately preceding the anniversary date of the Agreement.  The options vest immediately upon issuance of the underlying agreement at each anniversary date, and the option shares shall be exercisable by Mr. Mitha within 5 years from the date of grant.   Further under the terms of the Agreement, all options issued to Mr. Mitha in accordance with the Agreement shall become immediately exercisable as to 100% of the shares of Common Stock not otherwise vested upon any termination of employment.

Following is a table outlining the number of options required to be granted as fully vested under the Agreement at each anniversary date and the term of said options:

Date
 
Number of options
 
Expiry date
May 1, 2009
    1,000,000  
April 30, 2014
May 1, 2010
    1,000,000  
April 30, 2015
May 1, 2011
    1,000,000  
April 30, 2016
May 1, 2012
    1,000,000  
April 30, 2017
May 1, 2013
    1,000,000  
April 30, 2018
May 1, 2014
    1,000,000  
April 30, 2019
      6,000,000    

For financial reporting purposes, the Company has relied on the guidance provided in FASB 123R and has valued the options over 1,2,3,4,5 and 6 years at inception (May 1, 2008) applying variable accounting. The fair value of the shares will be recalculated at each reporting date using an exercise price of the preceding 90 days applying Volume Weighted Average Pricing (VWAP). The value attributable to the vested portion of each tranche will be amortized over its requisite period, with a final value being calculated on the grant date for each tranche applying the 90 day VWAP immediately preceding the actual date of grant. Additionally, we have not applied a forfeiture rate to these shares as under the terms of the Agreement the shares are guaranteed to become fully vested. 
 
 
F-30

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 9     Common Stock (Continued)
 
(b)  
Stock-based compensation - Continued
                                
         (i) Executive Stock Options – continued

The fair value of each option granted was computed using the Black-Scholes method using the following weighted-average assumptions:

Stock Price
(Issue date)
   
Exercise price
   
Risk Free interest rate
 
Date of issue
Expiration date
 
Term (years)
   
Volatility
   
Value
 
$ 0.50     $ 0.548       2.34 %
5/1/2008
5/1/2014
    2.4260       82.83 %   $ 0.27  
$ 0.50     $ 0.555       2.39 %
5/1/2008
5/1/2015
    2.7959       79.92 %   $ 0.21  
$ 0.50     $ 0.555       2.39 %
5/1/2008
5/1/2016
    3.2801       79.92 %   $ 0.22  
$ 0.50     $ 0.555       2.39 %
5/1/2008
5/1/2017
    3.7822       79.92 %   $ 0.24  
$ 0.50     $ 0.555       2.39 %
5/1/2008
5/1/2018
    4.2753       79.92 %   $ 0.26  
$ 0.50     $ 0.555       2.39 %
5/1/2008
5/1/2019
    4.7685       79.92 %   $ 0.27  

The fair value of the vested portion of options granted during the fiscal year ended August 31, 2008 totals $380,290 which amount has been expensed and recorded as a current liability on the Company’s balance sheet.  The fair value of the vested portion of options during the year ended August 31, 2009 totals $338,545 which amount has also been expensed and recorded as a current liability on the Company’s balance sheet. The following table summarizes details of the vesting schedule and associated fair value calculations:

Option
Grant date
 
Option Qty
   
Fair Market Value as at May 31, 2008
$
   
Amortization
Term
(In months)
   
Amortized value as at August 31, 2009
$
 
May 1, 2009
    1,000,000       273,038       12       273,038  
May 1, 2010
    1,000,000       206,630       24       137,754  
May 1, 2011
    1,000,000       224,523       36       99,788  
May 1, 2012
    1,000,000       241,052       48       80,351  
May 1, 2013
    1,000,000       255,627       60       68,167  
May 1, 2104
    1,000,000       268,821       72       59,738  
      6,000,000       1,469,691               718,836  
 
          (ii) Restricted stock awards

The Board of Directors approved a stock option and stock award plan on February 10, 2007 (the “2007 Plan”). Under the 2007 Plan, a maximum of 2,000,000 shares of the common stock, par value $0.001 per share, may be awarded to directors, officers, employees and consultants of the Company. The duration of the 2007 Plan has been set at 10 years from the time of adoption thereof by the Board of Directors.   The Board of Directors approved a further stock option and stock award plan on February 10, 2008 (the “2008 Plan”). Under the 2008 Plan, a maximum of 2,500,000 shares of the common stock, par value $0.001 per share, may be awarded to directors, officers, employees and consultants of the Company. The duration of the 2008 Plan has been set at 10 years from the time of adoption thereof by the Board of Directors. The Board of Directors approved a further stock option and stock award plan on April 30, 2009 (the “2009 Plan”). Under the 2009 Plan, a maximum of ,000,000 shares of the common stock, par value $0.001 per share, may be awarded to directors, officers, employees and consultants of the Company. The duration of the 2009 Plan has been set at 10 years from the time of adoption thereof by the Board of Directors.

 
F-31

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 9     Common Stock (Continued)

(b)  
Stock-based compensation - Continued
 
                      (ii) Restricted stock awards - continued
 
During the fiscal year ended August 31, 2009, the Company issued and reserved for issuance fully vested stock awards totaling 1,557,000 shares to employees and consultants under its Stock Option and Award plans as compensation for services rendered.  The shares were valued at the closing price of the Company’s common stock on the respective issue and/or reservation dates:

(a)  
On September 8, 2008, $0.59 per share with respect to 225,000 common shares issued to employees of wholly-owned subsidiary CPTL-UK, for a total of $132,750; and

(b)  
On September 8, 2008, $0.59 per share with respect to 32,000 common shares, for a total of $18,800.

(c)  
On January 9, 2009, $0.50 per share with respect to 350,000 common shares issued to an officer of the Company and an employee of the Company’s wholly-owned subsidiary CPTL-UK for a total of $175,000.

(d)  
On March 3, 2009, $0.50 per share with respect to 100,000 common shares issued to an employee of the Company’s wholly-owned subsidiary CPTL-UK for a total of $50,000.

(e)  
On June 30, 2009, $0.55 per share with respect to 25,000 common shares issued to an employee of the Company’s wholly-owned subsidiary CPTL-UK for a total of $13,750.

(f)  
On July 23, 2009, $0.55 per share with respect to 800,000 common shares reserved for issuance to certain officers and employees of the Company’s wholly-owned subsidiary CPTL-UK upon reaching the first benchmark in the Company’s development program for a total of $440,000.  The shares were subsequently issued on September 24, 2009.

(g)  
On July 28, 2009, $0.55 per share with respect to 25,000 common shares reserved for issuance to an employee of the Company’s wholly-owned subsidiary CPTL-UK for a total of $13,750.  The shares were subsequently issued on September 24, 2009.

All amounts have been expensed during the respective periods.

Under SFAS 123R, restricted stock awards are granted subject to certain restrictions, including in some cases service conditions. The grant-date fair value of restricted stock awards, which has been determined based upon the market value of the Company’s shares on the grant date, is expensed over the vesting period.  During fiscal year ended August 31, 2009, the Company has granted 1,032,000 stock awards to certain employees which are subject to certain service conditions, including term of employment.  275,000 stock awards remain unvested as at August 31, 2009.   In respect of these awards, the Company has recognized stock-based compensation of $55,052 with respect to the vested portion at August 31, 2009, and unrecognized compensation expense totaling $81,948 is expected to be recognized over fiscal 2010, 2011 and 2012 as to $51,704, $23,760, $6,484, respectively.

 
F-32

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)
Note 9     Common Stock (Continued)

(b)  
Stock-based compensation - Continued
 
       (iii) Restricted stock awards - continued
 
The following table summarizes information on the Company’s restricted stock awards.

