13th Nov 2009 07:00
13 NOVEMBER 2009
TURBO POWER SYSTEMS INC. (TPS) ANNOUNCES RESULTS FOR
THE THIRD QUARTER AND NINE MONTHS ENDED 30 SEPTEMBER 2009
Highlights
Production and development income for the quarter of £2.1 million (2008: £1.8 million)
EBITDA profit for the quarter of £0.11 million (2008: EBITDA loss £1.52 million)
EBITDA profit for the nine months ended 30 September 2009 of £0.13 million (2008: EBITDA loss £5.58 million)
Net losses for the quarter of £0.34 million (2008: £1.85 million loss)
Cash outflow in third quarter of £0.11 million (2008: Outflow of £0.08 million)
Order book at 30 September of £28 million
Announcement of agreement for long term development and production with McQuay International on 27 October, after the period end
Paul Summers, CEO, said:
"Progress continues to be made in improving the financial performance of the business, with both sales revenues and EBITDA profit increasing whilst we have maintained a reduced overhead expenditure.
The recent long term agreement with McQuay International for development of new products, in addition to the existing product already being delivered, underlines the potential that the business has for future growth.
Production activity is now increasing in both the rail and industrial sectors, and with a continuing emphasis on cost control, this should provide further improvement in profit and cash flow in the fourth quarter."
For further information, please contact:
Turbo Power Systems Tel: +44 (0)20 8564 4460
Alan Baird, Marketing Communications
Company Website: www.turbopowersystems.com
Kreab Gavin Anderson (PR) Tel: +44 (0)20 7074 1800
Ken Cronin
Michael Turner
KBC Peel Hunt Ltd Tel: +44 (0)20 7418 8900
Daniel Harris
Nicholas Marren
NOTES TO EDITORS
About Turbo Power Systems
Turbo Power Systems Inc (TSX:TPS.TO AIM:TPS.L) is a leading UK based designer and manufacturer of innovative power solutions. The Company's products are all based on its core technologies of power electronics and high speed motors and generators and are sold into a number of market sectors including aerospace, rail, and various industrial sectors. The Company's products provide improved efficiency and reduced energy consumption compared to existing technologies.
Turbo Power System's existing customers include blue chip companies such as Bombardier Transportation, McQuay International and Eaton Aerospace.
Forward looking statements
This MD&A 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 ongoing 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.
Definition of Non-GAAP financial measures
EBITDA is calculated as the net loss for the period less financial interest income and charges, taxation, foreign exchange gains and losses, depreciation, amortisation, and stock compensation charges. The Company believes that EBITDA is useful supplemental information as it provides an indication of the operational results generated by its business activities prior to taking into account how those activities are financed and taxed and also prior to taking into consideration asset amortisation. EBITDA is not a recognised measure under GAAP and, accordingly, should not be construed as an alternative to operating income or net loss determined in accordance with GAAP as an indicator of financial performance or of liquidity and cash flows. EBITDA does not take into account the impact of working capital changes, capital expenditures and other sources and uses of cash which are disclosed in the consolidated statement of cash flows. The Company's method of calculating EBITDA may differ from other issuers and may not be comparable to similar measures provided by other companies.
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.
OPERATIONAL REVIEW
This review has been prepared as at 13 November 2009.
Business of the Company
Turbo Power Systems:
Designs and manufactures high-speed permanent magnet based motors and generators for industrial, transport, power generation and military applications, where technical performance, energy efficiency and power density requirements cannot be met by conventional technology.
Designs and manufactures power electronics products which include variable frequency drives and inverters, which combine with our electrical machines to create an integrated solution, and a range of rugged power conversion products for rail and industrial applications.
Business Summary
Strategic Direction
TPS primary business focus is on the following markets:
Transport
Power Electronics for the Rail Industry
Energy
Grid Linked Inverters
Motors & Generators
Industrial Equipment
Motors & Generators
Power Supplies
Defence
Power Electronics
Motors & Generators
Whilst the business will continue to service existing programmes in other areas (e.g. aerospace and automotive) it will behave in a reactive manner to these markets and only engage in new programmes that meet the requirements of the business in terms of risk, cash flow and profitability.
The vision for the business can be summarised as follows:
"Be a world class provider of specialist Power Electronics and Electrical Machines maximising stakeholder benefit"
The business will achieve this through:
Market leading technologies and programme delivery
Long term partnerships with our customers
Strong year on year organic growth
A culture of continuous improvement of individual and business performance and capability
Accelerating business growth by acquisitions
In terms of the development of the business this means the Board intends to:
Structure the business to achieve the projected turnover without requiring outside investment or acquisitions
Develop technological advantage and customer partnerships in the following business sectors:
Transport
Energy
Industrial
Defence
Be a preferred supplier to a limited number of key customers
Balance business activities across development, production and after sales
Current Operating Climate
The majority of our customers and markets are still proving to be resilient to the current economic conditions. Additionally the spread of markets in which we operate provides some degree of resilience to downturns in a given sector.
Governments are continuing to invest in infrastructure projects and, indeed, see transport initiatives such as new rail programmes as a way of helping to sustain their industries whilst providing necessary public transportation and having a positive effect on the environment.
The defence spend in both the US and UK appears relatively stable and the future opportunities for TPS technology appear favourable. We will continue to investigate this market further and hope to see increased activity during the coming years.
As a result of the many 'green initiatives' the energy sector is still seeing significant growth and we will be looking to strengthen our position in this going forward.
The industrial sector is starting to recover with confirmation of production requirements for the remainder of this year and into next year for our laser power suppliers and increased customer interest in our motors for other industrial applications.
Many of our current contracts are U.S. Dollar based. We are therefore currently benefiting from the stronger US Dollar to weaker Sterling exchange rate. It has been 17% higher on average during 2009 at 1.543 USD:GBP as compared to a 2008 average of 1.855 USD:GBP. Exposure to exchange rate fluctuations is something that the business is very conscious of and management take measures in our contracting, purchasing and financial arrangements to seek to mitigate against exchange rate risk. At 30 September 2009 the Company did not have any exchange rate contracts.
Current Programmes
Transport
Rail
Deliveries continue on the major programmes (Bombardier Chicago Transit Authority and Bombardier Toronto). Deliveries have commenced on the Bombardier KL Programme which is anticipated to complete in early in 2010. Deliveries on our smaller rail programmes continue to be made to customer call off requirements.
Aerospace
The Jettison Fuel Pump motor drives for Eaton Aerospace continue to be delivered in line with the customer's call-off rate.
Energy
Renewable Energy
There has been continued European funded R&D work in this area relating to Grid Linked Inverters. This is being used as the basis for our business development activities for our future in the energy sector.
Industrial
Laser Power Supplies
Our customer has now confirmed an increased demand for their product and our power supply units are now being produced again. The customer has also indicated that they expect to see a return to previous levels of demand during 2010.
Industrial Motors and Drives
Materials to support deliveries to our Industrial Motors and Drives OEM (McQuay International) have been procured with the current 150 units order being scheduled for delivery during the six months to March 2010. These units are for use in McQuay International's recently launched Magnitude WME chiller.
The development of the first new motor and VFD unit, under the recently announced long term development agreement with McQuay International, is expected to begin in Quarter 4 of this year.
Defence
1MW High-Speed Generator
The contract awarded during 2008 by a US defence contractor is currently undergoing their systems integration and test phase and we are supporting this testing. The expectation is for our contract to complete inside Quarter 4 this year. We have initial indications that additional units could be required during 2010.
Financial Performance
Total revenues for the first nine months were £6.68 million, an increase of 14% over the same period last year (2008: £5.85 million), primarily due to significant development income during the nine months of £2.61 million (2008: £0.93 million). During the first quarter of the year our major rail production programmes commenced initial production, but over most of the nine months some of our industrial customers have reduced their demand as the weakened world economy impacted on their business volumes. This resulted in a decrease in production revenues to £4.07 million during the first nine months of 2009 (2008: £4.92 million).
Both Research and product development costs as well as general and administrative costs have remained at the reduced levels established in the latter part of 2008 following significant cost reduction initiatives. The Company also recorded an increase in UK Research & Development Tax credits relating to prior years during the second quarter, which offset current spending by a further £0.46 million. R&D tax credits in the third quarter were £0.25 million (2008: £0.05 million). R&D tax credits in total for the first nine months were £0.81 million (2008: £0.09 million).
The Company has generated a profit before interest, tax, depreciation, amortisation and stock compensation (EBITDA) for the quarter of £0.11 million (2008: Loss of £1.52 million), principally as a result of the improvement actions initiated during the latter part of 2008.
The Company recorded a net £0.11 million overall cash ouflow for the third quarter (2008: outflow £0.08 million) as stocks were increased in preparation for Quarter 4 production. As a result the Company finished the nine months with an unrestricted cash balance of £0.53 million and held further cash of £1.04 million associated with performance bonds.
