1st Quarter Results

TURBO POWER SYSTEMS

Press Release

27 April 2017

This announcement is released by Turbo Power Systems Inc and contains inside information for the purpose of Article 7 of the Market Abuse Regulation (EU) 596/2014 (MAR), encompassing information relating to the Transaction, and is disclosed in accordance with the Company's obligations under Article 17 of MAR. 

For the purposes of MAR and Article 2 of the Commission Implementing Regulation (EU) 2016/1055, this announcement is being made on behalf of the Company by the Board of the Company.

Turbo Power Systems Inc. ("TPS" or the "Company")

Announces Results for the Quarter

Ended 31 March 2017

Financial highlights:

· Revenue decreased 4% to £3.21 million (Q1 2016: £3.35 million).

· Gross profit increased to £1.39 million (Q1 2016: £1.30 million), with a margin of 43% (Q1 2016: 39%).

· Net loss of £0.34 million (Q1 2016: Loss £0.15 million).

· Cash outflow from operating activities of £0.09 million (Q1 2016: £0.64 million).

Operational highlights:

· Order intake in the quarter increased by 17% to £2.31 million (Q1 2016: £1.98 million).

Annual General Meeting

· To be held at 1:00pm on Thursday 25 May 2017 at the Company's offices in Gateshead.

· The Company is, amongst other proposals, presenting resolutions to (1) cancel the Company's admission to trading on AIM with effect from 5 June 2017; and (2) to effect a share consolidation of 5,000:1. Shareholders are strongly urged to review the proposals in detail;

· Full details were announced in the Notice of Meeting dated 19 April 2017 and which is available on the Company's website www.turbopowersystems.com/investors/press releases

Strategic Review announcement made on 30 March 2017:

· The Company announced that the Strategic Review had terminated, as TWC3N Limited ("TWC3N"),a company controlled principally by certain members of the Company's existing management team, had acquired the entire issued share capital of TAO Sustainable Power Solutions (UK) Limited ("TAO UK"). TAO UK is the immediate controlling entity of the Company and owns 89.4% of the issued share capital of the Company and has an outstanding loan of £0.33 million to the Company, on terms set out below under Funding. TWC3N also acquired the A Ordinary Shares ("A shares") in Turbo Power Systems Limited ("TPSL"). The A shares are convertible into the Company's Common Shares. Further information is provided in Note 10 to the Financial Statements, below.

Funding

On 15 March 2017, pursuant to the terms of the existing agreement announced on 29 March 2016, the Company exercised its option to extend the repayment date of the £314,000 loan from 1 April 2017 to 1 April 2018. All other conditions remain the same. At 31 March 2017 the loan amount including accrued interest is £0.33 million (2016: £0.31 million).

Carlos Neves, Chief Executive Officer, said:

"We are pleased that the Strategic Review has completed and that the Company can now move forward in 2017 with the entire team focused on delivering sustainable growth and achieving profitability of the business. We are pleased that order intake for the first quarter was 17% ahead of 2016 at £2.31 million, with a further £0.64 million already received in April 2017.

Our pipeline continues to be strong and I expect that in the upcoming months some of these opportunities will be secured following the strategic alignment and with the profitable margins needed to grow the business during 2017 and beyond."

For further information, please contact:

Notes to Editors

About Turbo Power Systems

Company Website: www.turbopowersystems.com

Company Twitter: https://twitter.com/turbopowersys

Turbo Power Systems Inc. (AIM: TPS.L) is a leading UK based designer and manufacturer of innovative power solutions. TPS's products are all based on its core technologies of high speed motors and generators and power electronics which are sold into a number of market sectors including transport, industrial, energy and defence sectors. The Company's products provide high performance while improving efficiency and reducing process energy consumption compared to existing technologies.

Turbo Power System's existing customers include blue chip companies such as Bombardier Transportation, Daikin, UK Power Networks, Wabtec and Eaton Aerospace.

This press release contains forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance, and underlying assumptions and other statements that are other than statement of historical fact. These statements are subject to uncertainties and risks including, but not limited to, the ability to meet on-going capital needs, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition, the need to protect proprietary rights to technology, government regulation, and other risks defined in this document and in statements filed from time to time with the applicable securities regulatory authorities.

