Annual Report and Financial Statements 2013€¦ · Group year end order book stood at £14.2m ... to design and manufacture further improved CO 2 ... • shell and tube exchangers

Annual Report and Financial Statements 2013

Company Number: 3152034


Table of Contents

Strategic Report03 Corac in Focus

04 Business Highlights

05 Strategy in Action

08 Q&A With Phil Cartmell

12 Chairman and CEO’s Joint Statement

16 Finance and Operations Statement

Corporate Governance24 Board of Directors

25 Directors’ Report

27 Corporate Governance Report

29 Remuneration Report

32 Independent Auditor’s Report

Financial Report33 Financial Statements

38 Notes to the Financial Statements

Other Information66 Company Information

is a combination of three advanced engineering and technology businesses serving oil and gas, renewable energy, industrial and defence sectors.

The Group works in partnership with system integrators, prime contractors and end-users to build sophisticated products that are placed at the heart of business critical operational systems. These range from offshore gas production platforms to nuclear powered submarines.

With a consistent theme of engineering excellence and innovation, Corac companies work on providing advanced technologies or solutions for energy systems, gas management and environment control.

The results are technically sophisticated, often unique in their field, and form the basis of long -term, successful relationships.

The Group employs more than 170 people across three sites in the UK, and supplies systems and services to customers worldwide.

Annual Report and Financial Statements2013 3

Two established profitable businesses and one investing in future technology propositions.

A two-part strategy:

• work closely with and maximise return from an established global customer base

• develop and commercialise new technologies that drive long-term value

Atmosphere Control International (ACI)

a defence business building upon strong relationships in the UK and Europe, whilst adding new customers in Asia – a strong platform for long-term value.

Corac Energy Technologies (CET)

a compressor company that develops, tests and applies compact high-speed turbomachinery. Patented technologies are at the core of customer systems in gas production and renewable energy sectors.

Hunt Thermal Technologies (HTT)

a thermal engineering company that builds large heat exchangers for technically challenging downstream oil and gas or process industrial plants, worldwide.

Corac in Focus


Business Highlights

Notes1 The comparative 2012 figures include a 9 month period post acquisition for ACI and HTT.2 Adjusted EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment, amortisation and

impairment of acquired intangible assets, share based payment charges and exceptional items. Exceptional items are those items believed to be exceptional in nature by virtue of their size and or incidence. See note 3 to the Financial Statements.

Financial1

£19.3m (£2.9m) £13.7mGroup Revenue Adjusted EBITDA2 Group Cash

2012: £15.3m 2012: (£4.1m) 2012: £6.7m

Group Net Assets were £25.7m (2012: £18.4m).

Group year end order book stood at £14.2m (2012: £14.4m).

• provides strong visibility for 2014 revenue

• supported by a significant pipeline of qualified potential sales opportunities

ACI - Strong financial performance and development of international business

• 3rd generation Combined Oxygen Generator System has been successfully proven at sea and will become a core contributor to ACI’s business for the next 10 years

• successful delivery of a CO2 scrubber to an Asian customer within a long-term, multi-unit programme, and agreement to design and manufacture further improved CO2 scrubbers for the follow-on class of vessels

• first sale of a re-generable CO2 removal system for an Air Independent Propulsion (AIP) submarine to another Asian Navy provides a platform to expand in that emerging market

CET - Proof of core technology and entry to wider applications with additional partners

• compact compressors were proven in customer tests both with industrial process gases in the UK and in methane at CET’s proving ground in Cumbria, and more than 6,000 feet underground in a live gas well in Texas

• expander technology in successful testing with our partner which showed economic power generated from waste process gases in a very compact and efficient package

• orders received for design of a compression system for offshore platform application and expander for generation of electricity from waste energy in the gas network

HTT - Successful restructuring and repositioning provides momentum for 2014

• fundamental business review resulting in a change of management, and a refocusing on its core strengths and major customers

• won and completed the early stages of a £1.6m order for five specialised heat exchanger units to be delivered in Saudi Arabia in 2014

• order from the UK division of a global speciality chemical company worth approximately £1.1m for the design and manufacture of 4 exchangers plus a full set of interchangeable spares to be delivered in the UK during 2014


Strategy in Action

Life Support Systems on Naval Vessels - ACI

ACI is recognised as a leading supplier of specialist submarine air purification equipment. The success of the Company is founded on:

• innovation and engineering excellence in its core atmosphere management products

• design-level integration in the vessel during construction

• intimate knowledge of the challenges and uniqueness of the submarine environment

• a track record of first class delivery and service over decades of system life

The solutions have lifetimes measured in decades, and ACI provides through-life support that includes both scheduled refurbishment and unscheduled service and repair.

The key technology underpinning the international sales of CO2 removal equipment is liquid MEA (Mono Ethanol Amine) direct scrubbing technology. Variants have been in use throughout the entire nuclear submarine community for almost 50 years. This has been extended and developed within the last 15 years for AlP (Air Independent Propulsion) diesel electric submarines. Innovations developed by ACI offer the prospect of at least another 30 years of service.

The core technology is supported by other systems for oxygen generation and removal of refrigerants and other toxic gases to provide an integrated atmosphere

management solution which also meets the stringent demands for noise, vibration and discharge that characterise long-term submarine deployments.

The 3rd generation O2 production system, known as the Combined Oxygen Generation System (COGS) has been successfully proven at sea and will become the backbone of the ACI business for the next 10 years, with service and refurbishment business potentially long after that.

ACI is exploring opportunities to transfer these technologies into other environments that call for clean air in confined spaces.

Corac’s technologies at the heart of customer systems

Corac Group is a combination of three operating companies, two of which offer mature products in their established markets, are profitable and generate cash. The third company is investing in commercialising future technology propositions. The Group strategy has two main elements. First, we maximise the return from our tier 1 customer base: we work with some of the largest and most successful organisations in the world and commit to delivering excellent products and services to them, working efficiently to create the greatest value from those relationships.

Secondly, we recognise the future value of innovation, and focus on the development of a select group of technologies in which we have experience and identify a commercial opportunity. A disciplined approach to development, working in partnership with integrators and end-users, with constant technical and commercial review will drive long-term benefit from this investment.

The strategy is implemented and supported by a management team that brings international, technical and commercial experience, and a track record of success at this level. This team will drive the Group towards profit and build shareholder value as a result.


CET technologies have been subject to extensive laboratory, flowloop and field testing with development partners in live gas wells and industrial applications in Europe, the United States and the Far East.


Compact Compressors and Expanders for Energy and Oil & Gas Markets - CET

CET is a compressor company that was the first to use gas bearings for high-speed, compact, no-oil turbomachines. It is an innovative business that develops technologies that are at the heart of performance-enhancing systems in oil and gas production and waste energy recovery.

As a technology developer, CET has created a portfolio of patented IP. These technologies are deployed either as:

• a central part of an end-user system, built to serve specific, site-related needs

• the core of a volume commercial product, produced by an OEM with technology licensed to the manufacturer

Corac’s core technologies are:

• compact, oil free compressors

• contactless expanders for energy generation

• rugged and compact electronic drive systems to control electrical machines in harsh environments

CET technologies have been subject to extensive laboratory, flowloop and field testing with development partners in live gas wells and industrial applications in Europe, the United States and the Far East. An industrial compressor using contactless bearings has been operating on a client site for more than 4 years, accumulating more than 25,000 hours at 60 to 70 thousand rpm, with minimal service or maintenance intervention.

The same technology has been applied in gas production with a landmark test carried out during 2013 in Texas. Three compressors acting together as a multi-stage system ran for 140 hours, more than 6,000 feet underground, in a live gas well.

Heat Exchange Systems for Downstream Petrochemical and Industrial Plants - HTT

Hunt Thermal Technologies is a leading supplier of heat exchangers operating in demanding applications, with complex metallurgy and highly specialised technical requirements in markets like downstream oil and gas or chemical process industries.

The company applies advanced manufacturing techniques to work with exotic metals. These are pioneering manufacturing procedures that typically exceed industry code requirements and are supported with exhaustive quality testing.

Proven experience with exotic metals, including Duplex, Super Duplex, Hastelloy and Cupronickel, means the company can differentiate itself from standard commoditised fabrication, and offer competitive solutions to international customers in diverse market sectors.

HTT also designs and manufactures extended surface heat exchangers for all forms of air and gas treatment and the heating, cooling and condensing of all types of liquids and vapours. All are custom designed and constructed to suit specific requirements. The full service includes problem solving, analysis and design of bespoke units, manufacture, installation and support.

Example installations include:

• shell and tube exchangers in duplex and carbon steel for offshore platform operation in the southern North Sea

• multiple duplex heat exchangers (each 14m long, weighing 13 tonnes) for a hydrocracker unit at an onshore oil and gas facility

• Combined Heat and Power (CHP) - gas to thermal fluid Recuperator, heating almost 5000 kg/hr of thermal fluid from 100°C to 300°C using exhaust gas at 400°C through a multi-section custom-designed extended surface exchanger.


It was a very busy time as the business evolved and we put in place some changes to set us up better for the long-term. We finished the bedding-in process with the acquired companies and found the balance between great products with solid long-term contracts, particularly in ACI, and new technology development to build the future.

We now have two businesses generating profit and are confident this will grow, and CET heading towards commercialisation. 2014 will be a big year to drive the business towards a wider revenue stream that continues down the path to make the group profitable.

Not at all. When we came in, the technology looked a lot closer to delivery than it really was. We have had to do a lot more than I expected to secure the resources to bring technologies to the table. Technology proving has taken a lot longer than I thought and must face a lot more challenges to be accepted as safe and effective.

Raising funds and buying the two companies from Wellman was a part of that. We also had to do a lot of internal evolution to focus on what we are best at and then to give them our best shot. We are a lot closer now and I think this year will show how much effect all that work can have on the business and our ability to give a return to our stakeholders.

I still believe in the technology and its potential. It is a slightly different picture now than I saw when I first came through the door, but the team around me has done great things with this business and I can see a path to get us where we should be.

Q&A With Phil CartmellHow do you look back on the past year?

After four years with the business, is it how you expected it to be?

Q

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the team around me has done great things with this business and I can see a path to get us where we should be


The focus is on proving technologies in customer environments. There is a delicate balance between proving that a technology performs and can be made available for general commercial use, and the particular demands of a single use.

We also test in productive customer facilities, which are only available to us at certain times as dictated by their business needs.

We feel that complex solutions can be delivered, but these will involve many parties, as we experienced during testing in Texas. Our contribution may in fact be a relatively small part of the deployment, and focused on our specialist area, the compact compressor.

At the Board level, we felt we were spread a bit thin in key areas, so sat down to work out the best shape to take us forward. That was partly about what the business had become, and also where we saw it going in the next few years. We needed to separate the Chairmanship from the executive leadership function, to focus more on the operational performance of the established businesses and to balance this with strong financial controls. So, we set about putting square pegs in square holes and I am pleased that Jon and Julia have joined us. It is a much more balanced team and I am happy with how it has worked so far.

HTT needed some work, as I felt they were not making the most of what they had. I am a firm believer in the value of good leadership and I was delighted when we met Neville Vickery in the spring. He was just what we needed at the time and has settled in very well at Dukinfield. His efforts to simplify the business and bring in a business development specialist to work alongside him have paid off well with a strong second half and more to come from that business.

We were really pleased to get our compressors working on site in Texas in April. This was a big step into new territory, and we learned a lot as a result.

We did a lot of simulation and flowloop testing before we went to Texas, based on data supplied from the well by our partner. Once in place, the compressors worked well, but as they went through the running sequence it was difficult to tune them to get the full output. When we took it out we could see why – it came out black and oily, which was a surprise in what we understood was a relatively clean and dry well.

We worked with our partners to figure things out, and two possibilities emerged. Either the normal gas stream is worse than we thought, or some material hit the compressor as a result of the start-up procedures.

We agreed that the compressor must withstand both conditions, so our partners are looking at the starting procedures to minimise bad effects whilst we look at making the compressor more resilient. We are now waiting for these actions to complete and an opportunity to revisit the field testing.

I look at it more as a Group plan, with different contributions coming from each of the three businesses. It is true, whilst CET is still in the development phase it is burning some cash and the other companies contribute profits to reduce the overall burn. The real integration is deeper than that though. HTT are expert fabricators and are supplying goods to the CET build programme at a much more economic rate than we could achieve by sourcing from the open market. Both companies are established in mature markets with good long-term prospects and that adds some stability into the package that we were missing before.

We have agency agreements in various countries that originated in one of the companies but are now being opened up to allow access for the others’ products in those locations, and this is proving to be a very positive step.

The net amount raised was £10.8 million and as explained in the placing document this will be used to invest to complete the development of our existing technologies, including the completion of projects with existing customers, building of test facilities and investment in equipment for multi-unit testing.

As we found in Texas, each well is unique, and the systems we provide will be bespoke variations on a core technology. We think the focus will be on proving the core technology; applications like the DGC will then be built on that foundation.

For example, at the wellhead we can do more to condition the gas before it gets to the compressor, and that will help us to deliver more standard systems in those locations.

The compressor is the central part of bigger systems with many other parties involved. Our true skills lie with the compressor, and I think this is where we will focus our efforts in the future. We can then work with others to add ancillary systems and put the whole package together at the well-site.

What are the business challenges facing CET?

There were some management changes. What drove those?

What happened on the DGC tests?

How are the acquired companies supporting the CET plan?

You raised funds in December. How will they be used?

How do you see the DGC going forward?

Q Q Q

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both companies are established in mature markets with good long-term prospects

work together flexibly to solve a production problem using our core technology


Q&A With Phil Cartmell (continued)

This is a big step forward. It came as a result of us showing a working compressor in our flowloop at Slough, and is the path we would like to follow more often in the future.

It takes existing technology and uses it as a base for use in other locations and applications. I think BP must have seen the potential of the technology, not just in Trinidad but possibly elsewhere.

The master agreement was set up to make it easier for both parties to work together flexibly to solve a production problem using our core technology.

It was a similar story to BP really. We have some proven technologies that can show prospective partners what is possible. We also have some creative and talented engineers who can describe what is possible in a range of uses. In this case, the compressor acting in reverse is an efficient generator of electricity in a small package. To the engineers it is a logical step; there is a lot of work to do to make it real, but that is what CET is in business to do – make valuable systems from a growing range of proven technologies.

Profitable, and to be delivering proven engineered solutions in strong markets across the globe, with our innovation skills working to add more products to the portfolio that will improve the returns in our businesses even more.

What does a Master Service Agreement with an oil major like BP mean to Corac?

How did you get into the renewable energy market?

Where do you see the group in three years’ time?

Q Q Q

make valuable systems from a growing range of proven technologies

Q&A With Phil Cartmell (continued)



Chairman and CEO joint statement OverviewThe year to 31 December 2013 was another exciting period of development for Corac. It was a period in which we made major progress in the integration of ACI and HTT, and saw them deliver a strong second half performance, which sets the Group up for growth in 2014. It was also a period in which we saw significant achievements in technology development by CET. This progress was made in both our compressors in the oil and gas markets, and our expanders in renewable energy applications.

The three group companies complement each other, with ACI and HTT providing a stable and profitable base within established markets. CET is developing a range of innovative compressors and expanders using its own patented technologies, which are now within sight of achieving commercial sales. The common theme is innovation and engineering excellence. This allows us to differentiate ourselves and to find those applications where core technologies can be used to generate exceptional value.

