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 2012.

Highlights:

John Wall, Chairman of Proton Power, commented: "We continue to make progress in our core business segments and I am particularly pleased with the achievements of the Group during 2012 including in particular the successful integration of our range extender into a Smith's Newton truck, the agreement entered into with Modl, the installation of a Proton Fuel Cell at one of E.ON's substations and, more recently, the acquisition of SPower which is now fully integrated within the Group and whose results will be consolidated for the first time in our interim results to June 2013.

We are well 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 -

Chairman and CEO's statement

We are pleased to report our results for the year ended 31 December 2012.

Business development

Proton is pleased to report the following achievements in 2012:

·; Development of the PM Module S5 which has now successfully completed more than 10,000 hours of start/stop operation

·; First installation of the 5kW PM Module within an EON power station in cooperation with Modl

·; Cooperation agreement signed with Modl for the development and production of a fully integrated fuel cell stationary power system

·; Receipt of an order from the RENESTA project for two 5kW PM Module systems

·; Successful road testing of the Smith Electric Vehicles ("SEV") Newton 7.5 tonne truck with the Proton Motor 7kW Range Extender System (REX)

·; Another successful year for the ZEM passenger ship in Hamburg with more than 700 hours of operation in 2012

·; Further investment in the Group's R&D infrastructure to allow continuous testing and operation

·; Opening a new branch office in the Cologne area

·; Completion of the new PM400 (25kW) stack development

The Group has now finalised development of the fuel cell Range Extender System for light duty vehicles. The SEV Newton truck is in the testing period and so far excellent results have been achieved, fully in line with our expectations. The vehicle participated in the Bertha Mercedes Benz Challenge completing a non-stop trip from Munich to Stuttgart (about 220 km) with energy from the batteries and the fuel cell Range Extender. The SEV Newton truck has also participated in several road shows, presenting electric vehicles to logistics companies. A larger fuel cell Range Extender for electric urban buses and other mobile applications is now under development.

A project is under preparation with Solaris Coach & Bus for the integration of our fuel cell Range Extender in an 18m Solaris Bus and the Group is working with Siemens on an integrated solution for an electric bus system for urban buses. Discussions with other European bus manufacturers are on-going. The electric urban bus market is seen as very important to the Group because of the worldwide demand for emission reductions in large cities.

Several 5kW stationary power systems have now been delivered to customers and the Group is now quoting for projects involving higher quantities. Market analysis has also identified a gap in the Smart Grid network for fuel cell stationary power supply. The Company is now working on applications in the high power sector (> 20kW) which will address the market for uninterruptible power supply as well as Smart Grid applications.

Interest has been shown from the maritime sector for the fuel cell system for several ship projects, mainly inland tourist and ferry boats as well as coast guard ships. The maritime market is seen as a longer term opportunity.

The Group successfully completed development of the new 25kW fuel cell stack. The new stack will be used in all three market segments (stationary, mobile and maritime). The Group continues to work on the development of new stack generations as well as the optimization of the current systems.

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.

Discussions with the German Hydrogen Organisation (NOW) have taken place for additional funding opportunities, including the commercial roll-out of the Range Extender system for light duty vehicles and buses.

The Group's product strategy includes:

·; Modular stationary power of 5kW, 25kW and 75kW for IT, Smart Grid and industrial applications.

·; A modular Range Extender for light duty commercial vehicles and city buses of 7kW and 20kW.

·; Maritime modular fuel cell systems of 25kW and 75kW for ships.

Targets for 2013 are:

·; Further orders for the new PM Module (19 inch modular Power Supply unit with 5kW).

·; Start to manufacture the first REX system for SEV Newton vehicles as a serial product.

·; Presentation of the first electric bus with an Electric Hybrid Battery/REX system.

·; Additional OEM partners for stationary and mobile applications.

·; Development of a 25kW modular fuel cell Range Extender.

·; Start a joint project for a mobile application with Magna Steyr based on an Austrian funding project.

Finance

Turnover increased by 5% to £920,000 mainly as a result of funded projects started in April 2010. The loss for the year was £4,172,000 and was in line with management expectations.

The Group secured new loan funding in 2012 of €4,100,000 from Roundstone Properties Limited and received grant funding of €825,548 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 €308,623 from sales of the 19 inch module, from sales of stacks and engineering services and from the service contract with ATG, the operator of the Zemship in Hamburg.

The total funds raised of €5,234,171 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 Group expects new partnerships in 2013 with OEM partners based on the provision of full support, from first planning to completion of prototypes. Products based on our 5kW and 25kW systems are available and we plan to sell them in higher quantities.

Talks with potential customers show a strong interest in our technology. Although the overall introduction of fuel cells takes time, we are positive on the outlook for 2013. New partnerships will strengthen our position in our European home market.

The Group will continue to invest in infrastructure, technology and employees. The Group's employees are the driving force and the basis of its know-how. Without the technical expertise of the team, the Group could not have made such huge steps in the development of fuel cell technology.

After the year-end the Group acquired SPower Holding GmbH and its subsidiary SPower GmbH, the power supply solution provider focused on IT, Telecoms, public infrastructure and healthcare customers which recently developed and will soon launch a new product for Solar Energy Storage. Sales and service of solutions are now being delivered by a single enlarged sales team which will allow the Company to target the Middle Eastern and South American markets.

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.

Operating and financial review

Group activities

The Group has begun selling PM Module S5 with 5kW for stationary power. The PM Module S5 can be used in parallel with up to three units for applications requiring 15kW. For higher power demand, the new PM400 has been developed, which can provide 25kW and up to 75kW in parallel. The necessary infrastructure for such applications (supply of pressurized air, cooling and DC/DC conversion) is currently under development. The Group aims to offer its customers a complete solution as a stand-alone application, or connected to an uninterruptible power supply ("UPS") system. Units each with 75kW can be used in parallel for higher power demand. The Group plans to design even higher power solutions, if required by its customers, above 100kW for stationary power to be used in UPS or Smart Grid applications.

The Group has also developed a mobile 7kW fuel cell system to operate as a Range Extender for battery driven light duty vehicles in cooperation with Smith Electric Vehicles ("SEV") based in the UK and USA. A Range Extender is continuously charging the battery based on a hydrogen fuel cell. The benefits are a significant increase of range of operation and support of air-conditioning or heating devices with zero emissions. The Group has completed a full integration of the Range Extender system into SEV's Newton light duty vehicle, which was introduced to the market at the Hannover Industrial Exhibition in April 2012. The results of extensive testing are fully in line with the Group's expectations. It is anticipated that sales of the first vehicles to customers in Germany will arise during 2013. A German government grant funding program is supporting the first vehicles with 48% of the investment.

The fuel cell Range Extender concept also provides exciting opportunities for urban electric bus applications. For that reason, the Group has developed a 20kW Range Extender version for buses, which can be used in modular operation with 20kW, 40kW and 60kW. An Austrian funding project in cooperation with Magna Steyr will start in 2013 with the integration of the 20kW Range Extender into a German branded light duty vehicle.

The Group has also developed a 25kW fuel cell stack which will be used for stationary and mobile applications in a single or modular mode. The Group is already designing the next generation of fuel cell stacks. The Group's accumulated stack know-how is vital to allow it to optimize stacks for individual applications.

Strategy

Sales strategy

Proton Motor is targeting mid-size technology companies to co-operate with, as well as large international companies. The Group is specifically looking for partners with market access for its applications and solutions. These partners should already be active in the market for battery powered electric solutions. Adding a fuel cell is often seen as the key to solving critical problems with pure battery powered products.

The sales process always starts with consulting, simulation, packaging study, integration, testing and final roll out with service support. Proton Motor can act as turn-key supplier for a complete solution with all the necessary know how under one roof. To have its own fuel cell stack gives a complete product offering from stack to final application which the Directors see as necessary to supply customers with a complete and optimized solution.

Manufacturing strategy

To date, the Group's fuel cell modules and fuel cell hybrid systems have been produced in relatively small volumes, on a project-by-project basis, largely utilising a combination of semi-automated processes and manual assembly. However, Proton Motor's technology development has been undertaken with the key objective of designing and manufacturing fuel cells and fuel cell hybrid systems for volume production with experienced contract manufacturers. In order to seek to achieve this, the Directors have:

·; identified target markets and commercial applications;

·; established further key commercial partnerships within these target markets;

·; designed the Group's fuel cells and fuel cell hybrid systems to meet the engineering requirements for volume manufacturing;

·; switched over to a new and more cost effective stack generation which will lead to a decrease in production costs by more than 60%;

·; established quality control procedures;

·; installed professional commercial test benches to ensure high quality standards for the Group's fuel cells and fuel cell systems;

·; built up a new electrical infrastructure for continuous testing;

·; reviewed, risk assessed and secured supplier and component manufacturing relationships;

·; identified and assessed major commercial factors, such as cost, availability, robustness and durability of components; and

·; secured and properly documented necessary regulatory and operational approvals for each application.