Notice of no auditor review of interim financial statements

Under Canadian National Instrument 51-102, Part 4, subsection 4.3(3(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying un-audited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.  

This review has been prepared as at 27 April 2017.

OPERATIONAL REVIEW

Business of the Company

Turbo Power Systems is a technology-led Company that designs and manufactures high-speed permanent magnet electric motors, generators and power electronics systems and provides bespoke solutions to transport, industrial, energy conversion, and defence markets.

Its track record in engineering innovation, which has been built and tested over a substantial number of years, allows the Company to meet challenging design and manufacturing briefs with specific requirements relating to environmental performance and performance to volume demands across the world.

TPS has a proven and worldwide track record in the development and deployment of equipment in many sectors, especially in rail and industrial. Long term relationships with customers in these markets have been built based on delivering competitive products with proven reliability.

Developed over the last 30 years, expertise in high-speed electrical machines and power electronics, allows the Company to explore its current and future portfolio and adjust accordingly to grow successfully in its chosen markets.

Way Forward

As a technology-led business, the Company understands the challenges of the market regarding quality, costs and timing. We continue to concentrate on three important pillars that will be key to achieving our long-term strategy, as follow:

· Improve the quality of the portfolio;

· Superior execution within design development, manufacturing operations and support activities; and

· Consistent delivery of internal improvements.

These will continue to underpin the Company's strategy as the Company drives forward in its chosen markets.

Market Overview

Transport:

Rail is a growing sector with huge investment globally, both in developed and developing countries. As an established supplier for auxiliary power units and battery charges TPS market share can increase based on traction systems, electric distribution systems and other added value services.

As part of the Board's plan to diversify the customer base, especially in the UK, during 2015 the Company won contracts with Wabtec Rail to supply at seat power supplies and air conditioning power supplies which have a shorter delivery timescale which presents fewer long term obstacles to revenue generation. These were shipping during 2016. However, due to changes in the Class 321 upgrade programme, at Wabtec Rail's behest production of the air conditioning power supply ceased. As reported on 15 March 2017, production did not recommence and the Company jointly terminated the contract after the period end in April 2017.

The Company continues to implement its strategy for expanding its Maintenance, Repair and Overhaul (MRO) services, especially in the UK, where it is working closely with both train operators and train service companies. In the UK the train purchasing and refurbishment timetable is governed by the franchise renewal schedule.

Industrial:

The HVAC Systems market has been a major market for the Company where TPS has a long standing relationship with Daikin, a major OEM in this market. The Company continues to work closely with Daikin on the design and production of its next generation product lines, and has seen an increase of business during the quarter compared with the same quarter last year.

Energy:

The Company continues to pursue the energy efficiency market for its electric motors and generators. Market studies have been conducted into energy recovery systems and the Board believes that TPS's technology would work very well with the push into the energy space. The Company is currently exploring opportunities with partners to provide systems that can be self-sufficient for energy recovery and subsequent energy generation at on site locations.

Notwithstanding that this is a market where acceptance by the customer for production takes a considerable period, the Company sees this as an important market for future growth in both development design revenue and production revenues.

Defence:

There is a growing market due to electrification of ships, one where TPS's technologies are suitable for energy recovery, traction and emission mitigation in marine systems. It is a specialised field with high entry barriers. Following the market reviews in 2013, the Company identified that there were unique characteristics to the product range that would be applicable to this market.

The Company had entered into a small design agreement for a low power, high speed motor. It was hoped that this initial agreement will lead to a further contract for the design of a large multi megawatt motor. Currently this is envisaged to be design work with the end customer performing the manufacture. This approach has been adopted to reduce the level of working capital required to complete the project and concentrate on the higher value intellectual property (IP) created by design work. As reported on 15 March 2017 this contract was on hold while the outcome of the Company's Strategic Review is determined. Now that the review has terminated active discussions on the contract are underway and it is expected that design work will commence in Q2.

Current Operations

Revenue in the quarter was down by 2% compared with the last quarter of 2016 and down by 4% on the first quarter of 2016. The decrease in the Production revenue was due to customer driven delays in production contracts.