Corac’s goal is to become a profitable engineering group that can balance technically superior deliveries in our established markets with innovation and development of new propositions to drive future growth.

Profitable and mature businesses

From revenue of £18.3m (2012 9 months: £15.1m) ACI and HTT generated a combined Adjusted EBITDA of £2.6m (2012 9 months: £2.3m) which underpinned the financial performance of the Group. ACI grew its profits last year, and HTT reshaped its management team and put in place the foundations for growth in 2014. The focus of both companies is to grow their businesses organically from their stable markets and strong customer bases. Notable successes have already been seen with additional export business for heat exchangers in Saudi Arabia and CO2 scrubbers in South East Asia.

Both companies provide large-scale technical equipment with the potential for ongoing support business. This provides visibility of a mature pipeline of future commercial value. Long-term relationships

also stimulate continuous improvement, and so the products will evolve to remain competitive and offer further growth potential. An example is the investment in advanced CO2 removal systems to meet the demands of future submarine programmes in the UK and abroad over the next thirty years.

Building future value

Long-term value will be built upon the ACI and HTT foundations. In both cases, the Group has implemented business development initiatives to focus on key technical strengths to secure a differentiated position in international markets. To support this further, the Group’s geographical presence has been extended with the appointment of a commercial agent in North Africa and the opening of discussions with potential partners in South America and Eastern Europe.

CET’s focus is to prioritise its most valuable technologies and deliver a business benefit at the earliest opportunity. It will build value by demonstrating the technical readiness of its core systems to partners and established market leaders, and then work with them to deliver commercial use. This modular approach will allow CET to show progress more effectively, and attract commercial revenues earlier in the process.

...notable successes have been seen from a business development approach that focused on key technical strengths...


Additional funding

From revenue of £18.3m (2012 9 months: £15.1m) ACI and HTT generated a combined Adjusted EBITDA of £2.6m (2012 9 months: £2.3m) which underpinned the financial performance of the Group. ACI grew its profits last year, and HTT reshaped its management team and put in place the foundations for growth in 2014. The focus of both companies is to grow their businesses organically from their stable markets and strong customer bases. Notable successes have already been seen with additional export business for heat exchangers in Saudi Arabia and CO2 scrubbers in South East Asia.

Board changes

In March 2013, the company announced the appointment of an independent non-executive Chairman, reflecting the significant acceleration of the Group’s development in the preceding year, with the Chief Executive Officer continuing to focus on providing vision, strategy and communication with investors, customers and staff. Richard King, an existing non-executive director, was appointed non-executive Chairman and Phil Cartmell as Chief Executive Officer.

At the same time, we also appointed Julia Henderson as an additional non-executive director, adding her experience of advising entrepreneurial growth companies in a wide range of sectors. In July, we separated the roles of Chief Financial Officer (CFO) and Chief Operating Officer (COO) to reflect the increasing breadth of business activities. We welcomed Jon Carter as CFO with a background in private equity backed and leveraged companies in the manufacturing and technology sectors, and Mark Crawford, previously CFO, was appointed COO to drive business growth and delivery across the three operating companies.These changes equip the Board with a range and balance of skills and position us well to continue the expansion of the Group.

£19.3m (£2.9m) £13.7mGroup Revenue Adjusted EBITDA2 Group Cash

2012: £15.3m 2012: (£4.1m) 2012: £6.7m

... the Group’s geographical presence has been extended with the appointment of a commercial agent in North Africa and the opening of discussions with potential partners in South America and Eastern Europe...


Chairman and CEO joint statement (continued)

Financial results

Group revenue increased to £19.3m (2012: £15.3m), and our Adjusted EBITDA loss before tax was £2.9m (2012: £4.1m). This improvement on 2012 was driven by a full-year Adjusted EBITDA contribution from the ACI/HTT businesses of £2.6m (2012 9 months: £2.3m), and a reduced Adjusted EBITDA loss at CET of £3.5m (2012: £4.7m). The Group’s loss before tax for the year was £4.3m (2012: £6.1m).

Following the successful fundraising in December, we closed the year with £13.7m (2012: £6.7m) of cash, which allows us to continue to support the key development and growth initiatives across the Group.

Outlook

The Group enjoys long-term successful relationships with a number of tier 1 customers and partners. We have also assembled a high quality leadership team, with an enviable group of talented engineers, technicians, commercial and administrative staff. We also have a growing portfolio of products and an exciting innovation pipeline that will serve us well for many years. The combination of all these factors provides encouragement for 2014 and beyond.

The operational improvements made at ACI and HTT have already led to further orders being secured soon after the year end (as announced 14 January 2014). This growth of the Group order book since the year end provides greater visibility of revenue for the balance of 2014.

We anticipate the business development initiatives in these companies to extend their products into new markets and build propositions for emerging products. These plans are expected to yield additional sales this year. Building upon the technical milestones achieved this year, the CET strategy is to focus on the demonstration of functioning systems that can deliver the performance and reliability expected by the markets in which we operate.

We are then confident of moving to the next phase of the product life with follow-on orders in 2014, and in some cases the preparation for manufacturing by our industrial partners.

Overall, we are pleased with the progress made in 2013 and how we are building the future value of the Group.

Phil Cartmell Chief Executive Officer

Richard King Non-executive Chairman


Annual Report and Financial Statements16 201314 Annual Report and Financial Statements 2013

Non-executive Chairman Chief Executive Officer

Finance and Operations statement

Operational Focus The operational focus in 2013 has concentrated on a number of areas:

Bedding in the ACI and HTT businesses and providing the platform for growth Restructuring the HTT management team Focus on the core technologies at CET and their applications in different sectors Using the CET innovation skills to enhance the solutions across the group Delivering the milestones on the CET partner programmes

Financial overview The Group narrowed its losses in the year and is focusing on becoming profitable within the next two years. The decision to acquire ACI and HTT in 2012 has positioned the Group with two businesses generating profits and cash, and poised for growth. CET is moving towards commercialisation and continuing to invest in compressor and expander technology. The successful fundraising in December 2013 helped to boost cash reserves to £13.7m at year end, and Group Net Assets to £25.7m (2012: £18.4m). The Group reduced its loss before tax by £1.8m to £4.3m and its Adjusted EBITDA loss by £1.2m to £2.9m.

2013 2012

Adjusted EBITDA1 £M £M Change %

ACI 2.3 1.7 35%

CET (3.5) (4.7) 26%

HTT 0.3 0.6 (50%)

Central costs (2.0) (1.7) 18%

Adjusted EBITDA1 loss (2.9) (4.1) 29%

Note: The comparative 2012 figures for ACI and HTT were for a 9 month period post acquisition in 2012.

1 Adjusted EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment, amortisation and impairment of acquired intangible assets, share based payment charges and exceptional items. Exceptional items are those items believed to be exceptional in nature by virtue of their size and or incidence.

December 2013 Share Placing and Open Offer The Group raised £10.8m (net of expenses) in a Placing and Open Offer completed in December 2013. The funds were raised principally to accelerate the CET path to commercialisation by funding the completion of the existing research programmes, capital expenditure to fund improved testing facilities and the build of multiple systems, permitting parallel testing to increase the efficiency of the development cycle.


2013 Annual Report and Financial Statement 15

Group Financial Key Performance Indicators The Group Board and Executive Board monitor the performance of the business through monthly reporting packs and in particular the following Key Performance Indicators (KPIs)

2013 2012

£M £M

Group

Revenue 19.3 15.3 Closing order book 14.2 14.4 Operating loss (4.3) (6.3) Adjusted EBITDA loss (2.9) (4.1) Net Cash 13.7 6.7

ACI

Revenue 10.7 7.5 Closing order book 5.9 9.6 Operating profit 1.5 1.1 Adjusted EBITDA 2.3 1.7 Margin 22% 23%

CET

Revenue 1.0 0.2 Closing order book 2.9 1.4 Operating loss (4.0) (5.1) Adjusted EBITDA loss (3.5) (4.7) R&D spend 3.0 3.2

HTT

Revenue 7.6 7.6 Closing order book 5.4 3.4 Operating profit 0.2 0.6 Adjusted EBITDA 0.3 0.6 Margin 4% 8% Central Costs Adjusted EBITDA loss (2.0) (1.7)

Note: The comparative 2012 figures for ACI and HTT were for a 9 month period post acquisition in 2012.

Revenue The Revenue movement was driven by the full year impact at ACI and HTT. This compares with a 9 month post acquisition period reported in 2012 for these businesses. ACI revenue increased slightly on a pro-rata basis to £10.7m (2012 9 months £7.5m). HTT revenue for the full year in 2013 of £7.6m was equivalent to the £7.6m achieved in 9 months in 2012, reflecting a weak first half year followed by the disruption caused by the management changes. Revenue at CET grew to £1.0m from £0.2m in 2012 as the development contracts progressed steadily.


16 Annual Report and Financial Statements 2013

Order Book The Group order book remained steady at £14.2m (2012 £14.4m) providing strong visibility for revenue in 2014, as the majority of this work will be delivered in the year. Furthermore, the pipeline of qualified opportunities was substantial at the year end and new orders taken since the year end have led to the order book growing in the early part of 2014.

Adjusted EBITDA Loss The Group Adjusted EBITDA loss was £2.9m (2012: £4.1m), which is an improvement on 2012, driven principally by an improved Adjusted EBITDA performance from the ACI/HTT businesses of £2.6m (2012 9 months: £2.3m), and a reduced Adjusted EBITDA loss at CET of £3.5m (2012: £4.7m).

The movement between Group EBITDA loss and Group Adjusted EBITDA loss was £68k related to share based payments. The statutory operating loss before tax for the year was £4.3m (2012: £6.1m).

Group Balance Sheet The Group’s net assets increased to £25.7m (2012: £18.4m), principally due to the Placing and Open offer which raised £10.8m net of expenses.

Group Cash Flow The Group ended the year with cash reserves of £13.7m (2012: £6.7m). The Placing and Open offer increased cash reserves, and significantly reduced the financial risk profile of the business. Such funding should permit the Group to progress the journey towards profitability as ACI and HTT improve their revenue streams and CET technologies reach commercial readiness. The Group’s operations continue to absorb cash, £3.7m (2012: £4.1m) to fund the development projects, despite the reduction in loss before tax reducing from £6.1m in 2012 to £4.3m in 2013. The relative size of the Group’s contracts continue to impact on the working capital requirements of the business, as the movement in inventories, receivables and payables in 2013 was an outflow of £1.5m (2012: inflow £0.2m). This is due to the material nature of the cash flows of each project, rather than any issues over recoverability of cash.

Risk Management The Directors Report on page 25 describes the principal risks and uncertainties affecting the Group and a summary of the actions taken by the Directors to mitigate the key financial risks.

Going concern The Directors are satisfied that, notwithstanding economic uncertainty, the Group has adequate resources to continue in business for the foreseeable future, and accordingly continue to adopt the going concern basis in preparing the accounts. In reaching this conclusion, the directors have considered forecasts that cover a period of greater than twelve months from the date of the approval of these financial statements. The forecasts take into account the Group’s existing cash resources, and include consideration of certain downside scenarios, in particular in relation to CET where there is inherently greater uncertainty as to the future cash flows of that business. The Directors have also considered the mitigating actions available to them, including the ability of management to make certain reductions to the Group’s discretionary expenditure if required.



Facilities The methane compressor development has led to an enhancement of the company capability in flowloop testing. As a result of experience in Texas, the company has built additional test facilities in Slough to provide a true multi-phase facility. This will allow engineers to explore the boundaries of operation with the introduction of fluids and solids into the gas stream. Commissioned in 2013, the facilities will be completed early in 2014 to provide more comprehensive demonstration and testing regime before compressors are deployed into live conditions.

People Corac Group employs a diverse and highly talented mix of technical, commercial and administrative staff. Total staff employed at the end of 2013 was 170 (31 December 2012: 165).

Some parts of the business must manage short-term fluctuations in activity levels and so a proportion of contract resources are used. The Group does enjoy great continuity from its permanent staff, and at the year end, just 5% of the workforce were contractors. Among our permanent staff, we are proud of our low levels of turnover. Staff attrition in 2013 was less than 7% of the permanent workforce.

Group companies work in highly technical and scientific disciplines and a significant proportion of the team hold first degrees, Masters and PhDs. 11% of employees are women including several in senior executive and technical positions, and we have 13 different nationalities bringing a broad experience of global business and technology.

In the central team, we have a small group of flexible, highly skilled and widely experienced business managers who work across the operating companies to provide specialist support and extended coverage more efficiently than would be possible from inside the companies.

Youth development is also important to Corac companies and we currently have four apprentices undergoing training and development, as well as many senior employees who have graduated from our apprenticeship programme.

Processes All operating companies are accredited to ISO 9001. ACI also has ISO 14001 and plans are in place for all three companies to be accredited to ISO 9001, 14001 and 18001 by the end of 2014.

As part of the growing focus on managing our positions within contracts and projects, the function of commercial management was concentrated in a Group function that supports the needs of the operating businesses. Access to specialist skills provided in this way has allowed us to negotiate more effectively with the large organisations we deal with, and has also shortened the lead time to concluding sales in the year.

Group-wide health and safety procedures have led to the introduction of standard site risk assessments and a series of factory-floor initiatives including regular team meetings and briefings on local topics relevant to safety. This work began at HTT and is being extended further across the Group. The Group has joined the British Safety Council and all employees will undergo their initial training module and be certified as trained.



Atmosphere Control International In the first full year of Group ownership, ACI has made good progress. Revenue and Adjusted EBITDA were slightly ahead of the comparative figures for the 9 month period of ownership in 2012, and Adjusted EBITDA margins were consistent at around 23%. The segment operating profit of ACI was £1.5m (2012 9 months: £1.1m). The order book did reduce from an exceptionally high £9.6m in 2012 (following the DCNS order announced in October 2012) to £5.9m in 2013, the majority of which is due for completion in 2014. More than £3m in new orders have since been taken in the first quarter of 2014.

Management priorities

ACI enjoys a very strong relationship with its primary customers, the UK MoD and BAeSystems, the prime contracting shipbuilder. Established over many years and providing the bulk of the company’s revenue, maintaining these relationships is a priority. The approach is to deliver committed work to expectations whilst also being proactive to understand future needs and respond effectively to provide long-term business.

Growth will be incremental, and will come from two sources: other international programmes specifying ACI’s existing technologies, and cross selling other ACI equipment to extend the reach in existing UK and international customers. Greater focus was paid to the business development activity in 2013 with presence at exhibitions, new marketing material and lead generation initiatives, creating a pipeline of sales opportunities that are expected to mature during 2014.

Submarine breathing system

Defence is a nationally focused business where large naval fleets will typically look for a domestic source for major systems. ACI is the only UK provider of atmosphere management systems for submarines. It also competes very effectively for business in nations that may not have their own national source. In 2013 ACI was awarded contracts by two countries in the Asia Pacific region, one for a further unit to continue an existing successful programme, and one was to enter a new programme, which was secured against international competition. In these fleets, the submarines are smaller, Air Independent Propulsion (AIP) boats, more commonly known as diesel-electric.

Development lead times are long in this sector, and work has started on an enhanced CO2 scrubbing system that will form the backbone of ACI’s business over the next thirty years, as it responds to calls for lower threshold levels of CO2 on future vessels.

