Proton Mtr Pwr Regulatory News (PPS)

 6 May 2014

Proton Power Systems plc

("Proton Power" or the "Company")

Final results

Proton Power Systems plc (AIM: PPS), the designer, developer and producer of fuel cells and fuel cell electric hybrid systems, today announces its results for the year ended 31 December 2013

Highlights:

· Order received from an Asian based customer for a special maritime feasibility study with a value of €297k.

· Order received from Siemens AG for SPower's UPS systems with a value of €857k.

· Completion of development and successful testing of the new PM400 (25kW) stack.

· Finalised development of the PM Module S25 for use with stationary power supply with 25kW of net power.

· Successful development of a 25kW HyRange System for bus and truck applications.

· Successful testing and operation of the 5kW PM Module with a UPS application within an EON power station.

· Delivery of a 5kW fuel cell system to RENESTA (Airbus Consortium).

· Successful road testing of the Smith Electric Vehicles ("SEV") Newton 7.5 tonne truck with the Proton Motor 8kW HyRange and testing with customers in the logistic sector.

· 5 years of successful operation for the ZEM passenger ship in Hamburg with more than 50,000 passengers transported.

· Achieved significant cost reductions for production of the PM200 fuel cell stack and PM Module S5.

· Successful development and testing of a 3kVA Solar Battery Storage System from SPower and further development of 10kVA version.

· Further improvements of the development infrastructure at our premises in Puchheim.

John Wall, Chairman of Proton Power commented: "The group now has a complete portfolio of solutions and products and is ready for roll out into the world markets and China in particular. We have focused on Environment, Energy and Mobility and that is proving to be a winning formula as evidenced by the significant upward movement in our market capitalization. Our financial base is strong as we announce today a new Euro 10.9 million loan note facility with Roundstone and we look to the future with great confidence."

- Ends -

For further information:

A copy of the annual report for the year ended 31 December 2013 is available from the Company's website (www.protonpowersystems.com) and will be posted to shareholders shortly, together with notice of annual general meeting to be convened at the offices of Westhouse Securities, Heron Tower, 110 Bishopsgate, London, EC2N 4AY at 11:00 a.m. on 4 June 2014.

Chairman and CEO's statement

We are pleased to report our results for the year ended 31 December 2013.

Business development

The Group is pleased to report the following achievements in 2013:

· Order received from an Asian based customer for a special maritime feasibility study with a value of €297k.

· Order received from Siemens AG for SPower's UPS systems with a value of €857k.

· Completion of development and successful testing of the new PM400 (25kW) stack.

· Finalised development of the PM Module S25 for use with stationary power supply with 25kW of net power.

· Successful development of a 25kW HyRange System for bus and truck applications.

· Successful testing and operation of the 5kW PM Module with a UPS application within an EON power station.

· Delivery of a 5kW fuel cell system to RENESTA (Airbus Consortium).

· Successful road testing of the Smith Electric Vehicles ("SEV") Newton 7.5 tonne truck with the Proton Motor 8kW HyRange and tested with customers in the logistic sector.

· 5 years of successful operation for the ZEM passenger ship in Hamburg with more than 50,000 passengers transported.

· Achieved significant cost reductions for production of the PM200 fuel cell stack and PM Module S5.

· Successful development and testing of a 3kVA Solar Battery Storage System from SPower and further development of 10kVA version.

· Further improvements of the development infrastructure at our premises in Puchheim.

The Group has finalized the development of products for mobile, stationary and maritime applications in the fuel cell clean power market; as well as products for UPS and Solar battery storage applications.

The Group now has a complete portfolio of solutions and products and is ready for a roll out into the world market. The Group strategy is to establish licensing partners to manufacture solutions for the three target market applications: mobile, stationary and maritime systems in Europe and Asia Pacific, providing support to its customers from first planning and simulation up to complete solutions with integration and after sales service. Customers with limited experience or know-how for fuel cell based solutions will get the best support available. Benefits for our customers are:

· Fast integration process.