The Company increased the production capacity for Daikin as this product line took capacity from the cancelled Wabtec contract. Deliveries to Eaton of the Jettison Fuel Pump continued in line with their requirements.

Gross margin increased by 4% to 43% in the quarter, reflecting the impact of the Company's focus on profitable contracts and the mix of contracts.

The overall expenses in the quarter of £1.69 million up 20% compared to £1.41 million at 31 March 2016, reflecting the increase investment in sales and marketing, focused research and development and administrative and other expenses.

Headcount at 31 March 2017 was 108, down 5 from 31 March 2016:113 and down 4 from 31 December 2016: 112.

Strategic Review

On 30 March 2017 the Company announced the termination of the Strategic Review, when TWC3N Limited ("TWC3N") acquired the entire share capital of TAO Sustainable Power Solutions (UK) Limited ("TAO UK").

The announcement on 30 March 2017 contains further details, including a change in directors for the Company. Charles Rendell and Carlos Neves, directors of the Company, are also directors and shareholders of TWC3N Limited and accordingly the majority of the Board of the Company are TAO UK representatives.

Support from TAO UK

On 15 March 2017, pursuant to the terms of the existing agreement announced on 29 March 2016, the Company exercised its option to extend the repayment date of the £314,000 loan, from 1 April 2017 to 1 April 2018. All other conditions remain the same. At 31 March 2017, the loan amount including accrued interest is £0.33 million (2016: £0.31 million).

Summary

In summary, the Company has continued to implement its strategy of bidding for profitable production and development contracts, whilst maintaining a disciplined and considered approach to costs.

Following the change in control announced on 30 March 2017 the Company will develop a new five year plan, building on the Company's sustained improvement in financial performance over recent years and on the investments, relationships and expertise of the Company in its core Transport, Industrial, Energy and Defence markets.

Going Concern

These consolidated financial statements have been prepared on the basis of International Financial Reporting Standards (IFRS) applicable to a "going concern", which assume that the Company will continue in operation for the foreseeable future and will be able to realise its assets and discharge its liabilities in the normal course of operations.

As at 31 March 2017 the Company had net operating cash outflows, with current liabilities of £4.12 million and current assets of £6.29 million, which includes £0.37 million of cash. The Company has a cumulative deficit of £100.54 million as at 31 March 2017 and was loss making for the period then ended.

The Company remains critically dependent upon i) customers paying to contractual terms and ii) the continued financial support of its intermediate parent undertaking TAO Sustainable Power Solutions (UK) Limited (TAO UK). The Company relies on TAO for continued financial support in the form of the loan made available to the Company, and in order to meet any shortfall in budgeted or forecasted working capital requirements and support the Company's growth plans. If not secured, this may result in the curtailment of the Company's activities. The timing of required financial support from TAO UK will depend on the Company's ability to generate cash from operations. In reasonably sensitised cash flow forecasts, and particularly dependent on the yet to be agreed settlement, including payment profile, of certain warranty provisions, support may well be required before the date of loan repayment in April 2018.

However, the Directors believe that they will succeed in delivering the Company's projected financial performance and that financial support from TAO UK, will remain in place to enable the Company to meet budgeted and forecasted working capital requirements and support the Company's growth plans. As is typical with any company placing reliance on other group entities for financial support, there can be no certainty that this support will continue although, at the date of approval of these financial statements, the Board have no reason to believe that TAO UK will not do so. Although there are no formal letters of support in place for the purpose of the directors' going concern assessment of the Company, the directors of the Company have taken comfort from the actions taken by TAO UK, in that loans have been provided when required (the latest being £0.31 million on 29 March 2016), rescheduling the repayment date of that loan to 1 April 2018, that all the debt existing at 12 November 2015 was waived and that the majority of the Board are TAO UK representatives, in forming their conclusion that they believe it is appropriate to prepare these financial statements on a going concern basis. Accordingly, they have continued to adopt the going concern basis of preparation.

If the Company is unable to either generate positive cash flows from operations or ensure the continued financial support from TAO UK and ultimately TWC3N its parent company, or secure additional debt or equity financing, these conditions and events indicate the existence of a material uncertainty which may cast significant doubt regarding the Company's ability to continue as a going concern and, therefore, to continue realising its assets and discharging its liabilities in the normal course of business.