Textile ducting – TexVent

ACI’s TexVent product has received a lot of business development support during the year. As a result of enhanced marketing effort, it was showcased at the DSEI exhibition at ‘Excel’ in the London Docklands. This has led to engagement with several potential new customers and opportunities to apply the system beyond naval vessels. Civilian maritime markets and other military uses such as temporary buildings, field hospitals etc. are all potential uses for this product.



Hunt Thermal Technologies HTT had a challenging year during which the management team was restructured and many of the processes in the business were re-engineered. Following a weak first half performance, HTT delivered an Adjusted EBITDA of £0.3m (2012 9 months: £0.6m), which was achieved principally in the second half of the year. The segment operating profit for HTT was £0.1m (2012 9 months: £0.6m). Furthermore, the improved processes have led to a closing order book of £5.4m (2012: £3.4m) all of which will be completed in the early stages of 2014.


HTT has capabilities in design and manufacturing with advanced metals, which differentiate it from the mass market (which tends to be commoditised, and with lower margins) and management priorities are to exploit these qualities and maximise their impact and growth potential.

The management restructuring led the company to recognise and play to these strengths. Neville Vickery, an experienced engineering business leader was recruited from David Brown Ltd, as Managing Director. There followed a restructuring programme that reinforced the existing operational management with new hires in finance and business development.

This leadership team has concentrated on what differentiates HTT from the commodity market and promoted high specification systems in domestic and international markets. The result has followed through into the order book with significant new orders and an active pipeline to prepare the business for 2014.

HTT Renaming

Hunt Graham Limited was renamed to Hunt Thermal Technologies Limited at the end of the year. The change provided an opportunity to reflect more accurately the nature of the business and its strengths in the market.

Shell and tube heat exchangers

HTT set out in 2013 to consolidate its core business in the UK petrochemical sector, build upon this and also extend into new export business that would be driven from its capability in complex and large thermal systems.

This approach led to a significant contract award, as announced in July 2013, to supply multiple heat exchangers to a major project in Saudi Arabia. This was secured through a competitive bid process against an international peer group and demonstrates that HTT can compete on a global scale where complex, high-integrity systems are the key requirement.

The order was placed by a global Engineering, Procurement and Construction (EPC) company who are a leading supplier of process systems to the Oil and Gas industry. That project was valued in excess of £1.6m to deliver five specialised heat exchanger units for delivery within one year. This route to market is expected to be an increasing part of HTT’s future business approach.

The contract has further value for the Group as it extends our activities in Saudi Arabia, alongside Corac Energy Technologies' gas field compressor project and demonstrates the Group's strategy of extending geographic presence and supporting key clients across the combined range of Corac Group business.



Corac Energy Technologies CET has continued to invest in the development of its compressor and expander technology, resulting in the Adjusted EBITDA loss narrowing to £3.5m (2012: £4.7m). The segment operating loss for CET was £4.0m (2012: £5.1m). Revenue at CET of £1.0m (2012: £0.2m) was a fivefold increase on 2012, and was achieved across a number of development projects in both the oil and gas and industrial sectors. Furthermore, the order book at year end stood at £2.9m (2012: £1.4m) of which £2.2m is in the oil and gas sector and £0.7m is in the industrial sector. The order book relates to the value of partner funding for the development projects rather than true commercial sales, which are expected to follow in 2014. The R&D spend of £3.0m (2012: £3.2m) remains significant, but was lower than the previous year due to greater focus on efficiency and cost control.


At CET there has been much progress made during the year on the core technology elements. Extensive testing of compressors and expanders has demonstrated the readiness of the core technologies and the opportunities to develop them further towards new applications.

The management focus has evolved to ensure that the building blocks of technology are robust and demonstrable. Field deployments of integrated systems rely on a number of external factors, many outside our control. The focus has therefore evolved to maximise the confidence in the building blocks and then to work with partners to put them into field applications.

Compact compressor – single-stage

This is the application group that is growing from the original downhole systems. It is, relatively speaking, the simpler of the methane compression systems, with a single stage of compression per motor. Each motor/compressor unit produces a modest pressure ratio and will be deployed with several in series to deliver higher ratios.

Following extensive testing in workshop and flowloop conditions, both at the Slough Technology Centre and the methane test facility in Cumbria, compressors were deployed for the first time as part of an integrated downhole compressor in a producing gas well in Texas in April 2013. The compressors performed well for 140 hours at depths in excess of 6,000 feet, with inlet temperatures approaching 100 degrees Celsius, and with condensate and other fluids in the gas stream. These conditions are as harsh as these solutions are expected to meet in the intended application wells. Work with the development partner continues in order to optimise the resilience of the compressor to erosion and fouling challenges.

The success of this work was the stimulus for other projects to take the single-stage compressor into new application areas. After much investigation of the potential for the technology, we signed a Master Service Agreement in July 2013 with BP Trinidad and Tobago to create a larger variant of the base compressor to be deployed on the deck of an unmanned offshore production platform. This is an exciting development as it builds upon successful R&D work already completed to find a new application point on high production rate wells.

Compact compressor – multi-stage

This is regarded within CET as a separate development path with different challenges to the single- stage machines. Based on a single, high power motor, this compressor has multiple stages mounted on a single shaft within the enclosed compressor casing that sits between flanges in the production pipework. The first application is under development with Saudi Aramco, having agreed an extension to the original contract during 2013. The intent is to deploy the compressor with supporting liquid management systems close to the wellhead.

Compact expander

The expander has been developed as a further variant to the compact single-stage compressor as a means of identifying further application areas for the core technology. In this case, pressurised gas spins the impeller to drive a permanent magnet generator, running on gas bearings, similar to those used in the compressor, to produce electricity. The first system of its kind was developed with our



industrial partner and successfully tested to show function and performance at the intended levels. The system has since completed endurance testing over several months at the partner site.

A further contract was signed in December 2013 to extend the use of these systems in renewable energy applications.

Outlook The next phase of the Group’s evolution will focus on getting the balance right between costs in the operational businesses and investment across the Group to drive growth. We will invest in new technologies plus any necessary facilities to improve operational efficiency and other support to maximise returns from the regular business activities.

There will also be challenges as a result of growth. Capacity, skills, processes and the general ability to deliver will be closely managed alongside external factors such as the supply chain to add value and efficiency from the increased scale of the Group’s activities.

Approval The Strategic Report was approved by the Board of Directors on 1 April 2014 and signed on its behalf by:

J P Carter M S Crawford

Chief Financial Officer Chief Operating Officer

Registered number: 3152034

Registered office: 683-685 Stirling Road, Slough, Berkshire SL1 4ST


industrial partner and successfully tested to show function and performance at the intended levels. The system has since completed endurance testing over several months at the partner site.

A further contract was signed in December 2013 to extend the use of these systems in renewable energy applications.

Outlook The next phase of the Group’s evolution will focus on getting the balance right between costs in the operational businesses and investment across the Group to drive growth. We will invest in new technologies plus any necessary facilities to improve operational efficiency and other support to maximise returns from the regular business activities.

There will also be challenges as a result of growth. Capacity, skills, processes and the general ability to deliver will be closely managed alongside external factors such as the supply chain to add value and efficiency from the increased scale of the Group’s activities.

Approval The Strategic Report was approved by the Board of Directors on 1 April 2014 and signed on its behalf by:

J P Carter M S Crawford

Chief Financial Officer Chief Operating Officer

Registered number: 3152034

Registered office: 683-685 Stirling Road, Slough, Berkshire SL1 4ST

JP Carter Chief Financial Officer

MS Crawford Chief Operating Officer


Board of Directors

Executive Directors Phil Cartmell

Chief Executive Officer

Phil Cartmell was appointed to the Board in September 2009. He has a highly active career in business, having formerly been Chief Executive of Vega Group plc between 2001 and 2008, where he grew the company into a leading European aerospace and defence business. In February 2008, Vega Group was acquired by Italian multi-national, Finmeccanica, for a substantial premium. Phil has served as a Non-Executive Director and adviser for a number of companies including Alterian plc a leading provider of Global Information Management solutions, where he was Non-Executive Chairman until its acquisition by SDL plc in January 2012 and Trafficmaster.

Jon Carter

Chief Financial Officer

Jon Carter was appointed to the Board in July 2013. Jon was previously CFO at IPL Group Limited, a software consultancy business, and part of a team that completed an award winning leveraged buy-out in 2008. Jon started his career in the corporate finance and corporate recovery practices of Coopers and Lybrand in South Wales where he qualified as a Chartered Accountant. Besides blue chip experience at Compass plc, Jon has led the finance teams in PE backed and leveraged businesses and successfully completed a buy-out and exit at leading short run book manufacturers Antony Rowe Group Limited.

Mark Crawford

Chief Operating Officer

Mark Crawford was appointed to the Board in November 2009. Prior to joining Corac Mark worked in a number of commercial roles, the last of which was as a Director with private equity backed Gondola, having previously gained international experience with PepsiCo, Inc. Mark started his career with Glaxo Pharmaceuticals UK Limited in various strategic planning and financial roles and where he gained his accountancy qualification with the Chartered Institute of Management Accountants.

Non-Executive Directors

Richard King

Non-Executive Chairman

Richard King was appointed to the Board in February 2011 and became Chairman in March 2013. Richard spent 35 years with Ernst & Young LLP, becoming Managing Partner of UK & Ireland and a member of both the EMEIA Board and Global management group. Richard is a Fellow of the Institute of Chartered Accountants in England and Wales and worked extensively with growing businesses. Richard is Chairman of both the Orchid Group and Grass Roots Group, Non-Executive Director of CSF Group plc and Allocate Software plc, is an advisory partner at Rockpool Investments LLP and is on the advisory board of Frogmore Property Group. He is also Chair of Trustees for the Willow Foundation, a charitable organisation for seriously ill children and adults.

Rohan Courtney OBE

Non-Executive Director

Rohan Courtney was appointed to the Board in April 2010 and chairs the Remuneration Committee. He was a career banker for 27 years including 8 years as Chief Executive in Europe of State Bank of New South Wales. He cofounded UCG Association where he is a Trustee (first Chairman of Trustees from 2009-2013), is Executive Chairman and major shareholder in Clean Coal Limited, a UCG operator, and has been involved in energy businesses for most of his career. Rohan has served on a number of public company boards and was a non-executive director of Tullow Oil plc, one of Europe's largest Independent Oil and Gas companies, from 1993 to 2007 (Senior Independent Director from 2000-2007).

Julia Henderson

Non-executive Director

Julia Henderson was appointed to the board in March 2013 as a non-executive director and chairman of the Audit Committee. Julia has over twenty five years' experience of advising entrepreneurial growth companies in a wide range of sectors. Her corporate finance career began at ANZ Merchant Bank after which she became a co-founder of Beeson Gregory, a mid-market investment bank (now part of Investec). Julia is now an independent consultant and non-executive director with private and quoted mid-market companies. She was non-executive Chairman of GTL Resources plc until its takeover in 2012 and is a non-executive director of Alkane Energy plc and ECO Animal Healthcare plc and Amati VCT plc.

Annual Report and Financial Statements2013 25 2013 Annual Report and Financial Statement 23

Directors’ Report

The directors present their report and audited financial statements for the year ended 31 December 2013.

Principal Activity Corac is a UK based group of advanced technology and engineering companies.

Atmosphere Control International provides air purification and oxygen generation equipment for submarines together with air handling and distribution systems.

Corac Energy Technology specialises in the research and development of technologies in the field of gas compression and the design and manufacture of high speed motors and generators using proprietary permanent magnetic rotor and oil-less bearings.

Hunt Thermal Technologies is a leading manufacturer of heat exchange equipment used in the cooling and heating of large scale industrial processes.

Results and Dividends The directors do not recommend the payment of a dividend (2012: nil) and propose that the loss be added to the deficit on reserves.

Research and Development Total R&D expenditure in the year, including £2.0m cost of sales within CET (2012: £0.2m), was £3.0m (2012: £3.2m), all of which was charged to the income statement in the year.

Principal Risks and Uncertainties In addition to financial risk management that is detailed in note 25 to the financial statements, there are a number of risks and uncertainties that could have a material impact on the Group. Risks are reviewed by the Board and appropriate processes and controls have been implemented in respect of monitoring and control.

Principal business risks are as follows:

Commercial contracts for customers may be large and long-term, with risks relating to contract delivery and performance, including cost. Internal procedures are designed to ensure that risks are managed on a contract-by-contract basis so that contracts are successfully delivered to customers on time, on budget and to the highest quality specification.

The Group has a niche position in the Defence (naval) and Oil and Gas markets supplying specialist equipment to a relatively narrow customer base and the main external market risks relate to the environmental factors within these specialist sectors.

Researching and developing innovative technologies carries a risk of failure to deliver within budgeted cost and timetable or with adequate operating performance and reliability. The Group has assembled a broad based team with experience of managing, developing technologies and project management and has secured appropriate external resources.

The market may not accept the Group’s technology solutions to achieve continuing support of existing sales channels and the anticipated level and rate of growth of future revenues. The Group continually monitors the market place and works closely with

development partners and customers to advance the Group’s technologies.

General economic conditions and uncertainties on potential partners’ plans for capital expenditure and their ability and appetite to fund projects may affect the business.

Technological change and the potential of competitors to develop alternative solutions may threaten the business. The Group has registered patents covering key areas of its technology, monitors relevant third party patents and has developed significant know how.

It is important to retain key employees in the development of the Group’s technologies and execution of its business plan. The Group seeks to avoid over dependence upon specific employees and formally documents key areas. The Group seeks to retain staff and encourage their long-term commitment by providing competitive remuneration packages including company-wide share options.

The principal financial risk is the management of cash during the development phase for the Group including:

Liquidity risk - the Group seeks to manage financial risk by ensuring that sufficient liquidity is available to meet foreseeable needs and by investing cash assets safely and profitably. The Group’s policy throughout the year has been to achieve this objective through management’s day-to-day involvement in business decisions rather than setting maximum or minimum liquidity ratios. Group policies are aimed at maximising liquidity and return on cash through the use of short and medium term bank deposits;

Foreign exchange risk - the Group undertakes contracts denominated in foreign currencies (principally Euro and US dollar) leading to an exposure in exchange rate movements for both sales and purchase transactions. Where they cannot be offset, forward exchange contracts are utilised to minimise the risk.

Credit risk - the Group’s principal financial assets are cash and trade receivables. The credit risk associated with cash is managed by ensuring that counterparties have high credit ratings assigned by international credit rating agencies.

Interest rate risk - the Group’s policy throughout the year has been to place funds on deposit directly with an approved list of banks maturities to match the anticipated cash requirements of the Group; and

Capital Management Capital consists of equity attributable to the equity holders of the parent.

The primary objective of the Group’s capital management is to ensure that it maintains sufficient capital to support the on-going expenditure requirements of the business with a view to future commercial success from these activities in order to maximise shareholder value.

The Group manages its capital structure and makes adjustments to it in light of working capital requirements. To adjust the capital structure, the Group issues new shares. The Group currently has no debt financing.


Directors’ Report continued

Creditor payment policy The Group and Parent Company seek to agree payment terms with their suppliers in advance of a transaction and will pay in accordance with the agreed terms as long as the Group and Parent Company are satisfied that the supplier has provided goods and services in accordance with the order.

The Group’s creditor payment period was 40 days (2012: 54 days). The Parent Company’s creditor payment period was 46 days (2012: 54 days).

Employee Involvement The Group’s policy is to encourage involvement at all levels, as it believes that this is essential for the success of the business.