During the nine months ended 30 September 2009 the Company has had no transactions with related parties and there are no further proposed transactions to disclose.
Going Concern
These consolidated financial statements have been prepared on the basis of Canadian generally accepted accounting principles ("Canadian GAAP") applicable to a 'going concern', which assumes 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 2009 the Company had incurred net cash outflows from operations therefore may require additional funding which, if not raised, may result in the curtailment of activities. The Company has incurred cumulative losses including a loss of £0.90 million in the first nine months of 2009 and has a cumulative deficit of £73.18 million as at 30 September 2009.
On 23 June 2009 the 2008 Loan Note Holders agreed to amend the terms of the 19 June 2008 loan agreement, as detailed in the Convertible notes disclosure within this MD&A, to temporarily remove the requirement to maintain a cash balance in excess of £750,000 until 31 December 2009, in order to allow more flexibility in working capital. As part of this agreement the Board has undertaken, within 2009, to address its future plans for repayment of all existing Loan Notes. Discussions with the loan note holders regarding arrangements for repayment of existing Loan Notes are progressing and the Board expects to make a further announcement on this subject in the near future.
At 30 September 2009 the Company had an unrestricted cash balance of £0.53 million and held restricted cash of £1.04 million associated with performance bonds. The Company's ability to continue as a going concern depends on its ability to generate positive cash flow from operations or secure additional debt or equity financing.
Management regularly reviews and considers the current and forecast activities of the Company in order to satisfy itself as to the viability of operations. These ongoing reviews include consideration of current order book and future business opportunities, current development and production activities, customer and supplier exposure, loan repayments and forecast cash requirements and balances. Based on these evaluations management consider that the Company is able to continue as a going concern.
There can be no assurances that the Company's activities will be successful or sufficient and as a result there is 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 that would be necessary if the "going concern" assumption were not appropriate. If the "going concern" assumption were not appropriate for these consolidated financial statements, then adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, would be necessary.
Summary of quarterly results
The following table sets forth selected quarterly consolidated financial information of the Company for the last eight quarters;
|
All amounts in £'000 |
Production revenue |
Research and product development |
General and administrative |
Net loss |
Loss per share |
Net cash flow from operating |
Net cash flow from capital investment |
|
December 2007 |
2,750 |
1,580 |
831 |
(1,578) |
(0.5) |
(1,379) |
(37) |
|
March 2008 |
1,962 |
1,591 |
1,059 |
(2,287) |
(0.7) |
(1,844) |
(96) |
|
June 2008 |
1,711 |
1,470 |
1,048 |
(2,276) |
(0.7) |
(2,479) |
(57) |
|
September 2008 |
1,246 |
1,363 |
1,025 |
(1,849) |
(0.6) |
(1,527) |
(10) |
|
December 2008 |
1,862 |
841 |
816 |
(3,151) |
(1.0) |
195 |
(8) |
|
March 2009 |
1,383 |
881 |
916 |
(368) |
(0.1) |
(458) |
(14) |
|
June 2009 |
1,235 |
199 |
812 |
(234) |
(0.1) |
(151) |
207 |
|
September 2009 |
1,453 |
579 |
654 |
(344) |
(0.1) |
(165) |
58 |
Production revenues decreased during the first nine months of 2009 reflecting the completion of the initial volumes on the McQuay Industrial Motor and Drive contract at the end of 2008, and the depressed industrial product market.
Research and development expenditure has remained at a decreased level compared with previous years reflecting the reduction in development activities on the Bombardier Chicago and Toronto rail programmes, together with the reduced development requirement as a result of the transition agreement on the Hamilton Sundstrand contract for the Boeing 787. Increased R&D tax credits recognized during the second quarter of 2009 further reduced the net Research and product development spend as analysed below.
|
All amounts in £'000 |
Research and Product Development |
||
|
Gross |
Tax Credits |
Net |
|
|
December 2007 |
1,607 |
(27) |
1,580 |
|
March 2008 |
1,591 |
- |
1,591 |
|
June 2008 |
1,514 |
(44) |
1,470 |
|
September 2008 |
1,413 |
(50) |
1,363 |
|
December 2008 |
1,248 |
(407) |
841 |
|
March 2009 |
881 |
- |
881 |
|
June 2009 |
761 |
(562) |
199 |
|
September 2009 |
829 |
(250) |
579 |
General and administrative costs reduced in the second quarter and remain lower than in previous years following initiatives to reduce such overheads.
Diluted earnings per share figures have not been provided as the loss in each period would be anti-dilutive.
Reconciliation of net loss to EBITDA result
|
Quarter ended 30 September |
Nine months ended 30 September |
|||||
|
2009 |
2008 |
2009 |
2008 |
|||
|
£'000 |
£'000 |
£'000 |
£'000 |
|||
|
Net loss |
(344) |
(1,849) |
(946) |
(6,412) |
||
|
Add back: |
||||||
|
Interest income |
(1) |
(18) |
(3) |
(83) |
||
|
Interest expense |
208 |
174 |
565 |
262 |
||
|
Finance charges |
5 |
70 |
29 |
112 |
||
|
Foreign exchange (gain)/loss |
47 |
(83) |
(154) |
(61) |
||
|
Amortisation |
162 |
161 |
499 |
496 |
||
|
Stock Compensation |
35 |
25 |
142 |
106 |
||
|
---------- |
---------- |
---------- |
---------- |
|||
|
EBITDA profit/(loss) |
112 |
(1,520) |
132 |
(5,580) |
||
|
---------- |
---------- |
---------- |
---------- |
|||
Copies of Quarterly and Annual Results
The Company's full Financial Results and Managements' Discussion and Analysis are available on www.sedar.com and full financial statements were mailed to shareholders during May 2009.
Copies of the quarterly and annual results are available from the Company's office at Unit 3 Summit Centre, Hatch Lane, West Drayton, Middlesex, UB7 0LJ, United Kingdom or available to view from the Company's website at www.turbopowersystems.com
Review of the nine months ended 30 September 2009
Production revenue
Production revenue in the nine months ended 30 September 2009 was £4.07 million compared with £4.92 million in 2008, a reduction of 17%.
|
2009 |
2008 |
||||
|
£'000 |
£'000 |
||||
|
Power electronics |
3,639 |
4,423 |
|||
|
Electrical machines |
432 |
496 |
|||
|
_____ |
_____ |
||||
|
4,071 |
4,919 |
||||
Revenues from the Power electronics division decreased by 18% compared with 2008 due to a smaller volume of rail programmes in full production during the nine months and a reduction in the call off rate on some of our industrial sector contracts.
Revenue in the Electrical machines division, which decreased by 13% compared with 2008, arose on completion of the down hole motor contract for Artificial Lift Company, and deliveries of motor units for McQuay International.
Development income
Development income in the nine months was £2.61 million, an increase of 181% compared with £0.93 million in 2008, and was principally related to the US Defence Contractor generator programme, the McQuay Industrial motor and drive contract and the sale of access rights to certain engineering design and methods in relation to that product.
|
|
2009
|
2008
|
|
|
|
|
|
£’000
|
£’000
|
|
|
|
|
|
|
|
|
|
|
|
Development income
|
2,612
|
932
|
|
|
|
|
|
|
|
|
|
|
Production costs
The cost of production revenues in the nine months amounted to £2.65 million (2008: £3.98 million).
|
|
2009
|
2008
|
|
|
|
|
|
£’000
|
£’000
|
|
|
|
|
|
|
|
|
|
|
|
Power electronics
|
2,442
|
3,568
|
|
|
|
|
Electrical machines
|
210
|
413
|
|
|
|
|
|
_____
|
_____
|
|
|
|
|
|
2,652
|
3,981
|
|
|
|
|
|
|
|
|
|
|
Production costs reduced in the Power electronics division as production volumes reduced, together with an increase in overall production gross margin.
Production costs at the Electrical machines division decreased primarily due to a decrease in attributable facilities costs.
Research and product development
Research and product development expenditure in the nine months was £1.66 million compared with £4.42 million in 2008, and comprised
|
|
2009
|
2008
|
|
|
|
|
|
£’000
|
£’000
|
|
|
|
|
|
|
|
|
|
|
|
Research and product development expenditure
|
2,471
|
4,518
|
|
|
|
|
Accrued R&D tax credits
|
(812)
|
(94)
|
|
|
|
|
|
_____
|
_____
|
|
|
|
|
Total expenditure
|
1,659
|
4,424
|
|
|
|
|
|
|
|
|
|
|
Research and product development expenditure decreased sharply following the agreement to transition the Hamilton Sundstrand aerospace development programme and the completion of development activities on the Bombardier Toronto rail programme. The redundancy programmes effected during the second half of 2008 have also resulted in reduced employment costs in the first nine months of 2009.
