Final Results

RNS Number : 7320U

Proton Power Systems PLC

30 June 2009

 



Press Release

30 June 2009

Proton Power Systems plc

('Proton Power' or 'the Group')

Final Results 

Proton Power Systems plc (AIM:PPS), a leading designer, developer and producer of fuel cells and fuel cell electric hybrid systems, today announces its final results for the year ended 31 December 2008.  

Highlights:

	Strengthened the Board with the appointments of: - Thomas Melczer as Chief Executive Officer of Proton Motor Fuel Cell GmbH and Proton Power Systems plc; - Ali Naini as Deputy Chairman and Non-Executive Director of Proton Power Systems plc; - Faiz Nahab as Non-Executive Director of Proton Power Systems plc; - Helmut Gierse as Non-Executive Director of Proton Power Systems plc;
	Secured funds of £4m, before expenses, via two share placings which have allowed the Group to continue its progress
	Won the Bavarian Innovation Award for the successful application of fuel cell technology as part of the first Triple-Hybrid© forklift truck
	Received TUV certification for the PM200 product, based on DIN EN 62282-2 in September 2008
	Launched the world's first fuel cell passenger ferry

Highlights since the period end:

	Obtained ISO 9001 accreditation in March 2009
	Selected Deutsche Mechatronics as contract manufacturer and signed a frame contract in May 2009
	Launched a triple-hybrid city bus for Skoda Electric in May 2009
	Proposed share reorganisation

Commenting on the results, John Wall, Executive Chairman, says: 'The excellent Board appointments we have made in Thomas, Ali, Faiz and Helmut have helped enormously in raising funds successfully and driving further sales and technical innovation. We are seeing growing demand for our products and are well placed to strengthening our leadership in the development and supply of fuel cell systems for back-to-base vehicle and back-up power applications.' 

'On behalf of the Board we would like to thank all on our team and our loyal shareholders for their continual confidence and support throughout the year.'

On 29 April 2009, the Company announced a new convertible loan agreement with Roundstone Properties Ltd (the 'Convertible Loan'). The par value of the Company's ordinary shares ('Ordinary Shares') is 5 pence, which is the minimum price at which such Ordinary Shares can be issued. Issue of the Ordinary Shares underlying the Convertible Loan at 2 pence each is subject to a share capital re-organisation being approved so that the par value of the Ordinary Shares is reduced to 1 pence. The proposal, which would be implemented by Resolution 8 to be proposed at the Annual General Meeting, if passed, would involve splitting each issued Ordinary Share into one new Ordinary Share of 1p ('New Ordinary Share') and four deferred shares of 1p. 

The practical effect of this change, if implemented, will be that each Shareholder will receive the same number of New Ordinary Shares as they hold Ordinary Shares, without any diminution in rights.

A copy of the Company's audited accounts for the year ended 31 December 2008 together with a notice of annual general meeting to be held at the offices of Arbuthnot Securities Limited, Arbuthnot House, 20 Ropemaker Street, London, EC2Y 9AR at 11.00 a.m. on 23 July 2009 will be posted to shareholders today and is available from the Company's website at www.protonpowersystems.com.

- ENDS -

For further information:  

Proton Power Systems plc
John Wall, Chairman	Tel: [phone]
Ali Naini, Deputy Chairman	Tel: [phone]
Thomas Melczer, CEO	Tel: [phone]
	www.protonpowersystems.com

Arbuthnot Securities Limited
Tom Griffiths / Antonio Bossi	Tel: [phone]
	www.arbuthnotsecurities.co.uk

Media enquiries:  

Abchurch Communications Limited
Justin Heath / Stephanie Cuthbert / Monique Tsang	Tel: [phone]
[e-mail]	www.abchurch-group.com

  Chairman and Chief Executive's report

Overview

We are pleased to report our results for the year ended 31 December 2008, which is the second full year as a public company on the Alternative Investment Market of the London Stock Exchange ('AIM').

On 28 May 2008 the Group secured funds of £3m, before expenses, by the placing of 30,000,000 new shares at 10p per share. This allowed the Group to repay the balance of the loan from General Capital Venture Finance Limited of £790,000. The progress which had been achieved over the previous 12 months can now continue.

In June 2008, we proudly announced that Proton Motor won the Bavarian Innovation Award for its triple hybrid technology. This underlines our leading position in the technology of fuel cell based back to base solutions. On 29 August 2008, the ferry for Hamburg's Alster river named 'Alsterwasser' was unveiled as the world's first hybrid fuel cell powered passenger ferry.

In August 2008 we appointed Arbuthnot Securities Limited as our nominated adviser and broker and welcomed Dr Faiz Nahab as a non-executive Director, and Ali Naini as a non-executive Director and Deputy Chairman. In the current year we have further strengthened the Board with the appointment of Helmut Gierse as a non-executive Director.

On 10 October 2008 the Group secured further funds for working capital of £1m, before expenses, by the placing of 10,000,000 new shares at 10p per share.

The company has successfully attained DIN EN ISO 9001 certification and in March 2009 received the certificate for Quality and Environmental Standards.