Disabled Employees Full consideration is given to employment applications from disabled persons who have the necessary aptitudes and abilities. Where an employee becomes disabled while employed, arrangements are made wherever practicable to maintain employment. The company seeks to develop the skills of disabled persons by providing applicable training, taking into account their particular needs.

Directors' and Officers' Liability Insurance The Parent Company has purchased liability insurance covering its directors and officers.

Directors and their Interests The directors during the year were as follows:

Executive

P Cartmell

M S Crawford

J P Carter (appointed 22 July 2013)

Non-executive

R W King

R R Courtney OBE

J A Henderson (appointed 26 March 2013)

Directors’ interests in shares are shown in the Remuneration report.

Related Party Transactions These have been disclosed within note 28 to the accounts.

Auditor Each of the persons who is a Director at the date of approval of this Annual Report confirms that:

so far as the director is aware, there is no relevant audit information of which the company’s auditors are unaware; and

the director has taken all steps that he/she ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the company’s auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

Deloitte LLP has expressed willingness to continue in office. In accordance with s489(4) of the Companies Act 2006 a resolution to re-appoint Deloitte LLP will be proposed at the Annual General Meeting.

This report was approved on behalf of the Board on 1 April 2014 and signed by order of the Board.

M J Webb Company Secretary

1 April 2014


Directors’ Report continued

Creditor payment policy The Group and Parent Company seek to agree payment terms with their suppliers in advance of a transaction and will pay in accordance with the agreed terms as long as the Group and Parent Company are satisfied that the supplier has provided goods and services in accordance with the order.

The Group’s creditor payment period was 40 days (2012: 54 days). The Parent Company’s creditor payment period was 46 days (2012: 54 days).

Employee Involvement The Group’s policy is to encourage involvement at all levels, as it believes that this is essential for the success of the business.

Disabled Employees Full consideration is given to employment applications from disabled persons who have the necessary aptitudes and abilities. Where an employee becomes disabled while employed, arrangements are made wherever practicable to maintain employment. The company seeks to develop the skills of disabled persons by providing applicable training, taking into account their particular needs.

Directors' and Officers' Liability Insurance The Parent Company has purchased liability insurance covering its directors and officers.

Directors and their Interests The directors during the year were as follows:

Executive

P Cartmell

M S Crawford

J P Carter (appointed 22 July 2013)

Non-executive

R W King

R R Courtney OBE

J A Henderson (appointed 26 March 2013)

Directors’ interests in shares are shown in the Remuneration report.

Related Party Transactions These have been disclosed within note 28 to the accounts.

Auditor Each of the persons who is a Director at the date of approval of this Annual Report confirms that:

so far as the director is aware, there is no relevant audit information of which the company’s auditors are unaware; and

the director has taken all steps that he/she ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the company’s auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

Deloitte LLP has expressed willingness to continue in office. In accordance with s489(4) of the Companies Act 2006 a resolution to re-appoint Deloitte LLP will be proposed at the Annual General Meeting.

This report was approved on behalf of the Board on 1 April 2014 and signed by order of the Board.

M J Webb Company Secretary

1 April 2014


Corporate Governance Report

Principles of Good Corporate Governance The Group is committed to high standards of corporate governance. It has adopted procedures to institute good governance insofar as it is practical and appropriate for an organisation of its size and nature, notwithstanding the fact that companies that have securities traded on the Alternative Investment Market of the London Stock Exchange (“AIM”) are not required to comply with the Combined Code as appended to the Listing Rules issued by the Financial Services Authority. Whilst not required to comply with the Code, the Group has chosen to give selected disclosures which they believe are necessary or valuable to readers.

As the Group grows, it will regularly review the extent of its corporate governance practices and procedures. At its current stage of development, the Parent Company does not consider it appropriate to be fully compliant with the Combined Code.

Application of Principles

Directors During the year the Board consisted of three full time executive directors (two until July 2013) and three non-executive directors (two until March 2013). The Board met nine times in the year and is provided with relevant information on financial, business and corporate matters prior to meetings.

As a result of the transformation of the group, an additional non-executive director was appointed to proactively address the growing needs of the Board to support the larger group of companies from a business and corporate governance perspective. The roles of Chief Financial Officer and Chief Operating Officer were separated and an additional Executive Director was appointed in July.

The Board is responsible for overall Group strategy, acquisition and divestment policy, approval of the budget, approval of major commercial contracts and capital expenditure projects and consideration of significant operational and financial matters. The Board monitors the exposure to key business risks and reviews the progress of the Group towards achievement of its budgets and forecasts. This is achieved by the close involvement of the executive directors in the day-to-day running of the business and by regular reports submitted to and considered at meetings of the Board and subcommittees. The Board also considers employee issues, key appointments and compliance with relevant legislation.

The Board has both an Audit and a Remuneration Committee. The Board do not consider it necessary to constitute a separate Nominations Committee and all members of the Board are consulted on the potential appointment of a new director or a company secretary.

All directors can receive appropriate training as necessary and are able to take independent professional advice in relation to their duties if necessary at the Parent Company’s expense. All directors are subject to re-election every three years.

Relationship with shareholders The Board attaches a high importance to maintaining good relationships with all shareholders. The Board holds regular meetings with institutional shareholders to keep them updated on the Group’s performance, strategy,

management and Board membership. In addition, the Board welcomes as many shareholders as possible to attend the Annual General Meeting and encourages an open discussion after the formal proceedings. The Executive Directors give regular briefings to a number of analysts who cover the technology sector and actively encourages more analysts to follow the Group.

Accountability and audit

Directors' responsibilities The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors are required to prepare the Group and Parent Company financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union.

Under company law, the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to:

properly select and apply accounting policies present information, including accounting policies,

in a manner that provides relevant, reliable, comparable and understandable information

provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance

assess the company's ability to continue as a going concern

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Parent Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors confirm that to the best of their knowledge the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and the management report, which is incorporated into the directors' report, includes a fair review of the development and performance of the business and the position of the Group taken as a whole, together with a description of the principal risks and uncertainties that it faces.



Corporate Governance Report continued As far as each of the directors is aware, there is no relevant information of which the Parent Company’s auditor is unaware. Each director has taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant information and to establish that the Parent Company’s auditor is aware of that information.

Audit Committee During the year, the Audit Committee comprised three non-executive directors (two until March 2013). The Committee has specific terms of reference that deal with its authority and duties. It meets at least twice a year, with the Executive Directors, and the auditor attending by invitation. The Committee reviews the independence and objectivity of the auditor each year. The Committee overviews the adequacy of the Group and Parent Company's internal controls, accounting policies and financial reporting and provides a forum through which the Company's external auditor reports to the non-executive directors.

The Board has decided that the size of the Group does not justify a dedicated internal audit function. This position will be reviewed as the Group's activities increase.

Going Concern Discussion of going concern is included within the accounting policies described in note 2 of the Notes to the Financial Statements.

Internal Control and Risk Management The Board has overall responsibility for ensuring that the Group and Parent Company have processes to identify, evaluate and manage key risks. The nature of the Group’s business comprises a mix of commercial design, manufacturing and service/maintenance as well as on-going R&D. This calls for rigorous cost analysis and market risk assessment. The system is designed to manage and minimise risk of failure to achieve the Parent Company's strategic objectives, and can only provide reasonable, and not absolute, assurance against material misstatement or loss.

Key areas of internal control are listed below:

the review of contract progress against milestones and forecast expectations to ensure that contracts are delivered on time and on budget

regular review of the technical development programmes, the commercialisation of the Group’s technology and the financial performance of the Group in the context of the Parent Company's business plan

an organisation structure with clear executive policies on recruitment, training, appraisals and project management

an annual budget showing projected revenues, costs, funding requirements and operational targets approved by the Board and monitored for performance against it

a system to ensure the security of the Group’s intellectual property

The directors consider that the present system of internal control is sufficient for the needs of the Group and Parent Company and adequately addresses the risks to which the Group is perceived to be exposed.

On behalf of the Board

J A Henderson Chairman

Audit Committee

1 April 2014
















Audit Committee

1 April 2014
















Audit Committee

1 April 2014



Remuneration Report

Unaudited Information

Remuneration Committee During the year, the Remuneration Committee was made up of three non-executive directors. The Remuneration Committee was chaired by Mr R R Courtney OBE and was attended by the Chief Executive by invitation. The Remuneration Committee sets and annually reviews the terms and conditions of employment of the executive directors. The remuneration of non-executive directors is fixed by the Board as a whole. The Remuneration Committee also monitors and reviews the Group-wide appraisal process and approves the proposals from the executive directors for all employees' remuneration and option arrangements.

Remuneration Policy The Parent Company's policy on executive directors' remuneration is to attract and retain high quality executives by paying competitive remuneration packages relevant to each director's role, experience and the external market. The packages include a basic salary, pension contributions and share options. Up to 2010, options granted incorporated individual performance conditions. From 2010, all new options were granted without performance conditions. On 24 September 2013, options over 500,000 shares were granted to J P Carter. The options are exercisable in three equal instalments, from 20 September 2014 at a price of 13.58 pence. No options were granted to the Directors during the year to 31 December 2012.

Service Agreements All Directors are appointed on 12 months rolling contracts and therefore have 12 month notice periods. Non-Executive Directors are appointed on three year contracts, with no notice period.

Audited Information

Directors' Emoluments

Basic salary

or fees Pension

contributions Other

Benefits

Total emoluments

2013

Total emoluments

2012

£000 £000 £000 £000 £000

Executive

P Cartmell 260 17 - 277 518

J P Carter (appointed 22 July 2013) 60 - - 60 -

M S Crawford 205 14 - 219 203

Non-executive

R W King 41 - - 41 32

R R Courtney 35 - - 35 35

J A Henderson (appointed 26 March 2013) 23 - - 23 -

624

31

-

655

788

Page 6



Remuneration Report continued

Directors' Share Options The interests of the directors, who were in office at the end of the financial year, in options over the shares of the Parent Company at 31 December 2013 and 31 December 2012 were:

As at Exercised Lapsed Issued As at

31 Dec 2012 in year in year in year 31 Dec 2013 Exercise

number number number number number price (p) Lapse date

Executive

P Cartmell 2,000,000 - - - 2,000,000 42.00 30 September 2019

P Cartmell 300,000 - - - 300,000 21.75 30 April 2020

P Cartmell 3,000,000 - - - 3,000,000 15.00 9 December 2020

J P Carter - - - 500,000 500,000 13.58 24 September 2023

M S Crawford 300,000 - - - 300,000 39.00 21 October 2019

M S Crawford 200,000 - - - 200,000 34.75 11 December 2019

M S Crawford 300,000 - - - 300,000 21.75 30 April 2020

M S Crawford 1,950,000 - - - 1,950,000 15.00 9 December 2020

Non-executive

R W King 250,000 - - - 250,000 15.00 7 February 2021

R R Courtney OBE 250,000 - - - 250,000 15.00 9 December 2020

The closing mid-market price of the Parent Company’s shares as quoted on the Daily Official List as published by the London Stock Exchange was 10.38p at 31 December 2013 and in the period 1 January 2013 to 31 December 2013 was a closing mid-market high of 16.88p per share and a low of 10.25p per share.



Directors' Share Options The interests of the directors, who were in office at the end of the financial year, in options over the shares of the Parent Company at 31 December 2013 and 31 December 2012 were:

As at Exercised Lapsed Issued As at

31 Dec 2012 in year in year in year 31 Dec 2013 Exercise

number number number number number price (p) Lapse date

Executive

P Cartmell 2,000,000 - - - 2,000,000 42.00 30 September 2019

P Cartmell 300,000 - - - 300,000 21.75 30 April 2020

P Cartmell 3,000,000 - - - 3,000,000 15.00 9 December 2020

J P Carter - - - 500,000 500,000 13.58 24 September 2023

M S Crawford 300,000 - - - 300,000 39.00 21 October 2019

M S Crawford 200,000 - - - 200,000 34.75 11 December 2019

M S Crawford 300,000 - - - 300,000 21.75 30 April 2020

M S Crawford 1,950,000 - - - 1,950,000 15.00 9 December 2020

Non-executive

R W King 250,000 - - - 250,000 15.00 7 February 2021

R R Courtney OBE 250,000 - - - 250,000 15.00 9 December 2020

The closing mid-market price of the Parent Company’s shares as quoted on the Daily Official List as published by the London Stock Exchange was 10.38p at 31 December 2013 and in the period 1 January 2013 to 31 December 2013 was a closing mid-market high of 16.88p per share and a low of 10.25p per share.




Directors' Interests The directors who held office at the end of the financial year had the following beneficial interests in the ordinary share capital of the Parent Company at 31 December 2013, at 31 December 2012 and at the date of this report:

Number held at Number held at

31 December 2013 31 December 2012

Ordinary Shares of Ordinary Shares of

10 pence each 10 pence each

P Cartmell 1,737,920 1,187,920

J P Carter 250,000 -

M S Crawford 370,207 180,167

R W King 440,476 290,476

J A Henderson 100,000 -

On behalf of the Remuneration Committee

R R Courtney OBE Chairman

Remuneration Committee

1 April 2014



Directors' Interests The directors who held office at the end of the financial year had the following beneficial interests in the ordinary share capital of the Parent Company at 31 December 2013, at 31 December 2012 and at the date of this report:

Number held at Number held at

31 December 2013 31 December 2012

Ordinary Shares of Ordinary Shares of

10 pence each 10 pence each

P Cartmell 1,737,920 1,187,920

J P Carter 250,000 -

M S Crawford 370,207 180,167

R W King 440,476 290,476

J A Henderson 100,000 -

On behalf of the Remuneration Committee

R R Courtney OBE Chairman

Remuneration Committee

1 April 2014



Independent Auditor’s Report We have audited the financial statements of Corac Group plc for the year ended 31 December 2013, which comprise the consolidated statement of comprehensive income, the consolidated and parent company statement of financial position, the consolidated and parent company statements of changes in equity, the consolidated and parent company statement of cash flows and the related notes 1 to 28. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective Responsibilities of Directors and Auditor As explained more fully in the directors’ responsibility statement within the corporate governance report, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the Audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on Financial Statements In our opinion:

the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2013 and of the group’s loss for the year then ended;

the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matter prescribed by the Companies Act 2006 In our opinion;

the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

the parent company financial statements are not in agreement with the accounting records and returns; or

certain disclosures of Directors’ remuneration specified by law are not made; or

we have not received all the information and explanations we require for our audit.

Darren Longley FCA Senior Statutory Auditor for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Reading, UK 1 April 2014


Independent Auditor’s Report We have audited the financial statements of Corac Group plc for the year ended 31 December 2013, which comprise the consolidated statement of comprehensive income, the consolidated and parent company statement of financial position, the consolidated and parent company statements of changes in equity, the consolidated and parent company statement of cash flows and the related notes 1 to 28. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective Responsibilities of Directors and Auditor As explained more fully in the directors’ responsibility statement within the corporate governance report, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the Audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on Financial Statements In our opinion:

the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2013 and of the group’s loss for the year then ended;

the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matter prescribed by the Companies Act 2006 In our opinion;

the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

the parent company financial statements are not in agreement with the accounting records and returns; or

certain disclosures of Directors’ remuneration specified by law are not made; or

we have not received all the information and explanations we require for our audit.