· No specific Fuel Cell know how necessary.

· Cost reductions based on usage of existing Proton Power technology.

Only three companies worldwide are able to provide such in-depth support with own-designed and optimized fuel cells; Proton Power Systems in Europe and two other competitors, which are located in North America.

Asia Pacific, as a target market, requires our specific attention. Based on the massive pollution problems in that region, we expect demand for clean power applications to increase significantly in the near future. The commitment from governments to take severe action to improve the situation, especially in China, will be a push for our technology. Talks with different companies in China support our expectation. We see China as the fastest growing market for fuel cell applications in the near future and we will focus our attention and efforts accordingly. "Made in Germany" technology is highly respected and in demand within China. Initial contracts in China are expected to be for bus and stationary power applications.

Furthermore, we are seeing good progress in the market introduction of our products and solutions in Europe and are in discussion with several European bus manufacturers. We hope to launch our next electric battery fuel cell bus on the road with a bus manufacturer from the Czech Republic in the second half of 2015. Intensive talks are also underway with a large international logistic company for electric battery fuel cell logistic vehicles, with an initial roll out for Germany planned for 2015. We hope to sign a MOU very soon for that project. Another project, funded by the Austrian government is anticipated with Magna, an Austrian based automotive supplier.

On the stationary power side, we are seeing very positive market interest for complete high power systems with electrolysers, hydrogen storage, repowering with our fuel cell and connection to the load via our UPS systems. There is also strong interest in the containerised solutions the Group offers for large solar and wind parks from Europe, Africa and China. The Group is currently working with different suppliers in Europe for the supply of electrolysers. Our modular fuel cell design based on our 25kW modules allows us to provide high power delivery up to several Megawatts.

Our first stationary solar battery storage system from SPower is generating a lot of interest in the Middle East. With sun hours of more than 2,000 per year, production cost of the complete system (solar modules and storage system) for the end user is down to €0.10 per kWh which is cheaper than the price for grid power in most countries. We have also improved our system with the addition of a central control unit, which allows the integrating of our system into a smart grid network. Many of our systems can be operated in parallel with this new feature. A utility company can access and monitor our system centrally and can charge or discharge the batteries remotely. This allows the use of solar energy if required alongside power from the grid to charge the batteries, if there is overcapacity of grid power available. The system can also be operated in an island / stand-alone mode (not grid connected). We expect high growth for such applications in the near future.

In the maritime sector, we have received requests from China for similar ship installations like the Alsterwasser in Hamburg. We see the maritime applications as long term business. Nevertheless our unique know-how in that sector provides us with a very competitive position in the fuel cell market.

We have achieved our development targets for 2013: systems have been tested in depth, reliability was proven and the lifetime in use for our fuel cell stacks is now above 10,000 hours. We have also continued to extend our component supplier base, which, due to specification and quality control procedures, is an extensive process.

To support the above market developments we have completely updated our product literature, our web site and have participated in exhibitions thoughout Europe.

The Group's product strategy includes:

· Modular stationary power of 5kW, 25kW and 50kW for IT, Smart Grid (Solar-and Windparks) and industrial applications.

· A modular Range Extender (HyRange) for light duty commercial vehicles and city buses of 8kW and 25kW/50kW or 75kW.

· Maritime modular fuel cell systems of 25kW for high power applications. 

Targets for 2014 are:

· First orders from Asia Pacific for our products and solutions.

· Orders for new buses with a HyRange system in Europe.

· Orders for HyRange systems for logistic vehicles.

· Order for containerized Hydrogen Power.

· First significant orders for our solar battery storage system.

· Further strengthening of our product platform.

· Enlarging our team with highly qualified staff.

Finance

Turnover increased by 21% to £1,114,000 mainly as a result the acquisition of SPower. The operating loss for the year was £4,896,000 which, when added to net finance costs of £828,000 and the non-cash loss arising from the change in the fair value of the embedded derivative on the shareholder loan of £3,543,000 resulted in a total loss of £9,267,000. With the exception of the fair value loss on the embedded derivative, this was in line with management expectations.