Business development

During the year we finalised development of our latest stack generation, PM 200 (3 - 8 kW). The company received the TUV certificate for the PM 200 product, based on DIN EN 62282-2 in September 2008. This was a world wide first for TUV certification of a hydrogen fuel cell stack.

Based on PM 200 we foresee a wide range of applications in the back to base vehicles and backup power markets.

To improve the lifetime for our product the company is planning to invest €420,000 in new testing equipment.

In addition to the continuous development work for our core fuel cell stacks, we have also continued with our work on the research, development and application of fuel cell based hybrid solutions for the following:

	a passenger ferry which will operate on Hamburg's Alster river;
	a utility street cleaning vehicle for Bucher/EMPA in Switzerland;
	a city bus for Skoda Electric, which will operate in Prague;
	an eco carrier transportation vehicle for Karmann in Germany; and
	a fuel cell based solution for stationary power supplies.

These projects allow us to offer comprehensive solutions for a wide portfolio of urban transportation and infrastructure applications, with our development partners, all based on our fuel cell technology. We are also planning to increase our marketing activities based on these applications to increase our penetration in these markets.

Finance

Turnover increased by 65% to £1,093,432 compared to 2007, which was £661,000. This outcome was in line with expectations. 

The out-turn for the year was a loss of £2,798,000 which was also in line with expectations. The Board, however, recognise the need for further fundraising to meet the Group's planned development and day-to-day working capital requirements. 

Outlook

While our focus remains that of developing a volume manufacturing capability we will strengthen our market position by identifying the applications with the highest demand for fuel cell and fuel cell hybrid systems. Consequently, we have decided to put resources into the design of fuel cell based solutions for stationary power supplies in the second half of 2009. In stationery power supply equipment we see a market with high demand for solutions with long back up times which can be exploited by standardised products. Fuel cell based products can provide an optimised solution for such applications in the IT and Telecom markets. Those solutions will be based on our existing modular fuel cell products.

We also believe that the continued improvement of our product portfolio for back to base urban solutions makes us more attractive to customers. We have the skills and knowledge to develop fuel cell based applications with other OEM partners.

In the second half of 2009, the Group also intends to start the industrialised production of fuel cells as well as application-specific systems, to be able to serve the growing demand we are experiencing. During that process, we plan to change our organisation and adjust our internal processes to start a professional manufacturing line in cooperation with German contract manufacturer Deutsche Mechatronics. 

Looking to the near future, rising energy prices and demand for environmentally friendly solutions for transportation as well as stationary power will support the growth of our business. The challenge is to start volume production of fuel cell solutions to be able to offer attractive prices to our customers. Volume manufacturing and a future service business will also provide future profitability.

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

John Wall FCA Chairman

Thomas Melczer Chief Executive

  Operating and financial review

Group activities

The Group has developed a standard hydrogen fuel cell module which is designed to enable it to provide customers with complete hydrogen fuel cells and fuel cell hybrid systems that can be integrated into their product range. The Group's fuel cell modules can be combined into stacks to meet the power needs of particular applications from 5kW to 50kW and higher kW ratings in parallel operation.

Milestones during the year were:

	the appointment in July 2008 of Thomas Melczer as Chief Executive Officer of Proton Motor Fuel Cell GmbH and Proton Power Systems plc;
	the appointment in July 2008 of Ali Naini as Deputy Chairman and Non-Executive Director of Proton Power Systems plc;
	the appointment in September 2008 of Faiz Nahab as Non-Executive Director of Proton Power Systems plc;
	winning a Bavarian Innovation Award for the successful application of fuel cell technology as part of the first Triple-Hybrid© forklift truck;
	TUV certification for the PM200 product, based on DIN EN 62282-2 in September 2008; and
	obtaining ISO 9001 accreditation in March 2009.

Strategy

Sales strategy

Although Proton Motor has been historically reliant on a small number of key customers, it has established strong relationships with key OEMs in its target market. The Group anticipates expanding this customer base as volume manufacturing capability increases. The Directors believe that effective execution with their OEM partners should enable Proton to be recognised as a global fuel cell technology platform.

Attractive primary markets and applications for the Group's fuel cell system, identified by the Group, generally display the following characteristics:

	potential material volume sales;
	'back-to-base' refuelling or stationary applications;
	existing power generation technology applications with notable disadvantages, for example: - slow recharge time of battery technology as well as additional working capital infrastructure where continuous battery use is required; - combustion engines emitting harmful emissions and noise pollution; - external electric power is generally delivered by overhead cables, for example trolley buses, and has geographical and logistical limitations; - applications with long backup time and space limitations (APU's).
	need to reduce industrial noise and emissions.

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 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;
	established quality control procedures;
	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;
	secured and properly documented necessary regulatory and operational approvals for each application; and
	selected Deutsche Mechatronics as contract manufacturer for stacks and systems and signed a framework contract in May 2009.

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; and
	energy security concerns.

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 busses;
	passenger ferry boats;
	light duty vehicles;
	street cleaning vehicles; and
	APU's.