Darren Longley FCA Senior Statutory Auditor for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Reading, UK 1 April 2014



Consolidated Statement of Comprehensive Income

for the year ended 31 December 2013

Group

2013 2012

Note

£000 £000

Revenue 3 19,330 15,299

Cost of sales (15,858) (11,845)

Gross profit 3,472 3,454

Distribution costs (219) (172)

Research and development costs (1,049) (2,986)

Administrative expenses (6,544) (6,570)

Operating loss 4 (4,340) (6,274)

Finance income 6 4 180

Loss before income tax

(4,336) (6,094)

Income tax credit 7 780 870

Total comprehensive loss for the year attributable to shareholders

(3,556) (5,224)

Loss per share expressed in pence per share

Basic and diluted loss per share 8 (1.1) (1.8)

All results relate to continuing activities.

The notes on pages 36 to 63 form part of these financial statements.

The notes on page 38 to 65 form part of these financial statements.



Consolidated and Parent Company Statement of Financial Position


Group Parent Company

2013 2012 2013 2012

Note £000 £000 £000 £000

ASSETS

Non current assets

Goodwill 9 4,953 4,953 - -

Other intangible assets 10 10,739 11,631 - -

Property, plant and equipment 11 1,365 1,828 3 1,590

Investments 12 - - 16,147 10,910

Amounts owed by EBT 13 - - 167 198

17,057 18,412 16,317 12,698

Current assets

Inventories 14 38 44 - -

Trade and other receivables 17 2,716 3,339 683 1,266

Taxation recoverable

266 700 - 700

Cash and cash equivalents 18 13,749 6,651 10,537 4,714

16,769 10,734 11,220 6,680

Total assets

33,826 29,146 27,537 19,378

LIABILITIES

Current liabilities

Trade and other payables 19 (4,059) (7,347) (1,287) (2,283)

Taxation payable

(51) (52) - -

(4,110) (7,399) (1,287) (2,283)

Non-current liabilities

Deferred taxation 21 (2,148) (2,675) - -

Provisions 22 (1,862) (712) - (150)

(4,010) (3,387) - (150)

Total liabilities (8,120) (10,786) (1,287) (2,433)

Net assets

25,706 18,360 26,250 16,945

EQUITY

Share capital 23 42,246 30,788 42,246 30,788

Share premium

13,769 13,769 13,769 13,769

Capital redemption reserve

575 575 575 575

Own shares held by the EBT

(561) (551) - -

Share-based payments reserve

1,094 1,026 1,000 932

Retained earnings

(31,417) (27,247) (31,340) (29,119)

Total equity

25,706 18,360 26,250 16,945

The financial statements were approved and authorised for issue by the Board of Directors and were signed on its behalf on 1 April 2014. The notes on pages 38 to 65 form part of these financial statements.

P Cartmell J Carter

Chief Executive Chief Financial Officer

(Company number: 3152034)


Consolidated and Parent Company Statement of Financial Position



2013 2012 2013 2012

Note £000 £000 £000 £000

ASSETS

Non current assets

Goodwill 9 4,953 4,953 - -

Other intangible assets 10 10,739 11,631 - -

Property, plant and equipment 11 1,365 1,828 3 1,590

Investments 12 - - 16,147 10,910

Amounts owed by EBT 13 - - 167 198

17,057 18,412 16,317 12,698

Current assets

Inventories 14 38 44 - -

Trade and other receivables 17 2,716 3,339 683 1,266

Taxation recoverable

266 700 - 700

Cash and cash equivalents 18 13,749 6,651 10,537 4,714

16,769 10,734 11,220 6,680

Total assets

33,826 29,146 27,537 19,378

LIABILITIES

Current liabilities

Trade and other payables 19 (4,059) (7,347) (1,287) (2,283)

Taxation payable

(51) (52) - -

(4,110) (7,399) (1,287) (2,283)

Non-current liabilities

Deferred taxation 21 (2,148) (2,675) - -

Provisions 22 (1,862) (712) - (150)

(4,010) (3,387) - (150)

Total liabilities (8,120) (10,786) (1,287) (2,433)

Net assets

25,706 18,360 26,250 16,945

EQUITY

Share capital 23 42,246 30,788 42,246 30,788

Share premium

13,769 13,769 13,769 13,769

Capital redemption reserve

575 575 575 575

Own shares held by the EBT

(561) (551) - -

Share-based payments reserve

1,094 1,026 1,000 932

Retained earnings

(31,417) (27,247) (31,340) (29,119)

Total equity

25,706 18,360 26,250 16,945

The financial statements were approved and authorised for issue by the Board of Directors and were signed on its behalf on 1 April 2014. The notes on pages 38 to 65 form part of these financial statements.

P Cartmell J Carter

Chief Executive Chief Financial Officer

(Company number: 3152034)



Consolidated Statement of Changes in Equity


Group

Capital Own

shares Share-based

Share Share redemption held by payments Retained

capital premium reserve EBT reserve earnings Total

£000 £000 £000 £000 £000 £000 £000

Balance at

1 January 2012 24,740 13,523 575 (551) 883 (22,023) 17,147

Issue of shares 6,048 246 - - - - 6,294

IFRS 2 share option charge - - - - 143 - 143

Transactions with owners 6,048 246 - - 143 - 6,437

Total comprehensive loss - - - - - (5,224) (5,224)

Balance at

31 December 2012 30,788 13,769 575 (551) 1,026 (27,247) 18,360

Issue of shares 11,458 - - (10) - - 11,448

IFRS 2 share option charge - - - - 68 - 68

Transactions with owners 11,458 - - (10) 68 - 11,516

Total comprehensive loss - - - - - (3,556) (3,556)

Share issue costs - - - - - (614) (614)

Balance at

31 December 2013 42,246 13,769 575 (561) 1,094 (31,417) 25,706

The notes on pages 36 to 63 to form part of these financial statements. The notes on page 38 to 65 form part of these financial statements.



Parent Company Statement of Changes in Equity


Parent Company

Capital Share-based

Share Share redemption payments Retained

Capital premium reserve reserve earnings Total

£000 £000 £000 £000 £000 £000

Balance at

1 January 2012 24,740 13,523 575 789 (22,268) 17,359

Issue of shares 6,048 246 - - - 6,294

IFRS 2 share option charge - - - 143 - 143

Transactions with owners 6,048 246 - 143 - 6,437

Total Comprehensive Loss - - - - (6,851) (6,851)

Balance at

31 December 2012 30,788 13,769 575 932 (29,119) 16,945

Issue of shares 11,458 - - - - 11,458

IFRS 2 share option charge - - - 68 - 68

Transactions with owners 11,458 - - 68 - 11,526

Total comprehensive loss - - - - (1,607) (1,607)

Share issue costs - - - - (614) (614)

Balance at

31 December 2013 42,246 13,769 575 1,000 (31,340) 26,250





Consolidated and Parent Company Statement of Cash Flows



2013 2012 2013 2012

Note £000 £000 £000 £000

Operating activities

Loss before income tax

(4,336) (6,094) (2,053) (7,940)

Adjustments for:

Depreciation

505 478 1 418

Amortisation 816 605 - -

Impairment of other intangible assets 76 - - -

Finance income

(4) (180) (4) (180)

Share-based payment expense

68 143 41 143

Increase in impairment on loan to the EBT 13 - - 31 52

Decrease in inventories

6 95 - -

Decrease in trade and other receivables

623 2,455 1,029 502

(Decrease)/increase in trade and other payables

(3,288) (2,303) (996) 277

Increase/(decrease) in provisions 1,150 - (150) -

(4,384) (4,801) (2,101) (6,728)

Income tax received

686 731 700 731

Net cash used in operating activities

(3,698) (4,070) (1,401) (5,997)

Investing activities

Transfer of property plant and equipment to subsidiary

- - 1,590 -

Interest received

4 180 4 180

Purchase of property, plant and equipment

(42) (175) (4) (150)

Long-term loan to subsidiary - - (5,210) -

Acquisition of subsidiary undertakings - (10,910) - (10,910)

Net cash used in investing activities (38) (10,905) (3,620) (10,880)

Financing activities

Proceeds from issue of shares 23 10,844 6,350 10,844 6,350

Purchase of own shares (10) - - -

Expenses of issue of shares 23 - (56) - (56)

Net cash from financing activities

10,834 6,294 10,844 6,294

Net increase/(decrease) in cash equivalents

7,098 (8,681) 5,823 (10,583)

Cash and cash equivalents at beginning of year

6,651 15,332 4,714 15,297

Cash and cash equivalents at end of year

13,749 6,651 10,537 4,714




Notes to the Financial Statements

1. Nature of Operations The principal activities of Corac Group plc and its subsidiaries (the “Group”) undertaken by the ACI, CET and HTT businesses comprise:

ACI: supplies air purification equipment, oxygen/hydrogen generation and purification for submarines and air handling and distribution systems in maritime and other environments.

CET: specialises in the research and development of technologies in the field of gas compression and the design and manufacture of high speed motors and generators using proprietary permanent magnetic rotor and oil-less bearings

HTT: Production of specialised heat exchange equipment used in the cooling and heating of large scale industrial processes. HTT supply original equipment and spares, and perform refurbishment and term support services to user communities in oil & gas, chemical processing, power generation, foods and pharmaceuticals from an integrated design and production facility.

Corac Group plc (the “Parent Company”) is the Group’s ultimate parent company, which is incorporated under the Companies Act and domiciled in the United Kingdom. The address of the registered office of the Company is Technology Centre, 683-685 Stirling Road, Slough, Berkshire SL1 4ST. The Parent Company’s shares are listed on AIM.

2. Summary of Significant Accounting Policies

2.1 Basis of preparation

The consolidated and Parent Company financial statements have been prepared in accordance with applicable International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board as adopted by the European Union. The consolidated financial statements are presented in pounds sterling as this is the currency of the primary economic environment in which the Group operates, and all values are rounded to the nearest thousand except when otherwise indicated.

The financial statements have been prepared under the historical cost convention. The measurement bases and principal accounting policies of the Group and Parent Company are set out below. The accounting policies adopted are consistent with those of the previous financial year.

At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

IFRS9 Financial Instruments IFRS14 Regulatory Deferral Accounts IFRS10, IFRS12 and IAS27 (amended) Investment

Entities Annual Improvements to IFRSs (2010-2013) Cycles IAS19 (amended) Defined Benefit Plans: Employee

Contributions IAS32 (amended) Offsetting Financial Assets and

Financial Liabilities

IAS36 (amended) Recoverable Amount Disclosures for Non Financial Assets

IAS39 (amended) Novation of Derivatives and Continuation of Hedge Accounting.

IFRIC21 Levies The directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group in future periods.

Going concern

The Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future, and accordingly continue to adopt the going concern basis in preparing the accounts. In reaching this conclusion, the directors have considered forecasts that cover a period of greater than twelve months from the date of the approval of these financial statements. The forecasts take into account the Group’s existing cash resources, and include consideration of certain downside scenarios, in particular in relation to CET where there is inherently greater uncertainty as to the future cash flows of that business. The Directors have also considered the mitigating actions available to them, including the ability of management to make certain reductions to the Group’s discretionary expenditure if required.

2.2 Significant management judgements in applying accounting policies

The significant management judgements in applying the accounting policies of the Group and Parent Company that have the most significant effect on the financial statements are set out below.

(i) Recognition of revenue

Revenue from the provision of commercial and R&D services is recognised when the outcome of the transaction can be estimated reliably using the criteria set out below in note 2.5 “Revenues”. As a consequence of the nature of these services, this requires the exercise of judgement, estimates and assumptions that are subject to uncertainty. The estimation uncertainty with respect to revenues from services is set out in note 2.3 “Estimation uncertainty”.

(ii) Capitalisation of development costs

Development costs are capitalised when all of the conditions set out below in note 2.7 “Research and development” have been met.

The Group’s management continually monitors whether the recognition requirements for development costs have been met by any expenditure. The Group has not yet capitalised any development costs as the criteria set out in IAS 38, “Intangible Assets”, have not been met. R&D costs expensed for the year ended 31 December 2013 (including those classified as cost of sales within CET) were £3.0m (2012: £3.2m).


Notes to the Financial Statements continued

2. Summary of Significant Accounting Policies (continued)

(iii) Deferred tax assets

The assessment of the probability of future taxable income against which brought forward losses can be utilised is based on the Group’s latest budget forecast, which is adjusted for significant non-taxable income and expenses and specific limits to the use of any unused tax loss or credit. If a positive forecast of taxable income indicates the probable use of a loss, especially when it can be used without time limit, a corresponding deferred tax asset is recognised in full.

2.3 Key sources of estimation uncertainty

When preparing the financial statements management undertakes a number of judgements, estimates and assumptions about the recognition and measurement of assets, liabilities, income and expenses based on historical experience and other factors considered reasonable at the time. Actual outcomes are likely to differ from the estimates made by management and actual results will seldom equal projected results.

Information about significant judgements, estimates and assumptions, which have the most significant effect on the recognition and measurement of assets, liabilities, income and expenses, are discussed below.

(i) Recognition of revenue

The revenue recognised from commercial and R&D services reflects management’s best estimate of the contract’s outcome and stage of completion. The Group’s management review the contracts monthly, including the costs to completion, which are subject to significant estimation uncertainty.

(ii) R&D Tax Credits

The definition of “qualifying” R&D expenditure for the purposes of R&D Tax Credits requires the exercise of judgement, estimates and assumptions, which are subject to uncertainty.

Qualifying R&D expenditure is defined by guidelines from the Department for Business Enterprise and Regulatory Reform, which are subject to interpretations by HM Revenue & Customs.

The Group has recognised an R&D Tax Credit of £0.3m (2012: £0.7m) in respect of the year ended 31 December 2013, which is subject to submission to and acceptance, by HM Revenue & Customs.

(iii) Share-based payments

The calculation of the share-based payments expense utilises assumptions and estimates (e.g. share volatility, future exercise rates) which may differ from actual results. Details of the accounting policy are set out in note 2.16(ii).

(iv) Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.

(v) Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to

settle that obligation and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material).

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

(vi) Warranties

Provisions for the expected cost of warranty obligations under local sale of goods legislation are recognised at the date of sale of the relevant products, or at the date that the need for remediation under warranty becomes known, at the directors’ best estimate of the expenditure required to settle the Group’s obligation.

(vii) Onerous contracts

Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

2.4 Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and all entities controlled by the company (its subsidiaries) and the Corac Employee Benefit Trust (see note 24) made up to 31 December each year.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in to line with those used by the group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Subsidiary undertakings are entities over which the Group has the power to control the financial and operating policies to obtain benefits from its activities. The Group obtains and exercises control through voting rights.

The Corac Employee Benefit Trust, which is managed by an independent trustee, is an employee share scheme established for the benefit of and as an incentive for the employees of the Group.

Unrealised gains on transactions between the Group and its subsidiaries are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group.

The Parent Company has taken advantage of the exemption available under section 408 of the Companies Act 2006 and has not presented its profit and loss account. The Parent Company’s result for the year was a loss of £1.6m (2012: £6.9m).




2.5 Revenues

Revenue is measured by reference to the fair value of consideration received or receivable by the Group for goods supplied and services provided, excluding VAT and trade discounts. Revenue is recognised upon the performance of services or transfer of risk to the customer.

(i) Sale of goods

Revenue from the sale of goods is recognised when all the following conditions are satisfied:

the Group has transferred to the buyer the significant risks and rewards of ownership of the goods

the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold

the amount of revenue can be measured reliably it is probable that the economic benefits associated

with the transaction will flow to the entity the costs incurred or to be incurred in respect of the

transaction can be measured reliably

(ii) Long-term contracts

Where the outcome of a long-term contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that the amount can be measured reliably and its receipt is considered probable.

