3rd Quarter Results, Ended 30 September 2016

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

Announces Results for the Third Quarter

Ended 30 September 2016

TPS reports Q3 profit, but expects challenging Q4

Financial highlights: Q3 2016 vs. Q3 2015

· Revenue increased 10% to £3.58 million (Q3 2015: £3.25 million).

· Net profit down by 50% to £0.02 million (Q3 2015 Profit £0.04 million).

· Gross profit increased 13% to £1.56 million (Q3 2015: £1.38 million), with gross margin up 2% to 44% (Q3 2015: 42%).

· Research and development increased fourfold to £0.49 million (Q3 2015 £0.12 million). And total expenses for the period increased by 43% to £1.47 million (Q3 2015: £1.03 million

· Operating profit reduced to £0.07 million (Q3 2015 £0.35 million).

Financial highlights: YTD 2016 vs. YTD 2015

· Order intake increased 53% to £9.95 million (YTD 2015 £6.52 million).

· Net profit of £0.04 million (YTD 2015 Profit £0.14 million), mainly due to contract signing delays and re-scheduling of current contracts.

· Revenue decreased 7% to £10.66 million (YTD 2015: £11.41 million).

· Gross profit decreased to £4.51 million (YTD 2015: £4.79 million), with gross margin maintained at 42% (YTD 2015: 42%).

· Research and development increased by 18% to £1.32 million (YTD 2015: £1.11 million).

· Total expenses for the period increased 6% to £4.24 million (YTD 2015: £4.01 million).

· Cash outflow from operating activities halved to £0.57 million (YTD 2015: £1.22million).

Strategic Review:

Strategic Review of the Company's business, first announced February 2015, remains ongoing. The Board notes, as previously reported, that all expressions of interest received to date as part of the Strategic Review from potential offerors for 100% of the issued and to be issued share capital of the Company on a debt-free, cash-free basis have been indicatively priced at a substantial discount to the prevailing share price. Further announcements will be made in due course, as appropriate.

Funding:

As previously reported, the Company remains critically dependent on continuing financial support by TPS's parent company, Vale S.A. ("Vale"), Brazil's largest mining company, which owns 89.4% of the issued share capital of the Company through its wholly owned subsidiary Tao Sustainable Power Solutions (UK) Ltd ("TAO UK").

Carlos Neves, Chief Executive Officer, said:

"The profitable results achieved in the first nine months of 2016 are a creditable achievement, not least because of the impact of the uncertainties about the ultimate outcome of the Strategic Review.

The hard work of our employees, in all areas, has demonstrated that the trend to profitability achieved last year could be maintained while we keep reinforcing the pillars for our continuous growth. The increasing order intake in the first nine months on 2016 is also encouraging. Due to the Company's global presence, the Company has US Dollar revenue streams that have had a positive impact on the results.

However, recent changes in customer delivery schedules for Q4 2016 that are beyond our control are expected to adversely impact the Company's results for the current year as a whole. Nevertheless, our rising order book and ongoing enquiries give us confidence in the outlook for 2017."

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 Applied and Eaton Aerospace. Tao Sustainable Power Solutions (UK) Ltd ("TAO UK"), which is a wholly owned subsidiary of Vale S.A., Brazil's largest mining company, owns 89.4% of the issued share capital of the Company.

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 31 October 2016.

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 military markets.

Its track record in engineering innovation, which has been built and tested over many 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 on high-speed electrical machines and power electronics, allows the Company to exploit 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. Since 2013 TPS has concentrated on three important pillars to successfully implement the strategy of achieving sustained profitability:

· 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.

Current Operations

Revenue in the quarter was up by 10% compared with the third quarter of 2015, but down by 4% on the second quarter of 2016. The decrease in the Engineering design revenue from 2015 was due to the delay in signing new contracts in the first nine months of 2016.

During October 2016, a large customer announced the move to the next generation of their product line. This decision has impacted the delivery schedule of the current product, leading to reduced quantities required in Q4 2016.

This change, coupled with the impact of other smaller changes in customer demand, will lead to a reduction in production units shipped in quarter four. The Company is in discussions with the customers involved over the exact impact that this will have on the Company's profitability and cash flow in the short term.

Gross margin was maintained at 44% from Q2 2016, reflecting the benefit of the Company's focus on opportunities for efficiencies. Gross margin decreased by 9% from Q2 2015 to £1.56 million.

The overhead base has been reducing since its peak level in 2012, with overall expenses in the quarter of £1.47 million up 7% compared to £1.37 million for Q2 2016 driven by an increase in research and development.

Headcount at 30 September 2016 was 115, up four from 31 December 2015 and level with 30 June 2016.