The Group secured new loan funding in 2013 of €8,019,000 from Roundstone Properties Limited and received grant funding of €271,000 from the German Government.

In addition to the above the group received €535,000 from sales of UPS systems.

The total funds raised financed the working capital for the year. The Company continues to be interested in involving other investors alongside Roundstone Properties Limited in this exciting opportunity.

Outlook

The Board sees the Group as a solitaire in the clean tech market. The unique know how and positioning of Proton Power underlines the high expectation in business development as well as the positive trend of our share price. Together with the SPower product line, the Group can offer a complete range of products, which addresses the fast growing markets worldwide of: clean transport, clean power and energy storage.

The main shareholder has committed itself to continue to finance the Group's activities based on the Group's complete product line, strong market growth for its products and systems and our team of experts. New partnerships, especially in China are expected to have a huge impact on the Group's business.

On behalf of the Board we would like to take this opportunity to thank the Proton Power team and our advisors for their hard work and effort as well as our customers and suppliers for their confidence and support throughout the year.

Consolidated income statement

for the year ended 31 December 2013

Consolidated statement of comprehensive income

Balance sheets

as at 31 December 2013

These financial statements on pages 22 to 49 were approved by the Board of Directors on 6 May 2014 and were signed on its behalf by:

J Wall FCA

Director

Statements of changes in equity

Statements of changes in equity 

Share premium

Costs directly associated with the issue of the new shares have been set off against the premium generated on issue of new shares.

Merger reserve

The merger reserve of £15,656,000 arises as a result of the acquisition of Proton Motor Fuel Cell GmbH and represents the difference between the nominal value of the share capital issued by the Company and its fair value at 31 October 2006, the date of the acquisition.

Reverse acquisition reserve

The reverse acquisition reserve (Group only) arises as a result of the method of accounting for the acquisition of Proton Motor Fuel Cell GmbH by the Company. In accordance with IFRS 3 the acquisition has been accounted for as a reverse acquisition.

Share option reserve

The Group operates an equity settled share-based compensation scheme. The fair value of the employee services received for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted. At each balance sheet date the Company revises its estimate of the number of options that are expected to vest. The original expense and revisions of the original estimates are reflected in the income statement with a corresponding adjustment to equity. The share option reserve represents the balance of that equity.

Statements of cash flows

for the year ended 31 December 2013

Notes to the financial statements

1. General information

Proton Power Systems plc ("the Company") and its subsidiaries (together "the Group") design, develop, manufacture and test fuel cells and fuel cell hybrid systems as well as the related technical components. The Group's design, research and development and production facilities are located in Germany.

The Company is a public limited liability company incorporated and domiciled in the UK. The address of its registered office is: St Ann's Wharf, 112 Quayside, Newcastle upon Tyne, NE1 3DX. The Company's initial public offering took place at the Alternative Investment Market of the London Stock Exchange on 31 October 2006 and its shares are listed on this exchange.

The financial information set out in this preliminary announcement does not constitute statutory accounts within the meaning of s495(2) or s495(3) of the Companies Act 2006. The statutory accounts contain an unqualified audit report, which did not include a statement under s498(2) or s498(3) of the Companies Act 2006, and will be delivered to the Registrar of Companies.

The statutory accounts for the year ended 31 December 2012 which have been delivered to the Registrar of Companies, contained an unqualified audit report and did not include a statement under s498(2) or s498(3) of the Companies Act 2006.

2. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. The accounting policies have been applied consistently, other than where new standards have been adopted during the year.

Development of the Group

Proton Power Systems plc was incorporated on 7 February 2006 and on 31 October 2006 acquired the entire share capital of Proton Motor Fuel Cell GmbH. As a result of this transaction, the shareholders in Proton Motor Fuel Cell GmbH received shares in the Company.