Where the outcome of a long-term contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred where it is probable they will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred.

When it is probable that total committed contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. In CET, the expected loss is only recognised to the extent that there is a contractual obligation on CET to deliver under the terms of the contract.

(iii) Financing from R&D partners

When the outcome of a transaction involving prototype and concept assessment, front end design, feasibility studies and R&D work can be estimated reliably, revenue is recognised by reference to the stage of completion at the balance sheet date, taking into account any preferential terms post commercialisation.

Where the outcome of a transaction cannot be estimated reliably, revenue is recognised to the extent of stage payments received.

2.6 Cost of sales

For funded development projects within CET, cost of sales is deemed to represent that element of R&D spend financed by development partners. As such, this is set to equal revenues recognised from R&D activity. For all other contracts (including all contracts within ACI and HTT) cost of sales represents the actual costs of materials, direct labour and overheads incurred with reference to the stage of completion of the contract at the balance sheet date.

2.7 Research and development

Expenditure on research (or the research phase of an internal project) is recognised as an expense in the period in which it is incurred.

Development costs incurred on specific projects are capitalised when all the following conditions are satisfied:

Completion of the intangible asset is technically feasible so that it will be available for use or sale.

The Group intends to complete the intangible asset and use or sell it.

The Group has the ability to use or sell the intangible asset.

The intangible asset will generate probable future economic benefits. Among other things, this requires that there is a market for the output from the intangible asset or for the intangible asset itself, or, if it is to be used internally, the asset will be used in generating such benefits.

There are adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

The expenditure attributable to the intangible asset during its development can be measured reliably.

The Group has not yet capitalised any development costs as the criteria set out above have not been met, and all such costs have been expensed as incurred.

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Following initial recognition, the related asset is amortised over the period of the expected future sales with impairment reviews being carried out at least annually. The asset is carried at cost less any accumulated amortisation and impairment losses.

The Group has not yet capitalised any development costs, as the criteria set out above have not been met.

2.8 Finance income

Finance income represents interest earned on cash deposits that is allocated over the relevant period.

2.9 Property, plant and equipment

Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment.

Depreciation is calculated to write down the cost less estimated residual value of all property, plant and equipment by equal annual instalments on a straight line basis over their estimated useful economic lives. The rates generally applicable are:

Computer equipment 33% per annum Office furniture and fittings 20% per annum Plant and machinery 10% to 20% per annum

Short leasehold improvements are depreciated over the term of the lease.

Management reviews the useful lives and residual values of all depreciable assets at each reporting date. At 31 December 2013, management assesses that the useful lives represent the expected utility of the assets to the Group and Parent Company.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. An impairment loss is recognised for the amount by which the assets carrying amount exceeds its recoverable amount.




To determine the recoverable amount, management estimates future cash flows from the asset based upon long-term financial projections. The gain or loss arising on the disposal or scrappage of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income.

2.10 Operating leases

Leases where substantially all the risks and benefits of ownership of the asset are not transferred to the Group are classified as operating leases and rentals payable are charged to the income statement on a straight line basis over the term of the lease.

2.11 Finance leases and hire purchase commitments

Assets held under finance leases, which are leases where substantially all the risks and rewards of the asset have passed to the Group, and hire purchase contracts are capitalised in the balance sheet and are depreciated over the shorter of the lease term and the asset’s useful lives. The capital elements of future obligations under leases and hire purchase contracts are included as liabilities in the balance sheet. The interest elements of the rental obligations are charged to the income statement over the periods of the leases and hire purchase contracts and represent a constant proportion of the balance of capital repayments outstanding.

2.12 Taxation

Income tax recoverable in respect of R&D cash tax credits is recognised when the decision has been taken to claim such amounts in cash. Until such a decision is made, the potential tax benefit arising from R&D expenditure is included in tax losses carried forward. The income tax recoverable in respect of R&D cash tax credits is based upon management estimates, judgements and assumptions considered reasonable at the time but the actual income tax recoverable may differ from those estimates.

The charge for current income tax is based on the results for the period as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred income tax is provided in full, using the liability method, on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. A deferred income tax asset is recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. For management’s assessment of the probability of future taxable income to utilise against potential deferred tax assets in respect of brought forward losses, see note 2.2(iii).

2.13 Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

2.14 Financial instruments

Financial assets and financial liabilities are recognised when the Group or Parent Company becomes a party to the contractual provisions of the financial instrument.

Financial assets are derecognised when the contractual right to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires.

Financial assets and financial liabilities are measured initially at fair value plus transaction costs, except for financial assets and financial liabilities carried at fair value through profit or loss, which are measured initially at fair value.

Financial assets and financial liabilities are measured subsequently as described below.

(i) Financial assets

For the purpose of subsequent measurement, financial assets are classified into the following categories upon initial recognition:

loans and receivables; financial assets at fair value through profit or loss;

The category determines subsequent measurement and whether any resulting income and expense is recognised in profit or loss or equity.

All financial assets except for those at fair value through profit or loss are subject to review for impairment at least at each reporting date. Financial assets are impaired when there is any objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied for each category of financial assets, which are described below.

All income and expenses relating to financial assets that are recognised in profit or loss are presented within “Finance costs” or “Finance income” except for impairment of trade receivables, which is presented within “Administrative expenses”.

The Group and Parent Company’s cash and cash equivalents fall into this category of financial instruments.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, these are recognised at amortised cost using the effective interest rate method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial.

Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty will default. Impairment of trade receivables are presented within “Administrative expenses”.

(i) Financial liabilities

The Group and Parent Company’s financial liabilities comprise trade and other payables.

Financial liabilities are measured subsequently at amortised cost using the effective interest rate method except for financial liabilities held for trading or designated at fair value through profit or loss, that are carried subsequently at fair value with gains or losses recognised in profit or loss. Discounting is omitted where the effect of discounting is immaterial.




2.15 Equity

Equity comprises the following:

“Share capital” which represents the nominal value of equity shares.

“Share premium” which represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue.

“Capital redemption reserve” which constitutes a non distributable reserve, which arose on the acquisition by the Company of its own shares.

“Own shares held by Employee Benefit Trust” which represents the costs of purchasing own shares held by the Employee Benefit Trust.

“Share-based payment reserve" which represents equity-settled share-based employee remuneration until such share options are exercised or lapse.

“Retained earnings” which represents retained profits and losses.

2.16 Employee benefits

(i) Defined Contribution Pension Scheme

The Group operates a defined contribution stakeholder pension scheme for employees. The assets of the scheme are held separately from those of the Group. The pension cost charged against profits represents the amounts payable by the Group and is expensed as it becomes payable.

(ii) Share-based payment

All equity-settled share-based payments are measured at fair value at the date of grant, which is ultimately recognised as an expense in the income statement with a corresponding credit to reserves. Options are valued using a Black-Scholes model.

If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the number of share options expected to vest. This estimate takes into account a number of factors including performance conditions applying to the relevant options. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period.

No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. Upon exercise of share options, the proceeds received net of attributable transaction costs are credited to share capital, and where appropriate share premium.

(iii) Employee benefit trust

The assets and liabilities of the Employee Benefit Trust ("EBT") have been included in the Group accounts. Any assets held by the Employee Benefit Trust cease to be recognised on the Group balance sheet when the assets vest unconditionally in identified beneficiaries.

The costs of purchasing own shares held by the Employee Benefit Trust are shown as a deduction against consolidated equity. The proceeds from the sale of own shares held increase consolidated equity. Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the Group income statement.

(iv) Short-term employee benefit costs

The undiscounted amount of short-term benefits attributable to services that have been rendered in the period are recognised as an expense, unless specifically required or permitted within the scope of IFRS reporting to be included in the cost of an asset. Any difference between the amount of cost recognised and cash payments made is treated as a liability or prepayment as appropriate.

2.17 Foreign currency translation

The Group’s consolidated financial statements are presented in pounds sterling, which is the functional currency of all group entities. Foreign currency transactions are translated into pounds sterling using the exchange rates prevailing at the dates of the transactions (spot exchange rates). Foreign currency gains and losses resulting from the settlement of such transactions and from the re-measurement of monetary items at year end exchange rates are recognised in profit or loss.

2.18 Business combinations

Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred.

The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3(2008) are recognised at their fair value at the acquisition date, except that deferred tax assets or liabilities and liabilities are recognised and measured in accordance with IAS 12 Income Taxes.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date.

The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed as of the acquisition date, and is subject to a maximum of one year.

2.16




2.19 Goodwill

Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest (if any) in the entity over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

2.20 Impairment of tangible and intangible assets excluding goodwill

Intangible assets other than goodwill that are acquired by the Group are stated at cost less accumulated amortisation (see below) and any impairment losses. At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment at least annually and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A

reversal of an impairment loss is recognised immediately in profit or loss.

2.21 Amortisation

Amortisation is charged to the income statement on a straight line basis over the estimated useful life of intangible assets other than goodwill of 15 years.

2.22 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

2.23 Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.



3. Segmental Reporting

Business segments For management purposes, the Group is treated as three business units comprising:

Atmosphere Control International – activities include the provision of air purification equipment for submarines including oxygen/hydrogen generation and purification, air handling and distribution systems.

Corac Energy Technologies – specialises in the research and development of technologies in the field of gas compression and the design and manufacture of high speed motors and generators using proprietary permanent magnetic rotor and oil-less bearings

Hunt Thermal Technologies – activities include the manufacture of heat exchange equipment used in the heating and cooling of large scale industrial processes.

Group Central Team – costs incurred to support the businesses are charged out to the operating companies leaving central unallocated costs that relate specifically to the Corac Group Plc operations.

The following table presents group revenue, profit and certain net asset information for each business segment. The comparatives for 2012 include the post acquisition results of Atmosphere Control International Limited and Hunt Thermal Technologies Limited for the nine months from 5 April to 31 December 2012.

2013 2012

£’000 £’000

Revenue

Atmosphere Control International 10,667 7,496

Corac Energy Technologies 1,049 220

Hunt Thermal Technologies 7,614 7,583

Group 19,330 15,299

Segment Operating Result


Corac Energy Technologies (3,954) (5,082)

Hunt Thermal Technologies 141 578

Central unallocated costs (2,037) (2,823)

Group (4,340) (6,274)

Loss from operations (4,340) (6,274)

Finance Income 4 180

Loss before income tax (4,336) (6,094)

Income tax credit 780 870

Loss after tax (3,556) (5,224)

Segment net assets / (liabilities)


Corac Energy Technologies 2,411 6,112

Hunt Thermal Technologies 2,407 2,244

Corac Group 8,618 (250)

Total net assets 25,706 18,360

The segment operating result for HTT includes an impairment loss on intangible assets of £76,000 (2012: £nil) arising on the change of name of Hunt Graham Limited to Hunt Thermal Technologies Limited.



3. Segmental Reporting (continued)

Geographical segments The Group’s operations are solely in the United Kingdom although some of the Group’s revenues are to customers outside the UK. All segment assets are located in the UK. The Group’s revenues from external customers are analysed into the following geographical areas:

2013 2012

£’000 £’000

Geographical analysis - revenue

United Kingdom 14,070 12,541

Rest of European Union 2,142 857

North America 656 10

Asia 796 1,073

Middle East 403 642

Rest of the World 1,263 176

Total revenue 19,330 15,299

Information about major customers Revenue includes sales from customers who contributed 10% or more to the Group’s revenue:

2013 2012

£’000 £’000

ACI

Customer 1 4,298 3,298

Customer 2 3,087 2,127

HTT

Customer 3 - 2,180

Customer 4 - 1,085

Total revenue 7,385 8,690



3. Segmental Reporting (continued)

Results by Segment

Atmosphere Control

International

Corac Energy Technologies

Hunt Thermal Technologies

Central unallocated

costs Group

£’000 £’000 £’000 £’000 £’000

2013

Segment operating result 1,510 (3,954) 141 (2,037) (4,340)

Depreciation, amortisation and impairment 814 423 159 1 1,397

EBITDA1 2,324 (3,531) 300 (2,036) (2,943)

Share based payments - 27 - 41 68

Adjusted EBITDA2 2,324 (3,504) 300 (1,995) (2,875)

2012

Segment operating result 1,053 (5,082) 578 (2,823) (6,274)

Depreciation, amortisation and impairment 600 418 65 - 1,083

EBITDA1 1,653 (4,664) 643 (2,823) (5,191)

Share based payments - - - 143 143

Exceptional items - - - 980 980

Adjusted EBITDA2 1,653 (4,664) 643 (1,700) (4,068)

1 EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment and amortisation and impairment of acquired intangible assets.

2 Adjusted EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment, amortisation and impairment of acquired intangible assets and any other acquisition related charges, share based payment charges and exceptional items. Exceptional items are those items believed to be exceptional in nature by virtue of their size and or incidence. There are no exceptional items in the current year. In the year to 31 December 2012, they comprise costs of £980,000 associated with the acquisitions of ACI and HTT on 5 April 2012 and the associated equity fundraising on 2 April 2012.



4. Operating Loss The Group operating loss for the year is stated after charging the following. The comparatives for 2012 include the post acquisition results of Atmosphere Control International Limited and Hunt Thermal Technologies Limited for the nine months from 5 April to 31 December 2012.

Group

2013 2012

£000 £000

Staff costs

Wages and salaries 7,006 6,241

Social security costs 768 718

Other pension costs 384 326

8,158 7,285

Exceptional item: costs associated with the Wellman acquisition - 980

Impairment of intangible assets 76 -

76 -

Amortisation of intangible assets 816 605

Depreciation of property, plant & equipment 505 478

Operating lease expense - rent 776 611

Loss on foreign exchange - 50

Auditor's remuneration

Audit fees

Fees payable for the audit of the Parent Company

and consolidated financial statements 21 21

Fees payable for the audit of the subsidiary companies 36 32

57 53

Non-audit fees

Fees payable for statutory and regulatory services 6 10

Corporate finance services 21 95

Tax Compliance services 13 25

Total auditor remuneration 97 183

Included in wages and salaries is a total expense of share-based payments of £68,000 (2012: £143,000), all of which arises from transactions accounted for as equity-settled share-based payment transactions.

Exceptional costs in 2012 relate to costs associated with the due diligence, advisor and broker fees relating to the acquisition of Atmosphere Control International Limited and Hunt Thermal Technologies Limited on 5 April 2012.



4. Operating Loss (continued)

Staff numbers

The average number of employees, including Directors, employed by the Group during the year (2012 includes employees of Atmosphere Control International Limited and Hunt Thermal Technologies Limited from 5 April 2012) was as follows:

Group

2013 2012

Number Number

Engineering 120 87

Business Development 12 17

Administration 38 27

170 131

Pension costs The Group operates a money purchase and a group stakeholder pension scheme. The assets of this scheme are held separately from those of the Group in separately administered funds. The pension cost charge represents contributions payable by the Group to these funds and amounted to £384,000 (2012: £326,000). No contributions were prepaid or overdue at 31 December 2013 (2012: £nil). The nature of the Group’s scheme is such that there is no possibility of a surplus or deficiency in funding arising from past service.

5. Directors’ Emoluments Key management of the Group are members of the Board of Directors. Key management personnel remuneration includes the following expenses:

Group

2013 2012

£000 £000

Emoluments 624 757

Pension contributions paid to defined contribution pension schemes 31 31

655 788

Two Directors (2012: two) accrued pension benefits during the year. No Director exercised share options during the year (2012: nil).