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

Competitive advantages

The Directors are confident that Proton'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 module for use in multiple applications; and
	a reliable, robust and durable technology; and
	the successful integration of fuel cell technology into a hybrid and Triple-Hybrid© system.

Future prospects

The Group's principal objective is to establish a volume manufacturing partnership based upon solid sales orders. This will enable the Group to achieve an economically viable unit cost for its fuel cells and fuel cell hybrid systems. The Group will invest in increased operational and sales infrastructure appropriate to its ongoing growth. The Directors believe that the advanced stage of commercialisation of the Group's technology, coupled with the Group's existing partnerships, will enable the business to firmly establish itself as a leading, global, fuel cell and fuel cell hybrid system provider.

Principal risks and uncertainties

Operating revenues

Although the Directors have confidence in the Group's future revenue earning potential, there can be no certainty that the Group will achieve or sustain significant revenues, profitability or positive cash flow from its operating activities. This could impair the Group's ability to sustain operations or secure any required funding. To date, the Group has incurred substantial losses and expects losses and cash expenditure to continue until it achieves volume sales production at commercial unit prices.

Early stage of commercialisation

The Group is at an early stage in the commercialisation and marketing of its technology. A number of the Group's relationships are also at an early stage and there is no assurance that any relationships will continue to result in revenue generating contracts with the Group. Continuing development of the Group's technology may be required and there can be no assurance that any of the Group's future technology will be commercially successful. The Group may encounter delays and incur additional research and development costs and expenses over and above those anticipated or allowed for by the Directors.

Material contracts

The Group has been, and in the short to medium term will continue to be, dependent on a limited number of key customers. A concentrated client base places considerable dependence in meeting contracted operating performance levels. If a major client or a number of clients terminate their contracts or significantly reduce or modify their business relationships with the Group, the Group may not be able to replace the shortfall in revenues. 

A number of the Group's material contracts are public sector contracts which may be dependent upon public grants and/or subsidies. The Group may not have control over payment of its costs under these contracts since it is reliant upon the lead partner(s) making claims for payment to the relevant public authority. Further, under the terms and conditions of public sector contracts, there may be a risk of claims for repayment from public authorities if the terms and conditions of such contracts are breached. 

Technology risk

A core component within the Group's product offering is its fuel cell module. This has undergone testing in prototype form however, as with any new technology, there are risks associated with the long-term operational life of the product.

Competing power technologies

As the Group's fuel cell technology has the potential to replace existing power products, competition for the Group's products will come from current power technologies, from improvements to current power technologies and from new alternative power technologies, including other types of fuel cells or other self-contained energy systems. Each of the Group's target markets is currently serviced by existing manufacturers with existing customers and suppliers. These manufacturers use proven and widely accepted technologies such as internal combustion engines, turbines, batteries and overhead contact lines.

Additionally, there are competitors working on development technologies other than fuel cells (such as advanced batteries, ultracapacitors and hybrid battery/internal combustion engines) in each of the Group's targeted markets. Some of these technologies may be as capable of fulfilling the existing and proposed regulatory requirements as the Group's fuel cell technology.

Many of the Group's competitors have financial resources, customer bases, businesses or other resources, which give them significant competitive advantages over the Group. Competitors and potential competitors may develop technologies and products that are less costly and/or more effective than the technology or products of the Group, or which may make those of the Group obsolete or uncompetitive.

Governmental regulation

There may be a change in government regulations or policies, which could have a material adverse effect on the Group's activities.

Commercial relationships

The success of the Group will depend on its ability to integrate the Group's fuel cell technology into products manufactured by OEMs. There is no guarantee that OEMs will manufacture appropriate products or, if they do manufacture such products, that they will choose to use the Group's fuel cell technology. Any integration, design, manufacturing or marketing problems encountered by OEMs could adversely affect the market for the Group's fuel cell technology and the Group's financial results.

Dependence on key personnel

In order to successfully implement the Group's anticipated growth, the Group will be dependent on its ability to hire and retain additional skilled and qualified personnel, particularly in relation to sales, sales support, technological development, management, marketing and technical personnel. There can be no assurance that the Group will be able to retain or hire necessary personnel.

Future funding

The Group is dependent on the continuing financial support of its main investor to meet its day-to-day working capital requirements. At this point in time there has been no indication that this financial support will be withdrawn, however, the Board recognises that the Group must show improved financial performance to warrant further financial support.

Currency exchange rate fluctuations

The Group intends to conduct much of its business overseas in currencies other than sterling and as such its financial performance is subject to the effects of fluctuations in foreign exchange rates.