In preparing the consolidated financial statements, Proton Motor Fuel Cell GmbH has been deemed to be the acquirer and the Company, the legal parent, has been deemed to be the acquiree. Under IFRS 3 "Business Combinations", the acquisition of Proton Motor Fuel Cell GmbH by the Company has been accounted for as a reverse acquisition and the consolidated IFRS financial information of the Company is therefore a continuation of the financial information of Proton Motor Fuel Cell GmbH.

On 7 February 2013 Group acquired 100% of the share capital of SPower Holding GmbH with its subsidiary SPower GmbH (see note 12).

The parent Company has produced its own income statement for approval by the Board, although as permitted by Section 408 of the Companies Act 2006, no separate income statement is presented in respect of the parent Company. The loss for the financial period dealt within the accounts of the parent Company was £20,227,000.

Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to those companies under IFRS.

The consolidated financial statements have been prepared under the historical cost convention and in accordance with IFRS interpretations (IFRICS) except for embedded derivatives which are carried at fair value through the income statement and on the basis that the Group continues to be a going concern.

Until such time as the Group achieves operational cash inflows through becoming a volume producer of its products to a receptive market it will remain dependent on its ability to raise cash to fund its operations from existing and potential shareholders and the debt market. The Group is currently dependent on the continuing financial support of its main investor, Roundstone Properties Limited ("Roundstone"), to meet its day-to-day working capital requirements. To date, Roundstone has invested €30.7m in the Group through equity and debt, including €9.5m currently due for repayment in October 2015 and €2.4m due for repayment in July 2016.

The Group and Roundstone have recently agreed terms on a facility to provide further funding, which is forecast to be sufficient for the period to December 2014. In addition, Roundstone has provided the Directors with a letter of support as follows "It is Roundstone Properties Limited's intention to provide financial support to ensure the continued trading of Proton Power Systems plc and Proton Motor Fuel Cell GmbH for the next twelve months. At this point in time there has been no indication of circumstances which would lead to withdrawing the support".

Roundstone Properties Limited is registered in the British Virgin Islands ("BVI") and as such is not subject to the requirement to have publicly available audited accounts. Due to the lack of audited accounts or other available financial information, the Directors are unable to confirm that Roundstone has the ability to provide such support. This condition indicates the existence of a material uncertainty which may cast doubt upon the Group's ability to continue as a going concern. However, the Directors firmly believe that the Group remains a going concern on the grounds that Roundstone has supported the Group extensively in recent years, that funding has been agreed by Roundstone up to December 2014 with further support committed up to at least May 2015, and that the Directors have no reason to doubt that Roundstone will not continue to provide funding or have the ability to continue funding.

2. Summary of significant accounting policies (continued)

The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3.

Basis of consolidation

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are

consolidated fully from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost

of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Acquisition costs are expensed as incurred. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Goodwill

Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment at least annually, or more frequently where circumstances suggest an impairment may have occurred. Any impairment is recognised immediately in the income statement and is not subsequently reversed. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

Share-based payments

The Company issues equity-settled share-based payments to certain employees of the Group as consideration for equity instruments (options) of the Group. A fair value for the equity settled share awards is measured at the date of grant. The Group measures the fair value using the valuation technique most appropriate to value each class of award being a Black-Scholes pricing model. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:

§ including any market performance conditions; (for example, an entity's share price);

§ excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and

§ including the impact of any non-vesting conditions (for example, the requirement for employees to save).

Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium.

The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity accounts.

2. Summary of significant accounting policies (continued)

Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in the British Pound ("Sterling"), which is the Group's presentation currency. Given the Company's listing on the Alternative Investment Market of the London Stock Exchange, the Directors consider that it is appropriate to present the financial statements in Sterling.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

Non-monetary items that are measured in terms of historical cost in a foreign currency are not re-translated.

 (c) Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

§ assets, liabilities and equity for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

§ income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and

§ all resulting exchange differences are recognised as other comprehensive income.