Remuneration of the highest paid Director included above is as follows:

Group

2013 2012

£000 £000

Emoluments 260 500

Pension contributions 17 18

277 518



6. Finance Income

Group

2013 2012

£000 £000

Interest income on bank deposits 4 180

7. Taxation Credit to consolidated income statement

Group

2013 2012

£000 £000

Corporation tax - R&D credit

Current year 266 700

Prior year (over)/under provision (13) 31

253 731

Deferred tax 527 139

780 870

The tax credit for the period is lower than the standard rate of corporation tax in the UK of 23.25% (2012: 24.5%). The differences are explained as follows:

Group

2013 2012

£000 £000

Loss on ordinary activities before taxation 4,336 6,094

Loss on ordinary activities multiplied by standard rate of corporation tax in the UK of 23.25% (2012: 24.5%)

1,008

1,493

Effect of:

Expenses not deductible for tax purposes (166) (317)

Depreciation in excess of capital allowances (82) (67)

Share -based payments (16) (35)

R&D enhanced relief 250 714

Surrender of tax losses for R&D credit (296) (728)

Trading losses carried forward (454) (501)

Utilisation of losses brought forward 49 135

Other short term timing differences (27) 6

Deferred taxation 527 139

Adjustment in respect of prior years (13) 31

Tax credit for the year 780 870

At the balance sheet date, the Group has approximately £16.5m (2012: £15.1m) of unrelieved tax losses for offset against future taxable profit. A deferred tax asset of £0.1m (2012: £0.1m) has been recognised in respect of £0.5m (2012: £0.5m) of such losses (see note 17). No deferred tax asset has been recognised in respect of the remaining £16.0m (2012: £14.6m), due to the uncertainty of timing of the generation of future taxable profits.


Notes to the Financial Statements continued 8. Loss per Share The calculation of basic loss per share for the year ended 31 December 2013 is based upon a loss after tax of £3,556,000 (2012: £5,224,000) and a weighted average number of shares of 310,164,087 (2012: 291,007,168). The weighted average number of shares has been reduced by the weighted average number of shares held by the Employee Benefit Trust.

The issue of additional shares on exercise of employee share options would decrease the basic loss per share and there is therefore no dilutive effect of employee share options.

9. Goodwill

Total

£000

Cost and net book value

At beginning and end of year 4,953

Goodwill arose on the acquisition of Atmosphere Control International Limited and Hunt Thermal Technologies Limited (formerly Hunt Graham Limited) on 5th April 2012.

In accordance with the requirements of IAS 36, Impairment of Assets, goodwill is allocated to the Group’s cash generating units, or groups of cash generating units, that are expected to benefit from the synergies of the business combination that gave rise to the goodwill as analysed in the table below:

Total

£000

Atmosphere Control International Limited 4,351

Hunt Thermal Technologies Limited 602

4,953

The goodwill balance has been tested for annual impairment on the following basis:

The carrying values of good will have been assessed by reference to value in use. Cash flows based on forecast information for the next financial year, which has been approved by the Board and in the

case of recent acquisitions on detailed annual forecasts. The key assumptions on which the impairment tests are based are a discount rate of 13.4%, a growth rate of 3% and

the forecast cash flows, pre-tax discount rates. No impairments were identified as a result of this exercise.



10. Other intangible assets

Technical Know How

Customer relationships

Trade name Total

£000 £000 £000 £000

Cost

At 1 January 2013 11,741 324 171 12,236

At 31 December 2013 11,741 324 171 12,236

Accumulated amortisation

At 1 January 2013 581 16 8 605

Charge for year 783 22 11 816

Impairment loss - - 76 76

At 31 December 2013 1,364 38 95 1,497

Net book value

At 31 December 2012 11,160 308 163 11,631

At 31 December 2013 10,377 286 76 10,739

Intangible assets above arose on the acquisition of Atmosphere Control International Limited and Hunt Thermal Technologies Limited (formerly Hunt Graham Limited) on 5 April 2012.

Technical Know How is recognised as Atmosphere Control International Limited’s proprietary expertise and experience of atmosphere management techniques in the defence environment.

The impairment of the Trade Name arose on the change of name of Hunt Graham Limited to Hunt Thermal Technologies Limited on 5 December 2013.



11. Property, Plant and Equipment

Group

Short Office

leasehold Computer furniture Plant &

improvements equipment & fittings Machinery Total

£000 £000 £000 £000 £000

Cost

At 1 January 2012 1,612 348 44 549 2,553

Additions 19 71 40 45 175

Acquisition of subsidiaries - 15 53 205 273

At 31 December 2012 1,631 434 137 799 3,001

Additions - 30 2 10 42

At 31 December 2013 1,631 464 139 809 3,043

Accumulated depreciation

At 1 January 2012 3 298 22 372 695

Charge for year 324 42 26 86 478

At 31 December 2012 327 340 48 458 1,173

Charge for year 326 50 29 100 505

At 31 December 2013 653 390 77 558 1,678

Net book value

At 1 January 2012 1,609 50 22 177 1,858

At 31 December 2012 1,304 94 89 341 1,828

At 31 December 2013 978 74 62 251 1,365

The Group’s obligations under finance leases (see note 20) are secured by the lessors’ title to the leased assets, which have a carrying value of £44,000 (2012: £59,000).



11. Property, Plant and Equipment (continued)

Parent Company

Short Office

leasehold Computer furniture Plant &

improvements equipment & fittings Machinery Total

£000 £000 £000 £000 £000

Cost

At 1 January 2012 1,612 348 44 549 2,553

Additions 19 60 38 33 150

At 31 December 2012 1,631 408 82 582 2,703

Transfer to subsidiary (1,631) (408) (82) (582) (2,703)

Additions - 4 - - 4

At 31 December 2013 - 4 - - 4

Accumulated depreciation

At 1 January 2012 3 298 22 372 695

Charge for year 324 36 11 47 418

At 31 December 2012 327 334 33 419 1,113

Transfer to subsidiary (327) (334) (33) (419) (1,113)

Charge for year - 1 - - 1

At 31 December 2013 - 1 - - 1

Net book value

At 1 January 2012 1,609 50 22 177 1,858

At 31 December 2012 1,304 74 49 163 1,590

At 31 December 2013 - 3 - - 3

At 31 December 2013, there are no assets held under finance leases (2012: £59,000).

The transfer to the subsidiary represents the cost and accumulated depreciation of property, plant and equipment transferred at book value to Corac Energy Technologies Limited by way of hive down on 1 January 2013 (see note 12).



12. Investments in Subsidiary Undertakings

The Parent Company’s investments comprise interests in group undertakings, details of which are listed below. The Companies are wholly owned and are incorporated in England and Wales.

Parent Company

2013 2012

£000 £000

Cost and Net Book Value

At 1 January

10,910

-

Investment during year - 10,910

Long-term loan to subsidiary 5,210 -

Grant of share options to subsidiary company employees 27 -

At 31 December 16,147 10,910

The total cost of investment in subsidiary undertakings can be analysed as:

2013 2012

£000 £000

Investment in shares in Group undertakings

Long-term loan to subsidiary

10,910

5,210

10,910

-

Share options granted to subsidiary employees 27 -

16,147 10,910

The investment during the prior year arose on the acquisition of the entire issued share capitals of Atmosphere Control International Limited and Hunt Thermal Technologies Limited (formerly Hunt Graham Limited) on 5

April 2012.

The long-term loan has been made to Corac Energy Technologies Limited. The loan is interest free and has no fixed date for repayment.

Share options have been granted to employees of Corac Energy Technologies Ltd



12. Investments in Subsidiary Undertakings (continued)

Name of undertaking

Description of shares held

Proportion of nominal value of shares held by

the Parent Company

Principal Activity

Atmosphere Control International Limited £1.00 ordinary shares 100% 1

Corac Energy Technologies Limited £1.00 ordinary shares 100% 2

Hunt Thermal Technologies Limited (formerly Hunt Graham Limited) £1.00 ordinary shares 100% 3

Corac Engineering Limited £1.00 ordinary shares 100% Dormant

Compact Radial Compressors Limited £0.0001 ordinary shares 100% Dormant

Wellman Defence Limited £1.00 ordinary shares 100% Dormant

1 Provision of air purification equipment for submarines including oxygen/hydrogen generation and purification, air handling and distribution systems.

2. Corac Energy Technologies Limited was dormant during 2012 and commenced trading on 1 January 2013 in the field of innovation and development of turbomachinery systems.

3 Manufacture of heat exchange equipment used in the heating and cooling of large scale industrial processes.

Transfer of Business and Assets to Corac Energy Technologies Limited On 1 January 2013, the trading business, employees and certain assets and liabilities of the company’s parent company, Corac Group plc, were transferred to the Company by way of a legal hive down agreement.

The following assets and liabilities were transferred at book value. The transfer was funded via an intercompany loan.

£000

Property, plant and equipment cost 2,700-

Cumulative depreciation (1,110)

1,590

Trade and other receivables 308

Taxation recoverable 700

Trade and other payables (1,610)

Provisions (150)

Net assets transferred 838

The company also transferred to CET its accumulated carried forward tax losses of £13.0 million to offset against future profits from the same trade.



13. Amounts owed by Employee Benefit Trust


2013 2012 2013 2012

£000 £000 £000 £000

Amounts owed by EBT - - 600 600

Less: impairment - - (433) (402)

- - 167 198

The loan to the Employee Benefit Trust is interest free and unsecured. Details of the Employee Benefit Trust are provided in note 24. The loan is repayable under the following circumstances:

(i) From receipt of consideration from the sale of shares in the Parent Company purchased with the loan; and

(ii) Following any lapses in options granted by the Employee Benefit Trust over shares in the Parent Company, the Parent Company can force the sale of shares to repay the loan.

The loan is not expected to be fully repaid within the next 12 months.

Under the terms of the loan facility, should the Employee Benefit Trust be unable to repay the loan following disposal of all its assets then the loan shall be considered waived.

The impairment against the loan is a result of movements in the number and open market value of the shares in the Parent Company held by the Employee Benefit Trust, which could affect its ability to fund future loan repayments.

14. Inventories


2013 2012 2013 2012

£000 £000 £000 £000

Raw materials 38 44 - -

15. Long-term Contracts The carrying amounts presented in the Group balance sheet for long-term contracts relate to the following categories of assets and liabilities:

2013 2012

£000 £000

Contracts in progress at the balance sheet date:

Amounts due from contract customers included in trade and other receivables 516 -

Amounts due to contract customers included in trade and other payables - (2,062)

Contract losses included in provisions (500) -

16 (2,062)

Contract costs incurred plus recognised profits less recognised losses to date 59,616 49,496

Less progress billings (59,600) (51,558)

16 (2,062)



16. Financial Assets and Liabilities The carrying amounts presented in the Consolidated and Parent Company balance sheets relate to the following categories of assets and liabilities:


2013 2012 2013 2012

£000 £000 £000 £000

Financial assets

Amounts owed by EBT (note 13) - - 167 198

Trade and other receivables (note 17) 1,887 2,584 596 1,015

Cash and cash equivalents (note 18) 13,749 6,651 10,537 4,714

15,636 9,235 11,300 5,927

Financial liabilities - current

Trade payables (note 19) 2,412 2,134 765 361

Current obligation under hire purchase contracts (note 20)

12 12 - 12

Amount owed to subsidiary undertakings - - - 10

Non-current obligations under hire purchase contracts (note 20)

25

37

-

37

2,449 2,183 765 420

See note 2.14 for a description of the accounting policies for each category of financial instruments. The fair values are presented in the related notes. A description of the Group’s risk management and objectives for financial instruments is given in note 25.



17. Trade and Other Receivables Group Parent Company

2013 2012 2013 2012

£000 £000 £000 £000

Financial assets:

Trade receivables 1,371 2,584 - 113

Amounts owed by subsidiary undertakings - - 596 902

Amounts due from construction contract customers (note 15)

516 - - -

1,887 2,584 596 1,015

Non-financial assets:

Prepayments and accrued income 582 563 23 207

Deferred tax 148 148 - -

Other taxes 99 44 64 44

2,716 3,339 683 1,266

The carrying value of trade and other receivables is considered a reasonable approximation of fair value due to their short term nature. A provision of £272,000 for impairments of receivables was assumed on acquisition of Hunt Thermal Technologies Limited on 5 April 2012. Subsequently during 2013, the Group has made a provision of £59,000 at ACI in respect of a doubtful receivable from one customer. With this exception, no other allowances for doubtful receivables have been made because there has not been a significant change in credit quality and the amounts are still considered recoverable. The average age of these receivables is 20 days (2012: 81 days). The ageing of past due but not impaired receivables is:


2013 2012 2013 2012

£000 £000 £000 £000

0-30 days 434 391 - -

31-60 days 39 687 - -

61-90 days - - - -

>90 days 3 199 - -

476 1,277 - -

In 2013 a rent deposit of £55,000 (2012:£55,000) and contract retentions of £nil (2012:£59,000) due after more than one year are included within Prepayments and accrued income.

Trade receivables disclosed above are classified as loans and receivables and are therefore measured at amortised cost. Credit terms are negotiated as part of each individual contract. No interest is charged on the receivables from the date of the invoice. The Group does not hold any collateral or other credit enhancements over any of its trade receivables nor does it have a legal right of offset against any amounts owed by the Group to the counterparty.

Deferred tax comprises: Group

2013 2012

£000 £000

Accelerated capital allowances and other temporary differences 42 24

Tax losses carried forward 106 124

148 148

The deferred tax asset is expected to be recovered in more than one year.

At the balance sheet date, the Group has unused tax losses of £16.5m (2012: £15.1m) available for offset against future profits. A deferred tax asset has been recognised in respect of £0.5m (2012: £0.5m) of such losses. No deferred tax asset has been recognised in respect of the remaining £16.0m (2012: £14.6m) due to



17. Trade and Other Receivables (continued)

the uncertainty of the timing of future taxable profits. Unrecognised tax losses are losses that may be carried forward indefinitely

18. Cash and Cash Equivalents


2013 2012 2013 2012

£000 £000 £000 £000

Cash and cash equivalents 13,749 6,651 10,537 4,714

The funds were placed on floating interest rate deposit as follows:


2013 2012 2013 2012

£000 £000 £000 £000

Cash at bank and in hand 13,749 6,651 10,537 4,714

19. Trade and Other Payables


2013 2012 2013 2012

£000 £000 £000 £000

Financial liabilities:

Amounts falling due within one year

Trade payables 2,412 2,134 765 361

Obligations under hire purchase contracts 12 12 - 12

Amount owed to subsidiary undertakings - - - 10

Amounts falling due after one year

Obligations under hire purchase contracts

29

37

-

37

2,453 2,183 765 420

Non-financial liabilities:

Accrued expenses

Amounts due to construction contract customers (see note 15)

1,377

-

2,289

2,062

459

-

1,533

214

Other taxes and social security 229 813 63 116

4,059 7,347 1,287 2,283

The carrying values of trade and other payables are considered to be a reasonable estimate of their fair values.

Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 40 days (2012: 54 days). For most suppliers no interest is charged on the trade payables. The Group has financial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms.