These consolidated financial statements do not reflect any adjustments that would be necessary if the going concern assumption were not appropriate.

Summary of Quarterly Results

The following table shows selected quarterly consolidated financial information of the Company for the last eight quarters:

Quarterly revenues down by £0.06 million on the previous quarter, but in line with the Board's expectations.

Research and development expenditure continues to increase, up £0.06 million over the previous quarter, following the Board approved strategy to drive the Company's technology forward.

General and Administration expenses have decreased 12% in the first quarter compared with the fourth quarter of 2016, and remain in line with the Company's expectations for 2017.

Copies of Quarterly and Annual Results

The Company's full Financial Results and Managements' Discussion and Analysis for 2016 together with the First quarter 2017 Financial Results and Managements' Discussion and Analysis are available on www.sedar.com. The Annual Report and Financial Statements for 2016 have been mailed to shareholders.

Copies of the quarterly and annual results are available from the Company's office at 1 Queens Park, Queensway North, Team Valley Trading Estate, Gateshead, NE11 0QD, United Kingdom or available to view from the Company's website at www.turbopowersystems.com.

Annual General Meeting ("AGM")

As previously announced, the AGM will be held at 1:00 pm (GMT+1) on Thursday 25 May 2017, at the Company's offices at 1 Queens Park, Queensway North, Team Valley Trading Estate, Gateshead NE11 0QD.

Copies of the Annual Report and Financial Statements for 2016 and the Notice of Meeting, Management Proxy and Information Circular have been posted to Shareholders, where applicable. Copies are also available on www.sedar.com and the Company's website www.turbopowersystems.com.

The resolutions to be put forward at the AGM directly impact upon shareholders and shareholders are strongly urged to review the Notice of Meeting in detail.

Review of the quarter ended 31 March 2017

Revenue

Revenue in the quarter ended 31 March 2017 was down 4% at £3.21 million (Q1 2016: £3.35million.)

Production revenue decreased in the quarter by 7% to £2.85 million (Q1 2016: £3.06 million), due to customer driven delays in production contracts.

Development revenue increased by 21% to £0.36 million (Q1 2016: £0.29 million) as development contracts progress.

Cost of Sales

The cost of sales was £1.82 million (Q1 2016: £2.45 million).

Gross Profit

Gross profit increased by 7% to £1.39 million (Q1 2016: £1.30 million), with gross margin increasing to 43% (Q1 2016: 39%).

The Company remains committed to increasing the profitability of both its current and future contracts.

Research and product development

Research and product development costs in the quarter increased by 37% to £0.57 million (Q1 2016: £0.42 million), in line with the Board's plans for the Company has become more product focused. This is net of RDEC tax credits of £0.05 million (Q1 2016: £0.05 million).

General and administrative costs

General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, were up by 5% compared to 2016 to £0.97 million (Q1 2016: £0.92 million).

The Company continues to review and control its costs without prejudicing the business operational strengths, with a reduction in headcount of 4% compared with 31 March 2016 (31 March 2017: 108, 31 December 2016: 112 and 31 March 2016: 113)

Operating loss

Operating loss before other operating income was £0.30 million (Q1 2016: profit £0.12 million).

Finance expense

Finance expense was £0.01 million which arose from the interest on the historical loans from TAO UK (Q1 2016: £nil).

Net loss

The Company recorded a net loss of £0.34 million (Q1 2016: profit £0.15 million).

Cash flows for the quarter ended 31 March 2017

Operating cash flows

The Company recorded an operating cash outflow before working capital movements of £0.29 million for the quarter (Q1 2016: outflow £0.07 million).

After adjusting for changes in working capital items the Company had an overall cash outflow from operations of £0.06 million (Q1 2016: £0.64 million).

Investing activities

Cash outflows from capital investments in the quarter were £0.10 million (Q1 2016: £0.05 million).

Financing activities

There was no cash received from financing activities in the first quarter (Q1 2016: £0.31 loan from TAO UK).