Cost of investment

The cost of an acquisition is measured at the fair values, on the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued. At each balance sheet date, the Company reviews the carrying amount of the investment to determine whether there is any indication that the investment has suffered an impairment loss. Any impairment loss is recognised as an expense immediately.

Property, plant and equipment

Property, plant and equipment are stated at acquisition cost or, as the case may be, production cost, reduced by accumulated depreciation and impairment losses. Costs of acquisition / costs of production include the expenses directly attributable to the acquisition. All repairs and maintenance are reported in the income statement as expenditure in the financial year in which they were incurred. The costs of production include all directly attributable costs, as well as the appropriate proportion of the overheads relating to production.

Depreciation is charged on the basis of the economic life of the assets on a straight line basis as follows:

· Office & other equipment 10% - 33%

· Technical equipment & machinery 20%

· Leasehold property improvements over the life of the lease, or useful economic life where shorter

Additions in the financial year are depreciated from the time of their acquisition.

The residual values and the useful lives of property, plant and equipment are reviewed at each financial year-end and, if applicable9, are adjusted. When the carrying amount of an asset exceeds its recoverable amount, the carrying amount is reduced to the recoverable amount.

Gains and losses arising from the disposal of assets are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in the income statement.

2. Summary of significant accounting policies (continued)

Intangible assets

Intangible assets are capitalised at acquisition cost and amortised over their estimated economic life of the assets of three years, on a straight-line basis.

A self-developed intangible asset is recognised if the following criteria are fulfilled:

§ identification of the self-developed asset is possible;

§ the technical feasibility of completing the self-developed asset so that it will be available for use or sale;

§ the availability of adequate technical, financial and other resources to complete the development and to use or sell;

§ probability that the expected future economic benefits that are attributable to the self-developed intangible asset will flow to the entity; and

§ the development costs of the asset can be measured reliably.

Self-developed intangible assets are amortised over the assumed economic life of the assets, on a straight-line basis. If a self-developed intangible asset is not recognized in accordance with IAS 38, the development costs are expensed in the period in which they are incurred.

Amortisation starts when the asset is available for use. The capitalized costs include all directly attributable costs, as well as reasonable parts of the overheads relating to production.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises design costs, raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.

Customer-specific contracts

Accounting for customer-specific contracts is carried out in accordance with IAS 11. If the result of a contract can be reliably estimated, the revenue and expenses are reported in accordance with the percentage of completion as per the reporting date. This is usually determined from the ratio of the costs of the contract incurred up to the reporting date in comparison with the estimated overall costs of the contract, unless this would lead to a distortion in the presentation of the percentage of completion. Insofar as the result of a contract cannot be reliably estimated, the proceeds of the contract are to be recorded only in the amount of the costs of the contract incurred which are likely to be collectible.

Where it is probable that the total cost of the contract will exceed the total contract revenue the expected loss is recognised immediately as an expense in the income statement.

Trade receivables

Trade and other receivables are recorded at the time of their initial recognition at fair value and subsequently at amortized cost less any impairment in value that may be necessary. An impairment in value in the case of trade and other receivables is recognized if there are objective indications that the amount of the debt due cannot be collected in full. The impairment in value is recognized in the income statement. Insofar as the reasons for value adjustments made in previous periods no longer exist, corresponding write-ups shall be made.

Cash and cash equivalents

Deposits with financial institutions are initially measured at their fair value. There are no cash equivalents.

Share capital

Share capital represents the nominal value of shares that have been issued. Share premium includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted from share premium, net of any related income tax benefits. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Trade and other payables

Trade and other payables, payables in respect of shareholders as well as other payables, are initially valued at fair value and subsequently at amortised cost.

2. Summary of significant accounting policies (continued)

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defersettlement of the liability for at least 12 months after the balance sheet date.

Where it is deemed that a host debt instrument contains an embedded derivative, the embedded derivative is recognised separately, initially at fair value, then fair valued through the income statement.