   
Shares
   
Weighted Average
Grant Date
Fair Value
 
             
Unvested, at August 31, 2008
    -       -  
Granted
    1,032,000     $ 0.53  
Vested
    757,000       0.57  
Forfeited
    -          
Unvested, end of August 31, 2009
    275,000     $ 0.50  

Note 10   Warrants

The Company had outstanding warrants to purchase 10,714,286 and 7,714,286 shares of its common stock at August 31, 2009 and August 31, 2008, respectively, at prices ranging from $0.60 to $0.85 per share.

The following schedule shows the warrants outstanding and changes made during the fiscal year ended August 31, 2009:

   
Number
   
Weighted Average
Exercise Price
 
Warrants outstanding, August 31, 2008
    7,714,286     $ 0.70  
Changes during the fiscal year ended August 31, 2009
               
          Granted
    3,000,000     $ 0.70  
          Exercised
    -       -  
          Expired
    -       -  
Warrants outstanding, August 31, 2009
    10,714,286     $ 0.70  

Warrants outstanding at August 31, 2009 expire as follow:

Year
 
Number of Shares
 
2010
    3,000,000  
2013
    7,714,286  

Detailed terms of the valuations of the above noted warrants are discussed above in Note 7 – Secured Convertible Note Financings and Note 8 – Stock Purchase Agreement.

 
F-33

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 11   Deferred Tax Assets

 
At August 31, 2009, the Company has incurred non-capital losses in the United States totaling approximately $9,601,127 (2008-$7,018,000) and non-capital losses in the U.K. totaling £2,294,416 (2008 - £1,109,000) which can be carried forward and applied against future taxable income.  The losses in the U.K. may be carried forward indefinitely and the losses in the United States expire in 2029.

At August 31, 2009 and 2008, the significant components of future income tax assets are as follows:

   
2009
   
2008
 
Deferred tax assets
           
Non-capital losses carryforward
  $ 7,669,971     $ 3,229,000  
Valuation allowance for deferred tax asset
    (7,669,971 )     (3,229,000 )
                 
    $ -     $ -  

 
The amount taken into income as deferred tax assets must reflect that portion of the income tax loss carryforwards that is more likely than not to be realized from future operations.  The Company has chosen to provide an allowance of 100% against all available income tax loss carryforwards, regardless of their time of expiry.  The increase in valuation allowance was $4,440,971 for the year ended August 31, 2009.

Note 12   Other

On October 31, 2008 the Company signed a letter of intent (“LOI”) with Flukong Enterprise Inc. (“Flukong”) for a purchase order of up to 500 of Clean Power’s steam hybrid engines to provide fuel savings of 40 per cent or better in refrigerated trailer (“reefer”) applications with Flukong Enterprise Inc., an Edmonton, Alberta based corporation. The LOI grants distributorship to Flukong for new customers in both Canada and China, and is renewable annually if Flukong can demonstrate inter alia its capacity to meet a sales target of a pre-agreed number of reefer engines per year.  Under the terms of the LOI, Flukong would purchase up to 500 of Clean Power’s hybrid refrigeration engines over an 18 month period, following their formal certification by US regulatory bodies, most notably the Environmental Protection Agency (“EPA”).  Furthermore, upon commencement of the first delivery, Clean Power would grant an option for Flukong to purchase an additional 1,000 reefer engines per year for two years. To secure these terms Flukong has paid a US$84,000 deposit to Clean Power Technologies.

During the quarter ended November 30, 2008, the Company and Quercus agreed to extend the date for the filing of the registration statement on Form S-1, more particularly described under Note 8 to these financial statements to November 19, 2008, on which date the Company successfully filed its Form S-1.  The registration statement was declared effective by the SEC on December 4, 2008.

On June 13, 2009 the Company held its 2009 Annual General Meeting of Shareholders (the “Meeting”).  At the Meeting shareholders elected directors, ratified the appointment of the Company’s independent auditors for the current fiscal year and approved a 2009 Stock Option and Stock Award Plan whereby the Company may issue up to 4,000,000 shares of the Company’s common stock to directors, officers, employees and consultants, as further described in the Definitive Schedule 14C filed with the SEC on May 19, 2009.

 
F-34

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 13
Subsequent events

On September 3, 2009, the Company entered into a Memorandum of Understanding (the "MOU") with NewEnco and Renewable Power Systems ("RPS").   The MOU sets out the terms and conditions whereby the Company, NewEnco and RPS have agreed to work together through the MOU which is referred to as a Collaboration Agreement with the ultimate goal of making landfill site operations more energy efficient by installing a system developed and manufactured by the Company that utilizes the heat recovery system on a landfill gas engine and recovers the exhaust heat which will be used to make electricity and feed this into the national grid.   The terms of the MOU call for the Company to place a heat recovery system on a landfill gas engine on the RPS and NewEnco site at Abingdon, U.K. which will be used to recover the exhaust heat which the Company will use to make electricity and feed into the national grid.  The Company expects to begin field tests in early 2010. Each of the parties to the MOU shall be responsible for their own costs in connection with the project.

On September 24, 2009, the Company issued 15,000 shares of the Company’s common stock to an employee with respect to provisions of his employment contract providing for an annually granted service based award. Subsequent to the fiscal year end, on September 24, 2009, the Company issued a total of 100,000 shares to an advisory board member as a stock award.

On September 24, 2009 the Company issued a total of 200,000 shares to employees of the Company as stock based awards.
 
On September 24, 2009, the company issued a total of 825,000 shares, which had been previously reserved for issuance, as described above in Note 9 to the consolidated notes to the financial statements, Section (a),sub-sections (vi) and (vii).
 
On October 2, 2009, the Company entered into an Amended and Restated Stock Purchase Agreement (the "Purchase Agreement") with The Quercus Trust ("Quercus") a California Trust that previously (i) purchased $2,000,000 in convertible debentures issued by the Company pursuant to an offering conducted in July 2008; and (ii) purchased 2,222,222 shares of the Company's Common Stock at a price of $0.45 per share. The Purchase Agreement provided for the purchase by Quercus of 2,500,000 shares of the Company's common stock at a purchase price of $0.20 per share (the "Shares").  In addition to the Shares, the Company also agreed to  issue warrants to purchase an aggregate of 3,125,000 shares of the Company's common stock  at an exercise prices of (x) $0.27 per share for the initial 1,875,000 warrants (the "$0.27 Warrants); and (y) $0.38 per share for the remaining 1,250,000 warrants (the "$0.38 Warrants).

On October 16, 2009, the Company entered into Amendment No. 1 to the Amended and Restated Stock Purchase Agreement (the "Purchase Agreement") with The Quercus Trust ("Quercus" or the "Purchaser"), a California Trust that previously (i) purchased $2,000,000 in convertible debentures issued by the Company pursuant to an offering conducted in July 2008; (ii) purchased 2,222,222  shares of the Company's Common Stock at a price of $0.45 per share; and (iii) purchased 2,500,000 shares of the Company's common stock at a purchase price of $0.20 per share. The Purchase Agreement provided for the purchase by Quercus of an aggregate of 3,580,247 shares of the Company's common stock (the "Shares") as follows: (i) 1,111,111 shares of the Company's Common Stock at a purchase price of $0.45 per share; and (ii) 2,469,136 shares of the Company's Common Stock at a purchase price of $0.405 per share.  The aggregate purchase for these securities was $1,500,000. In addition to the Shares, the Company also agreed to issue to Quercus warrants to purchase (i) 833,333 shares of Common Stock at an exercise price of $0.60 per share (the "$0.60 Warrants"); (ii) 555,555 shares of Common Stock at an exercise price of $0.85 per share (the "$0.85 Warrants"); (iii) 1,857,852 shares of Common Stock at an exercise price of $0.54 per share (the "$0.54 Warrants"); and (iv) 1,234,568 shares of Common Stock at an exercise price of $0.77 per share (the "$0.77 Warrants").