Strategic Review

On 20 February 2015 shareholders were informed that the Board are conducting a Strategic Review of the Company's business and as part of this review are looking at a potential sale of the Company. The Board has appointed Lincoln International LLP to assist in this process. The Company is a Canadian Business Corporation, registered in Yukon, Canada and is not subject to the provisions of the UK City Code on Takeovers and Mergers.

Further announcements were made on 12 November 2015, 7 January 2016, 29 March 2016, 6 May 2016 and 28 July 2016 explaining that all expressions of interest received to date as part of the Strategic Review from potential offerors for 100% of the issued and to be issued share capital of the Company on a debt-free, cash-free basis have been indicatively priced at a substantial discount to the share price.

The Board continues to regularly discuss with its majority owner how best to proceed with the Strategic Review. Further announcements will be made in due course, as appropriate. In the meantime there can be no certainty that any potential transaction will proceed, or as to the terms of any such transaction. The Company may discontinue the strategic review process at any time.

Support from TAO UK

On 29 March 2016 the Company entered into a new loan of £314,000, which accrues interest at 6% per annum, with its parent company, TAO UK, repayable on 1 April 2017, which can be extended at the Company's request for a further year.

As at 30 September 2016 the loan amount was £0.31 million plus accrued unpaid interest of £ 0.01 million (30 September 2015: £10.48 million plus accrued unpaid interest of £1.89 million, the full outstanding loan was waived in full on 12 November 2015).

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.

We believe that this was reflected in the significant improvement in the gross margin and operating profit of the Company during 2015, which has continued in the first three quarters of 2016.

As noted in the first two quarters results, whilst the current order book extends over the next two years and beyond, the need to win further substantial orders, execution of those orders and completion of development programmes in a consistent and timely manner are all key to delivering management's plans for improved results during the final quarter of 2016 and in 2017.

The current position with regard to customers revising down their demand for production in Q4 2016 is expected to cause the Company to report a loss before tax for the fourth quarter. The move towards selling the newly designed products in 2017 allows the Company to reset its financial base.

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 30 September 2016 the Company had net operating outflows, with a net debt of £3.45 million, being £3.56 million of debt less £0.11 million of cash. The Company has a cumulative retained deficit of £99.39 million as at 30 September 2016 and was profit 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), who in turn is dependent on their parent undertaking VSE (which in turn is dependent on its parent company Vale S.A. (Vale)). 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.

However, the Directors believe that they will succeed in delivering the Company's projected financial performance and that financial support from TAO UK and, ultimately, VSE, and its parent company, Vale, Brazil's largest mining company, will remain in place to enable the Company to meet budgeted and forecasted working capital requirements and support the Company's growth plans. 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), that the existing debt was waived in November 2015 and that VSE has Board representation, 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 VSE and 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 going concern assumption and, accordingly, the use of accounting principles applicable to a going concern.

These consolidated financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, which 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 revenue decreased 4% in September 2016 over June 2016, due to customer driven delays to production shipments.

Research and development expenditure is increasing as the Company develops to new technologies to attract new customer contracts in line with the Board approved strategy to drive the Company's technology forward.

General and Administration expenses have increased by £0.02 million (2%) in September 2016 over the second quarter.

Copies of Quarterly and Annual Results

The Company's full Financial Results and Managements' Discussion and Analysis for 2015 together with the half year 2016 Financial Results and Managements' Discussion and Analysis are available on www.sedar.com. The Annual Report and Financial Statements for 2015 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.

Review of the quarter ended 30 September 2016

Revenue

Revenue in the quarter ended 30 September 2016 was up 10% at £3.58 million (Q3 2015: £3.25 million.)

Production revenue increased by 19% over the same period last year to £3.36 million (Q3 2015: £2.82 million), while development revenue decreased by 49% to £0.22 million (Q3 2015: £0.42 million) due to the timing of development projects and the revenue recognised on these projects.

Cost of Sales

The cost of sales was £2.02 million (Q3 2015: £1.87 million) an increase of 8%.

Gross Profit

Gross profit increased by 13% to £1.56 million (Q3 2015: £1.38 million), with gross margin increasing slightly to 44% (Q3 2015: 42%).

The Company remains committed to seek to increase the profitability of its current and future contracts.

Research and product development

Research and product development costs in the quarter increased fourfold to £0.49 million (Q3 2015: £0.12 million), in line with the Board's plans for the Company to become more product focused. This is net of Research and Development tax credits of £0.06 million (Q3 2015: £0.25 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 increased by 6% compared to 2015 to £0.88 million (Q3 2015: £0.83 million).

The Company continues to control its costs without prejudicing the business operational strengths, while also committing to recruit staff with the correct skill sets to complement and enhance the Company's technical capabilities. This resulted in an increase in headcount of 6% compared with 30 September 2015 (30 September 2016: 115, 30 September 2015: 108).