Taxes on income and revenue

Tax expenses are the aggregate amount of current taxes and deferred taxes. Current taxes are measured in respect of the taxable profit (tax loss) for a period. Current tax is measured using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax liabilities are the future tax expense (tax income) on the differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part, or all, of that deferred tax asset to be utilized. Deferred tax liabilities and assets are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred taxes are recognized in the income statement, except to the extent that it relates to items previously charged or credited to equity.

Employee benefits

The Company makes discretionary contributions to the personal pension plans of employees. The contributions are expensed on an accruals basis. The Group has no further payment obligations once the contributions have been paid.

Recognition of revenue and expenses

Revenue comprises the sales value of goods and the rendering of services. 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, rebates and trade discounts. Revenue is recognised at the point that the goods or services have been provided to the customer. Recognition of revenues from interest and interest expenses is made on an accruals basis. Financing costs are recorded as expenses in the period in which they are incurred. Research costs are expensed in the period in which they are incurred. Expenses for development costs that fulfil the intangible assets policy are capitalised in the year incurred (see Intangible assets above).

Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. Government grants for expenses already incurred are recognized as income in the period in which the corresponding claim is created. If applicable, received government grants are deducted from the capitalised development costs in accordance with IAS 20.24. Amortisation is charged to administrative expenses.

Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

Derivative financial instruments

All derivative financial instruments are accounted for at fair value through the income statement.

Conversion of debt instruments

On conversion of debt instruments the total consideration is deemed to be the fair value of the liabilities extinguished in accordance with the Companies Act.

2. Summary of significant accounting policies (continued)

Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Company

The following standards and amendments to existing standards are mandatory for periods beginning on or after 1 January 2014 or later periods, however the Directors do not consider any of these to be relevant to the Company's operations and therefore do not expect them to have any future impact on the Company's financial statements.

§ IFRS 9 "Financial instruments"- classification, measurement and regarding general hedge accounting

§ IFRS 10 "Consolidated financial statements"

§ IFRS 11 "Joint arrangements"

§ IFRS 12 "Disclosure of interests in other entities"

§ IAS 27 (Revised 2011) "Separate financial statements"

§ IAS 28 (Revised 2011) "Associates and joint ventures"

§ Amendments to IFRSs 10, 11 and 12 on transition guidance

§ Amendments to IFRSs 10, 12 and IAS 27 for investment entities

§ Amendment to IAS 19 "Employee benefits" regarding defined benefit plans

§ Amendment to IAS 32 "Financial instruments: Presentation" on offsetting financial assets and financial liabilities

§ Amendments to IAS 36 "Impairment of assets"

§ Amendments to IAS 39 "Financial instruments: Recognition" on novation of derivatives and hedge accounting

§ Annual improvements 2012

§ Annual improvements 2013

Changes in accounting policy and disclosures

The following amendments to existing standards are effective for this year:

§ Amendment to IFRS 1 "First time adoption" on government grants and on fixed dates and hyperinflation

§ IFRS 13 "Fair value measurement"

§ Amendment to IAS 1 "Financial statement presentation" regarding other comprehensive income

§ Amendment to IAS 12 "Income taxes" on deferred tax

§ Amendment to IAS 19 "Employee benefits"

The above amendments do not have a significant impact on the Group.

3. Critical accounting estimates and judgements

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are discussed below.

Recognition of development costs

Self developed intangible assets are recognised where the Group can estimate that it is probable that future economic benefits will flow to the entity. See Note 10.

3. Critical accounting estimates and judgements (continued)

Impairment of goodwill

The carrying value of goodwill must be assessed for impairment annually, or more frequently if there are indications that goodwill might be impaired. This requires an estimation of the value in use of the cash generating units to which goodwill is allocated. Value in use is dependent on estimations of future cash flows from the cash generating unit and the use of an appropriate discount rate to discount those cash flows to their present value.