By order of the Board

J Wall Director

29 June 2009

  Consolidated income statement

for the year ended 31 December 2008

	Note		2008		2007
			£'000		£'000
Continuing operations
Revenue	2,3,4		1,093		661
Cost of sales			(2,514)		(1,594)
Gross loss			(1,421)		(933)
Other operating income			74		48
Administrative expenses			(1,416)		(1,504)
Operating loss			(2,763)		(2,389)
Finance income			26		89
Finance costs			(61)		(69)
Loss for the year attributable to equity holders of the Company	5		(2,798)		(2,369)
Loss per share (expressed as pence per share)
Basic	9		(5.4)		(7.6)
Diluted	9		(5.4)		(7.6)

  Balance sheets

as at 31 December 2008

			Group		Company
	Note	2008	2007	2008	2007
		£'000	£'000	£'000	£'000
Non-current assets
Intangible assets	10	783	398	-	-
Property, plant and equipment	11	362	176	-	-
Investment in subsidiary	12	-	-	4,555	15,507
		1,145	574	4,555	15,507
Current assets
Inventories		137	108	-	-
Trade and other receivables	13	270	934	25	102
Cash and cash equivalents	14	772	682	200	505
		1,179	1,724	225	607
Total assets		2,324	2,298	4,780	16,114
Capital and reserves
Ordinary shares	18	3,570	1,570	3,570	1,570
Share premium		6,275	4,735	6,275	4,735
Merger reserve		15,656	15,656	15,656	15,656
Reverse acquisition reserve		(13,862)	(13,862)	-	-
Share option reserve		346	430	346	430
Foreign translation reserve		(304)	44	-	-
Capital contributions		1,324	1,002	-	-
Retained earnings		(12,029)	(9,444)	(21,164)	(7,245)
Total equity		976	131	4,683	15,146
Non-current liabilities
Borrowings	16	-	514	-	514
Current liabilities
Trade and other payables	15	1,348	1,653	97	454
Total liabilities		1,348	2,167	97	968
Total equity and liabilities		2,324	2,298	4,780	16,114

These financial statements were approved by the Board of Directors on 29 June 2009 and were signed on its behalf by:

J Wall FCA

Director

  Statements of changes in equity

	Attributable to equity holders of the Company
Group	Share Capital	Share Premium	Merger Reserve	Reverse Acquisition Reserves	Share Option Reserve	Translation Reserve	Capital Contribution Reserves	Retained Earnings	Total Equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 January 2007	1,570	4,735	15,656	(13,862)	147	30	916	(7,007)	2,185
Loss for the year	-	-	-	-	-	-	-	(2,369)	(2,369)
Currency translation differences	-	-	-	-	-	14	86	(68)	32
Total recognised income and expense for the year	-	-	-	-	-	14	86	(2,437)	(2,337)
Share based payments credit	-	-	-	-	283	-	-	-	283
Balance at 31 December 2007	1,570	4,735	15,656	(13,862)	430	44	1,002	(9,444)	131
Balance at 1 January 2008	1,570	4,735	15,656	(13,862)	430	44	1,002	(9,444)	131
Loss for the year	-	-	-	-	-	-	-	(2,798)	(2,798)
Currency translation differences	-	-	-	-	-	(348)	322	213	187
Total recognised income and expense for the year	-	-	-	-	-	(348)	322	(2,585)	(2,480)
Share based payments debit	-	-	-	-	(84)	-	-	-	(84)
Proceeds from share issues	2,000	2,000	-	-	-	-	-	-	4,000
Share issue costs	-	(460)	-	-	-	-	-	-	(460)
Balance at 31 December 2008	3,570	6,275	15,656	(13,862)	346	(304)	1,324	(12,029)	976

  Statements of changes in equity 

	Attributable to equity holders of the Company
Company	Share Capital	Share Premium	Merger Reserve	Share Option Reserve	Retained Earnings	Total Equity
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 January 2007	1,570	4,735	15,656	147	(1,052)	21,056
Loss for the year	-	-	-	-	(6,193)	(6,193)
Total recognised income and expense for the year	-	-	-	-	(6,193)	(6,193)
Share based payments credit	-	-	-	283	-	283
Balance at 31 December 2007	1,570	4,735	15,656	430	(7,245)	15,146
Balance at 1 January 2008	1,570	4,735	15,656	430	(7,245)	15,146
Loss for the year	-	-	-	-	(13,919)	(13,919)
Total recognised income and expense for the year	-	-	-	-	(13,919)	(13,919)
Proceeds from share issues	2,000	2,000	-	-	-	4,000
Share issue costs	-	(460)	-	-	-	(460)
Share based payments debit	-	-	-	(84)	-	(84)
Balance at 31 December 2008	3,570	6,275	15,656	346	(21,164)	4,683

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 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.

  Cash flow statements

for the year ended 31 December 2008

		Group		Company
	Note	Year ended 31 December		Year ended 31 December
		2008	2007	2008	2007
		£'000	£'000	£'000	£'000
Cash flows from operating activities
Net cash used in operations	20	(1,777)	(1,486)	(270)	50
Interest received		28	86	23	116
Interest paid		(65)	(64)	(48)	(62)
Net cash used in operating activities		(1,814)	(1,464)	(295)	104
Cash flows from investing activities
Capital contribution to subsidiary		-	-	(2,719)	(2,088)
Purchase of intangible assets		(643)	(422)	-	-
Purchase of property, plant and equipment		(162)	(150)	-	-
Net cash used in investing activities		(805)	(572)	(2,719)	(2,088)
Cash flows from financing activities
Proceeds from issue of share capital		3,540	-	3,540	-
Increase in loan balances	20	-	1,000	-	1,000
Loan repayments		(831)	(168)	(831)	(168)
Net cash generated from financing activities		2,709	832	2,709	832
Net (decrease)/increase in cash and cash equivalents		90	(1,204)	(305)	(1,152)
Opening cash and cash equivalents		682	1,886	505	1,657
Closing cash and cash equivalents		772	682	200	505

  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.

These Group consolidated financial statements were authorised for issue by the Board of Directors on 29 June 2009.

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 230 of the Companies Act 1985, 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 £13,919,000.

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 1985 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 (including special purpose 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, plus costs directly attributable to the acquisition. 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 companies. 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; either a Black-Scholes, Monte Carlo or Binomial 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 a separate component of equity.

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.

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, 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

Sales revenues are included affecting net income in compliance with IAS 11 and IAS 18. 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.

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

New standards and interpretations currently in issue but not effective for accounting periods commencing on 1 January 2007 are: 

• IAS 1 Presentation of Financial Statements (revised 2007) (effective 1 January 2009); 

• IAS 23 Borrowing Costs (revised 2007) (effective 1 January 2009); 

• Amendment to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation (effective 1 January 2009); 

• IAS 27 Consolidated and Separate Financial Statements (Revised 2008) (effective 1 July 2009); 

• Amendment to IFRS 2 Share-based Payment - Vesting Conditions and Cancellations (effective 1 January 2009); 

• Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and IAS 27 Consolidated and Separate Financial Statements - Costs of Investment in a Subsidiary, Jointly Controlled Entity or Associate (effective 1 January 2009); 

• Amendment to IAS 39 Financial Instruments: Recognition and Measurement - Eligible Hedged Items (effective 1 July 2009) 

• Improvements to IFRSs (effective 1 January 2009 other than certain amendments effective 1 July 2009); 

• IFRS 3 Business Combinations (Revised 2008) (effective 1 July 2009); 

• IFRS 8 Operating Segments (effective 1 January 2009); 

• IFRIC 15 Agreements for the Construction of Real Estate (effective 1 January 2009) 

• IFRIC 16 Hedges of a Net Investment in a Foreign Operation (effective 1 October 2008) 

• IFRIC 17 Distributions of Non-cash Assets to Owners (effective 1 July 2009) 

• IFRIC 18 Transfers of Assets from Customers (effective prospectively for transfers on or after 1 July 2009)

Based on the Group's current business model and accounting policies, management does not expect material impacts on the Group's financial statements when these standards or interpretations become effective, with the exception of IAS1 (revised 2007). The adoption of IAS1 (revised 2007) will result in a change in presentation of the primary statements as the statement of changes in equity will no longer be a primary statement. Instead a statement of comprehensive income will be presented.

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.

Estimated useful life of property, plant and equipment and impairment

The Group estimates the useful life of property, plant and equipment and reviews this estimate at each financial period end. The Group also tests for impairment whenever a trigger event occurs. See Note 11.

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.

Revenue recognition

The Group uses the percentage-of-completion method in accounting for its fixed-price contracts to deliver project services. Use of the percentage-of-completion method requires the Group to estimate the services performed to date as a proportion of the total services to be performed. 

4    Segmental information

A business 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 business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.

Based on an analysis of risks and returns, the Directors consider that the Group has only one identifiable business segment, green energy and one geographical segment as the geographical location of its customers is incidental to the Group's operations.

Geographical analysis of turnover

	2008	2007
	£'000	£'000
Europe	1,093	637
USA	-	24
	1,093	661

5    Loss on ordinary activities before taxation

	2008	2007
	£'000	£'000
Loss on ordinary activities before taxation is stated
after charging
Depreciation and other amounts written off property, plant and equipment and intangible fixed assets:
Owned	489	197
Hire of other assets - operating leases	228	167
Pension contributions	30	17
after crediting
Foreign exchange gains	(51)	-
Grants from public bodies	(713)	(383)

6    Auditor's remuneration

	2008	2007
	£'000	£'000
Audit services
Fees payable to the Company's auditor for the audit of the parent company and consolidated accounts	15	15
Fees payable to the Company's auditor and its associates for other services:
The audit of the Company's subsidiary pursuant to legislation	19	23
Tax services	6	-
Other services	10	-
	50	38

  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:

	Number of employees
	Group		Company
	2008	2007	2008	2007
Development and construction	28	23	-	-
Administration and sales	15	8	5	5
	43	31	5	5

The aggregate payroll costs of these persons were as follows:

	Group		Company
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Wages and salaries	1,742	1,125	115	98
Share based payments	102	283	51	196
Share options forfeited	(187)	-	(184)	-
Social security costs	257	178	10	12
Other pension costs	30	17	-	-
	1,944	1,603	(8)	306

Share based payments

The Group has incurred an expense in respect of 2,700,000 (2007: 767,500) share options and nil (2007: 200,000)  shares during the year issued to employees as follows:

	Group		Company
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Share options	13	245	10	196
Shares	-	38	-	-
	13	283	10	196

Details of share options granted during 2008 are disclosed in the Directors' report on page 12 and the Remuneration report on pages 14 to 16. 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 2008 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:

	2008		2007
	Number	Weighted average exercise price	Number	Weighted average exercise price
		£		£
Opening balance	1,337,500	0.787	570,000	0.800
Granted	2,700,000	0.100	767,500	0.778
Forfeited	(877,500)	0.788	-	-
Closing balance	3,160,000	0.200	1,337,500	0.787

At 31 December 2008 110,000 of the above options were exercisable at an exercise price of 80p.