Operating profit

Operating profit before other operating income was £0.07 million (Q3 2015: profit £0.35 million).

Other operating income

There was no other operating income arising from the Regional Growth Fund in the quarter (Q3 2015: £nil).

The Company is in negotiations about the future of the project and the financial impacts thereto. The Board notes that there is £0.24 million liability in the balance sheet to cover any potential repayments.

Finance expense

Finance expense was £0.01 million (Q3 2015: £0.18 million arose from the interest on the historical loans from TAO UK, which were waived in full in November 2015).

Net profit

The Company recorded a net profit of £0.02 million (Q3 2015: profit £0.03 million).

Review of the nine months ended 30 September 2016

Revenue

Revenue in the nine months ended 30 September 2016 decreased 7% to £10.66 million (Q3 2015: £11.41 million.)

Production revenue for the nine months increased by 4% to £10.03 million (Q3 2015: £9.60 million) primarily due to increased demand for Daikin production units.

Development revenue decreased by 65% to £0.62 million (Q3 2015: £1.82 million) as development contracts in 2015 have been completed and the timings of current development contracts affects the revenue recognised.

Cost of Sales

The cost of sales reduced 7% to £6.15 million (Q3 2015: £6.62 million).

Gross Profit

Gross profit decreased by 6% to £4.51 million (Q3 2015: £4.79 million), with gross margin remaining at 42% (Q3 2015: 42%).

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

Research and product development

Research and product development costs in the period decreased by 19% to £1.32 million (Q3 2015: £1.11 million), This is net of Research & Development tax credits of £0.23 million (Q3 2015: £0.25 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, remained constant at £2.66 million (Q3 2015: £2.68 million).

The Company has continued to control its costs without prejudicing the business operational strengths. The headcount has increased by 4 to 115 in the nine months to 30 September 2016 (31 December 2015: 111).

Operating profit

Operating profit before other operating income was £0.27 million (Q3 2015: profit £0.79 million).

Other operating income

There was no other operating income arising from the Regional Growth Fund in the nine months to 30 September 2016 (Q3 2015: £nil). As noted above, the Company is in negotiations about the future of the project

Finance expense

Finance expense of £0.01 million (Q3 2015: £0.53 million) arose from the interest on the loans from TAO UK, which were waived in full in November 2015.

Net profit

The Company recorded a net profit for the nine months of £0.04 million (Q3 2015: profit £0.14 million).

Cash flows for the nine months ended 30 September 2016

Operating cash flows

The Company recorded an operating cash inflow before working capital movements of £0.20 million for the period (Q3 2015: inflow £0.87 million).

After adjusting for changes in working capital items the Company had an overall cash outflow from operations of £0.57 million (Q3 2015: Outflow of £1.22 million).

Investing activities

Cash outflows from capital investments in the nine months were £0.12 million (Q3 2015: £0.34 million).

Financing activities

Cash inflow received from financing activities amounted to £0.31 million, from the new TAO UK loan (Q3 2015: £nil).

Overall cash outflow for the period

Overall the cash outflow during the nine months was £0.38 million (Q3 2015: Outflow £1.56 million).

Balance sheet as at 30 September 2016

The Company ended the period with an unrestricted cash balance of £0.11 million compared with £0.50 million at 31 December 2015. 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 2015: £0.07 million), relating to utilities deposits. The Company was released from the performance bond of £0.06 million in September 2016.

Non-current assets have decreased from £0.87 million at 31 December 2015 to £0.82 million at 30 September 2016, after depreciation and amortisation charges of £0.17 million.

Loans and borrowings have increased since 31 December 2015 by the new TAO UK loan of £0.31 million and accrued interest of £0.01 million (31 December 2015: £nil). The loan and interest are shown as a current liability 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.

Net current assets at 30 September 2016, excluding restricted cash balances included under current assets, were £3.03 million (31 December 2015: £2.88 million).

As at 30 September 2016, 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 31 October 2016, 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 30 September 2016 were £0.11 million (31 December 2015: £0.50 million).

Restricted cash at 30 September 2016 was £3,000 (31 December 2015: £0.07 million).

The Company reported a profit in the nine months of £0.04 million and has a cumulative deficit of £99.39 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 2015.

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 30 September 2016 the Sterling equivalent of Canadian Dollar denominated net liabilities amounted to £3,100 (31 December 2015: net liabilities £1,950).

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 30 September 2016 the Sterling equivalent of the US Dollar denominated assets amounted to £1.59 million (31 December 2015: £1.96 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 2015. There have been no significant changes since 31 December 2015.