Classification and fair value of financial instrumentsThe Group uses judgement to determine the classification of certain financial instruments, in particular convertible loans advanced during the year. Judgement is applied to determine whether the instrument is a debt, equity or compound instrument and whether any embedded derivatives exist within the contracts.

Judgements have been made regarding whether the conversion feature meets the "fixed for fixed" test in each instrument. In the case of each instrument it is deemed it is not met on the basis that the loan is in Euros and shares are in Sterling.

The Group uses valuation techniques to measure the fair value of these financial instruments. In applying these valuation techniques, management use estimates and assumptions that are, as far as possible, consistent with observable market data. Where applicable

market data is not observable, management uses its best estimate about the assumptions that market participants would make. These

estimates may vary from the actual prices that would be achieved in an arm's length transaction at the reporting date.

4. Segmental information

The Group has adopted the requirements of IFRS8 'Operating segments'. The standard requires operating segments to be identified on the basis of internal financial information about components of the Group that are regularly reviewed by the Chief Operating Decision Maker ('CODM') to allocate resources to the segments and to assess their performance. The CODM has been identified as the Board of Directors. The Board considers the business from a product/services perspective.

Based on an analysis of risks and returns, the Directors consider that the Group has only one identifiable operating segment, green energy.

All non-current assets are located in Germany.

Revenue from external customers

Siemens AG represented 40.8% of the Group's revenue in 2013.

The results as reviewed by the CODM for the only identified segment are as presented in the financial statements with the exception of the revaluation loss (2012: loss) on the fair value of the embedded derivative of £3,543,000 (2012: £14,000) and the associated impact on the balance sheet.

5. Loss on ordinary activities before taxation

6. Auditor's remuneration

In the current year the figures relate to PricewaterhouseCoopers LLP. In the prior year they relate to Grant Thornton UK LLP. The prior year figure includes £22,000 in respect of the audit of Proton Motor Fuel Cell GmbH in support of the Group audit undertaken by Grant Thornton UK LLP. The audit of Proton Motor Fuel Cell GmbH was performed by RSM Altavis GmbH.

7. Staff numbers and costs

The monthly average number of persons employed by the Group (including Directors) during the year, analysed by category, was as follows:

The aggregate payroll costs of these persons were as follows:

Share based payments

The Group has incurred an expense in respect of 50,740,000 (2012: 47,260,000) share options during the year issued to employees as follows:

Details of share options granted during 2013 are disclosed in the Directors' report on page 13 and the Remuneration report on pages 16 to 17. The cost of these options to the Group is being charged over a two year period from the date of grant at which point they become exercisable.

At 31 December 2013 the Group operated a single share option scheme ("SOS"). The SOS allows the Company to grant options to acquire shares to eligible employees. Options granted under the SOS are unapproved by HM Revenue & Customs. The maximum number of shares over which options may be granted to an employee under the SOS may not be greater than 10 per cent of the Company's issued share capital at the date of grant when added to options or awards granted in the previous 10 years. The exercise of options can take place at any time after the second anniversary of the date of grant. Options cannot, in any event, be exercised after the tenth anniversary of the date of grant.

All share-based employee remuneration will be settled in equity. The Group has no legal or constructive obligation to repurchase or settle options. Share options and weighted average exercise price are as follows for the reporting periods presented:

The fair values of options granted were determined using the Black-Scholes valuation model. Significant inputs into the calculation include a weighted average share price and exercise prices. Furthermore, the calculation takes into account future dividends of nil and volatility rates of between 50% and 94%, based on expected share price. Risk-free interest rate was determined between 2.130% and 5.125% for the various grants of options. It is assumed that options granted under the SOS have an average remaining life of 7 months (2012: 14 months).

The underlying expected volatility was determined by reference to the historical data, of the Company. No special features inherent to the options granted were incorporated into measurement of fair value.

Directors' remuneration

Details of Directors' remuneration are given in the Remuneration report on pages 16 to 17.

The remuneration of key management of the Group was as follows:

The Group has no key management other than Directors.

8. Taxation

Due to losses within the Group, no expenses for tax on income were required in either the current or prior periods.