Accrued R&D tax credits recognised during 2009 are made up of £0.35 million of accrued credits in respect of expenditure incurred during 2009, and £0.46 million of additional tax credit claimed for the year ended 31 December 2008.
General and administrative
General and administrative costs in the nine months of £2.38 million (2008: £3.13 million), which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, have fallen following the redundancy programmes effected in the second half of 2008.
Amortisation
Amortisation was consistent with the previous period at £0.50 million for both 2009 and 2008.
Interest income
Interest income in the nine months was £0.003 million compared with £0.08 million in 2008, as a result of lower maintained cash balances and reduced interest rates.
Interest expense and finance charges
Interest expenses arise from the issue of convertible bonds in March 2005 and June and August 2008 and comprise
|
|
2009
|
2008
|
|
|
|
|
|
£’000
|
£’000
|
|
|
|
|
|
|
|
|
|
|
|
Interest payable
|
471
|
217
|
|
|
|
|
Accretion of debt
|
94
|
45
|
|
|
|
|
|
_____
|
_____
|
|
|
|
|
|
565
|
262
|
|
|
|
|
|
|
|
|
|
|
Cash flows for the nine months ended 30 September 2009
Cash inflow from operating activities
Operating cash inflow before movements in working capital was £0.14 million for the nine months (2008: Outflow of £5.57 million)
Movements in stocks, work in progress, and debtors and creditors produced a net cash outflow of £1.52 million during the nine months (2008: outflow £0.32 million), as stocks were increased for production in Quarter 4 and creditor balances were reduced.
Investing activities
Cash outflows on capital investments in the nine months were £0.06 million compared with £0.16 million in 2008. Receipts from reduced performance bonds held as restricted funds generated £0.31 million in the nine months (2008: £0.04 million).
Overall cash outflow for the nine months
Overall the cash outflow during the nine months was £0.52 million. (2008: outflow £2.97 million).
Review of the quarter ended 30 September 2009
Production revenue
Production revenue in the quarter ended 30 September 2009 was £1.45 million compared with £1.25 million in 2008, an increase of 16%.
|
|
2009
|
2008
|
|
|
|
|
|
£’000
|
£’000
|
|
|
|
|
|
|
|
|
|
|
|
Power electronics
|
1,260
|
860
|
|
|
|
|
Electrical machines
|
193
|
386
|
|
|
|
|
|
_____
|
_____
|
|
|
|
|
|
1,453
|
1,246
|
|
|
|
|
|
|
|
|
|
|
Revenues from the Power electronics division increased by 47% compared with 2008 as rail production on the Bombardier Toronto and Bombardier KL programmes commenced compared with low production during 2008 as existing programmes were completing.
Revenue in the Electrical machines division, which decreased by 47% compared with 2008, arose on motor units for McQuay International and the US Defence Contractor generator equipment.
Development income
Development income in the quarter was £0.66 million, an increase of 20% compared with £0.55 million in 2008, and related to the sale of IP rights to McQuay for their motor product.
|
|
2009
|
2008
|
|
|
£’000
|
£’000
|
|
|
|
|
|
Development income
|
660
|
545
|
Production costs
The cost of production revenues in the quarter amounted to £0.80 million (2008: £0.95 million).
|
|
2009
|
2008
|
|
|
|
|
|
£’000
|
£’000
|
|
|
|
|
|
|
|
|
|
|
|
Power electronics
|
702
|
831
|
|
|
|
|
Electrical machines
|
101
|
117
|
|
|
|
|
|
_____
|
_____
|
|
|
|
|
|
803
|
948
|
|
|
|
|
|
|
|
|
|
|
Production costs reduced in the Power electronics division as production volumes reduced, together with an increase in overall production gross margin.
Production costs at the Electrical machines division decreased marginally due principally to a decrease in attributable facilities costs.
Research and product development
Research and product development expenditure in the quarter was £0.58 million compared with £1.36 million in 2008, and comprised
|
|
2009
|
2008
|
|
|
|
|
|
£’000
|
£’000
|
|
|
|
|
|
|
|
|
|
|
|
Research and product development expenditure
|
829
|
1,413
|
|
|
|
|
Accrued R&D tax credits
|
(250)
|
(50)
|
|
|
|
|
|
_____
|
_____
|
|
|
|
|
Total expenditure
|
579
|
1,363
|
|
|
|
|
|
|
|
|
|
|
Accrued R&D tax credits recognised during the quarter are in respect of expenditure incurred during 2009.
General and administrative
General and administrative costs in the quarter of £0.65 million (2008: £1.03 million) consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, and have fallen following the redundancy programmes effected in the second half of 2008.
Amortisation
Amortisation was consistent with the previous period at £0.16 million in both 2009 and 2008.
Interest income
Interest income in the quarter was £0.001 million compared with £0.02 million in 2008, as a result of lower maintained cash balances and reduced interest rates.
Interest expense and finance charges
Interest expenses arise from the issue of convertible bonds in March 2005 and June and August 2008 and comprise
|
|
2009
|
2008
|
|
|
|
|
|
£’000
|
£’000
|
|
|
|
|
|
|
|
|
|
|
|
Interest payable
|
170
|
159
|
|
|
|
|
Accretion of debt
|
38
|
15
|
|
|
|
|
|
_____
|
_____
|
|
|
|
|
|
208
|
174
|
|
|
|
|
|
|
|
|
|
|
Cash flows for the quarter ended 30 September 2009
Cash inflow from operating activities
Operating cash inflow before movements in working capital was £0.32 million for the quarter (2008: Cash outflow of £1.46 million)
Movements in stocks, work in progress, and debtors and creditors produced a net cash outflow of £1.09 million during the quarter (2008: £0.07 million), as stocks were increased in preparation for Quarter 4 production, and creditors balances were significantly reduced.
Investing activities
Cash outflows on capital investments in the quarter were £0.03 million compared with £0.01 million in 2008. Receipts from reduced performance bonds held as restricted funds generated £0.08 million in the quarter (2008: outflow of £0.04 million).
Overall cash outflow for the quarter
The Company recorded a net cash outflow during the quarter of £0.11 million (2008: outflow £0.08 million).
Balance sheet as at 30 September 2009
The Company ended the period with an unrestricted cash balance of £0.53 million compared with £1.05 million at 31 December 2008. Substantially all of the Company's cash balances are denominated in Sterling.
In addition the Company had restricted cash amounts of £1.04 million principally relating to performance bonds entered into as part of contracts with the Toronto Transit Commission and Bombardier (December 2008: £1.35 million).
Long term assets excluding restricted cash have decreased from £1.64 million at 31 December 2008 to £1.20 million at 30 September 2009, after amortisation charges of £0.50 million.
Long term liabilities have decreased to £3.37 million at 30 September 2009 compared to £4.70 million at 31 December 2008, reflecting the impact of classifying the 2005 Loan Note repayment as current liabilities, and an increase in the value of the 2008 Loan Note debt element of the Loan Notes together with the interest accruing during the nine months.
Net working capital at 30 September 2009, excluding restricted cash balances and loan note creditors, was £1.34 million, compared with £0.94 million as at 31 December 2008.
As at 30 September 2009, the Company had 320,235,430 common shares issued and outstanding and 115,000,000 A ordinary shares issued and outstanding. As at that date there were 26,474,900 outstanding share options and 23,357,142 outstanding warrants.
Contractual Obligations
|
£’000
|
Payments due by period
|
||||||
|
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014 and thereafter
|
|
Trade and other payables
Convertible notes
|
2,516
6,226
|
2,516
58
|
-
1,818
|
-
4,350
|
-
-
|
-
-
|
-
-
|
|
Operating leases
|
3,173
|
-
|
478
|
481
|
478
|
244
|
1,492
|
|
|
______
|
______
|
______
|
______
|
______
|
______
|
______
|
|
|
11,915
|
2,574
|
2,296
|
4,831
|
478
|
244
|
1,492
|
|
______
|
______
|
______
|
______
|
______
|
______
|
______
|
|
Shareholders' deficiency
The movement in shareholders' deficiency comprised:
|
As at 13 November 2009 the Company had 320,235,430 common shares issued and outstanding. As at that date there were 26,444,900 outstanding share options and 23,357,142 outstanding warrants.
Liquidity
Cash and cash equivalents at 30 September 2009 were £0.53 million, compared with £1.05 million at 31 December 2008.
Restricted cash at 30 September 2009 was £1.04 million, compared with £1.35 million at 31 December 2008.
The Company incurred a loss in the nine months of £0.95 million and has a cumulative deficit of £73.18 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 2008.
Currency risk management
Principally all of the Company's expenditures are 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 2009 the Sterling equivalent of Canadian Dollar denominated net assets amounted to £13,000 (31 December 2008: net assets £52,000).