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

Related Party Transactions

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:

A summary of the loan movement is:

This amount is 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

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 30 September 2016 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 £99.39 million as at 30 September 2016.

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 2015.

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 2015.

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:

F Senhora, Chairman

31 October 2016

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 Vale S.A. ("Vale"), a company registered in Brazil.

These condensed consolidated interim financial statements of the Company as at and for the quarter ended 30 September 2016 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 30 September 2016 the Company had net operating outflows, with a net debt of £3.45 million, being £3.56 million of debt less £0.11 million of cash. The Company has a cumulative deficit of £99.39 million as at 30 September 2016 and was profit making for the period then ended.

The Company continues to be 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), who in turn is dependent on their parent undertaking VSE (which in turn is dependent on its parent company Vale S.A. (Vale)). 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.

However, the Directors believe that they will succeed in delivering the Company's projected financial performance and that financial support from TAO UK and, ultimately, its parent company, Vale, Brazil's largest mining company, will remain in place to enable the Company to meet budgeted and forecasted working capital requirements and support the Company's growth plans. 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), that the existing debt was waived in November 2015 and that VSE has Board representation, 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 VSE and 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 going concern assumption and, accordingly, the use of accounting principles applicable to a going concern.

These consolidated financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, which 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 2015, and using the same methods of computation.

The condensed consolidated interim financial statements were authorised for issuance by the Board of Directors on 31 October 2016.

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 30 September 2016 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 £99.39 million as at 30 September 2016.

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 30 September 2016 and 30 September 2015

6 Profit per share

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

Details of dilutive potential securities outstanding included in EPS calculations at 30 September 2016 are as follows:

7 Derivative financial instrument

The notional principal amounts of the outstanding forward foreign exchange contracts at 30 September 2016 were £1.04 million (30 September 2015: £0.65 million, 31 December 2015: £0.67 million).

8 Provisions

Onerous Contracts: The Company entered 2015 with one contract where the estimated material and labour costs were in excess of the expected revenues. In 2015 the final £77,000 was utilised as the contract was concluded. There are no onerous contracts in 2016.

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. During the third quarter of 2016 the dilapidations for the Heathrow site was settled and the provision of £191,000 relating to this was released (Q3 2015: £nil). The Company has recorded no further increase in accretion expense in 2016 (Q3 2015: £nil).

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.

As previously reported, during Q4 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 £0.44 million remained at 31 December 2015. The Company has utilised a further £0.43 million in the first nine months of 2016 leaving a provision of £0.01 million at 30 September 2016. See Note 9.

9 Contingent Liabilities

As reported in Note 8 Provisions above, during Q4 2015 the Company received a claim from a customer for warranty, relating to a fault within motor units delivered during 2013 to 2015.

The financial statements include a one off expense during 2015 of £0.50 million, of which £0.44 million remained as a liability as at 31 December 2015. In the nine months to 30 September 2016 a further £0.43 million was utilised, with £0.01 million remaining at 30 September 2016. The provision was made to cover the costs of the replacement parts to be supplied and where the cost can be accurately estimated. The remaining provision will be utilised in quarter 4 of 2016.

The matter is subject to an insurance claim by the Company for costs requested by the customer beyond the unit replacement costs. To date some costs have been covered by the insurance company. There is significant uncertainty about the amount of some of these further costs and therefore the amount of any further insurance claim and whether the insurance claim will cover all the costs. There is also significant uncertainty as to whether the Company is liable for some or all the further costs that the customer is requesting.

The Directors believe that based on independent advice (which continues to be taken) and their current assessment of the facts that the provision made is appropriate. However, the final amount will be dependent upon the outcome of the agreements between the parties.

10 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 is 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.

The Company has drawn down on all its borrowing facilities as at 30 September 2016 (2015: all loans drawn down in full). There is no unpaid accrued interest included in the loan amount at 30 September 2016.

11 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 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 30 September 2016 the Capital contribution reserve, from the waiver of the TAO UK Loans and accrued interest, was £12.37 million (31 December 2015: £12.37 million)

Other reserves

At 30 September 2016, other reserves comprise of the stock compensation reserve of £1,823,000 (31 December 2015: £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.

12 Related party transactions

Transactions with the parent and ultimate parent company

During the periods ended 30 September 2015 and 30 September 2016 the Company undertook no significant transactions with related parties. Save for the loans and borrowings (see Note 10 above) and any accrued interest, there were no amounts outstanding at 31 December 2015 and 30 September 2016 between the Company and TAO UK, and the Company and VSE. Any transactions are conducted within the normal course of business for supply of engineering design services and are transacted at exchange amount, which is the amount agreed for the transaction.

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:

The information communicated in this announcement is inside information for the purposes of Article 7 of Regulation 596/2014.