 
F-35

 

CLEAN POWER TECHNOLOGIES INC.
 (A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
August 31, 2009
 (Stated in U.S. Dollars)

Note 13
Subsequent events – (Continued)
 
On October 16, 2009 and October 19, 2009, Ms. Diane Glatfelter and Mr. Peter Gennuso, respectively, resigned from their position as members of the Board of Directors of the Company pursuant to the terms of the Purchase Agreement, as amended and restated.   Concurrently, Mr. David Gelbaum, the trustee of the Quercus Trust, was appointed to the Board of Directors of the Company. The Company's Board currently consists of four members, two of which are affiliates of the Quercus Trust.

On November 11, 2009, the Company fulfilled its obligation with respect to a short term loan of $84,000 to an unrelated third party, as identified above in the notes to the consolidated financial statements, Note 6(r).

 
F-36

 


There are not currently and have not been any disagreements between us and our accountants on any matter of accounting principles, practices or financial statement disclosure.

ITEM 9A(T). CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of August 31, 2009.  Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to our Company required to be included in our reports filed or submitted under the Exchange Act.

Management’s Report On Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 14d-14(f).  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial reporting reliability and financial statement preparation and presentation.  In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2009.  In making the assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.   Based on its assessment, management concluded that, as of August 31, 2009, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

There were no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the quarter ended August 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION

There are no items that required disclosure in a Form 8-K during the fourth quarter of the year covered by this Form 10-K that were not reported by the Company.

 
25

 

PART III
 

Directors, Executive Officers Promoters and Control Persons

The following table sets forth the name, age and position of each of the members of our board of directors, executive officers, and certain significant employees as of the fiscal year ending August 31, 2009.

Name
 
Age
 
Position
Term
Abdul Mitha
    63  
Director
September 28, 2006 to date
         
President / CEO
June 2, 2006 to date
         
Vice President Finance
July 30, 2005 to date
Michael Burns
    54  
Director
May 23, 2006 to date
         
Significant Employee, Project Manager
August 8, 2008 to date
David Anthony
    48  
Director
February 10, 2009 to date
Diane Glatfelter
    43  
Secretary-Treasurer and Chief Financial Officer
May 23, 2006 to October 16, 2009
Peter Gennuso
    38  
Director
May 15, 2008 to October 19, 2009
         
Vice President Corporate Strategy
February 23, 2009 to date

Our Board of Directors consists of only one class. All of the directors will serve until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. There are no family relationships among directors and executive officers.  There are no arrangements or understandings between any director or executive officer and any other person(s) pursuant to which a director or executive officer was selected.  Our executive officers are elected annually by our Board of Directors. Ms. Glatfelter and Mr. Gennuso resigned from the Board of Directors as per the Purchase Agreement with the Querucs Trust. Mr. David Gelbaum, the trustee of the Quercus Trust, was appointed to the Board of Directors on October 16, 2009. Simultaneously with these resignations and appointment, Mr. Gennuso and Mr. James Mason were appointed as Board Observers.

We know of no pending proceedings to which any director, member of senior management, or affiliate is either a party adverse to us, or our subsidiaries, or has a material interest adverse to us or our subsidiaries.

None of our executive officers or directors have been involved in any bankruptcy proceedings within the last five years, been convicted in or has pending any criminal proceedings, been subject to any order, judgment or decree enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity or been found to have violated any federal, state or provincial securities or commodities law.

Abdul Mitha, President, Chief Executive Officer and Member of the Board of Directors
Mr. Mitha is the sole director and President of our U.K. Subsidiary and the sole director and officer of our Nevada subsidiary.  Mr. Mitha has over twenty-five years of domestic and international experience in the management of ongoing and start-up public and private companies. Mr. Mitha has provided consulting and advisory services to various start-up businesses in Canada including Findex Resources, Inc., Meritworld.Com Inc., and E-Com Interactive, Inc. From March 1991 to September 2005, Mr. Mitha was the President and shareholder of AVS 90 PV Associates Ltd. a company which acted as an advisor and consultant to start up companies, and was involved in the financing and negotiating of joint venture projects. From September 2005, to present, Mr. Mitha was the President and a director of Unicus Corporation, a company involved in the promotion of steam and gas technologies.  Mr. Mitha practiced law at the English Bar from 1972 - 1977 when he immigrated to Canada. Since 1977, Mr. Mitha has been an entrepreneur in business and real estate investments. Mr. Mitha received his MA in Comparative Law from Brunel University, Middlesex, England and is a Barrister-at-Law with the English Bar. Mr. Mitha was a member of the British Institute of Management from 1973 to 1978 and a member of the Institute of Arbitrators (England) from 1972 to 1978.

 
26

 

Mr. Mitha is not an officer or director of any other reporting company that files annual, quarterly or period reports with the United States Securities and Exchange Commission.

Michael Burns, Member of the Board of Directors
He is the Secretary of our U.K. Subsidiary.  Mr. Burns is an engineer with experience in the field of control systems, and project management. From December, 2002 to the date of this filing, Mr. Burns was the managing director for Engineering Verification Services Ltd., a company offering various automotive design and development projects including a heat recovery steam engine hybrid vehicle project with Mitsui Babcock. From April 2001 to December 2002, Mr. Burns held the position of Chief Engineer, Engineering Verification Services and Business Unit Manager with TWR Engineering Worthing Technical Centre. From October 1994 to April 2001, Mr. Burns was employed by the Daewoo Motor Company with his final position being Chief Engineer, vehicle testing, prototype building and executive board member. He had under management a department of 240 people. Mr. Burns resides in the United Kingdom.

Mr. Burns is not an officer or director of any other reporting company that files annual, quarterly or period reports with the United States Securities and Exchange Commission.

David Anthony, Member of the Board of Directors
Beginning in 2006, David Anthony has been acting as managing partner of 21 Ventures, LLC, a New York based company that provides seed and bridge capital to early stage technology ventures. Mr. Anthony also serves on the board of directors of Agent Video Intelligence, Orion Solar, BioPetroClean, Cell2Bet, Juice Wireless, Visioneered Image Systems, and VOIP Logic. He is an Adjunct Professor at the New York Academy of Sciences and also serves as entrepreneur-in-residence at the University of Alabama, Birmingham School of Business. Mr. Anthony received his MBA from The Tuck School of Business at Dartmouth College in 1989 and a BA in economics from George Washington University in 1982.
 
Mr. Anthony is not an officer or director of any other reporting company that files annual, quarterly or period reports with the United States Securities and Exchange Commission.
 
Diane Glatfelter, Secretary-Treasurer and Chief Financial Officer
Ms. Glatfelter holds a Bachelor of Science with a major in marketing and a minor in management, received from the University of Bridgeport in 1988. From June 1999 to the date of this filing, Ms. Glatfelter is the President and shareholder of K2 Unlimited, Inc. a consulting company which provides consulting in all areas of cash flow, including factoring, purchase order advances, debt management, bounced check recovery, loans, revenue management, risk management and collections.  Ms. Glatfelter has 150 million dollars of accounts receivable under management for various clients at any one time. Ms. Glatfelter resides in Billerica, MA.

Ms. Glatfelter is an officer and director of OLM Ventures Inc. a reporting company that files annual, quarterly or period reports with the United States Securities and Exchange Commission.