Interest rate risk management
The analysis of the Company's financial assets and borrowings analysed between floating and fixed interest rates is shown below;
|
Sep 2009 |
Dec 2008 |
|
|
£'000 |
£'000 |
|
|
Floating rate financial assets |
1,566 |
2,402 |
|
Fixed rate borrowings 2005 Bond |
(1,789) |
(1,789) |
|
Fixed rate borrowings 2008 Bond |
(3,000) |
(3,000) |
The fixed rate borrowings for the 2005 Bond are at 6.5% per annum, and for the 2008 Bond are at 15% per annum.
The Company invests surplus cash funds in short term money market deposits with financial institutions and cash funds which have at least a short term credit rating of F1. The maturity of the deposits is between one and three months.
Convertible notes
Convertible notes are considered to be compound financial instruments, and the liability component and the equity component must be presented separately, as determined at initial recognition. The Company has valued the equity component of these notes using the residual value of equity component method, whereby the liability component is valued first using the current market rate for comparable instruments, at the time of issuance. The difference between the proceeds of the notes issued and the fair value of the liability is assigned to the equity component.
On 11 March 2005 the Company completed an £8,000,000 (gross) financing agreement with institutional investors. The financing comprised unsecured convertible notes and warrants. The convertible notes have a term of five years plus one day and bear interest at a rate of 6.5% per annum. They are convertible, at the option of the holder, into an aggregate of 66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of £0.12 per share. The warrants have a term of five years and are convertible into an aggregate of 7,000,000 Common Shares in Turbo Power Systems Inc. at an exercise price of £0.15 per share. The convertible notes are unsecured.
On 6 January 2007 £2,000,000 of the 2005 convertible notes were converted at a conversion price of £0.08. Immediately following the conversion on 6 January 2007 the remaining face value of 2005 convertible notes was £1,789,000.
The Company incorporated the guidance provided by the CICA's Emerging Issue Committee Abstract 96 "Accounting for the Early Extinguishment of Convertible Securities Through (1) Early Redemption or Repurchase and (2) Induced Early Conversion" (EIC96) in accounting for the early redemption of the convertible notes. EIC96 provides guidance on the treatment of the fair value of the conversion feature on the extinguishment of the convertible notes. Conversion of the convertible notes resulted in a decrease in loss and comprehensive loss during 2007 of £47,000 and an additional increase in deficit of £2,414,000.
On 19 June 2008 the Company completed a financing agreement with institutional investors for potential financing of up to £3,000,000 (gross) comprised of secured convertible notes and warrants. The convertible notes were issuable in £750,000 increments over a three year period from the date of the agreement. The Company issued £1,500,000 of convertible notes under the agreement on 19 June 2008. The financing comprised secured convertible notes and warrants. The convertible notes bear interest at 15% per annum and are convertible into an aggregate of 75,000,000 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of £0.04 per share. The notes required quarterly interest and quarterly principal payments commencing March 2009.
On 15 August 2008 the Company amended the terms of the 19 June 2008 loan agreement and issued an additional £1,500,000 of convertible notes under the amended terms. The new terms result in all interest and capital repayments being deferred until maturity on 19 June 2011, and provide that if at any time, including once the convertible notes governed by the 19 June 2008 agreement have been fully repaid, there is a change in control of the Company, or its subsidiaries or substantially all of its assets, the holders of the convertible notes will be entitled to receive a risk premium, calculated according to the enterprise value ascribed to the Company, under the transaction after deducting any balance of the convertible notes and/or interest outstanding. This risk premium will be equal to an initial payment of £1,500,000 plus 75% of the next £6,000,000 of enterprise value and 50% of the remainder. The amendment was treated as a debt extinguishment and, as a result, the Company recorded a debt extinguishment charge of £115,000.
On 23 June 2009 the 2008 Loan Note Holders agreed to amend the terms of the 19 June 2008 loan agreement to temporarily remove the requirement to maintain a cash balance in excess of £750,000 until 31 December 2009, in order to allow more flexibility in working capital. As part of this agreement the Company has undertaken, within 2009, to address its plans for repayment of all existing Loan Notes. Discussions with the loan note holders regarding arrangements for repayment of existing Loan Notes are progressing and the Board expects to make a further announcement on this subject in the near future.
Financial instruments
There has been no change in the classifications adopted by the Company regarding its financial instruments and full analysis is provided in the Company's financial statements for the year ended 31 December 2008.
The Company's financial assets and liabilities consist primarily of the cash and cash equivalents, restricted cash, trade receivables, investments, trade payables, convertible notes and currency option contracts.
|
|
|
|
|
|
|
|
Held-for
|
Loans and
|
Other
|
Carrying
|
|
|
trading
|
receivables
|
liabilities
|
amount
|
|
30 September 2009 £’000
|
|
|
|
|
|
|
|
|
|
|
|
Asset (liability)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
531
|
-
|
-
|
531
|
|
Restricted cash
|
1,035
|
-
|
-
|
1,035
|
|
Trade receivables
|
-
|
1,588
|
-
|
1,588
|
|
Trade payables
|
-
|
-
|
(2,516)
|
(2,516)
|
|
Convertible notes
|
-
|
-
|
(4,990)
|
(4,990)
|
|
|
-------
|
-------
|
---------
|
---------
|
|
Total
|
1,566
|
1,588
|
(7,506)
|
(4,352)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for
|
Loans and
|
Other
|
Carrying
|
|
|
trading
|
receivables
|
liabilities
|
amount
|
|
31 December 2008 £’000
|
|
|
|
|
|
|
|
|
|
|
|
Asset (liability)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
1,054
|
-
|
-
|
1,054
|
|
Restricted cash
|
1,348
|
-
|
-
|
1,348
|
|
Trade receivables
|
-
|
1,255
|
-
|
1,255
|
|
Trade payables
|
-
|
-
|
(3,406)
|
(3,406)
|
|
Convertible notes
|
-
|
-
|
(4,512)
|
(4,512)
|
|
|
-------
|
-------
|
--------
|
--------
|
|
Total
|
2,402
|
1,255
|
(7,918)
|
(4,261)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept
2009
£’000
|
Dec
2008
£’000
|
||
|
|
Carrying
|
|
Carrying
|
|
|
|
amount
|
Fair value
|
amount
|
Fair value
|
|
Asset (liability)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
531
|
531
|
1,054
|
1,054
|
|
Restricted cash
|
1,035
|
1,035
|
1,348
|
1,348
|
|
Trade receivables
|
1,588
|
1,588
|
1,255
|
1,255
|
|
Trade payables
|
(2,516)
|
(2,516)
|
(3,406)
|
(3,406)
|
|
Convertible notes
|
(4,990)
|
(4,990)
|
(4,512)
|
(4,512)
|
|
|
-------
|
-------
|
--------
|
--------
|
|
Total
|
(4,352)
|
(4,385)
|
(4,261)
|
(4,261)
|
|
|
|
|
|
|
Related Party Transactions
There were no related party transactions during the nine months ended 30 September 2009.
Off balance sheet arrangements
As of 30 September 2009, the Company had no off-balance sheet arrangements.
Critical accounting estimates
The consolidated financial statements are prepared in accordance with Canadian Generally Accepted Accounting, which require estimates and assumptions to be made that affect the amounts reported in the consolidated financial statements.
The Critical Accounting Estimates included within these statements are assessed on an unchanged basis from the prior year and as disclosed in the Company's Financial Statements for the year ended 31 December 2008.
The consolidated financial statements and this discussion and analysis have been recorded and reported in GBP Sterling.
The preparation of these financial statements requires estimates and assumptions to be made that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Research & Development tax credits receivable
The Company accrues for tax credits receivable relating to certain research and development expenditure incurred by the Company. These amounts are based on determinations by management of expenditures that qualify for the related tax credits. The nature and amount of these accruals are subject to measurement uncertainty and the effect on the consolidated financial statements of resulting adjustments in future periods could be significant. Adjustments, if any, will be reflected in the period that the relevant taxation authorities assess the tax claims. As at 30 September 2009, tax debtors recoverable included £350,000 (31 December 2008: £ 144,000) of accrued tax credits.
Warranty provision
In establishing the accrued warranty liability, estimates are made of the likelihood that products sold will experience warranty claims. The estimates are based on the number of units subject to warranty, the likely failure rate and associated costs of replacement and the nature of the contract. Should these estimates prove to be incorrect, the actual costs incurred may be different from those provided for in the warranty provisions. As at 30 September 2009, provisions for warranty claims were £141,000 (31 December 2008: £ 184,000).