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 a volatility rate of 50%, based on expected share price. Risk-free interest rate was determined between 4.160% and 4.909% for the various grants of options. It is assumed that options granted under the SOS have an average remaining life of 25 months (2007: 49 months).

Given the company has a limited established historical record the underlying expected volatility was determined by reference to the historical data, of comparable companies. 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 16. 

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

	Group
	2008	2007
	£'000	£'000
Wages and salaries including social security contributions	407	302
Pension contributions	-	-
Share-based payment charge	51	245
	458	547

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.

	2008	2007
	£'000	£'000
Tax reconciliation
Loss before tax	(2,798)	(2,369)
Expected tax credit at 29.65% (2007: 30%)	(830)	(711)
Expenses not deductible for tax purposes	(33)	56
Tax losses carried forward	863	655
Tax charge	-	-

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 share. 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. 

	2008		2007
	Basic	Diluted	Basic	Diluted
	£'000	£'000	£'000	£'000
Loss attributable to equity holders of the Company	(2,798)	(2,798)	(2,369)	(2,369)
Weighted average number of ordinary shares in issue (thousands)	51,418	51,418	31,391	31,391
Shares issuable (weighted) - share options (thousands)	-	1,124	-	1,261
Adjusted weighted average number of ordinary shares	51,418	52,542	31,391	32,652
	Pence per share	Pence per share	Pence per share	Pence per share
Loss per share (pence per share)	(5.4)	(5.4)	(7.6)	(7.6)

Details of shares issued after the balance sheet date are given in Note 22.

10    Intangible assets - Group

	Copyrights,  trademarks and other intellectual  property rights	Development  costs	Total
	£'000	£'000	£'000
Cost
At 1 January 2007	34	90	124
Exchange differences	3	42	45
Additions	5	417	422
At 31 December 2007	42	549	591
At 1 January 2008	42	549	591
Exchange differences	14	320	334
Additions	5	638	643
At 31 December 2008	61	1,507	1,568
Amortisation
At 1 January 2007	25	-	25
Exchange differences	3	11	14
Charged in year	5	149	154
At 31 December 2007	33	160	193
At 1 January 2008	33	160	193
Exchange differences	12	148	160
Charged in year	4	428	432
At 31 December 2008	49	736	785
Net book value
At 31 December 2008	12	771	783
At 31 December 2007	9	389	398
At 1 January 2007	9	90	99

Self-developed intangible assets in the amount of £643,000 (2007: £417,000) 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 £130,000 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

	Leasehold property	Technical equipment & machinery	Office & other equipment	Self-constructed plant & machinery	Total
	£'000	£'000	£'000	£'000	£'000
Cost
At 1 January 2007	20	164	439	27	650
Exchange differences	5	15	37	18	75
Additions	33	9	57	51	150
At 31 December 2007	58	188	533	96	875
At 1 January 2008	58	188	533	96	875
Reclassification	-	-	(90)	90	-
Exchange differences	24	72	146	76	318
Additions	23	47	18	74	162
At 31 December 2008	105	307	607	336	1,355
Depreciation
At 1 January 2007	20	150	425	-	595
Exchange differences	2	15	33	11	61
Charge for year	1	10	10	22	43
At 31 December 2007	23	175	468	33	699
At 1 January 2008	23	175	468	33	699
Reclassification	-	-	(81)	81	-
Exchange differences	8	58	129	42	237
Charge for year	5	10	21	21	57
At 31 December 2008	36	243	537	177	993
Net book value
At 31 December 2008	69	64	70	159	362
At 31 December 2007	35	13	57	71	176
At 1 January 2007	-	14	14	27	55

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

12    Investment in subsidiary undertaking

			2008	2007
Company			£'000	£'000
Shares in Group undertaking
Cost
At beginning of year			21,170	17,886
Additions			2,720	3,284
At end of year			23,890	21,170
Impairment
At beginning of year			5,663	-
Charge for the year			13,672	5,663
At end of year			19,335	5,663
Net book value
At end of year			4,555	15,507

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 £13.672m (2007: £5.663m) 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

	Group		Company
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Trade receivables	218	795	-	-
Other debtors	12	50	12	14
Prepayments and accrued income	40	89	13	88
	270	934	25	102

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

13    Trade and other receivables (continued)

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:

			Group
			2008	2007
			£'000	£'000
Not more than 3 months			53	94
More than 3 months but not more than 6 months			17	115
More than 12 months			72	-
			142	209

14    Cash and cash equivalents

	Group		Company
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Cash at bank and on hand	447	72	7	(9)
Short term bank deposits	325	610	193	514
	772	682	200	505

15    Trade and other payables

	Group		Company
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Trade payables	795	836	69	55
Loan (see Note 16)	-	317	-	317
Payments on account on contracts	135	187	-	-
Social security and other taxes	3	6	3	6
Other creditors	48	27	1	1
Accruals and deferred income	367	280	24	75
	1,348	1,653	97	454

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

16    Borrowings

	Group		Company
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Loan
Current borrowings	-	317	-	317
Non-current borrowings	-	514	-	514
Total borrowings	-	831	-	831

The total aggregate repayments, including interest, in respect of the above borrowings are £954,000.