Overall cash outflow for the period

Overall the cash outflow during the quarter was £0.20 million (Q1 2016: Outflow £0.39 million).

Balance sheet as at 31 March 2017

The Company ended the period with an unrestricted cash balance of £0.37 million compared with £0.57 million at 31 December 2016. Substantially all of the Company's cash balances are denominated in Sterling.

In addition, the Company had restricted cash amounts of £3,000 (31 December 2016: £4,000), relating to utilities deposits

Non-current assets have increased from £0.83 million at 31 December 2016 to £0.88 million at 31 March 2017, after depreciation and amortisation charges of £0.06 million.

Loans and borrowings are the TAO UK loan of £0.31 million plus £0.02 million of accrued interest. The loan and interest are shown as a non-current liability repayable on 1 April 2018, and accrues interest at 6% per annum, payable annually.

Net current assets at 31 March 2017, excluding restricted cash balances included under current assets, were £2.17 million (31 December 2016: £2.56 million).

As at 31 March 2017, the Company had 3,336,865,922 common shares issued and outstanding and 892,777,778 A ordinary shares issued and outstanding. As at that date there were 4,872,728 outstanding share options.

Contractual Obligations

Shareholders' equity

The movement in shareholders' surplus comprised:

As at 27 April 2017, the Company had 3,336,865,922 common shares issued and outstanding and 892,777,778 A ordinary shares issued and outstanding. As at that date there were 4,872,728 outstanding share options.

Liquidity

Cash and cash equivalents at 31 March 2017 were £0.37 million (31 December 2016: £0.57 million).

Restricted cash at 31 March 2017 was £3,000 (31 December 2016: £4,000).

The Company reported a loss in the quarter of £0.34 million and has a cumulative deficit of £100.54 million. The Company's ability to continue as a going concern depends on its ability to generate positive cash flows from operations or secure additional debt or equity financing.

The Company has not changed its approach to Currency risk and Interest rate risk management from that of the prior year and as disclosed in the annual statements at 31 December 2016.  

Currency risk management

The Company's expenditure is principally denominated in Sterling, which is funded from Sterling cash balances. Exchange differences, which arise on consolidation of the Company's Canadian operations, are included in exchange adjustments within the income statement. At 31 March 2017 the Sterling equivalent of Canadian Dollar denominated net liabilities amounted to £13,750 (31 December 2016: net liabilities £5,900).

The Company receives a significant proportion of its revenue in US Dollars (including from contracts with Canadian customers). As such the Company routinely maintains a significant receivables balance in US Dollars, which are revalued at each period end. At 31 March 2017 the Sterling equivalent of the US Dollar denominated assets amounted to £0.74 million (31 December 2016: £0.54 million).

To manage its foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, the Company uses forward foreign exchange contracts. Further information is provided in Note 7 Derivative Financial Instruments.

Interest rate risk management

The analysis of the Company's financial assets and borrowings analysed between floating and fixed interest rates is shown below

The fixed rate borrowings are at 6.0% per annum.

Financial instruments

The Company's financial assets and liabilities consist primarily of the cash and cash equivalents, restricted cash, trade receivables, trade payables and loans.

The amounts at which the assets and liabilities above are recorded are considered to approximate to fair value.

Fair value estimation

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Company uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Techniques, such as estimated discounted cash flows, are used to determine fair value for the financial instruments. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date.

The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to the short-term nature of trade receivables and payables. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the group for similar financial instruments.

Derivative financial instruments

The Company uses foreign exchange forwards to help manage its foreign exchange risk. The Company classifies these derivatives as financial assets at fair value through profit and loss. Derivatives are classified as current assets.

Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the group has transferred substantially all risks and rewards of ownership.

Gains or losses arising from changes in the fair value of the 'financial assets at fair value through profit or loss' category are presented in the income statement within 'Other gains - net' in the period in which they arise.

Financial Risk Management and Capital Structure

The Company's risk management programme remains as detailed on page 51 in the Annual Report and Financial Statements 31 December 2016. There have been no significant changes since 31 December 2016.

Further information is provided in Management's Discussion and Analysis and the notes to these Condensed Consolidated Interim Financial Statements.