Review of the carrying value of long-term assets
The Company regularly reviews the carrying value of all of its long-term assets to determine whether or not any write down is required for impairment in the carrying value of these assets. The carrying values are based on the higher of the asset's net realisable value and the value from utilisation of the asset in the Company's ongoing operations. The determination of the net realisable value requires estimates to be made of future revenues. If future revenues are significantly lower than these estimates, then the Company may be required to make additional impairment provisions in future periods.
Stock-based compensation
Assumptions that affect the Company's application of the fair value method to expense employee options and warrants issued in connection with the debt offering include the determination of volatility factors and the life of the options issued.
Allowance for doubtful accounts
The Company reviews the status of its customer accounts at least monthly, and recognises a provision against any balance which is considered to be doubtful. At 30 September 2009 a provision of £39,000 was required (31 December 2008: £39,000).
Implementation of new accounting policies
Section 3064 Goodwill and Intangible Assets
In February 2008 the CICA issued Handbook Section 3064 Goodwill and Intangible Assets, effective for interim and annual financial statements relating to fiscal years beginning on or after October 1 2008. Section 3064, which replaces Section 3062 Goodwill and Other Intangible Assets, and Section 3450 Research and Development Costs, establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. This new standard is effective for the Company's fiscal year commencing January 1 2009. The adoption of this standard has not changed the Company's accounts.
Section 1000 Financial Statement Concepts
On 1 January 2009 the Company adopted the new recommendations of CICA Handbook Section 1000, Financial Statement Concepts, to clarify the criteria for recognition of an asset and the timing of expense recognition. The new requirements are effective for annual financial statements relating to fiscal years beginning on or after 1 October 2008. The adoption of this standard has not impacted the Company's consolidated financial statements.
Credit Risk and the Fair Value of Financial Assets and Liabilities
On 20 January 2009 the CICA's Emerging Issue Committee ("EIC") issued abstract EIC-173, Credit and the Fair Value of Financial Assets and Liabilities, which requires entities to take both counterparty credit risk and their own credit risk into account when measuring the fair value of financial assets and liabilities, including derivatives. EIC-173 was to be applied retrospectively without restatement of prior periods in all financial assets and liabilities measured at fair value in interim and annual financial statements ending on or after the date of issuance of this abstract. Upon adoption there was no impact on the financial statements.
New accounting pronouncements - not yet adopted
New or updated CICA Handbook sections that have been issued but are not yet effective, and have a potential implication for the Company, are as follows:
Section 1582 Business combinations
This section replaces Section 1581 Business Combinations and applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period of the Company beginning on or after January 1, 2011. Section 1582 is not expected to have a significant impact on the financial statements.
Section 1601 Consolidated Financial Statements
In January 2009, the CICA issued Handbook Section 1601, Consolidated Financial Statements, which replaces Handbook Section 1600, Consolidated Financial Statements carries forward the existing Canadian guidance on aspects of the preparation of consolidated financial statements subsequent to acquisition other than non-controlling interests. The section establishes the standards for preparing consolidated financial statements and is effective for fiscal years beginning on or after January 1, 2011. The Company may elect to early adopt this section and if so, will be required to early adopt Section 1582, Business Combinations and Section 1602, Non-controlling Interests.
Section 1602 Non-controlling Interests
In January 2009, the CICA issued new Handbook Section 1602, Non-controlling Interests, which establishes standards for the accounting of non-controlling interests of a subsidiary in the preparation of consolidated financial statements subsequent to a business combination. This standard is effective for fiscal years beginning on or after January 1, 2011. The Company may elect to early adopt this section and if so, will be required to early adopt Section 1582, Business Combinations and Section 1601, Consolidated Financial Statements.
Harmonizing of Canadian and International Financial Reporting Standards (IFRS)
In February 2008, the Accounting Standards Board of the CICA confirmed its strategic plan which will abandon Canadian GAAP and affect a complete convergence to the International Financial Reporting Standards. These new standards will be effective for the Company's interim financial statements commencing January 1, 2011. The Company is closely monitoring changes arising from this convergence and has identified that the majority of the Company's accounting policies are substantially compliant, and is currently establishing the changes required to the remaining accounting policies and determining the required adjustments to its financial statements with its external financial advisors. Key financial staff have received training on the process of conversion to IFRS and have established links with appropriate external financial advisors to support this process.
Risks and uncertainties
The development and commercialisation plans for the Company's products presented in this Management's Discussion & Analysis are forward-looking statements and as such are subject to a number of risks and uncertainties including those detailed below.
Our business entails risks and uncertainties that affect our outlook and eventual results of our business and commercialisation plans. The primary risks relate to meeting our product development and commercialisation milestones, which require that our products exhibit the functionality, cost, durability, and performance required in a commercial product.
There is a risk that the markets for certain of our products may never develop, or that market acceptance might take longer to develop than anticipated. Our business planning process recognises and, to the extent possible, attempts to manage these risks by pursuing diverse markets for each of our products. Within these markets our commercialisation plan is focused on products that we believe have a competitive advantage.
We develop both subsystems and complete systems across our high speed motors and generators and power electronics product ranges and these development programmes are subject to risk. These risks include problems or delays due to technical difficulties and inability to meet design performance goals, including power output, life and reliability. We mitigate these risks to the extent possible through detailed project management, formal design reviews, reviews by external experts, contingency plans which anticipate likely problems, safety reviews, training and testing programs related to the operation and maintenance of the products.
We seek to maintain our technology lead through our strong intellectual property position, which will act as a barrier against competitors, and by continuing to invest in technology development. However, there can be no assurance that our present or future issued patents will protect our technology lead. We also rely upon know-how and trade secrets to maintain our technology lead. However, there is no assurance that this information can be completely protected.
Another market driver for products is the development of government policy related to the environment. Unfavourable decisions related to environmental policies (such as noise and exhaust emission levels) could result in delays in the introduction of our distributed power generation products. We mitigate, to the extent possible, the effects of changes in government regulations by developing products for diverse geographic locations.
We cannot predict with certainty our future revenues or results from our operations. If we experience significant cost overruns on any of our programs and we cannot obtain additional funds to cover such overruns or additional cash requirements, certain research and development activities may be delayed, resulting in changes or delays to our commercialisation plans. We may be required to raise additional capital through the issuance of equity or debt. We seek to mitigate this risk by securing funding commitments from a variety of sources and through adjustments to our development plans, by maintaining a substantial cash reserve, by being financially conservative in our expenditures and by maintaining good communications with investors and investment bankers to assist us should we need to access the public or private capital markets.
We are also subject to normal operating risks such as credit risks and foreign currency risks. Foreign currency sales and purchases are made in Sterling, Euros, Canadian and US Dollars. Over time, currency balances are matched, to the extent possible, to planned currency purchases.
Controls and Procedures
There were no changes in the Company's internal controls over financial reporting (ICFR) or disclosure controls and procedures (DCP) during the three and nine months ended 30 September 2009 that have materially or are reasonably likely to materially affect internal controls over financial reporting.