Market and competitive environment

The Board believes the growth in the fuel cell market will be determined by the following factors:

·; the ongoing depletion of fossil fuel reserves;

·; current and future air quality regulation;

·; growing industrial and consumer demand for alternative sources of energy;

·; the potential long term competitiveness of the auto and transportation industries;

·; energy security concerns;

·; limitations of purely battery powered propulsion systems; and

·; discussions regarding hydrogen as an energy storage for green energy (power to gas).

Initial market segments have been identified, which the Board believes, would benefit from the advantages of fuel cell hybrid systems and are target market segments for the Group. Those market segments are:

·; city buses;

·; passenger ferry boats;

·; light duty vehicles; and

·; auxiliary power units ("APUs") for back-up power and smart grid applications.

The Directors see significant growth and demand in those market segments for fuel cell applications.

Competitive advantages

The Directors are confident that the Group's technology brings the following distinct combination of characteristics to the power systems market:

·; zero harmful emissions;

·; lower fuel consumption than comparable commercial alternatives;

·; no recharge requirement, unlike batteries;

·; silent operation;

·; a standard fuel cell stack for use in multiple applications;

·; modular fuel cell systems for easy customer adoptions

·; a reliable, robust and durable technology; and

·; successful integration of fuel cell technology into a hybrid and Triple-Hybrid© system.

Future prospects

The Group's principal objective is to expand volume manufacturing with industrial partners based on licence agreements. This will enable the Group to achieve an economically viable unit cost for its fuel cells and fuel cell hybrid systems. Also the Group will utilize the sales channels of its industrial partners to address various markets and ensure growth of sales volume. The Directors believe that the advanced stage of commercialisation of the Group's technology, coupled with the Group's preferred partnerships, will enable the business to establish itself firmly as a leading, global, fuel cell and fuel cell hybrid system provider.

Consolidated income statement

for the year ended 31 December 2012

Consolidated statement of comprehensive income

Balance sheets

as at 31 December 2012

These financial statements were approved by the Board of Directors on 13 May 2013 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.

Statements of cash flows

for the year ended 31 December 2012

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 2012 (including comparatives) were approved and authorised for issue by the board of directors on 13 May 2013.

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 2011 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. 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 loss for the financial period dealt within the accounts of the parent Company was £9,201,000.

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 except for embedded derivatives which are carried at fair value through profit and loss 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 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, 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, 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, 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 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 recognized 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. If applicable, received government grants are deducted from the capitalized 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 amortisable 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 indefinite 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 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 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 initially 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 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 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 capitalized (see Intangible assets above).

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 recognized 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.

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 11 Joint Arrangements (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).

·; 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).

·; IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (effective 1 January 2013).

·; Annual Improvements 2009-2011 Cycle (effective 1 January 2013).

·; Transition Guidance - Amendments to IFRS 10, IFRS 11 and IFRS 12 (effective 1 January 2013).

·; Investment Entities - Amendments to IFRS 10, IFRS 12 and IAS 27 (effective 1 January 2014). Not yet adopted by the EU.

EU adoption date for IFRS 10, IFRS 11, IFRS 12, IAS 27 (Revised) and IAS 28 (Revised) is 1 January 2014.

The revised standards will be adopted in the Group's consolidated financial statements, where relevant for the period beginning 1 January 2013, 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 techniqueMarket capitalisation is taken to equate to fair value less costs to sell in the assessment of the carrying value of the investment in the Company. See note 12.

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

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

 Alster-Touristik GmbH represented 10.78% of the Group's revenue in 2012.

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 (2011: gain) on the fair value of the embedded derivative of £14,000 (2011: £3,735,000) 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 23,000,000 (2011: 20,790,000) share options during the year issued to employees as follows:

Details of share options granted during 2012 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 2012 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 2012 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 14 months (2011: 18 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 £48,000 (2011: £24,000) are recognized 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. There were no self-developed intangible assets (2011: £nil) not yet been brought into use.

There are no individually significant intangible assets.

11. Property, plant and equipment - Group