Related Party Transactions

On 15 March 2017 the Company announced that its wholly owned subsidiary Turbo Power Systems Limited had exercised its option to extend the repayment date of the £314,000 loan provided by TAO UK from 1 April 2017 to 1 April 2018.

Critical accounting policies and estimates

These condensed consolidated interim financial statements have been prepared on the basis of International Financial Reporting Standards applicable to a going concern, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 31 March 2017 the Company had net operating cash outflows. Therefore, the Company may require additional funding which, if not raised, may result in the curtailment of activities. The Company has a cumulative deficit of £100.54 million as at 31 March 2017.

Further information on Going Concern is provided in Note 2.

The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, revenue and expenses and the related disclosures of contingent assets and liabilities. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately differ from those estimates.

Estimates and underlying assumptions 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. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future period affected.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the financial year are disclosed on page 42 in the Annual Report and Financial Statements for 31 December 2016.

Principal Risks and Uncertainties

Internal Control

The Board of Directors has overall responsibility for the accounting policies and ensuring that the Company maintains an adequate system of internal financial control to provide them with reasonable assurance that assets are safeguarded and of the reliability of financial information used for the business and for publication. More detail on the Company's internal control can be found on page 27 of the Annual Report and Financial Statements for the year ended 31 December 2016.

Turbo Power Systems Inc.

Condensed consolidated interim income statement

Unaudited

________________________________________________________________________________

The Notes form an integral part of these condensed consolidated interim financial statements.

Turbo Power Systems Inc.

Condensed consolidated interim statement of financial position

Unaudited

________________________________________________________________________________

Approved by the Board:

R J Piper, Chairman

27 April 2017

The Notes form an integral part of these condensed consolidated interim financial statements. 

Turbo Power Systems Inc.

Condensed consolidated interim statement of changes in equity

Unaudited

________________________________________________________________________________

The Notes form an integral part of these condensed consolidated interim financial statements.

Turbo Power Systems Inc.

Condensed consolidated interim statement of cash flows 

Unaudited

_____________________________________________________________________

The Notes form an integral part of these condensed consolidated interim financial statements.

Turbo Power Systems Inc.

Notes to the condensed consolidated interim financial statements

Unaudited

________________________________________________________________________________

1 Reporting entity

Turbo Power Systems Inc. ("The Company") is subsisting pursuant to the Business Corporations Act (Yukon Territory). The Company's registered office is Suite 200-204 Lambert Street, Whitehorse, Yukon Y1A 3T2, Canada.

The Company conducts operations through its wholly owned subsidiary company, Turbo Power Systems Limited ("TPSL"), whose main trading address is 1 Queens Park, Queensway North, Team Valley Trading Estate, Gateshead NE11 0QD, United Kingdom.

The Company's parent undertaking is TAO Sustainable Power Solutions (UK) Limited ("TAO UK"), a company registered in England and Wales, UK. The Company's ultimate parent company is TWC3N Limited, a company controlled principally by members of the Company's management team.

These condensed consolidated interim financial statements of the Company as at and for the quarter ended 31 March 2017 comprises of the Company and its subsidiaries. The Company's subsidiaries comprise:

2 Going concern

These consolidated financial statements have been prepared on the basis of International Financial Reporting Standards (IFRS) applicable to a "going concern", which assume that the Company will continue in operation for the foreseeable future and will be able to realise its assets and discharge its liabilities in the normal course of operations.

As at 31 March 2017 the Company had net operating cash outflows, with current liabilities of £4.12 million and current assets of £6.29 million, which includes £0.37 million of cash. The Company has a cumulative deficit of £100.54 million as at 31 March 2017 and was loss making for the period then ended.

The Company remains critically dependent upon i) customers paying to contractual terms and ii) the continued financial support of its intermediate parent undertaking TAO Sustainable Power Solutions (UK) Limited (TAO UK). The Company relies on TAO for continued financial support in the form of the loan made available to the Company, and in order to meet any shortfall in budgeted or forecasted working capital requirements and support the Company's growth plans. If not secured, this may result in the curtailment of the Company's activities. The timing of required financial support from TAO UK will depend on the Company's ability to generate cash from operations. In reasonably sensitised cash flow forecasts, and particularly dependent on the yet to be agreed settlement, including payment profile, of certain warranty provisions, support may well be required before the date of loan repayment in April 2018.