|
TURBO POWER SYSTEMS INC. |
|||||
|
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS |
|||||
|
UNAUDITED |
|||||
|
Notes |
Quarter ended 30 Sept |
Nine months ended 30 Sept |
||||||||
|
2009 |
2008 |
2009 |
2008 |
|||||||
|
£'000 |
£'000 |
£'000 |
£'000 |
|||||||
|
unaudited |
unaudited |
unaudited |
unaudited |
|||||||
|
Revenue |
3,4 |
1,453 |
1,246 |
4,071 |
4,919 |
|||||
|
Development income |
3,4 |
660 -------- |
545 -------- |
2,612 -------- |
932 -------- |
|||||
|
2,113 |
1,791 |
6,683 |
5,851 |
|||||||
|
Expenses |
||||||||||
|
Production costs |
803 |
948 |
2,652 |
3,981 |
||||||
|
Research and product development |
5 |
579 |
1,363 |
1,659 |
4,424 |
|||||
|
General and administrative |
654 |
1,025 |
2,382 |
3,132 |
||||||
|
Amortisation |
162 -------- |
161 -------- |
499 -------- |
496 -------- |
||||||
|
2,198 |
3,497 |
7,192 |
12,033 |
|||||||
|
Loss before interest, finance charges and foreign exchange |
(85) |
(1,706) |
(509) |
(6,182) |
||||||
|
Interest income |
1 |
18 |
3 |
83 |
||||||
|
Interest expense |
6 |
(208) |
(174) |
(565) |
(262) |
|||||
|
Finance charges |
(5) |
(70) |
(29) |
(112) |
||||||
|
Foreign exchange gain/(loss) |
(47) -------- |
83 -------- |
154 -------- |
61 -------- |
||||||
|
(259) |
(143) |
(437) |
(230) |
|||||||
|
-------- |
-------- |
-------- |
-------- |
|||||||
|
Net loss and Comprehensive loss |
(344) ===== |
(1,849) ===== |
(946) ===== |
(6,412) ===== |
||||||
|
Loss per share - basic |
10 |
(0.1) p |
(0.6) p |
(0.3) p |
(2.0) p |
|||||
|
Loss per share - diluted |
10 |
(0.1) p |
(0.6) p |
(0.3) p |
(2.0) p |
|||||
|
Weighted average number of shares outstanding |
319,873,611 |
318,571,062 |
319,570,902 |
318,571,062 |
||||||
The accompanying notes are an integral part of these financial statements
|
TURBO POWER SYSTEMS INC. |
|||||||
|
CONSOLIDATED BALANCE SHEETS |
|||||||
|
UNAUDITED |
|||||||
|
Notes |
As at 30 September |
As at 31 December |
|||||
|
2009 |
2008 |
||||||
|
£'000 |
£'000 |
||||||
|
unuadited |
|||||||
|
Current assets |
|||||||
|
Cash and cash equivalents |
8 |
531 |
1,054 |
||||
|
Restricted cash |
8 |
715 |
552 |
||||
|
Trade and other receivables |
8 |
1,588 |
1,255 |
||||
|
Stock and work in progress |
2,009 |
1,685 |
|||||
|
Prepayments |
474 |
372 |
|||||
|
R&D tax credits receivable |
350 -------- |
144 -------- |
|||||
|
5,667 -------- |
5,062 -------- |
||||||
|
Long-term assets |
|||||||
|
Restricted cash |
8 |
320 |
796 |
||||
|
Intangible assets |
11 |
0 |
13 |
||||
|
Property, plant and equipment |
11 |
1,202 -------- |
1,624 -------- |
||||
|
7,189 ===== |
7,495 ===== |
||||||
|
Liabilities and shareholders' deficiency |
|||||||
|
Creditors: amounts falling due within one year |
|||||||
|
Trade and other payables |
2,516 |
3,406 |
|||||
|
Deferred income |
1,095 |
166 |
|||||
|
Convertible notes |
14 |
1,760 -------- |
- -------- |
||||
|
5,371 -------- |
3,572 -------- |
||||||
|
Creditors: amounts falling due after more than one year |
|||||||
|
Warranty provision |
141 |
184 |
|||||
|
Convertible notes |
14 |
3,230 -------- |
4,512 -------- |
||||
|
3,371 -------- |
4,696 -------- |
||||||
|
Non controlling interest |
|||||||
|
Class A Ordinary share capital |
13 |
13,310 |
13,310 |
||||
|
Capital and reserves |
|||||||
|
Common share capital |
12 |
55,828 |
55,804 |
||||
|
Contributed surplus |
2,491 |
2,349 |
|||||
|
Deficit |
(73,182) ---------- |
(72,236) ---------- |
|||||
|
Shareholders' deficiency |
(14,863) --------- |
(14,083) --------- |
|||||
|
7,189 ====== |
7,495 ====== |
||||||
The accompanying notes are an integral part of these financial statements
|
TURBO POWER SYSTEMS INC. |
|||||
|
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND DEFICIT |
|||||
|
UNAUDITED |
|||||
|
Common Share capital |
Contributed surplus |
Deficit |
Total Deficiency |
|||||||
|
£'000 |
£'000 |
£'000 |
£'000 |
|||||||
|
unaudited |
unaudited |
unaudited |
unaudited |
|||||||
|
Balance at 1 January 2008 |
55,804 |
1,964 |
(62,673) |
(4,905) |
||||||
|
Net loss and comprehensive loss |
(9,563) |
(9,563) |
||||||||
|
Stock compensation |
123 |
123 |
||||||||
|
Equity portion on issue of convertible notes |
262 |
262 |
||||||||
|
--------- |
--------- |
--------- |
--------- |
|||||||
|
Balance at 31 December 2008 |
55,804 |
2,349 |
(72,236) |
(14,083) |
||||||
|
Net loss and comprehensive loss |
(946) |
(946) |
||||||||
|
Shares issued for loan interest |
24 |
24 |
||||||||
|
Stock compensation |
142 |
142 |
||||||||
|
--------- |
--------- |
--------- |
--------- |
|||||||
|
Balance at 30 September 2009 |
55,828 ===== |
2,491 ===== |
(73,182) ====== |
(14,863) ===== |
||||||
The accompanying notes are an integral part of these financial statements
|
TURBO POWER SYSTEMS INC. |
||||||
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
||||||
|
UNAUDITED |
||||||
|
Quarter ended 30 Sept |
Nine months ended 30 Sept |
||||||||||
|
2009 |
2008 |
2009 |
2008 |
||||||||
|
£'000 |
£'000 |
£'000 |
£'000 |
||||||||
|
unaudited |
unaudited |
unaudited |
unaudited |
||||||||
|
Net loss from operations |
(344) |
(1,849) |
(946) |
(6,412) |
|||||||
|
Amortisation |
162 |
161 |
499 |
496 |
|||||||
|
Accretion of debt |
38 |
15 |
94 |
45 |
|||||||
|
Adjustment to fair value of investment |
- |
6 |
- |
13 |
|||||||
|
Stock compensation charges |
35 |
25 |
142 |
106 |
|||||||
|
Unrealised foreign exchange (gain)/loss |
181 |
83 |
(20) |
61 |
|||||||
|
Movement in net interest accrual |
243 |
98 |
371 |
126 |
|||||||
|
--------- |
--------- |
--------- |
--------- |
||||||||
|
315 |
(1,461) |
140 |
(5,565) |
||||||||
|
Decrease/(increase) in debtors |
842 |
(39) |
(35) |
757 |
|||||||
|
Decrease/(increase) in stock |
(279) |
(173) |
(324) |
(432) |
|||||||
|
Increase/(decrease) in creditors |
(1,043) |
146 |
(555) |
(610) |
|||||||
|
--------- |
--------- |
--------- |
--------- |
||||||||
|
Net cash outflow from operating activities |
(165) --------- |
(1,527) --------- |
(774) --------- |
(5,850) --------- |
|||||||
|
Investing activities |
|||||||||||
|
Purchase of property, plant and equipment |
(26) |
(10) |
(62) |
(163) |
|||||||
|
Movement in restricted funds |
84 |
(39) |
313 |
43 |
|||||||
|
--------- |
--------- |
--------- |
--------- |
||||||||
|
Cash inflow/(outflow) from investing activities |
58 --------- |
(49) --------- |
251 --------- |
(120) --------- |
|||||||
|
Cash inflow from financing activities |
- --------- |
1,500 --------- |
- --------- |
3,000 --------- |
|||||||
|
Increase/(decrease) in cash in the period |
(107) ====== |
(76) ====== |
(523) ====== |
(2,970) ====== |
|||||||
|
Cash and cash equivalents: |
|||||||||||
|
Beginning of period |
638 ---------- |
1,341 ---------- |
1,054 ---------- |
4,235 ---------- |
|||||||
|
End of period |
531 ====== |
1,265 ====== |
531 ====== |
1,265 ====== |
|||||||
|
Supplemental cash flow information |
|||||||||||
|
Cash paid for interest |
- |
56 |
26 |
112 |
|||||||
|
Cash received as interest |
1 |
18 |
3 |
83 |
|||||||
The accompanying notes are an integral part of these financial statements
1. Basis of preparation and going concern
The consolidated financial statements have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements have, in management's opinion, been properly prepared using careful judgement with reasonable limits of materiality and within the framework of the significant accounting policies summarised in the Company's financial statements for the year ended 31 December 2008, and the subsequent changes in accounting policies as detailed in Note 2 below.
The Company's interim financial statements do not conform in all respects to the requirements of Canadian GAAP for annual financial statements. The Company's interim statements should be read in conjunction with the consolidated financial statements of the Company for the year ended 31 December 2008.
The Company's functional and reporting currency is Pound Sterling.
Going concern
These consolidated financial statements have been prepared on the basis of Canadian generally accepted accounting principles ("Canadian GAAP") applicable to a 'going concern', which assumes 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 2009 the Company had net cash outflows from operations therefore may require additional funding which, if not raised, may result in the curtailment of activities. The Company has incurred cumulative losses including a loss of £0.90 million in the first nine months of 2009 and has a cumulative deficit of £73.18 million as at 30 September 2009. At 30 September 2009 the Company had an unrestricted cash balance of £0.53 million and held restricted cash of £1.04 million associated with performance bonds. The Company's ability to continue as a going concern depends on its ability to generate positive cash flow from operations or secure additional debt or equity financing.
Management regularly reviews and considers the current and forecast activities of the Company in order to satisfy itself as to the viability of operations. These ongoing reviews include consideration of current order book and future business opportunities, current development and production activities, customer and supplier exposure and forecast cash requirements and balances. Based on these evaluations management consider that the Company is able to continue as a going concern.