Peter Gennuso, Vice President Corporate Strategy
Mr. Gennuso is a partner at Gersten Savage LLP, a law firm located in New York, NY, where he specializes in corporate and securities law including securities offerings, venture capital, private equity, mergers, acquisitions and emerging growth companies. He has been with Gersten Savage since May 2004, initially starting as an associate in the firm’s corporate and securities department. Prior to joining Gersten Savage, Peter was an associate at a New York City law firm. Mr. Gennuso is currently legal counsel for Clean Power Technologies Inc. and has served as legal counsel since December 27, 2006. He earned a JD and MBA (Finance) from Pace University in 1998.

Mr. Gennuso is not an officer or director of any other reporting company that files annual, quarterly or period reports with the United States Securities and Exchange Commission.

Advisory Board

The Company has an advisory board as detailed below:
 
Professor Fred Bayley: Fred Bayley is professor emeritus in the University of Sussex, which he joined in 1966 as the founding Professor of Mechanical Engineering. He moved from Newcastle where after a spell in marine engineering
on the Tyne he had become lecturer and, later, reader in the University Department of Mechanical Engineering. He has taught and researched in heat transfer and fluid mechanics while acting also as a consultant to the process and power industries. The experience thus gained has been applied to gas turbines and recently to hybrid vehicles. The UK Institution of Mechanical engineers awarded him the 2001 Dugald Clerk Prize for his paper on the saturated liquid accumulator to the Total Vehicle Conference. Professor Bayley is the principal inventor of the CESARS technology.
 
 
27

 
James Mason: Mr. Jim Mason is a career automotive engineer and strategic consultant, initially trained by General Motors. After an early career in programme management with GM Vauxhall and Leyland Trucks, Jim joined ENASA Pegaso, the Spanish national truck and bus maker, as Technical Director responsible for Advanced Technology, Product Planning and Engineering. Based in Madrid, he was intimately involved in acquisitions, such as UK truck-maker Seddon-Atkinson, and the process of privatising the Company -- which culminated in its acquisition by Iveco (Fiat Commercial Group) in 1990.  Jim returned to the UK, running his own engineering consultancy, until joining Daewoo in 1995 to head up their strategic initiative aimed at establishing a credible design and engineering centre in Europe. Since retiring from full-time employment in 2003 he has continued acting as a consultant to auto-engineering companies and to private equity businesses requiring technical due diligence for proposed acquisitions. Jim is also a Chartered Engineer (CEng.), a Fellow of the Institution of Mechanical Engineers (FIMechE), and a Member of the Society of Automotive Engineers (MSAE).

Section 16(a) Beneficial Ownership Reporting Compliance

Based on a review of Forms 3, 4, and 5 and amendments thereto furnished to the registrant during its most recent fiscal year, the following represents each person who did not file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year:

Name
Reporting Person
Form 3/# of transactions
Form 4/# of transactions
Form 5/# of transactions
The Quercus Trust
10% owner
Late/1
N/A
N/A
Peter Gennuso
Director
N/A
Late/2
N/A
Abdul Mitha
Principal Executive Officer and Director
N/A
Late/1
N/A

Code of Ethics


Nominating Committee

There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors.

Audit Committee

At this time, the Company is not required to have an audit committee. Further, since there are not sufficient independent members of the Board it is not feasible at this time to have an audit committee.   The Board of Directors performs the same functions as an audit committee.  The Board of Directors in performing its functions as an audit committee has determined that it does not have an audit committee financial expert.

ITEM 11.  EXECUTIVE COMPENSATION.

Compensation Discussion and Analysis

The Board of Directors approved a stock option and stock award plan on February 10, 2007 (the “2007 Plan”). Under the 2007 Plan, a maximum of 2,000,000 shares of the common stock, par value $0.001 per share, may be awarded to directors, officers, employees and consultants of the Company. The duration of the 2007 Plan has been set at 10 years from the time of adoption thereof by the Board of Directors.

 
28

 
 
The Board of Directors approved a further stock option and stock award plan on February 10, 2008 (the “2008 Plan”). Under the 2008 Plan, a maximum of 2,500,000 shares of the common stock, par value $0.001 per share, may be awarded to directors, officers, employees and consultants of the Company. The duration of the 2008 Plan has been set at 10 years from the time of adoption thereof by the Board of Directors.

The Board of Directors approved a further stock option and stock award plan on April 30, 2009 (the “2009 Plan”). Under the 2009 Plan, a maximum of 4,000,000 shares of the common stock, par value $0.001 per share, may be awarded to directors, officers, employees and consultants of the Company. The duration of the 2009 Plan has been set at 10 years from the time of adoption thereof by the Board of Directors.

The Company’s 2007 Plan, 2008 Plan, and 2009 Plan (collectively the “Plans”) are to be used to maintain the ability of the Company and its subsidiaries to attract and retain highly qualified and experienced directors, officers, employees and consultants (“Participants”) and to give such Participants a continued proprietary interest in the success of the Company and its subsidiaries. Pursuant to this Plan, eligible Participants will be provided the opportunity to participate in the enhancement of stockholder value through the grants of options, stock appreciation rights, awards of free trading stock and restricted stock, bonuses and/or fees payable in stock, or any combination thereof.

The Company’s Plans are currently administered by its Principal Executive Officer, Mr. Abdul Mitha under the guidelines of the plans as detailed below:

The Administrator shall have the authority, in its discretion:

·  
to determine the fair market value of the securities to be issued under these Plans;
·  
to select the Participants to whom the Options and Stock Awards may be granted thereunder;
·  
to determine whether and to what extent Options or Stock Awards or any combination thereof, are granted thereunder;
·  
to determine the number of shares of Common Stock or equivalent units to be covered by each Option and Stock Award granted thereunder;
·  
to approve forms of agreement for use under these Plans;
·  
to determine the terms and conditions, not inconsistent with the terms of these Plans, of any Option or Stock Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration, and any restriction or limitation regarding any Option or Stock Award or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;
·  
to construe and interpret the terms of this Plan and Options or Stock Awards;
·  
to prescribe, amend and rescind rules and regulations relating to the Plans, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws;
·  
to modify or amend each Option or Stock Award (subject to Section 18(c) of the Plans);
·  
to authorize any person to execute on behalf of the Company any instrument or treasury order required to effect the grant of an Option or Stock Award previously granted by the Administrator; and
·  
to make all other determinations deemed necessary or advisable for administering these Plans.

The Company’s Executive Compensation is currently approved by the Board of Directors of the Company in the case of the Company’s Principal Executive Officer.   For all other executive compensation contracts, the Principal Executive Officer negotiates and approves the contracts and compensation.

On May 22, 2008, the Board of Directors approved an Employment Agreement (the “Agreement”) with Mr. Abdul Mitha, a director and executive officer of the Company.  Under the terms of the Agreement, the Company must employ Mr. Mitha until July 1, 2014, unless sooner terminated, with the provision of extending the term for an additional five (5) years upon mutual agreement between the Company and Mr. Mitha.  The Company has agreed to compensate Mr. Mitha with an annual base salary of $500,000 during the first year of the initial term, with annual increases of 20% per year thereafter during the term of the Agreement, payable in consistent payroll installments. The Company has also agreed to increase Mr. Mitha’s base salary to $750,000 when the Company generates in excess of $1,000,000 and up to $5,000,000 in gross revenue.  