20. Obligations under Finance Leases and Hire Purchase Contracts The company uses finance leases and hire purchase contracts to acquire plant and machinery. Future minimum lease payments under hire purchase contracts are as follows:


2013 2012 2013 2012

£000 £000 £000 £000

Future minimum payments due:

Not later than one year

14

14

-

14

After one year but not more than five years 27 41 - 41

41 55 - 55

Less finance charges allocated to future periods

(4)

(6)

-

(6)

Present value of minimum lease payments 37 49 - 49

The present value of minimum lease payments is analysed as follows:

Not later than one year 12 12 - 12

After one year but not more than five years 25 37 - 37

37 49 - 49

The average lease term is 5 years. For the year ended 31 December 2012, the average effective borrowing rate was 5.9% (2012: 5.9%). Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

All lease obligations are denominated in sterling. The group’s obligations under finance leases are secured by the lessors’ rights over the leased assets as disclosed in note 11.

The fair value of the group’s lease obligations is approximately equal to their carrying amount.

21. Deferred Taxation


2013 2012 2013 2012

£000 £000 £000

At 1 January 2,675 - -

Deferred tax liability arising in the year - 2,814 - -

Credit to Comprehensive Income (527) (139) - -

At 31 December 2,148 2,675 -

The deferred tax liability arose in respect of intangible assets acquired on the acquisition of Atmosphere Control International Limited and Hunt Thermal Technologies Limited (formerly Hunt Graham Limited) on 5 April 2012.



22. Provisions

Group Parent

Warranty Contracts Property Total Property

£000 £000 £000 £000 £000

At 1 January 2013 382 - 330 712 150

Transferred to subsidiary - - - - (150)

Utilised (35) - - (35) -

Released to Comprehensive Income (70) - - (70) -

Charged to Comprehensive Income 755 500 - 1,255 -

At 31 December 2013 1,032 500 330 1,862 -

The warranty provision recognises future claims for rectification and repair to goods sold and remaining under a contractual warranty period, the majority of which are expected to be incurred in the next one to three years.

The contract provision represents foreseeable losses on contracts in progress. These are expected to be incurred in the next one to two years.

The property provision recognises future costs of building dilapidations arising under the terms of property leases.

23. Share Capital

Parent Company

2013 2012

£000 £000

Allotted, called up and fully paid

422,464,726 (2012: 307,880,146 ) ordinary shares of 10p each 42,246 30,788

Number Number

At 1 January 307,880,416 247,404,225

Issued during year 114,584,310 60,476,191

At 31 December 422,464,726 307,880,416

In accordance with the Articles of Association for the Company adopted on 19 May 2011, the share capital of the Company consists of an unlimited number of ordinary shares of nominal value 10 pence each.

All shares are equally eligible to receive dividends and the repayment of capital and represent one vote at the shareholders’ meeting of Corac Group plc. None of the Parent Company shares are held by any company in the Group. The Employee Benefit Trust holds shares in the Parent Company as set out in note 24.

On 11 June 2013, the Company issued 50,000 new ordinary shares of 10p each following the exercise of an employee share option issued at 10 pence per share under the Enterprise Management Incentive (EMI) Scheme. These shares were subsequently admitted for trading on AIM.

Following the approval at a General Meeting of the Company on 19 December 2013, the Company issued as a placement 110,000,000 new ordinary shares of 10p each and 4,534,310 new ordinary shares of 10p each as the result of an Open Offer. All shares were issued at a price of 10p each and all were subsequently admitted for trading on AIM. Expenses of £614,000 associated with the issue have been recognised in equity.

Options The Group has two unapproved share option schemes and an Enterprise Management Incentive (EMI) scheme. Share options have been granted by both the Parent Company and the Corac Employee Benefit Trust (note 24) under the rules of these schemes. The share options granted by the Employee Benefit Trust have no dilutive effect on the Parent Company's share capital.



23. Share Capital (continued)

Unapproved schemes EMI scheme Total

Number of options

Parent Company

EBT

Parent Company

EBT

Parent Company

EBT

Total

At 1 January 2013 10,885,755 300,000 7,780,547 678,338 18,666,302 978,338 19,644,640

Exercised during the year - - (50,000) - (50,000) - (50,000)

Lapsed during the year - - (1,985,577) (108,334) (1,985,577) (108,334) (2,093,911)

Granted during the year - - 2,583,184 - 2,583,184 - 2,583,184

At 31 December 2013 10,885,755 300,000 8,328,154 570,004 19,213,909 870,004 20,083,913

The exercise of options issued prior to April 2010, is subject to the satisfaction of the applicable performance conditions. At 31 December 2013, performance conditions not satisfied relate to the market price of the ordinary shares of the Parent Company as quoted on AIM. Generally, options will lapse on cessation of employment or ten years from issue.

The movement on the Group’s share option schemes is summarised in the table below.

2013 2012

weighted weighted

2013 average 2012 average

number exercise number exercise

of options price (pence) of options price (pence)

As at 1 January 2013 19,644,640 22.4 17,530,987 24.8

Exercised during the year (50,000) 10.0 - -

Lapsed during the year (2,093,911) 12.8 (1,512,310) 22.1

Granted during the year 2,583,184 13.8 3,625,963 11.0

At 31 December 2013 20,083,913 22.4 19,644,640 22.4

Exercisable at 31 December 2013 16,225,662 24.6 12,599,783 27.3

50,000 share options were exercised during the year (2012: nil). The options outstanding at 31 December 2013 had exercise prices as shown in the following table and a weighted average remaining contractual life of 6.6 years.

At 31 December 2013 options over ordinary 10p shares together with the fair value per option granted and the assumptions used in the calculation of fair value for awards made after 7 November 2002, are set out in the table below.

The closing market price of the Parent Company's shares at 31 December 2013 was 10.38p and the range during the year was between 10.25p and 16.88p.

Expected volatility is a measure of the amount by which a share price is expected to fluctuate during a period. For options issued after 2009, expected volatility was based on the volatility of the Parent Company’s shares during the previous 12 months. For options issued in earlier periods, the volatility of the Parent Company's share price was calculated as the average of annualised standard deviations of daily continuously compounded returns on the Parent Company's stock, calculated over 1, 2 and 3 years back from the date of grant where possible.

The risk-free rate is the yield to maturity on the date of grant of a UK Gilt Strip, with term to maturity equal to the expected life of the option.

The group recognised total expenses of £68,000 and £143,000 related to equity-settled share-based payment transactions in 2013 and 2012 respectively.



23. Share Capital (continued)

Date of grant Number

Option price per

share Pence

Closing share price

at grant Pence

Exercise price Pence

Expected volatility

%

Risk-free interest

rate %

Fair value per share

Pence

2004 35,000 * 33.00 33.00 33.00 37.69 4.50 31.28

2005 15,002 * 31.25 32.25 31.25 38.54 4.20 13.36

2006 420,002 * 37.50 36.50 37.50 38.26 4.30 11.41

2007 463,336 36.00 36.00 36.00 35.44 5.35 7.20

2007 855,000 39.00 38.50 39.00 35.04 5.30 9.45

2007 30,000 48.50 49.50 48.50 35.53 5.51 14.75

2007 550,000 51.50 51.50 51.50 29.32 4.58 10.10

2007 470,000 53.67 52.00 53.67 29.32 4.58 7.99

2008 300,000 * 14.90 16.75 14.90 79.50 2.76 7.96

2008 290,000 14.90 16.75 14.90 79.50 2.76 7.96

2009 2,000,000 42.00 41.40 42.00 69.13 0.86 15.19

2009 300,000 39.00 35.75 39.00 69.13 1.04 12.34

2009 200,000 34.75 32.00 34.75 69.13 1.02 11.08

2010 100,000 * 25.25 24.52 25.25 67.61 1.27 8.78

2010 390,000 25.25 24.52 25.25 67.61 1.27 8.78

2010 1,200,000 21.75 22.00 21.75 50.63 1.20 6.31

2010 400,000 15.40 14.92 15.40 37.09 0.78 2.93

2010 6,705,000 15.00 14.80 15.00 37.43 0.80 3.04

2010 515,270 15.08 15.50 15.08 37.43 0.88 3.45

2011 250,000 14.15 14.25 14.15 40.71 1.32 3.35

2011 250,000 14.85 15.00 14.85 40.71 1.63 3.58

2012 774,649 11.83 11.75 11.83 36.28 0.45 2.34

2012 500,000 11.25 11.25 11.25 36.28 0.47 2.27

2012 368,000 10.00 9.50 10.00 36.28 0.51 1.73

2012 128,500 10.00 9.13 10.00 31.02 0.32 1.25

2012 190,000 13.67 14.25 13.67 42.23 0.28 3.53

2013 1,634,154 14.00 14.00 14.00 42.23 0.35 3.25

2013 500,000 13.58 13.37 13.58 25.01 0.54 1.81

2013 250,000 12.96 12.88 12.96 20.44 0.51 1.75

20,083,913

* These options were issued by the Employee Benefit Trust.

All options expire 10 years after the date of grant.

The dividend yield of 0% in all cases reflects the absence of dividends and of a clear dividend policy statement at the relevant dates of grant.



24. Employee Benefit Trust On 8 November 2002, the Parent Company established the Corac Employee Benefit Trust, an employee benefit trust, as an employees' share scheme for the benefit of and as an incentive for the employees of the Group. The Corac Employee Benefit Trust is managed by an independent trustee.

At 31 December 2013 the Parent Company had loaned £600,000 (2012: £600,000) to the Corac Employee Benefit Trust. With this loan the Trustee purchased shares in the Parent Company and, at 31 December 2013, the Corac Employee Benefit Trust held 1,606,769 (2012: 1,506,347) ordinary shares in Corac Group plc with a book cost of £653,352 (2012: £643,310) which had a market value of £166,702 (2012: £197,633). As set out in note 2.17(ii), neither the purchase nor sale of shares in the Parent Company leads to a gain or loss being recognised in the consolidated statement of comprehensive income but instead these are shown as movements on consolidated equity.

Options have been granted over 870,004 (2012: 978,338) shares to certain employees being:, 35,000 at 33.0p per share until 15 December 2014, 15,002 at 31.25p per share until 28 December 2015, 420,002 at 37.5p per share until 27 July 2016, 300,000 at 14.9p per share until 30 December 2018 and 100,000 at 25.25p per share until 23 June 2019. Options issued prior to 2010 are subject to performance conditions. At 31 December 2013, performance conditions not satisfied relate to the market price of the ordinary shares of the Parent Company as quoted on AIM.

The Parent Company intends to fund any shortfall should the Employee Benefit Trust need to purchase more shares to fulfil its obligations to option holders.

Dividends on the shares owned by the Employee Benefit Trust, the purchase of which was funded by an interest free loan to the Employee Benefit Trust from the Parent Company, are waived on the condition that the Trustee shall not be liable for any losses to the Employee Benefit Trust as a result of the waiver.

25. Risk Management Objectives and Policies

Liquidity risk Until the Group achieves cash flow breakeven from the sale of its products and services, it will seek to finance its operations by raising equity financing on the AIM and investing the proceeds on a short term basis as its development proceeds. The Group seeks to manage financial risk to ensure sufficient liquidity to meet foreseeable requirements until cash flow breakeven and to invest cash profitably and at low risk.

The Group holds investments in bank deposits as a liquid resource to fund its operations. The Group’s strategy for managing cash is to maximise interest income whilst ensuring availability to match the profile of the Group’s expenditure. Liquidity is further managed by tight controls over expenditure.

Credit risk The Group’s exposure to credit risk arises from holding cash and cash equivalents. The Group places funds on deposit directly with banks. Group credit policy limits deposits to an approved list of specific banks, which is compiled taking into account various factors including credit ratings.

The Group’s exposure to credit risk is also attributable to its trade receivables, which, as set out in note 17, at 31 December 2013 were £1,371,000 (2012: £2,584,000). The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic environment. There are doubtful receivables of £59,000 at the end of 2013 (2012: nil).

Interest rate risk A further risk arising from the Group’s financial instruments is interest rate risk. The Directors consider the principal element of risk directly arising from changes in interest rates relates to the level of interest income earned on bank deposits. Funds are invested to maintain a balance between accessibility of funds and competitive rates of return whilst investing funds safely.

It is, and has been throughout the period under review, the Group’s policy that no trading in financial instruments shall be undertaken.

Foreign currency risk The Group undertakes contracts denominated in foreign currencies (principally Euro and US dollar) leading to an exposure in exchange rate movements for both sales and purchase transactions. Where they cannot be offset, forward exchange contracts are utilised to minimise the risk.



26. Financial Commitments under Operating Leases Future minimum lease payments under non-cancellable operating leases are as follows:


2013 2012 2013 2012

£000 £000 £000 £000

Land and buildings

Within one year 777 706 55 221

From one to five years 2,305 2,180 - 590

In more than five years 6,046 4,555 - -

9,128 7,441 55 811

Office equipment and motor vehicles

Within one year 77 121 14 49

From one year to five years 95 131 8 60

172 252 22 109

9,300 7,693 77 920

No Company in the Group sub-leases any of their leased premises.

Land and building operating lease payments represent rentals payable by the group for all of its properties. Leases are negotiated for periods of between 1 and 25 years and rentals are fixed for an average of 5 years.

At 31 December 2013, the Group had no capital commitments (2012: £nil).

27. Contingent Liabilities As part of the Groups long-term contract trading activities, £184,000 of performance and warranty bonds (2012: £447,000) have been issued to customers. No liability is expected to arise and no provision is made in the accounts.

The Group has received a legal claim from a customer. In the opinion of the Directors, this claim is without merit, and adequate provision for costs has been made within the financial statements. The Group has applied the provisions of IAS 37 (92), which permits exemption from full disclosure of this claim as it considers that to do so could be seriously prejudicial to the outcome of the claim.

28. Related Party Transactions During the year, no transactions took place between the Group and other entities with common directorship or controlled by a related party.


Company Information

Company Number 3152034

Directors

P Cartmell Chief Executive Officer

J P Carter Chief Financial Officer (appointed 22 July 2013)

M S Crawford Chief Operating Officer

R W King Non-executive Chairman

R R Courtney OBE Non-executive Director

J A Henderson Non-executive Director (appointed 26 March 2013)

Secretary M J Webb

Registered Office

Technology Centre 683-685 Stirling Road Slough Berkshire SL1 4ST

Nominated Adviser and Broker

Cenkos Securities plc 6-8 Tokenhouse Yard London EC2R 7AS

Nominated Adviser and Broker

Cenkos Securities plc 6-8 Tokenhouse Yard London EC2R 7AS


Auditor

Deloitte LLP Abbots House, Abbey Street, Reading RG1 3BD

Solicitor

Nabarro LLP Lacon House, 84 Theobald’s Road, London WC1X 8RW

Bankers

National Westminster Bank plc 1 Penn Road, Beaconsfield, Buckinghamshire HP9 2PU

Barclays Bank plc One Snowhill, Queensway, Birmingham B4 6GN

Patent Agent

Mathys & Squire LLP 120 Holborn, London EC1N 2SQ

Registrar

Equiniti PO Box 4630 Aspect House, Spencer Road, Lancing West Sussex BN99 6QQ

Financial PR

MHP Communications 60 Great Portland Street, London W1W 7RT

Technology Centre, 683-685 Stirling Road, Slough, Berkshire, SL1 4ST

Tel: +44 (0)1753 285 800 Fax (0)1753 285 801 email: [email protected] www.corac.co.uk

Registered in England & Wales No. 3152034

Documents

Annual Report and Financial Statements 2013€¦ · Group year end order book stood at £14.2m ... to design and manufacture further improved CO 2 ... • shell and tube exchangers