There can be no assurances that the Company's activities will be successful or sufficient and as a result there is 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 that would be necessary if the "going concern" assumption were not appropriate. If the "going concern" assumption were not appropriate for these consolidated financial statements, then adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, would be necessary.
2. Changes in accounting policies and recent accounting pronouncements
Changes in accounting policies
Section 3064 Goodwill and Intangible Assets
In February 2008 the CICA issued Handbook Section 3064 Goodwill and Intangible Assets, effective for interim and annual financial statements relating to fiscal years beginning on or after 1 October 2008. Section 3064, which replaces Section 3062 Goodwill and Other Intangible Assets, and Section 3450 Research and Development Costs, establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. This new standard is effective for the Company's fiscal year commencing 1 January 2009. The adoption of this standard has not changed the Company's accounts.
Section 1000 Financial Statement Concepts
On January 1, 2009, the Company adopted the new recommendations of CICA Handbook Section 1000, Financial Statement Concepts, to clarify the criteria for recognition of an asset and the timing of expense recognition. The new requirements are effective for annual financial statements relating to fiscal years beginning on or after October 1, 2008. The adoption of this standard did not impact the Company's consolidated financial statements.
Credit Risk and the Fair Value of Financial Assets and Liabilities
On 20 January 2009 the CICA's Emerging Issue Committee ("EIC") issued abstract EIC-173, Credit and the Fair Value of Financial Assets and Liabilities, which requires entities to take both counterparty credit risk and their own credit risk into account when measuring the fair value of financial assets and liabilities, including derivatives. EIC-173 was to be applied retrospectively without restatement of prior periods in all financial assets and liabilities measured at fair value in interim and annual financial statements ending on or after the date of issuance of this abstract. Upon adoption there was no impact on the financial statements.
Recent accounting pronouncements
New or updated CICA Handbook sections that have been issued but are not yet effective, and have a potential implication for the Company, are as follows:
Section 1582 Business combinations
This section replaces Section 1581 Business Combinations and applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period of the Company beginning on or after 1 January 2011. Section 1582 is not expected to have a significant impact on the financial statements.
Section 1601 Consolidated Financial Statements
In January 2009, the CICA issued Handbook Section 1601, Consolidated Financial Statements, which replaces Handbook Section 1600, Consolidated Financial Statements carries forward the existing Canadian guidance on aspects of the preparation of consolidated financial statements subsequent to acquisition other than non-controlling interests. The section establishes the standards for preparing consolidated financial statements and is effective for fiscal years beginning on or after January 1, 2011. The Company may elect to early adopt this section and if so, will be required to early adopt Section 1582, Business Combinations and Section 1602, Non-controlling Interests. Section 1601 is not expected to have a significant impact on the financial statements.
Section 1602 Non-controlling Interests
In January 2009, the CICA issued new Handbook Section 1602, Non-controlling Interests, which establishes standards for the accounting of non-controlling interests of a subsidiary in the preparation of consolidated financial statements subsequent to a business combination. This standard is effective for fiscal years beginning on or after January 1, 2011. The Company may elect to early adopt this section and if so, will be required to early adopt Section 1582, Business Combinations and Section 1601, Consolidated Financial Statements. Section 1602 is not expected to have a significant impact on the financial statements.
Harmonizing of Canadian and International Financial Reporting Standards (IFRS)
In February 2008, the Accounting Standards Board of the CICA confirmed its strategic plan which will abandon Canadian GAAP and affect a complete convergence to the International Financial Reporting Standards. These new standards will be effective for the Company's interim financial statements commencing January 1, 2011. The Company is closely monitoring changes arising from this convergence and has identified that the majority of the Company's accounting policies are substantially compliant, and is currently establishing the changes required to the remaining accounting policies and determining the required adjustments to its financial statements with its external financial advisors.
3. Segmental analysis
The Company's two reportable segments are the power electronics segment, which is involved in the development and manufacture of electrical power supply and control systems and the electrical machines segment, which is involved in the development and commercialisation of high speed electrical machines.
Corporate charges relating to the financing of the Company and other related management activities are allocated between the two reportable segments.
The power electronics and electrical machines systems segments both operate in the United Kingdom. Significantly all of the Company's assets are located in the United Kingdom.
|
Power electronics |
Electrical machines |
Total |
||||
|
2009 |
2008 |
2009 |
2008 |
2009 |
2008 |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Quarter ended 30 September |
||||||
|
Revenue |
1,260 |
860 |
193 |
386 |
1,453 |
1,246 |
|
Development income |
32 |
218 |
628 |
327 |
660 |
545 |
|
Amortisation |
(57) |
(47) |
(105) |
(114) |
(162) |
(161) |
|
Interest income |
- |
10 |
1 |
81 |
1 |
18 |
|
Interest expense |
(103) |
(87) |
(105) |
(87) |
(208) |
(174) |
|
Profit/(Loss) for the period |
(819) |
(1,306) |
475 |
(543) |
(344) |
(1,849) |
|
-------- |
-------- |
-------- |
-------- |
--------- |
-------- |
|
|
Capital expenditure |
24 |
10 |
2 |
- |
26 |
10 |
|
Power electronics |
Electrical machines |
Total |
||||
|
2009 |
2008 |
2009 |
2008 |
2009 |
2008 |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Nine months ended 30 September |
||||||
|
Revenue |
3,639 |
4,423 |
432 |
496 |
4,071 |
4,919 |
|
Development income |
389 |
304 |
2,223 |
628 |
2,612 |
932 |
|
Amortisation |
(171) |
(142) |
(328) |
(354) |
(499) |
(496) |
|
Interest income |
1 |
42 |
2 |
41 |
3 |
83 |
|
Interest expense |
(282) |
(131) |
(283) |
(131) |
(565) |
(262) |
|
Profit/(Loss) for the period |
(1,982) |
(4,073) |
1,036 |
(2,339) |
(946) |
(6,412) |
|
-------- |
-------- |
-------- |
-------- |
--------- |
-------- |
|
|
Capital expenditure |
57 |
138 |
5 |
25 |
62 |
163 |
|
Power electronics |
Electrical machines |
Total |
||||
|
Sept 2009 |
Dec 2008 |
Sept 2009 |
Dec 2008 |
Sept 2009 |
Dec 2008 |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Total assets |
3,439 |
4,624 |
3,750 |
2,871 |
7,189 |
7,495 |
|
Property, plant and equipment |
409 |
532 |
793 |
1,092 |
1,202 |
1,624 |
|
Total liabilities |
4,186 |
4,596 |
4,556 |
3,672 |
8,742 |
8,268 |
|
Total revenue |
Quarter ended 30 September |
Nine months ended 30 September |
||||
|
2009 |
2008 |
2009 |
2008 |
|||
|
£'000 |
£'000 |
£'000 |
£'000 |
|||
|
UK |
391 |
395 |
1,286 |
877 |
||
|
USA |
1,640 |
1,202 |
4,732 |
3,614 |
||
|
Canada |
3 |
84 |
179 |
1,189 |
||
|
Rest of World |
79 |
110 |
486 |
171 |
||
|
_____ |
______ |
_____ |
______ |
|||
|
2,113 |
1,791 |
6,683 |
5,851 |
|||
4. Significant customers
In the nine months ended 30 September 2009, 51% of the Company's sales were derived from two customers (2008: 50% from three customers). In the quarter ended 30 September 2009, 70% of the Company's sales were derived from two customers (2008: 42% from three customers). All the significant customers in 2009 were also customers during the 2008 period.
5. Research and product development
|
Quarter ended 30 September |
Nine months ended 30 September |
|||||
|
2009 |
2008 |
2009 |
2008 |
|||
|
£'000 |
£'000 |
£'000 |
£'000 |
|||
|
Sales of prototypes and development contributions |
660 |
545 |
2,612 |
932 |
||
|
|
|
|
|
|||
|
Research and product development cost |
829 |
1,413 |
2,471 |
4,518 |
||
|
Research and development tax credits |
(250) |
(50) |
(812) |
(94) |
||
|
|
|
|
|
|||
|
579 |
1,363 |
1,659 |
4,424 |
|||
|
|
|
|
|
|||
In accordance with the Company's accounting policy, tax credits for research and development expenditures are netted against the related expenditure. At 30 September 2009 the Company had accrued tax credits amounting to £0.35 million (2008: £0.26 million).These amounts are based on determinations by management of expenditures that qualify for the related tax credits. The nature and amount of these accruals are subject to measurement uncertainty and the effect on the consolidated financial statements of resulting adjustments in future periods could be significant. Adjustments, if any, will be reflected in the period that these are assessed by the relevant taxation authorities.