 
29

 

In the event that the Company is unable to pay the base salary in cash to Mr. Mitha, the Company is required to provide compensation within ninety (90) days by way of restricted shares of common stock, issued at $0.50 per share.  Mr. Mitha is entitled to receive bonus payments or incentive compensation, as outlined below, as may be determined by the Board of Directors of the Company.  Mr. Mitha is also entitled to participate in all stock option plans of the Company in effect during the term of employment. The Company shall take all action reasonably requested by the Executive to permit any cashless exercise of the options as permitted under the Company’s Stock Option Plan.

Under the terms of the Agreement, Mr. Mitha shall be entitled to receive such bonus payments or incentive compensation as may be determined at any time or from time to time by the Board of Directors of the Company (or any authorized committee thereof) in its discretion.  Such potential bonus payments and/or incentive compensation shall be considered at least annually by the Board or committee and shall relate to the following:

·  
200,000 shares when the Company raises a minimum of $3,000,000 financing for the project. Should the amount raised be higher, additional shares on pro rata basis.
·  
200,000 shares when formal tests of the engines for each industry application are successfully completed to the satisfaction of the first end user client in such category.
·  
150,000 shares when the Company enters into Joint Venture or Collaboration Agreements with any company or companies which will help to accelerate the Company’s project or help to accelerate the revenue format.
·  
100,000 share each year or pro rata thereof when the Company generates $1,000,000 in Gross Revenue during each operating year; thereafter 200,000 shares each year or pro rata thereof when the Company generates in excess of $1,000,000 and up to $5,000,000 in Gross Revenue during each operating year; and 350,000 shares each year or pro rata thereof when the Company generates $10,000,000 and up in Gross Revenue during each operating year.

The first 200,000 shares, relative to formal tests in industry applications, were earned during the fiscal year, and issued subsequent to the end of the fiscal year.

Under the terms of the Agreement, the Company has agreed to enter into a stock option agreement with Mr. Mitha, granting Mr. Mitha the option to purchase at the end of each anniversary of the Agreement 1,000,000 shares of the Company’s common stock at an exercise price of the average 90 days trading price immediately preceding the anniversary date of the Agreement.   The options vest immediately upon issuance of the underlying agreement at each anniversary date, and the option shares shall be exercisable by Mr. Mitha within 5 years from the date of grant.  Further under the terms of the Agreement, all options issued to Mr. Mitha in accordance with the Agreement shall become immediately exercisable as to 100% of the shares of Common Stock not otherwise vested upon any termination of employment. The stock options under this contract were or are to be granted directly from Company treasury, as earned.  The first 1,000,000 options under this agreement were granted in the fiscal year.
 
Following is a table outlining the number of options required to be granted as fully vested under the Agreement at each anniversary date and the term of said options:

Date
 
Number of Options
 
Expiry Date
May 1, 2009
    1,000,000  
April 30, 2014
May 1, 2010
    1,000,000  
April 30, 2015
May 1, 2011
    1,000,000  
April 30, 2016
May 1, 2012
    1,000,000  
April 30, 2017
May 1, 2013
    1,000,000  
April 30, 2018
May 1, 2014
    1,000,000  
April 30, 2019
TOTAL
    6,000,000    
 
On August 8, 2008, the project manager entered into a new employment agreement (the “Employment Agreement”) with the Company for a term of four (4) years.  Under the terms of the Employment Agreement, from March 1, 2009 and on each subsequent anniversary during the term of the Employment Agreement, the project manager is entitled to an annual salary increase of 10% relative to a base salary of £10,000, as well as the following performance based compensation:

 
30

 

·  
500,000 shares of common stock when the Refrigeration Compact Heat Exchanger (the “Refrigeration Unit”) for the grocery truck/trailer is successfully tested;
·  
1,000,000 shares of common stock when the first Refrigeration Unit is commercially sold;
·  
1,000,000 shares of common stock each time the heat recovery system for (i) the Marine application or   (ii) an Auxiliary Steam Engine for trucks or similar engines based on steam recovery are commercially sold to the first customer;
·  
1,000,000 shares of common stock when the first automobile which is developed on the heat recovery system is successfully tested and verified by the E.P.A; and
·  
1,000,000 shares of common stock when the first automobile heat recovery system is commercially sold.

On February 1, 2009, the Company entered into an addendum to accelerate the annual salary increase permitted under the contract upon achieving certain development benchmarks.  As a result, starting March 1, 2009 Mr. Burn’s monthly salary was adjusted to a base of £12,100.

The stock awards under this contract were or are to be issued under the Company’s stock option and stock award plans. With the achievement of the first milestone, 500,000 shares of common stock were earned under the Employment agreement in the current fiscal year, and were issued subsequent to the fiscal year end.

Summary Compensation Table
 
Name and Principal Position
Year
Salary ($)
Bonus ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($)
Total ($)
Abdul Mitha
Principal Executive Officer
2009
533,333
-0-
110,000(1)
1,469,691(2)
-0-
-0-
-0-
2,113,024
Abdul Mitha
Principal Executive Officer
2008
166,667
-0-
-0-
2,913,061(3)
-0-
-0-
2,600.000
5,679,728
Diane Glatfelter
Principal
Financial Officer
2009
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
Diane Glatfelter
Principal Financial Officer
2008
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
Michael Burns, Secretary CPTL-UK
2009
209,160
-0-
275,000(4)
-0-
-0-
-0-
-0-
484,160
Michael Burns, Secretary  CPTL-UK
2008
191,119
-0-
-0-
-0-
-0-
-0-
-0-
191,119
 
(1) 200,000 shares granted under performance incentive sections of employment contract, which were earned in the fiscal year, and issued subsequent to the end of the fiscal year.
(2) Reflects the valuation of 1,000,000 issued option awards on May 1, 2009 at the amount of $273,038 and the valuation of 5,000,000 granted option awards at the amount of $1,196,653 which portion are revalued each quarter until issued in blocks of 1,000,000 option awards upon the anniversary of each May 1 until fully issued in 2014.
(3) Reflects the valuation of 6,000,000 granted option awards at the fiscal year ended August 31, 2008 which amount is revalued each quarter commencing May 1, 2008 until issued in blocks of 1,000,000 upon the anniversary of the grant date until May 1, 2014.
(4) 500,000 shares granted under performance incentive sections of employment contract, which were earned in the fiscal year, and issued subsequent to the end of the fiscal year.
 
 
31

 

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth for each named executive officer certain information concerning the outstanding equity awards as of our latest fiscal year end August 31, 2009.

 
Option Awards
Stock Awards
Name
Number of
Securities
Underlying
Unexercised
Options
Exercisable
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
 
Option
Exercise Price ($)
 
Option
Expiration
Date
Number of Shares
or Units
of Stock
that Have Not Vested
 
Market
Value of
Shares or
Units of
Stock
that Have Not
Vested ($)
 
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or Other
Rights
That Have Not
Vested
 
Equity Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested ($)
 
Abdul Mitha
1,000,000
Nil
5,000,000
See (1) below
See (1) below
Nil
Nil
Nil
Nil
Diane Glatfelter
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Michael Burns
Nil
Nil
Nil
Nil
Nil
Nil
 
4,000,000
See (2) below
 
(1) Mr. Mitha has the option to purchase at the end of each anniversary of his employment agreement, which commenced in May 2008, 1,000,000 shares of the Company’s common stock at an exercise price of the average 90 days trading price immediately preceding the anniversary date of the Agreement.   The options vest immediately upon issuance of the underlying agreement at each anniversary date, and the option shares shall be exercisable by Mr. Mitha within 5 years from the date of grant.
(2) Mr. Burns has the right to stock awards based on benchmarks of development more particularly described above, from which 500,000 shares were earned in the fiscal year.  We have not valued the remaining awards as they are not yet earned.  Based on the closing price of $.45of the Stock as at August 31, 2009 the awards would have had a value of $1,800,000.

Compensation of Directors

Name
Fees Earned or Paid in Cash ($)
Stock
Awards ($)
Option
Awards ($)
Non-Equity Incentive Plan Compensation ($)
Change in Pension Value and Nonqualified Deferred Compensation
Earnings ($)
All Other Compensation ($)
Total  ($)
James Mason, Advisory Board Member
20,183
-0-
-0-
-0-
-0-
-0-
20,183
Fred Bayley,
Advisory Board Member
-0-
-0-
-0-
-0-
-0-
-0-
-0-

Other than as detailed above, we did not pay director's fees to Company Directors and Advisory Board Members by way of cash or other cash compensation for services rendered as a director in the year ended August 31, 2009.  We have no present formal plan for compensating our directors for their service in their capacity as directors, although in the future, such directors are expected to receive compensation and options to purchase shares of common stock as awarded by our board of directors or (as to future options) a compensation committee which may be established in the future.  Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors.  The board of directors may award special remuneration to any director undertaking any special services on behalf of our company other than services ordinarily required of a director.  Other than as indicated in this Annual Report, no director received and/or accrued any compensation for his or her services as a director, including committee participation and/or special assignments.

 
32

 
 
Compensation Committee

We do not currently have a compensation committee.  The Company’s Executive Compensation is currently approved by the Board of Directors of the Company in the case of the Company’s Principal Executive Officer.   For all other executive compensation contracts, the Principal Executive Officer negotiates and approves the contracts and compensation.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Security Ownership of Certain Beneficial Owners

The following table sets forth information, as of November 17, 2009, with respect to the beneficial ownership of the Company’s Common Stock by each person known by the Company to be the beneficial owner of more than 5% of the outstanding common stock.  Information is also provided regarding beneficial ownership of common stock if all outstanding options, warrants, rights and conversion privileges (to which the applicable 5% stockholders have the right to exercise in the next 60 days) are exercised and additional shares of common stock are issued.
 
TITLE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER
AMOUNT AND NATURE OF BENEFICIAL OWNER
PERCENT OF CLASS(1)
Common
Doosan Babcock Energy Ltd.
11 The Boulevard,
Crawley, West Sussex, U.K.
4,000,000 shares held directly
5.20%
Common
Abdul Mitha
32 Hawkwood Pl N.W.
Calgary, Alberta T3G 1X6
CEO, President, Director
11,538,493 common shares of which 8,538,493(2) common shares are held directly, 2,000,000(3) common shares are held indirectly, and 1,000,000 options held directly(4)
12.24%
Common
The Quercus Trust
1835 Newport Blvd, A109–PMB 467
Costa Mesa, CA  92627
31,543,699 common shares held directly(5)
31.96%
 
 
 
(1) based upon 76,940,942 issued and outstanding shares of common stock as of November 17, 2009.
(2) This amount includes 1,117,464 common shares which are available for issue under the terms of a convertible loan with Mr. Mitha, as at August 31, 2009, and 200,000 shares granted according to performance incentive clauses in Mr. Mitha’s employment contract.
(3) These 2,000,000 common shares are owned by: Mr. Mitha’s wife, who owns 500,000 shares of common stock and Mr. Mitha’s son and daughter, who each own 750,000 shares of common stock.  Mr. Mitha disclaims any beneficial ownership of these shares, and therefore these 2,000,000 shares are not included in the percent of class calculation.
(4) A total of 1,000,000 stock options are presently exercisable by Mr. Mitha pursuant to his employment contract and are included in this calculation.  The options were issued on May 1, 2009, are fully vested, and expire on April 30, 2014. The exercise price is the average 90 days trading price immediately preceding May 1, 2009. A further 5,000,000 options are required to be issued to Mr. Mitha over the period of his contract or upon his termination.  While the Company does not anticipate a termination of Mr. Mitha’s contract these 5,000,000 options are not included in the calculation as they have yet been earned pursuant to the contract.
(5) Consists of up to 5,714,286 shares of common stock to be issued pursuant to a Convertible Debenture in the amount of $2,000,000, 470,725 shares of common stock issued as interest on the Convertible Debentures, 4,285,714 shares of common stock issuable upon the exercise of Class A warrants and 2,857,143 shares of common stock issuable upon the exercise of Class B warrants.  This also includes 2,222,222 shares of common stock issued as a result of a stock purchase agreement, which agreement also included warrants to purchase 1,666,667 and 1,111,111 shares of common stock at various strike prices. This includes a further 2,500,000 shares issued in respect of an amended and restated purchase agreement as of October 2, 2009 and 3,125,000 associated warrants available for purchase at various strike prices.  This includes further 3,580,247 shares of common stock issued in respect of Amendment No.1 to the amended and restated purchase agreement, and  4,481,308 associated warrants available for purchase at various strike prices. Mr. David Gelbaum, a member of our Board of Directors of the Company, is the Trustee of the Quercus Trust and has voting and dispositive power over the shares beneficially owned by the Quercus Trust. Mr. David Anthony, a member of the Board of Directors of the Company, is a consultant to the Quercus Trust.
 
 
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Security Ownership of Management

The following table shows, as of November 17, 2009, the shares of Clean Power Common Stock beneficially owned by each director (including each nominee), by each of the executive officers and by all directors and executive officers as a group.  Information is also provided regarding beneficial ownership of common stock if all outstanding options, warrants, rights and conversion privileges (to which the applicable officers and directors have the right to exercise in the next 60 days) are exercised and additional shares of common stock are issued.

TITLE OF CLASS
NAME OF BENEFICIAL OWNER
AMOUNT AND NATURE OF BENEFICIAL OWNER
PERCENT OF CLASS(1)
Common
Abdul Mitha
32 Hawkwood Pl N.W.
Calgary, Alberta T3G 1X6
CEO, President, Director
11,538,493 common shares of which 8,538,493(2) common shares are held directly, 2,000,000(3) common shares are held indirectly, and 1,000,000 options held directly(4)
12.24%
Common
Michael Burns
Director
1,550,000 common shares of which 1,500,000 are held directly and 50,000(5) common shares are held indirectly
1.95%
 Common
Diane Glatfelter
Chief Financial Officer, Secretary-Treasurer and Director
 240,000 common shares held directly
 0.03%
 Common
Peter J. Gennuso
Vice President Corporate Strategy and Director
 861,839 common shares held directly
 
1.08%
Common
David Anthony(6)
Director
0 common shares
0.00%
Common
All Officers and Directors as a group
Common shares
15.30%

(1) based upon 76,940,942 issued and outstanding shares of common stock as of November 17, 2009
(2) This amount includes 1,117,464 common shares which are available for issue under the terms of a convertible loan with Mr. Mitha, as at August 31, 2009, and 200,000 shares granted according to performance incentive clauses in Mr. Mitha’s employment contract.
(3) These 2,000,000 common shares are owned by: Mr. Mitha’s wife, who owns 500,000 shares of common stock and Mr. Mitha’s son and daughter, who each own 750,000 shares of common stock.  Mr. Mitha disclaims any beneficial ownership of these shares, and therefore these 2,000,000 shares are not included in the percent of class calculation.
(4) A total of 1,000,000 stock options are presently exercisable by Mr. Mitha pursuant to his employment contract and are included in this calculation.  The options were issued on May 1, 2009, are fully vested, and expire on April 30, 2014. The exercise price is the average 90 days trading price immediately preceding May 1, 2009. A further 5,000,000 options are required to be issued to Mr. Mitha over the period of his contract or upon his termination.  While the Company does not anticipate a termination of Mr. Mitha’s contract these 5,000,000 options are not included in the calculation as they have yet been earned pursuant to the contract.
(5) The 50,000 common shares are owned by Mr. Burn’s wife.  Mr. Burns disclaims any beneficial ownership of these shares.
(6) Mr. David Anthony is a consultant to The Quercus Trust, whose shares of common stock are included in the Quercus Trust disclosure above under the heading “Security Ownership of Certain Beneficial Owners”

Changes in Control

None.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.


On July 26, 2006, CPTL-UK entered into a lease agreement with an officer of CPTL-UK to lease the office and laboratory premises for a term of three years. (see Note 6 – (a)).  Under the terms of the lease, an expense of $29,400 (£18,778.40) was charged during the year ended August 31, 2009 by an officer of CPTL-UK as rent. Upon expiration of the lease the officer agreed to continue to provide month to month use of the premises at a rate of (£1,500) per month, plus certain taxes, until such time as a long-term lease can be negotiated.
 
 
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Pursuant to an employment agreement dated May 22, 2008, between the Company and its CEO, Mr. Abdul Mitha, Mr. Mitha invoiced the Company $533,333 with respect to his monthly salary obligation for the twelve month period ended August 31, 2009.  During the twelve month period Mr. Mitha received payments against his accrued salary totaling $160,418, leaving $499,582 due and payable to Mr. Mitha in salary obligations as at August 31, 2009.

During the fiscal year ended August 31, 2009 Mr. Mitha advanced $508,907 (2008 -$436,060) for operations, under the terms of a convertible debenture approved September 28, 2006.  In respect of these advances, during the twelve months ended August 31, 2009 the Company recorded amortization of loan discount in the amount of $127,596  (2008 - $80,246).  Unamortized discount at August 31, 2009, which has been applied to additional paid in capital with respect to the beneficial conversion feature associated with the loan proceeds advanced to the Company during the twelve months ending August 31, 2009, totalled $118,718 (2008 - $366,134), which amount is being amortized over  the term of the note(s) or until conversion.  During the quarter ended February 28, 2009, the Company issued 850,000 shares of common stock to Mr. Mitha to retire $425,000 of the cumulative loans as at that date, including all accrued interest as at the date of settlement, at $0.50 per share, less an unamortized discount upon conversion totaling $(186,114).  As at August 31, 2009 the balance sheet reflects notes payable to Mr. Mitha of $445,690 which amount reflects convertible loans totaling $558,732, net an unamortized discount of $113,042.
 
Review, Approval or Ratification of Transactions With Related Persons

The Company does not currently have any written policies and procedures for the review, approval or ratification of any transactions with related persons.
 
Promoters and Certain Control Persons
 
None
 
Parents

There are no parents of the Company
 
Director Independence
 
As of the date of this Annual Report, we do not have any independent directors.
 
The Company has developed the following categorical standards for determining the materiality of relationships that the Directors may have with the Company. A Director shall not be deemed to have a material relationship with the Company that impairs the Director's independence as a result of any of the following relationships:

1.
the Director is an officer or other person holding a salaried position of an entity (other than a principal, equity partner or member of such entity) that provides professional services to the Company and the amount of all payments from the Company to such entity during the most recently completed fiscal year was less than two percent of such entity’s consolidated gross revenues;
2.
the Director is the beneficial owner of less than five (5%) per cent of the outstanding equity interests of an entity that does business with the Company;
3.
the Director is an executive officer of a civic, charitable or cultural institution that received less than the greater of one million ($1,000,000) dollars or two (2%) per cent of its consolidated gross revenues, as such term is construed by the New York Stock Exchange for purposes of Section 303A.02(b)(v) of the Corporate Governance Standards, from the Company or any of its subsidiaries for each of the last three (3) fiscal years;
4.
the Director is an officer of an entity that is indebted to the Company, or to which the Company is indebted, and the total amount of either the Company's or the business entity's indebtedness is less than three (3%) per cent of the total consolidated assets of such entity as of the end of the previous fiscal year; and
5.
the Director obtained products or services from the Company on terms generally available to customers of the Company for such products or services. The Board retains the sole right to interpret and apply the foregoing standards in determining the materiality of any relationship.

 
35

 

The Board shall undertake an annual review of the independence of all non-management Directors. To enable the Board to evaluate each non-management Director, in advance of the meeting at which the review occurs, each non-management Director shall provide the Board with full information regarding the Director’s business and other relationships with the Company, its affiliates and senior management.

Directors must inform the Board whenever there are any material changes in their circumstances or relationships that could affect their independence, including all business relationships between a Director and the Company, its affiliates, or members of senior management, whether or not such business relationships would be deemed not to be material under any of the categorical standards set forth above. Following the receipt of such information, the Board shall re-evaluate the Director's independence.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the fees billed to the Company for professional services rendered by the Company's principal accountant, for the year ended August 31, 2009 and August 31, 2008:

Services
 
2009
   
2008
 
Audit fees
    27,000       25,000  
Audit related fees
    15,500       10,500  
Tax fees
    3,700       0  
Total fees
  $ 46,200     $ 35,500  

Audit fees consist of fees for the audit of the Company's annual financial statements or the financial statements of the Company’s subsidiaries or services that are normally provided in connection with the statutory and regulatory filings of the annual financial statements.

Audit-related services include the review of the Company's financial statements and quarterly reports that are not reported as Audit fees, in addition to auditor review of the Company’s two S-1 filings during the fiscal period.

Tax fees included tax planning and various taxation matters.

 
36

 

PART IV

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Financial Statements

The following consolidated financial statements of the Company are filed as part of this Annual Report on Form 10-K as follows:

Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets
F-3
Consolidated Statements of Operations and Comprehensive Loss
F-4
Consolidated Statement of Changes in Stockholders’ Deficiency
F-5 to F-6
Consolidated Statements of Cash Flows
F-7 to F-8
Notes to the Consolidated Financial Statements
F-9 to F-36

All other schedules have been omitted because they are not applicable, not required under the instructions, or the information requested is set forth in the consolidated financial statements or related notes there to.

Exhibits
 
EXHIBIT NO.
IDENTIFICATION OF EXHIBIT
3.1
Articles of Incorporation
Incorporated by reference to our SB-2 registration statement filed  with the Securities and Exchange Commission on March 15, 2004
3.1 (i)
Amendment to Articles of Incorporation dated June 12, 2006
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on July 21, 2006
3.1(ii)
Amendment to Articles of Incorporation dated June 13, 2006
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on July 21, 2006
3.2
Bylaws
Incorporated by reference to our SB-2 registration statement filed with the Securities and Exchange Commission on March 15, 2004
3.2(i)
Amended and Restated Bylaws
 
Incorporated by reference to our Form 10-QSB filed with the Securities and Exchange Commission on January 22, 2007
10.1
Agreement and Plan of Merger between the Company, Clean Energy and Power Solutions Inc. and the shareholders of Clean Power Technologies Inc. executed
on May 22, 2006.
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on July 21, 2006
 
10.2
Memorandum of Understanding between the Company and Mitsui Babcock Energy Limited dated September 11, 2006
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on September 12, 2006
10.3
Collaboration Agreement between the Company and Mitsui Babcock Limited dated October 11, 2006
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 19, 2006
10.4
 2007 Stock Option and Stock Award Plan approved by the Board of Directors and the Shareholders
Incorporated by reference to our Form SB-2 registration statement filed with the Securities and Exchange Commission on March 23, 2007

 
37

 

10.5
 
 
 