However, the Directors believe that they will succeed in delivering the Company's projected financial performance and that financial support from TAO UK, will remain in place to enable the Company to meet budgeted and forecasted working capital requirements and support the Company's growth plans. As is typical with any company placing reliance on other group entities for financial support, there can be no certainty that this support will continue although, at the date of approval of these financial statements, the Board have no reason to believe that TAO UK will not do so. Although there are no formal letters of support in place for the purpose of the directors' going concern assessment of the Company, the directors of the Company have taken comfort from the actions taken by TAO UK, in that loans have been provided when required (the latest being £0.31 million on 29 March 2016), rescheduling the repayment date of that loan to 1 April 2018, that all the debt existing at 12 November 2015 was waived and that the majority of the Board are TAO UK representatives, in forming their conclusion that they believe it is appropriate to prepare these financial statements on a going concern basis. Accordingly, they have continued to adopt the going concern basis of preparation.

If the Company is unable to either generate positive cash flows from operations or ensure the continued financial support from TAO UK and ultimately TWC3N its parent company, or secure additional debt or equity financing, these conditions and events indicate the existence of a material uncertainty which may cast significant doubt regarding the Company's ability to continue as a going concern and, therefore, to continue realising its assets and discharging its liabilities in the normal course of business.

These consolidated financial statements do not reflect any adjustments that would be necessary if the going concern assumption were not appropriate.

3 Basis of preparation

These condensed consolidated interim financial statements have been prepared in accordance with IAS34 Interim Financial Reporting.

The Company's condensed consolidated interim financial statements were prepared in accordance with the accounting policies set out in Note 3 to the consolidated financial statements for the year ended 31 December 2016, and using the same methods of computation.

The condensed consolidated interim financial statements were authorised for issuance by the Board of Directors on 27 April 2017.

The condensed consolidated interim financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial instruments.

The condensed consolidated interim financial statements are presented in £ sterling, rounded to the nearest £1,000, which is the Company's functional and presentation currency.

4 Critical accounting judgements and key sources of estimation uncertainty

These condensed consolidated interim financial statements have been prepared on the basis of International Financial Reporting Standards applicable to a 'going concern', which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 31 March 2017 the Company had net operating cash outflows. Therefore, the Company may require additional funding which, if not raised, may result in the curtailment of activities. The Company has a cumulative deficit of £100.54 million as at 31 March 2017.

Further information on Going Concern is provided in Note 2.

The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, revenue and expenses and the related disclosures of contingent assets and liabilities. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

Estimates and underlying assumptions 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. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future period affected.

5 Segmental analysis

The Company reports by its distinct segments of production and development, both segments operate in the United Kingdom. Except for the investments held by the Company which are located in Canada, all of the Company's assets are located in the United Kingdom.

Geographic Segmental Information

All property, plant and equipment were located within the United Kingdom during both periods ended 31 March 2017 and 31 March 2016

6 (Loss) per share

(Loss) per common share has been calculated using the weighted average number of shares in issue during the relevant financial periods.

As the Company experienced a loss in 2016 all potential common shares outstanding from dilutive securities are considered anti-dilutive and are excluded from the calculation of diluted loss per share.

Details of dilutive potential securities outstanding included in EPS calculations at 31 March 2017 are as follows:

7 Derivative financial instrument

The notional principal amounts of the outstanding forward foreign exchange contracts at 31 March 2017 were £nil million (2016: £0.67 million).

8 Provisions

Asset Retirement Obligations: 

During 2010 the Company recognised a requirement for a provision for the asset retirement obligations related to the two properties it then leased. One lease has subsequently terminated in 2013 and the other will terminate in 2022. Accordingly a provision, based on the present value of the future expected expenditure was recorded at £674,000 as at 31 December 2010. Following a 2015 review of the provision against expected costs the Company released £39,000 of this provision. In 2016 the Company agreed a settlement for the lease that was terminated in 2013 and consequently released the provision of £191,000 relating to this lease. The Company has recorded no further increase in accretion expense in 2017 (2016: £nil). After the expiry of the current lease in 2022 the provision is expected to be released.

