Proton Mtr Pwr Regulatory News (PPS)

Proton Power Systems plc

("Proton Power" or the "Group")

Financial Results

Proton Power Systems plc (AIM:PPS), the designer, developer and producer of fuel cells and fuel cell electric hybrid systems, today announces its Preliminary Results for the year ended 31 December 2010.

Highlights:

John Wall, Chairman of Proton Power, commented: "Proton Power is pleased to report a positive year in which turnover increased by 237% to £718,000. We have seen a general shift in the attitude of automotive manufacturers and governments which are increasingly recognising the importance of supporting the growth of a hydrogen infrastructure. During the year, Proton Power has been working closely with our partners and has received funding from them to help develop the most efficient roadmap for delivering battery and fuel cell solutions to the German electric mobility market.

"I am pleased to report good progress on our range extender project and stationary applications and I remain confident that continued progress will be made on our stack and system development and integration. While economic conditions and market growth remains volatile, the Group has been fortunate to have the support of its loyal shareholders such as our lead investor Roundstone Properties, who have provided the Group with the necessary funding."

- Ends -

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Chairman and CEO's statement

Overview

We are pleased to report our results for the year ended 31 December 2010, which is our fourth full year as a public company on the AIM market of the London Stock Exchange.

Business development

There has been a major shift in the attitude to hydrogen fuel cell power solutions as automotive manufacturers such as Daimler, Opel, Audi, Toyota, and Hyundai have publicly acknowledged that the future technology for automotive vehicles must include a battery and fuel cell solution.

These companies and local governments are supporting the creation of a hydrogen infrastructure and Germany in particular will take a leading role in setting up a network of up to 2000 hydrogen fuelling stations following an announcement by GM/Opel in April 2011.

This development will support the general market introduction of hydrogen fuel cell solutions as well as the Group's product strategy which includes:

·; Stationary power from 5kW to 100kW for small information technology and industrial applications including back up power.

·; A range extender for light duty vehicles from 8kW to 20kW.

·; Mobile fuel cell based solutions for ships and buses.

Proton Power's strategy is to work closely with OEM partners for each of these product areas and the management is currently in discussions with SPower, Smith Electric Vehicles (SEV) and Skoda Electric.

The Group will continue to focus on stack and system development and integration and will cooperate with international OEM partners to further develop, licence and sell our products.

In addition Proton Power continues to work on new development projects, funded by the German Hydrogen Organisation (NOW). These are mainly in the stationary power supply area with systems from 50kW to 100kW with other German based integrators and will address the data centre market.

The Group is pleased to give a status update on the current projects which are grant funded by NOW. The Range Extender project with SEV is well under way. Proton Power has successfully equipped and tested the first Edison truck and is now working on the Newton truck which will be the main platform vehicle for a fuel cell range extender solution. 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.

Development on the new PM400 stack for power up to 20kW is also progressing well. The new stack will be an excellent addition to the Group's portfolio and will allow Proton Power to bring down costs because of the higher integration and power.

The Group's Triple Hybrid Bus with Skoda Electric which is in use in the Czech Republic was upgraded with a system based on the latest fuel cell stack and the Alsterwasser ship in Hamburg is now back in operation.

Finance

Turnover increased by 273 % to £718,000 (€837,000) mainly as a result of funded projects started in April 2010. The loss for the year was £3,018,000.

The Group secured new funding in 2010 from convertible loans with a total value of €6,480,000 from the major shareholder, Roundstone Properties Limited. £1,500,000 was converted into ordinary shares in 2010 by issuing 75 million shares at 2p each. This convertible loan facility stands at €7.56 million of which €6.34 million had been draw down at the year end.

Outlook

Proton Power's current discussions with major OEM partners have highlighted that there is now a realistic opportunity for the breakthrough of fuel cell technology into the commercial domain. The range extender project with SEV is an excellent opportunity to enter a volume market. Stationary applications will also develop quickly as the electricity grid struggles to cope with increasing and variable electricity demand covered by a generation mix which now includes a significant amount of unpredictable (principally wind) renewable power.

Based on Proton Power's modular concept each success story will help the other products because the main components used are similar and cost reductions will be achieved as the Group cooperates with our suppliers and contract manufacturers.