The Group and Company have the following committed fixed rate borrowing facilities:

	Group		Company
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Total facilities	-	2,000	-	2,000

17    Deferred income tax - Group

	2008	2007
	£'000	£'000
Accelerated capital allowances	230	116
Losses carried forward	(230)	(116)
	-	-

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 £4,897,000 (2007: £2,985,000) in respect of losses amounting to £1,260,000 (2007: £920,000) and €15,670,000 (2007: €12,254,000).

18    Called up share capital

	2008	2007
	£'000	£'000
Authorised
Equity: 92,000,000 (2007: 65,000,000) Ordinary shares of 5p each	4,500	3,250
Allotted, called up and fully paid
Equity: 71,390,893 (2007: 31,390,863) Ordinary shares of 5p each	3,570	1,570

During the year 40m ordinary shares of 5p each were issued at 10p per share.

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

19    Commitments

Neither the Group nor the Company had any capital commitments at the end of the financial year, for which no provision has been made. Total future lease payments under non-cancellable operating leases are as follows:

	2008		2007
	Land and buildings	Other	Land and buildings	Other
Group	£'000	£'000	£'000	£'000
Operating leases which expire:
Within one year	7	-	5	-
In the second to fifth years inclusive	-	-	-	-
After more than five years	2,377	-	2,037	-
	2,384	-	2,042	-

20    Cash generated from operating activities

	Group		Company
	Year ended 31 December		Year ended 31 December
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Loss for the period	(2,798)	(2,369)	(13,919)	(6,193)
Adjustments for:
Depreciation and amortisation	489	197	13,672	5,663
Interest income including loan waivers	(26)	(89)	(21)	(119)
Interest expenses	60	69	42	67
Share based payments	(84)	283	(84)	283
Operating loss before changes in net working capital	(2,359)	(1,909)	(310)	(299)
Inventories	(26)	(87)	-	-
Receivables	661	25	74	313
Payables	(53)	485	(34)	36
Net cash used in operations	(1,777)	(1,486)	(270)	50

Loans of £831,000 were paid off during the year.

21    Related party transactions

During the year ended 31 December 2008 the Group and Company entered into the following related party transactions:

	Group		Company
	Year ended 31 December		Year ended 31 December
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Income / (expenses)
Turquoise International Limited corporate finance fee	60	-	60	-
Ms K Hauck consultancy fees	10	-	10	-
Proton Motor Fuel Cell GmbH loan interest	-	-	-	36

At 31 December 2008 the Group and Company had the following balances with related parties:

	Group		Company
	Year ended 31 December		Year ended 31 December
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Amounts owing from / (due to)
Turquoise International Limited corporate finance fee	(60)	-	(60)	-
Volvo Group loan	(341)	(236)	-	-

22    Post balance sheet events

On 13 January 2009 the Company placed 10,000,000 new ordinary shares of 5 pence each in the capital of the Company (the 'Placing Shares') at 10 pence per Placing Share to raise £1.0 million (before expenses). The net proceeds of the Placing will be used by the Company to provide additional working capital. 

On 9, 10 and 11 February 2009 the Company issued three warrants to acquire 10,000,000 new ordinary shares each of 5 pence each in the capital of the Company (the 'Warrant Shares') during the period 1 February 2009 to 30 April 2009 at 5 pence per Warrant Share to raise £0.5 million (before expenses). On 29 April 2009 the Warrant Shares were abrogated in favour of a convertible loan agreement of £1,500,000. The net proceeds of the loan will be used by the Company to provide additional working capital. All of this facility has now been drawn down.

On 13 February 2009 the Company placed 600,000 new ordinary shares of 5 pence each in the capital of the Company (the 'Placing Shares') at 10 pence per Placing Share to raise £60,000 (before expenses) to settle the outstanding invoice of Turquoise International Limited.  

23    Risk management objectives and policies

The Group's activities expose it to a variety of financial risks:

• foreign exchange risk;

• interest rate risk;

• credit risk; and

• liquidity risk;

The Group's overall risk management programme focuses on the unpredictability of cash flows from customers and seeks to minimise potential adverse effects on the Group's financial performance. The Board has established an overall treasury policy and has approved procedures and authority levels within which the treasury function must operate. The Directors conduct a treasury review at least monthly and the Board receives regular reports covering treasury activities. Treasury policy is to manage risks within an agreed framework whilst not taking speculative positions.

The Group's risk management is co-ordinated at Proton Motor Fuel Cell GmbH in close co-operation with the Board of Directors, and focuses on actively securing the Group's short to medium term cash flows by minimising the exposure to financial markets. Long term financial investments are managed to generate lasting returns. 