Warranty: 

Production units sold by the Company are provided with a warranty against operational failure. The warranty period provided is dependent upon the sales agreement with the customer and the nature of the unit, but typically is between one and two years from the date of delivery. The warranty provision is maintained at a level calculated to reflect the current costs of repair and incidence of failure of existing and similar units.

During the final quarter of 2015 the Company received a claim from a customer for warranty, relating to a fault within motor units delivered to a customer during 2013 to 2015. The Company included a one off provision expense in 2015 of £0.50 million, of which £0.45 million remained at 31 December 2015. During 2016 the £0.45 million was fully utilised.

The Company reported a contingent liability as at 31 December 2015 in relation to further costs that might be arising out of the warranty claim. Having reviewed the current situation, especially in relation to ongoing customer relationships and insurance proceeds that might be receivable, the Company provided a further £0.65 million as at 31 December 2016 (2015: £0.50 million) to cover any further potential negotiations. Subject to those negotiations, this matter has been treated as a current liability as it is more than likely to be resolved within the next twelve months. Any payment related to this matter will be dependent on agreement with our customer on all matters that are critical for maintaining the long-term relationship between the two companies.

9 Loans and borrowings

On 29 March 2016, the Company announced that its wholly owned subsidiary Turbo Power Systems Limited had entered into an agreement to draw down on a new loan to be provided by TAO UK, to support working capital requirements. The additional amount available to draw down as follows:

29 March 2016 £314,000

This amount was repayable on 1 April 2017, which can be extended, at the Company's request, for a further year, and accrues interest at 6% per annum, payable annually. In March 2017, TAO UK extended the loan repayment date to 1 April 2018. All other conditions remain the same.

The Company has drawn down on all its borrowing facilities as at 31 March 2017 (2016: all loans drawn down in full). There is unpaid accrued interest of £0.01 million included in the loan amount at 31 March 2017 (2016: £nil)

10 Share capital and options

Share capital and other reserves

Share Capital

The Company is authorised to issue an unlimited number of common shares and an unlimited number of preferred shares, issuable in series, without nominal or par value. All common shares rank equally with regard to the Company's residual assets.

The holders of common shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company.

Holders of A Ordinary Shares of Turbo Power Systems Limited ("TPSL") (Convertible shares), carry no voting rights, cannot attend any shareholder meetings and, in the event of winding-up of TPSL are entitled to a maximum distribution of £500,000 in aggregate, to rank before the Common Shares. The A Ordinary shares are convertible into an equal number of Common Shares of the Company on request by the holder, having given 61 days' notice. Under certain take over or change in control events, the A Ordinary Shares are exchangeable under "super exchange" rights, converting for 3 Common shares of the Company for every A Ordinary Share held. As at 31 March 2017 all the A Ordinary Shares were owned by TWC3N, the Company's ultimate parent company.

As the A Ordinary Shares are non-participating interests in TPSL and are non-voting, no current year or cumulative net losses have been allocated to the A Ordinary Shares.

Capital contribution reserve

At 31 March 2017 the Capital contribution reserve, from the waiver of the TAO UK Loans and accrued interest and the repayment of the Regional Growth Fund grant, was £12.79 million (31 December 2016: £12.79 million).

Other reserves

At 31 March 2017, other reserves comprise of the stock compensation reserve of £1,823,000 (31 December 2016: £1,823,000).

The Company has issued share options under the 2002 Stock Option Plan and A Ordinary Shares that are convertible into common shares of the Company.

11 Related party transactions

Transactions with the parent and ultimate parent company

During the periods ended 31 March 2016 and 31 March 2017 the Company undertook no significant transactions with related parties.

Save for the loans and borrowings (see Note 9 above) and any accrued interest, there were no amounts outstanding at 31 December 2015 and 31 March 2016 between either the Company and TAO UK or the Company and TWC3N Limited.

Key Management personnel compensation

In addition to their salaries, the Company provides non-cash benefits to executive management and contributes to a defined contribution pension plan. Some executive officers participate in the share option programme.

Key management personnel compensation comprises the following: