Proton Mtr Pwr Regulatory News (PPS)

Proton Power Systems plc

("Proton Power" or the "Group")

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 2011.

Highlights:

John Wall, Chairman of Proton Power, commented: "The acceptance of fuel cells as an alternative source of power has continued to grow over the last two years and Proton, as a developer of fuel cells as well as an integrator, is in a very strong position to take advantage of this increased interest and the growing markets.

"What is particularly encouraging is real demand in Proton's key target sectors including stationary power, maritime and transport. Our strategy continues to focus on developing modular systems for use in these three areas.

"There has been great progress with the fuel cell Range Extender which has now been fully integrated into the Smith Electric Vehicle. In addition we have taken our first orders for PM Module S5 for use in UPS applications.

"On the transport side, the ZEM passenger ship in Hamburg is now being used daily and saw more than 750 hours of operation in 2011. There has also been successful day to day operation of the Triple Hybrid Bus in the Czech Republic.

"In October 2011, we announced the conversion of a convertible loan note of circa £8.8 million and interest into equity which has allowed us to simplify the presentation of our accounts by removing non operational gains and losses from our financial results, therefore resulting in a market capitalisation which more closely reflects the total investment made by our key investors.

"As our business development strategy and financial position continues to strengthen, we are excellently placed and have great confidence that Proton's products and solutions will have a major role to play in the growing acceptance of the use of fuel cells for power supply and storage."

- Ends -

Media enquiries:

Chairman and CEO's statement

We are pleased to report our results for the year ended 31 December 2011.

Business development

Proton is pleased to report the following achievements in 2011:

The Group has made good progress in developing the fuel cell Range Extender for light duty vehicles and stationary power systems, as well as the development of the new PM400 stack generation product.

A large number of project requests, specifically in the stationary, maritime and transport vehicle sectors supports our confidence that fuel cells are seen as a serious alternative to conventional fuel powered systems and an indispensable addition to existing battery based systems as range extenders.

We are also in discussion with a variety of OEM partners to co-operate in different market segments.

Our long term experience in different fuel cell applications, as well as our own stack development and production, gives us a unique market position and a competitive advantage in comparison to our competitors in Europe, which are mainly integrators using stacks produced in North America.

Our own stack design allows us to optimise our systems for customers' requirements. We also see the development of an independent European stack as vital for the industry.

Continuous discussions with the German Hydrogen Organisation (NOW) have taken place for additional funding opportunities, including the commercial roll-out of the Range Extender system.

The Group's product strategy includes:

The Group's strategy is to work closely with OEM partners in each of these product areas and management is currently in discussions with SPower, Smith Electric Vehicles (SEV), Skoda Electric and other Europe based customers.

Proton Motor offers complete engineering expertise for simulation, packaging and integration to customers. This supports them without existing fuel cell or hydrogen know-how and experience.

The Group has also continued to work on new development projects, funded by NOW. These are mainly in the stationary power supply area with systems of 60kW and 120kW with other German based integrators.

The Range Extender project with SEV is well under way. Proton Motor has successfully equipped and tested the first Newton truck. This vehicle was presented to the public at the Hannover Industrial Exhibition in April 2012. SEV sees the Range Extender as an excellent addition to its battery powered electric vehicle where an operational range above 120 km is required or when there is a need for additional power for cooling or on board maintenance work. The same Range Extender system is also a useful addition to electric buses for inner-city public transport. Start stop operation and up to 20 hours daily operation will require another energy source in addition to a battery in an electric bus. We are working on technical solutions with bus manufacturers.

Development on the new PM400 stack for power up to 17kW is also progressing well. The new stack will be an excellent addition to the Group's portfolio and will allow it to bring down costs because of increased efficiency and power. The first sample stack was available for testing at the end of the year 2011.

Targets for 2012 are:

Finance

Turnover increased by 22% to £875,000 mainly as a result of funded projects started in April 2010. The loss for the year was £1,592,000 and was in line with management expectations.

The Group secured new funding in 2011 of €2,620,000 from Roundstone Properties Limited and received €1,207,886 from the German Government to develop the Range Extender system and for the development of a new stack generation.

In addition to the above the group received €214,479 from sales of the 19" module, from the service contract with ATG, the operator of the Zemship in Hamburg, and from the final account for the original European Zemship project.

The total funds raised of €4,042,365 financed the working capital for the year. In October 2011, we announced the conversion of a convertible loan note of c. £8.8 million and interest cumulated thereon into new ordinary shares. The conversion has allowed us to simplify the presentation of our accounts by removing non operational gains and losses from our financial results and resulted in a market capitalisation which more closely reflects the total investment made by Roundstone Properties Limited and others in the Company. The Company continues to be interested in involving other investors alongside Roundstone Properties Limited in this exciting opportunity.

Outlook

The Group's focus for the coming 12 months will be the market introduction of the Range Extender solution with SEV. The first 20 vehicles will be tested with customers in Germany starting in the second half of 2012. We are also planning a similar Range Extender solution for bus manufacturers. This year will also see progress with the Group's stationary power supply products and the first customer installations in Germany and Italy. Furthermore, the Group's work on maritime projects continues with further interest in fuel cell systems for inland ships in both Germany and the Netherlands.

The development of the Group's new larger stack, the PM400, which can produce up to 17kW of electrical power, allows us to be more efficient with larger applications and to reduce system cost. The Group is also working on specific technical solutions with different partners as part of European funded projects.

The change to renewable energies is underway and irreversible. Markets for our solutions are massive and the Group has solutions for several very important market segments. We, therefore, look to the future with great confidence, as our products and solutions will play a major and important role for the infrastructure of power storage and power supply in the coming years.

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 2011

Consolidated statement of comprehensive income

Balance sheet

as at 31 December 2011

These financial statements were approved by the Board of Directors on 31 May 2012 and were signed on its behalf by:

J Wall FCA

Director

Statements of changes in equity

Statements of changes in equity

Share premium account

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.

Other equity reserve

Other equity reserve represents the residual element on initial recognition of compound financial instruments measured at fair value less the debt component.

Statements of cash flows

for the year ended 31 December 2011

Notes to the financial statements

1. General information

Proton Power Systems plc ("the Company") and its subsidiary (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 in England & Wales. The address of its registered office is: St Ann's Wharf, 112 Quayside, Newcastle upon Tyne, NE99 1SB. 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 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.

The consolidated financial statements for the year ended 31 December 2011 (including comparatives) were approved and authorised for issue by the board of directors on 31 May 2012.

2. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied.

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.

As permitted by Section 408 of the Companies Act 2006, no separate income statement is presented in respect of the parent Company. The profit for the financial period dealt within the accounts of the parent Company was £8,782,000.

Basis of preparation

The consolidated financial statements of Proton Power Systems plc have been prepared in accordance with International Financial Reporting Standards (IFRS) 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 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 dependant on its ability to raise cash to fund its operations from existing and potential shareholders and the debt market.

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 profit and loss.

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.

Share-based payments

The Company issues equity-settled share-based payments to certain employees 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 determined at the grant date is expensed on a straight-line basis over the vesting period, based on the Group's estimate of the shares that will eventually vest and adjusted for the effect of non-market based vesting conditions.

The value of shares issued to settle fees and finance costs has been measured by reference to the fair value of services provided.

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 profit and loss.

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 and liabilities 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, plus any costs directly attributable to the acquisition. 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 profit and loss 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 equipment, furniture & equipment 10% - 33%

·; Technical equipment & machinery 20%

·; Leasehold property improvements over the life of the lease

The residual values and the useful lives of property, plant and equipment are reviewed at each financial year-end and, if applicable, are adjusted. When the carrying amount of an asset exceeds its recoverable amount, the carrying amount is reduced to the recoverable amount. To determine the recoverable amount, the Group's management estimates expected future cash flows from each cash generating unit and determines a suitable interest rate in order to calculate the present value of those cash flows.

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 recognized in the income statement.

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

Amortization starts when the asset is available for use. The capitalised costs include all directly attributable costs, as well as reasonable parts of the overheads relating to production. If applicable, received government grants are deducted from the capitalised development costs in accordance with IAS 20.24. Amortisation is charged to administrative expenses.

Self-developed intangible assets are tested for impairment annually. Insofar as there are indications of an impairment for other intangible assets, the planned amortizable intangible assets shall be subjected to an impairment test and, if necessary, the carrying amount reduced to the recoverable amount within the meaning of IAS 36.

Impairment of non-financial assets

At each balance sheet date the Group reviews the carrying amount of its property, plant and equipment 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 in order 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 identifiable life is tested for impairment 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 the carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

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 as income immediately, unless the relevant asset is carried at a revalued amount in which case the reversal of the impairment loss is treated as a revaluation increase.

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 construction 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 construction 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 amortised cost less any impairment in value that may be necessary. An impairment in value in the case of trade and other receivables is recognised if there are objective indications that the amount of the debt due cannot be collected in full. The impairment in value is recognised in profit and loss. Insofar as the reasons for value adjustments made in previous periods no longer exist, corresponding write-ups shall be made.

Deposits with financial institutions

Deposits with financial institutions are measured at their fair value.

Share capital

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.

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 defer settlement 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 profit and loss.

Equity

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.

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 recognised 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 utilised. Deferred tax liabilities and assets are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred taxes are recognised in profit and loss, 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.

Other provisions

Other provisions are made insofar as there is a constructive obligation arising from past events and it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. The valuation of the provisions is reviewed at each reporting date. Provisions for guarantees are made in relation to individual cases.

Recognition of revenue and expenses

Revenue comprises revenue from the sale 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 in accordance with IAS 38.54. Expenses for development costs that fulfil the criteria of IAS 38.57 are capitalised (see Intangible assets above). Amortisation over the assumed economic life begins when the asset is available for use in accordance with IAS 38.97.

Royalty income

Royalty income is recognised on an accruals basis in accordance with the substance of the relevant agreements.

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 recognised as income in the period in which the corresponding claim is created.

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.

Compound financial instruments

Compound financial instruments are measured at fair value. The debt component is initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. The residual element on initial recognition is recognised as other equity.

Derivative financial instruments

All derivative financial instruments are accounted for at fair value through profit and loss.

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.

Standards, amendments and interpretations not yet applied by Proton Power Systems plc

The IASB and IFRIC have issued additional standards and interpretations which are effective for periods starting after the date of these financial statements. The following standards and interpretations have yet to be adopted by the Group:

·; IFRS 9 Financial Instruments (effective 1 January 2015).

·; IFRS 10 Consolidated Financial Statements (effective 1 January 2013).

·; IFRS 12 Disclosure of Interests in Other Entities (effective 1 January 2013).

·; IFRS 13 Fair Value Measurement (effective 1 January 2013).

·; IAS 19 Employee Benefits (Revised June 2011) (effective 1 January 2013).

·; IAS 27 (Revised), Separate Financial Statements (effective 1 January 2013).

·; IAS 28 (Revised), Investments in Associates and Joint Ventures (effective 1 January 2013).

·; Disclosures - Transfers of Financial Assets - Amendments to IFRS 7 (effective 1 July 2011).

·; Deferred Tax: Recovery of Underlying Assets - Amendments to IAS 12 Income Taxes (effective 1 January 2012).

·; Presentation of Items of Other Comprehensive Income - Amendments to IAS 1 (effective 1 July 2012).

·; Disclosures - Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (effective 1 January 2013).

·; Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (effective 1 January 2014).

·; Mandatory Effective Date and Transition Disclosures - Amendments to IFRS 9 and IFRS 7 (effective 1 January 2015).

·; Government Loans - Amendments to IFRS 1 (effective 1 January 2013).

The revised standards will be adopted in the Group's consolidated financial statements, where relevant for the period beginning 1 January 2012, although are not anticipated to 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.

 Valuation technique

Market capitalisation is taken to equate to fair value less costs to sell in the assessment of the carrying value of the investment. See Note 12.

Classification and fair value of financial instruments

The 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. A judgement has also been made as to whether a loss arises on recognition of the fair value of the embedded derivatives or whether it is a deemed distribution. Given the transaction is with a shareholder it has been judged that this constitutes a deemed distribution

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

An operating segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other operating segments for which discreet financial information is available and is regularly reviewed by the Chief Operating Decision Maker ("CODM").

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

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 gain on the fair value of the embedded derivative of £3,735,000 (2010: £1,818,000) and the associated impact on the balance sheet.

5. Loss on ordinary activities before taxation

6. Auditor's remuneration

7. Staff numbers and costs

The 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 20,790,000 (2010: 4,100,000) share options during the year issued to employees as follows:

Details of share options granted during 2011 are disclosed in the Directors' report on page 11 and the Remuneration report on pages 14 to 15. The cost of these options to the Group is being written off over a two year period from the date of grant at which point they become exercisable.

At 31 December 2011 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 can not, 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:

At 31 December 2011 255,000 of the above options were exercisable at an exercise price of 77.5p and 79p.

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 as illustrated above. 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 4.000% and 5.125% for the various grants of options. It is assumed that options granted under the SOS have an average remaining life of 18 months (2010: 11 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 14 to 15.

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

The Company 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.

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 one category of dilutive potential ordinary shares, share options; 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 £24,000 (2010: £313,000) are recognised in the reporting year, because the prerequisites of IAS 38 have been fulfilled.

The useful life of self-developed intangible assets is three years from completion of the asset.

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. Self-developed intangible assets costing £nil (2010: £22,000) have not yet been brought into use and have been reviewed for impairment.

There are no individually significant intangible assets.

11. Property, plant and equipment - Group

12. Investment in subsidiary undertaking

On 31 October 2006 the Company acquired the entire share capital of Proton Motor Fuel Cell GmbH, a company incorporated in Germany. The cost of investment comprises shares issued to acquire the company valued at the listing price of 80p per share, together with costs relating to the acquisition and subsequent capital contributions made to the subsidiary.

Following a review of the Company's assets the Board has concluded that there are sufficient grounds for its investment in the subsidiary undertaking to be subject to an impairment review under IAS 36. In arriving at the credit (2010: charge) in the year of £6,602m (2010: £2.175m) the Board has determined the recoverable amount by reference to the fair value of the asset less costs to sell (see note 3).

13. Trade and other receivables

The Directors consider that the carrying amount of trade and other receivables approximates to their fair values.

In addition some of the unimpaired trade receivables are past due as at the reporting date. The age of financial assets past due but not impaired is as follows:

14. Cash and cash equivalents

15. Trade and other payables

The Directors consider that the carrying amount of trade and other payables approximates to their fair values.

16. Borrowings

During the year the Group and Company entered into several extensions to an existing convertible loan agreement taking the facility to €9,180,000. Further draw downs under this agreement during the year were €2,840,000. During the year the company converted €9,180,000, being the total of the existing loans to 425m new ordinary shares of 1p each at a price of 2p per share. The conversion rate of £1/€1.08 was fixed in an extension of the initial loan agreement in November 2009. A further £325,000 in accrued interest was also converted to 12.4m new ordinary shares of 1p each at a price of 2.62p per share.

These instruments were classified as a debt host instrument with an embedded derivative being the conversion feature. The embedded derivative has been fair valued and the residual value of the instrument had been recognised as debt. The debt has subsequently been measured at amortised cost.

The remaining loan of €1,500,000 carries interest at 10% per annum and is repayable on 30 July 2013.

Following the above conversion the company has drawn down €1,000,000 in short-term loans from Roundstone Properties Limited, these loans are of 60 days' duration, interest free, unsecured and are to be settled either in cash or by the issue of ordinary share capital to the value of €1m. These instruments were classified as a debt host instrument with an embedded derivative being the conversion feature. Due to the short term nature of the instrument, the embedded derivative is of immaterial value.

17. Embedded derivatives

The embedded derivatives relate to the conversion features attached to convertible loans as disclosed under note 16. The derivatives are initially recognised at fair value and fair valued at each subsequent accounting reference date.

The embedded derivatives fall within the fair value hierarchy level 3 which means that inputs for the liability are not all based on observable market data (unobservable inputs). Details of movements in the fair value of embedded derivatives are given in note 27.

18. Deferred income tax - Group

Deferred tax assets are recognised for tax loss carry-forwards to the extent that the realisation of the related benefit through future taxable profits is probable. The Group did not recognise deferred income tax assets of £6,902,000 (2010: £6,834,000) in respect of losses amounting to £4,112,000 (2010: £2,579,000) and €27,163,000 (2010: €25,124,000).

19. Share capital

The share capital of Proton Power Systems plc consists of fully paid Ordinary shares with a par value of £0.01 (2010; £0.01) and Deferred Ordinary shares with a par value of £0.01. All Ordinary shares are equally eligible to receive dividends and the repayment of capital and represent one vote at the shareholders' meeting of Proton Power Systems plc. Deferred Ordinary shares have no rights other than the repayment of capital in the event of a winding up. None of the parent's shares are held by any company in the Group.

During the year 438m ordinary shares of 1p each were issued. This comprised:

§ On 17 October 2011 the company converted €9,180,000 of an existing convertible loan to 425m new ordinary shares of 1p each at a price of 2p per share. The conversion rate of £1/€1.08 was fixed in an extension of the initial loan agreement in November 2009. Total consideration for the shares issued was the combined value of the debt and embedded derivatives which were extinguished on issue of the shares amounting to £8,401,610.

§ On 17 October 2011 the company converted £357,563 of accrued interest on an existing loan to 12.4m new ordinary shares of 1p each at a price of 2.62p per share. Total consideration for the shares issued was the combined value of the debt and embedded derivatives which were extinguished on issue of the shares amounting to £357,563.

§ On 4 November 2011 the company settled an invoice for £15,000 by the issue of 500,000 new ordinary shares of 1p each at a price of 3p per share.

Details of share options in issue are given in Note 7.

The number of shares in issue at the balance sheet date is 619,895,443 (2010: 181,990,863) Ordinary shares of 1p each (2010: 1p each) and 327,963,452 (2010: 327,963,452) Deferred Ordinary shares of 1p each.

Proceeds received in addition to the nominal value of the shares issued during the year have been included in share premium, less registration and other regulatory fees and net of related tax benefits.

On 23 July 2009 each of the 81,990,863 Ordinary shares of 5p each in the capital of the Company in issue were sub-divided into five shares of 1p each, of which upon the occurrence of such sub-division, one share shall be a new ordinary share of 1p each and four shares shall be converted into and reclassified as four Deferred Ordinary shares of 1p each having the following rights and being subject to the following restrictions:-

·; no right to participate in any dividends declared, made or paid by the Company;

·; the right on a return of assets in a winding up to the repayment of the capital paid up on such shares after the rights of all holders of Ordinary shares have been discharged in full and the sum of £10,000,000 has been paid in respect of each issued Ordinary share in the capital of the Company but no other right to participate in the assets of the Company, but so that none of the rights and restrictions attached to such Deferred Ordinary shares shall be or be deemed to be varied or abrogated in any way by the passing or coming into effect of any special resolution of the Company to reduce its share capital (including a special resolution to reduce the capital paid up on, and cancel, such Deferred Ordinary shares);

·; no right to receive notice of or to attend at any general meeting of the Company.