24    Foreign currency sensitivity

The Group's functional currency is Euros. The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Euro and Sterling. Foreign exchange risk arises from the Group's conversion of its subsidiary's results to the reporting currency of Sterling.

The Group does not hedge either economic exposure or the translation exposure arising from the profits, assets and liabilities of Euro business.

Foreign currency denominated financial assets and liabilities, translated into Sterling at the closing rate, are as follows:

	Year ended 31 December 2008		Year ended 31 December 2007
	€'000	£'000	€'000	£'000
Financial assets	839	817	1,369	1,009
Financial liabilities	(1,285)	(1,251)	(1,627)	(1,199)
Short-term exposure	(446)	(434)	(258)	(190)

The following table illustrates the sensitivity of the net result for the year and equity with regard to the Group's financial assets and financial liabilities and the Sterling/Euro exchange rate. It assumes a +/- 24.40% change of the Sterling/Euro exchange rate for the year ended at 31 December 2008 (2007: 2.00%). This percentage has been determined based on the average market volatility in exchange rates in the previous 12 months. The sensitivity analysis is based on Group's foreign currency financial instruments held at each balance sheet date.

If the Euro had strengthened against Sterling by 24.40% (2007: 2.00%) then this would have had the following impact:

			Year ended 31 December 2008	Year ended 31 December 2007
			£'000	£'000
Net result for the year			(106)	(4)
Equity			(106)	(4)

  If the Euro had weakened against Sterling by 24.40% (2007: 2.00%) then this would have had the following impact:

			Year ended 31 December 2008	Year ended 31 December 2007
			£'000	£'000
Net result for the year			106	4
Equity			106	4

Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of Group's exposure to currency risk.

25    Interest rate sensitivity

The Group's policy is to minimise interest rate cash flow risk exposures on long-term financing. Longer-term borrowings are therefore usually at fixed rates. At 31 December 2008, the Group is exposed to changes in market interest rates through its bank deposits, which are subject to variable interest rates. All financial liabilities have fixed rates.

The following table illustrates the sensitivity of the net result for the year and equity to a possible change in interest rates of +4.75% and -4.75% (2007: +/-1%), with effect from the beginning of the year. These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on the Group's financial instruments held at each balance sheet date. All other variables are held constant.

	Year ended 31 December 2008		Year ended 31 December 2007
	£'000	£'000	£'000	£'000
	+4.75%	-4.75%	+1.0%	-1.0%
Group
Net result for the year	37	(37)	6	(6)
Equity	37	(37)	6	(6)
Company
Net result for the year	10	(10)	5	(5)
Equity	10	(10)	5	(5)

26    Credit risk analysis

Credit risk is managed on a Group basis. Credit risk arises from cash and deposits with banks, as well as credit exposures to customers, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of 'A' are accepted. If customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the Board. 

No credit limits were exceeded during the reporting period, and management does not expect any losses from non-performance by these counterparties. The Directors do not consider there to be any significant concentrations of credit risk.

The Group's exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date, as summarised below:

	Group		Company
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Cash and cash equivalents	772	682	200	505
Trade and other receivables	270	934	25	102
Short-term exposure	1,042	1,616	225	607

The Group continuously monitors defaults of customers and other counterparties identified either individually or by group and incorporates this information into its credit risk controls. Where available at reasonable cost, external credit ratings and/or reports on customers and other counterparties are obtained and used. The Group's policy is to deal only with creditworthy counterparties. 

The Group's management considers that all the above financial assets that are not impaired for each of the reporting dates under review are of good credit quality, including those that are past due. 

None of the Group's financial assets are secured by collateral or other credit enhancements.

In respect of trade and other receivables, the Group is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk for liquid funds and other short-term financial assets is considered negligible, since the counterparties are reputable banks with high quality external credit ratings.

27    Liquidity risk analysis

Prudent liquidity risk management includes maintaining sufficient cash and the availability of funding from an adequate amount of committed credit facilities. The Group maintains cash to meet its liquidity requirements.

The Group manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well as cash-outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis, as well as on the basis of a rolling 30-day projection. Long-term liquidity needs for a 180-day and a 360-day lookout period are identified monthly.

As at 31 December 2008, the Group's liabilities have contractual maturities which are summarised below:

		Within 6 months	6 to 12 months	1 to 5 years
		£'000	£'000	£'000
Trade payables		795	-	-
Other short term financial liabilities		52	-	-

This compares to the maturity of the Group's financial liabilities in the previous reporting period as follows:

		Within 6 months	6 to 12 months	1 to 5 years
		£'000	£'000	£'000
Long-term bank loans (including interest)		198	198	198
Trade payables		836	-	-
Other short term financial liabilities		33	-	-

The above contractual maturities reflect the gross cash flows, which may differ to the carrying values of the liabilities at the balance sheet date.

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the annual general meeting of Proton Power Systems plc (the 'Company') will be held at 11:00 am at the offices of Arbuthnot Securities Limited, Arbuthnot House, 20 Ropemaker Street, London, EC2Y 9AR on 23 July 2009.

 

END

 

 

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