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 2010

Consolidated statement of comprehensive income

Balance sheets

as at 31 December 2010

These financial statements were approved by the Board of Directors on 2 June 2011 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 their 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 2010

 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 2010 (including comparatives) were approved and authorised for issue by the board of directors on 2 June 2011.

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 £1,262,000.

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 judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment 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 fully consolidated 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 minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

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 more appropriate to present the financial statements in Sterling.

(b) Transactions and balances

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

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

(c) Group companies

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

§ assets 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 the income statement as expenditure in the financial year in which they were incurred. The costs of production include all directly attributable costs, as well as the appropriate proportion of the overheads relating to production.

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

·; Office equipment, furniture & equipment 10% - 33%

·; Technical equipment & machinery 20%

·; Leasehold property improvements over the life of the lease

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 3 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 amortized 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.

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

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 recognized for all taxable temporary differences and deferred tax assets to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised.

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

Employee benefits

The Company makes discretionary contributions to the personal pension plans of employees. The contributions are expensed on an accruals basis.

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 accrual 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). Amortization 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 accrual 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.

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.

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 2013).

·; IAS 24 (Revised 2009) Related Party Disclosures (effective 1 January 2011).

·; Amendment to IAS 32 Classification of Rights Issues (effective 1 February 2010).

·; IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective 1 July 2010).

·; Prepayments of a Minimum Funding Requirement - Amendments to IFRIC 14 (effective 1 January 2011).

·; Improvements to IFRS issued May 2010 (some changes effective 1 July 2010, others effective 1 January 2011).

·; 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).

·; Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters - Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards (effective 1 July 2011).

IFRS 9-13, Amendments to IFRS 7, Amendments to IAS 12 and Amendments to IFRS 1 are not yet adopted by the EU and therefore no disclosure is required under IAS 8.The revised standards will be adopted in the Group's consolidated financial statements, where relevant for the period beginning 1 January 2011, 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.

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 £1,818,000 (2009: £20,000) 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 4,100,000 (2009: 1,170,000) share options during the year issued to employees as follows:

Details of share options granted during 2010 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 2010 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 2010 206,350 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 11 months (2009: 14 months).

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

Directors' remuneration

Details of Directors' remuneration are given in the Remuneration report on pages 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 £313,000 (2009: £258,000) are recognized in the reporting year, because the prerequisites of IAS 38 have been fulfilled.

The useful life of self-developed intangible assets is 3 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 £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

The economic life of leasehold property improvements as well as of technical equipment and machinery is 5 years.

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 charge under IAS 36. In arriving at the charge in the year of £2.175m (2009: £5.329m) the Board has determined the recoverable amount by reference to the fair value of the asset demonstrated by the market price of the Group's equity on AIM.

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 €8,100,000. Further drawn downs under this agreement during the year were €5,680,000. During the year the company converted €540,000 of the existing loans to 25m 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. Also during the year the company converted £1,000,000 of an existing loan to 50m new ordinary shares of 1p each at a price of 2p per share.

Total draw downs under existing facilities were €8,080,000 at the period end with a balance of €7,540,000 outstanding. These instruments are 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 has been recognised as debt. The debt has subsequently been measured at amortised cost.

The loans carry interest at 10% per annum and are repayable on 30 July 2012. In the event that the convertible loans are converted, rather than repaid, no interest is payable.

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 28.

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 £6,834,000 (2009: £6,071,000) in respect of losses amounting to £2,579,000 (2009: £1,589,000) and €25,124,000 (2009: €21,027,000).

19. Share capital

The share capital of Proton Power Systems plc consists of fully paid Ordinary shares with a par value of £0.01 (2009; £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 75m ordinary shares of 1p each were issued at 2p per share. This comprised:

§ On 18 January 2010 the company converted £1,000,000 of an existing convertible loan to 50m new ordinary shares of 1p each at a price of 2p per share.

§ On 14 October 2010 the company converted €540,000 (£500,000) of the existing convertible loans to 25m 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.

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

The number of shares in issue at the balance sheet date is 181,990,863 (2009: 106,990,893) Ordinary shares of 1p each (2009: 1p each) and 327,963,452 (2009: 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;