The tax on the Group's loss before tax differs from the theoretical amounts that would arise using the weighted average tax rate applicable to losses of the Companies as follows:

9. Loss per share

Basic loss per share is calculated by dividing the loss attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.

Diluted loss per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has two categories of dilutive potential ordinary shares, share options and convertible debt; however, these have not been included in the calculation of loss per share because they are anti dilutive for these periods.

10. Intangible assets - Group

Self-developed intangible assets in the amount of £65,000 (2012: £48,000) are recognized in the reporting year, because the prerequisites of IAS 38 have been fulfilled.

The amortisation charge above is recognized in the administrative expenses in the income statement.

For self-developed intangible assets brought into use no indications of impairment in value that would trigger an impairment test arose in the reporting year. There were no self-developed intangible assets (2012: £nil) not yet been brought into use.

Other than goodwill, there are no individually significant intangible assets.

10. Intangible assets - Group (continued)

On 7 February 2013 the Group acquired 100% of the share capital of SPower Holding GmbH with its subsidiary SPower GmbH (together "SPower"). Established in 2007, SPower serves IT, Telecoms, public infrastructure and healthcare customers in Germany, Europe and Middle East with power supply solutions for DC and AC power demand. Beside the business for power supply, SPower also offers solutions for Solar Systems as well as a new product line for Solar Energy Storage. Following the acquisition SPower will be completely integrated into Proton Motor's business division. Sales, after sales service and logistics will be strengthened and cross selling synergies will be optimised. None of the goodwill recognised is expected to be deductible for tax purposes.

The following table summarises the consideration paid for SPower, the fair value of assets acquired and liabilities assumed at the acquisition date.

The revenue included in the consolidated statement of comprehensive income since 7 February 2013 contributed by SPower was £790,000. SPower also contributed a loss of £204,000 over the same period.

Had SPower been consolidated from 1 January 2013, the consolidated statement of comprehensive income would show revenue of £1,254,000 and a loss of £9,309,000.

Dr. Faiz Nahab and Thomas Melczer, who are both Directors of Proton Power Systems plc, each held approximately 41.8 per cent of SPower's share capital and each received a nominal total consideration of €1 for their SPower shares. In addition, Dr. Faiz Nahab was connected to Roundstone Properties Ltd, a substantial shareholder in the Company. The acquisition of SPower was therefore classified as a transaction with related parties for the purposes of the AIM Rules. In accordance, therefore, with the AIM Rules, the Directors of the Company, with the exclusion of Dr. Faiz Nahab and Thomas Melczer, having consulted with the Company's nominated adviser, Westhouse Securities Limited, considered that the terms of the transaction were fair and reasonable insofar as the Company's shareholders are concerned.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to cash generating units that are expected to benefit from the synergies of the acquisition. Goodwill acquired in the year relates to the acquisition of SPower which represents the sole cash generating unit.

Goodwill is tested annually for impairment or more frequently if there are indications that goodwill might be impaired. Goodwill is tested for impairment by estimating future cash flows from the cash generating units to which goodwill has been allocated and discounting these cash flows to their present value. Each unit to which goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. The key assumptions in this calculation are in respect of discount rates used and the change in cash flows. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the cash generating unit.

Cash flows are estimated using the most recent budget information for the year to December 2014, which has been approved by the Board and extrapolates cash flows based on an estimated growth rate of 2% excluding inflation. The pre-tax discount rate used to discount the forecast cash flows is 17%.

10. Intangible assets - Group (continued)

The Directors consider the assumptions adopted in calculating the cash flows to be reasonable given current market conditions and expectations for the future performance of the business.

Significant headroom exists in the discounted cash flow model and, based on the sensitivity analysis performed, reasonable possible changes in the assumptions would not cause the carrying amount of the SPower business to equal or to exceed their recoverable amount.

Amortisation and impairment charges are recognised within administrative expenses.

11. Property, plant and equipment - Group