 
Subscription Agreement from Doosan Babcock Energy Ltd., executed pursuant to the Collaboration Agreement between the Company and Doosan Babcock Energy Ltd. dated October 11, 2006
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on June 20, 2007
10.6
2008  Stock Option and Stock Award Plan approved by the Board of Directors and the Shareholders
Incorporated by reference to our Definitive 14-C filed with the Securities and Exchange Commission on April 17, 2008
10.7
Employment Agreement between Abdul Mitha and the Company effective May 1, 2008, approved by the Board of Directors on May 22, 2008.
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on May 28, 2008
10.8
Stock Purchase Agreement dated July 10, 2008, by and between the Company and The Quercus Trust
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on July 16, 2008
10.9
Promissory Note issued by  the Company to The Quercus Trust
 
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on July 16, 2008
10.10
Registration Rights Agreement by and between the Company and The Quercus Trust
 
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on July 16, 2008
10.11
Pledge Agreement by and between the Company and The Quercus Trust
 
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on July 16, 2008
10.12
Class A Warrant issued by the Company to the Quercus Trust pursuant to the Stock Purchase Agreement dated July 10, 2008
 
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on July 16, 2008
10.13
Class B Warrant issued by the Company to the Quercus Trust pursuant to the Stock Purchase Agreement dated July 10, 2008
Incorporated by reference to our Form 8-K filed  with the Securities and Exchange Commission on July 16, 2008
10.14
Cooperation Agreement between the Company and Voith Turbo GmbH & Co., KG dated August 5, 2008
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on August 8, 2008
10.15
Memorandum of Understanding between the Company and Farm Fresh Marketing Inc. dated December 12, 2008
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on December 16, 2008
10.16
Lease Agreement between Quentin King and Clean Power Technologies Limited effective November 13, 2008
Incorporated by reference to our Form 10-Q filed with the Securities and Exchange Commission on April 10, 2009.
10.17
Option Agreement between Quentin King  and Clean Power Technologies Limited effective November 13, 2008
Incorporated by reference to our Form 10-Q filed with the Securities and Exchange Commission on April 10, 2009.
10.18
Lease Agreement between Mr. Andrew Leaver and Mrs. Hilary Leaver  and Clean Power Technologies Limited effective November 18, 2008
Incorporated by reference to our Form 10-Q filed with the Securities and Exchange Commission on April 10, 2009.
 
10.19
Stock Purchase Agreement dated February 10, 2009, by and between the Company and The Quercus Trust
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on February 13, 2009

 
38

 

10.20
Form of Registration Rights Agreement dated February 10, 2009, by and between the Company and The Quercus Trust
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on February 13, 2009
10.21
Form of Warrant issued by the Company to the Quercus Trust pursuant to the Stock Purchase Agreement dated February 10, 2009
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on February 13, 2009
10.22
Form of Warrant issued by the Company to the Quecus Trust pursuant to the Stock Purchase Agreement dated February 10, 2009
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on February 13, 2009
10.23
Binding Letter of Intent between the Company and  the University of Sussex dated March 13, 2009
Incorporated by reference to our Form 10-Q filed with the Securities and Exchange Commission on April 10, 2009.
10.24
Assignment of Patent between the Company and the University of Sussex, Richard Stobart and Mudalige Weerasinghe dated  March 13, 2009
Incorporated by reference to our Form 10-Q filed with the Securities and Exchange Commission on April 10, 2009.
 
10.25
2009 Stock Option and Stock Award Plan approved by the Board of Directors and the Shareholders
Incorporated by reference to our Definitive 14-C filed with the Securities and Exchange Commission on May 19, 2008
10.26
Amendment to the Articles of Incorporation and Bylaws of the Company.
Incorporated by reference to our Definitive Schedule 14C filed with the Securities and Exchange Commission on June 8, 2009.
10.27
Option Agreement between Quentin King and Clean Power Technologies Limited effective June 29, 2009
Incorporated by reference to our Form 10-Q filed with the Securities and Exchange Commission on July 13, 2009.
 10.28  Lease Agreement between Quentin King and Clean Power Technologies Limited effective June 29, 2009    Incorporated by reference to our Form 10-Q filed with the Securities and Exchange Commission on July 13, 2009.
 10.29  Memorandum of Understanding between NewEnco, Renewable Power Systems and the Company dated September 3, 2009.  Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on September 9, 2009.
 10.30  Form of Amended and Restated Stock Purchase Agreement dated October 2, 2009 between the Company and The Quercus Trust.  Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 7, 2009.
 10.31  Form of Registration Rights Agreement between the Company and The Quercus Trust dated October 2, 2009.  Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 7, 2009.
 10.32  Form of $0.27 Warrant issued by the Company to the Quecus Trust pursuant to the Amended and Restated Stock Purchase Agreement dated October 2, 2009.  Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 7, 2009.
 10.33  Form of $0.38 Warrant issued by the Company to the Quecus Trust pursuant to the Amended and Restated Stock Purchase Agreement dated October 2, 2009.  Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 7, 2009.
 10.34  Amendment No.1 to  Amended and Restated Stock Purchase Agreement dated October 16, 2009 between the Company and The Quercus Trust.  Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 20, 2009.

 
39

 
10.35
Form of Registration Rights Agreement dated October 16, 2009 between the Company and The Quercus Trust.
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 20, 2009
10.36
Form of $0.54 Warrant issued by the Company to the Quecus Trust pursuant to Amendment No. 1 to Amended and Restated Stock Purchase Agreement dated October 16, 2009.
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 20, 2009
10.37
Form of $0.60 Warrant issued by the Company to the Quecus Trust pursuant to Amendment No. 1 to Amended and Restated Stock Purchase Agreement dated October 16, 2009.
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 20, 2009
10.38
Form of $0.77 Warrant issued by the Company to the Quecus Trust pursuant to Amendment No. 1 to Amended and Restated Stock Purchase Agreement dated October 16, 2009.
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 20, 2009
10.39
Form of $0.85 Warrant issued by the Company to the Quecus Trust pursuant to Amendment No. 1 to Amended and Restated Stock Purchase Agreement dated October 16, 2009.
Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on October 20, 2009
14.1
Code of Ethics
 
Incorporated by reference to our Form 10-K filed with the Securities and Exchange Commission on November 19, 2008.
21.1
Subsidiaries of the Registrant
Incorporated by reference to our Form 10-K filed with the Securities and Exchange Commission on November 19, 2008.
22.1
Notice of majority shareholder approval to increase authorized capital and establish two series of preferred shares.
Incorporated by reference to our Definitive Schedule 14C filed on July 2, 2008.
31.1
Section 302 Certification- Principal Executive Officer
Filed herewith
31.2
Section 302 Certification Principal Financial Officer
Filed herewith
32.1
Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.2
Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith

 
40

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CLEAN POWER TECHNOLOGIES INC.

Date:
November  30 , 2009
By:
/s/ Abdul Mitha
   
Name:
Abdul Mitha
   
Title:
President, Principal Executive Officer

Date:
November 30, 2009
By:
/s/ Diane Glatfelter
   
Name:
Diane Glatfelter
   
Title:
Secretary, Treasurer, Principal Financial Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated, who constitute the entire board of directors:

Date:
November  30, 2009
By:
/s/ Abdul Mitha
   
Name:
Abdul Mitha
   
Title:
Director
       
Date:
November  30, 2009
By:
/s/ Michael Burns
   
Name:
Michael Burns
   
Title:
Director
       
Date:
November  30, 2009
By:
/s/ David Gelbaum
   
Name:
David Gelbaum
   
Title:
Director
       
Date:
November  30, 2009
By:
/s/ David Anthony
   
Name:
David Anthony
   
Title:
Director


 
41