6. Interest expense
|
Quarter ended 30 September |
Nine months ended 30 September |
|||||
|
2009 |
2008 |
2009 |
2008 |
|||
|
£'000 |
£'000 |
£'000 |
£'000 |
|||
|
Interest |
170 |
159 |
471 |
217 |
||
|
Accretion of debt |
38 |
15 |
94 |
45 |
||
|
|
|
|
|
|||
|
208 |
174 |
565 |
262 |
|||
|
|
|
|
|
|||
7. Financial instruments
The Company's financial assets and liabilities consist primarily of the cash and cash equivalents, restricted cash, trade receivables, investments, trade payables, convertible notes and currency option contracts.
Classification and carrying amount
|
|
|
|
|
|
|
|
Held-for
|
Loans and
|
Other
|
Carrying
|
|
|
trading
|
receivables
|
liabilities
|
amount
|
|
30 September 2009 £’000
|
|
|
|
|
|
|
|
|
|
|
|
Asset (liability)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
531
|
-
|
-
|
531
|
|
Restricted cash
|
1,035
|
-
|
-
|
1,035
|
|
Trade receivables
|
-
|
1,588
|
-
|
1,588
|
|
Trade payables
|
-
|
-
|
(2,516)
|
(2,516)
|
|
Convertible notes
|
-
|
-
|
(4,990)
|
(4,990)
|
|
|
-------
|
-------
|
--------
|
--------
|
|
Total
|
1,566
|
1,588
|
(7,506)
|
(4,352)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for
|
Loans and
|
Other
|
Carrying
|
|
|
trading
|
receivables
|
liabilities
|
amount
|
|
31 December 2008 £’000
|
|
|
|
|
|
|
|
|
|
|
|
Asset (liability)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
1,054
|
-
|
-
|
1,054
|
|
Restricted cash
|
1,348
|
-
|
-
|
1,348
|
|
Trade receivables
|
-
|
1,255
|
-
|
1,255
|
|
Trade payables
|
-
|
-
|
(3,406)
|
(3,406)
|
|
Convertible notes
|
-
|
-
|
(4,512)
|
(4,512)
|
|
|
-------
|
-------
|
--------
|
--------
|
|
Total
|
2,402
|
1,255
|
(7,918)
|
(4,261)
|
|
|
|
|
|
|
Carrying value and fair market value
|
|
30 September 2009
£’000
|
31 December 2008
£’000
|
||
|
|
Carrying
|
|
Carrying
|
|
|
|
amount
|
Fair value
|
amount
|
Fair value
|
|
Asset (liability)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
531
|
531
|
1,054
|
1,054
|
|
Restricted cash
|
1,035
|
1,035
|
1,348
|
1,348
|
|
Trade receivables
|
1,588
|
1,588
|
1,255
|
1,255
|
|
Trade payables
|
(2,516)
|
(2,516)
|
(3,406)
|
(3,406)
|
|
Convertible notes
|
(4,990)
|
(4,990)
|
(4,512)
|
(4,512)
|
|
|
-------
|
-------
|
--------
|
--------
|
|
Total
|
(4,352)
|
(4,385)
|
(4,261)
|
(4,261)
|
|
|
|
|
|
|
8. Financial Risk Management
The Company has exposure to counterparty credit risk, liquidity risk and market risk associated with its financial assets and liabilities. The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. The Board of Directors has established the Audit Committee which is responsible for developing and monitoring the Company's compliance with risk management policies and procedures. The Audit Committee regularly reports to the Board of Directors on its activities.
The Company's risk management program seeks to minimize potential adverse effects on its financial performance and ultimately shareholder value. The Company manages its risks and risk exposures through a combination of insurance and sound business practices.
The Company's financial instruments and the nature of the risks which they may be subject to are set out in the following table.
|
|
|
|
Foreign
|
|
|
|
|
|
Interest
|
|
|
|
Credit
|
Liquidity
|
Exchange
|
Rate
|
|
|
Risk
|
Risk
|
Risk
|
Risk
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
Yes
|
|
Yes
|
Yes
|
|
Restricted cash
|
Yes
|
|
Yes
|
Yes
|
|
Trade receivables
|
Yes
|
|
Yes
|
|
|
Trade payables
|
|
Yes
|
Yes
|
|
|
Convertible notes
|
|
Yes
|
|
|
(a) Credit Risk
Credit risk arises from cash held with banks and credit exposure to customers, including outstanding accounts receivables. The maximum exposure to credit risk is equal to the carrying value (net of allowances) of the financial assets. The objective of managing counterparty credit risk is to prevent losses on financial assets. The Company assesses the credit quality of counterparties, taking into account their financial position, past experience and other factors.
Cash and cash equivalents
Cash and cash equivalents consist of bank balances and short-term investments with terms of less than three months or less. Credit risk associated with cash and cash equivalents is minimized substantially by ensuring that these financial assets are investment in debt instruments of highly rated financial institutions. As at 30 September 2009 the Company had cash and cash equivalents consisting of cash on hand and deposits with banks of £0.53 million (31 December 2008 - £1.05 million). As at 30 September 2009, the Company does not expect any counterparties to fail to meet their obligations.
Restricted cash
In 2004 the Company committed cash bonds in support of contracts placed by the Toronto Transit Commission for the CLRV and H6 programmes. The associated contracts required the bonds to remain in place until two years after the equipment was delivered. According to the current contract schedule that would result in the remaining cash related to the H6 programme of £0.28 million being under the performance bond restriction until March 2010. During the quarter ended 30 September 2009 £0.10 million of this bond was released back to the Company
During March 2007 the Company committed cash bonds totalling USD$0.80 million (£0.50 million) in support of contracts placed by Bombardier Transportation for the CTA and TTC programmes. The associated contracts require the bonds to remain in place until after development and the prototype equipment is delivered. During the nine months ended 30 September 2009 $0.10 million (£0.06 million) of this bond was released back to the Company.
The Company has also provided a property lease guarantee bond which is held in escrow and totals £0.32 million.
At 30 September 2009 cash subject to restrictions totaled £1.04 million (31 December 2008: £1.35 million).
Trade receivables
Trade receivables consist primarily of trade accounts receivable from billings of product sales and development income. The Company's credit risk arises from the possibility that a counterparty which owes the Company money is unable or unwilling to meet its obligations in accordance with the terms and conditions in the contracts with the Company, which would result in a financial loss for the Company. This risk is mitigated through established credit management techniques, including monitoring counterparty' creditworthiness, setting exposure limits and monitoring exposure against these customer credit limits. However, due to the limited number of potential customers in each market this is not always possible. In these cases the Company reduces its exposure by obtaining up-front payments from the end customer prior to delivery of goods.
The carrying amount of accounts receivable are reduced through the use of an allowance for doubtful accounts and the amount of the loss is recognized in the statement of operations in other expenses. When a receivable balance is considered uncollectable, it is written off against the allowance for accounts receivable. Subsequent recoveries of amounts previously written off reduce other expenses in the statement of operations.
Significant debtors at 30 September 2009 comprised £0.40 million due from two customers, representing 46% of the outstanding balance (31 December 2008: £0.51 million due from three customers, representing 49% of the outstanding balance). Consequently, the Company has concentrations of credit risk with respect to its accounts receivable.
|
30 September 2009 |
31 December 2008 |
|||||
|
Balance |
% |
Balance |
% |
|||
|
£'000 |
£'000 |
|||||
|
Customer 1 |
203 |
23 |
225 |
22 |
||
|
Customer 2 |
200 |
23 |
155 |
15 |
||
|
Customer 3 Other Total |
- 467 ------ 870 |
- 54 ---- 100 |
125 517 ------ 1,022 |
12 51 ---- 100 |
||
The following table outlines the details of the aging of the Company's receivables and related allowance for doubtful accounts as at 30 September 2009 and 31 December 2008:
|
|
Sept
|
Dec
|
|
|
2009
|
2008
|
|
|
£’000
|
£’000
|
|
|
|
|
|
Trade
|
870
|
1,022
|
|
Other miscellaneous receivables
|
718
|
233
|
|
|
-------
|
-------
|
|
|
1,588
|
1,255
|
|
|
-------
|
-------
|
|
|
|
|
|
Not past due
|
688
|
730
|
|
Past due for over one day but not more than 30 days
|
96
|
187
|
|
Past due for over 30 days but not more than 60 days
|
85
|
98
|
|
Past due for over 60 days
|
40
|
46
|
|
Less: allowance for doubtful accounts
|
(39)
|
(39)
|
|
|
-------
|
-------
|
|
Total accounts receivable, net
|
870
|
1,022
|
|
|
-------
|
-------
|
|
|
|
|
|
|
|
|
|
|
|
£’000
|
|
Allowance for doubtful accounts
|
|
|
|
Balance, 1 January 2009
|
|
(39)
|
|
Increase in provision for doubtful accounts
|
|
-
|
|
|
|
-------
|
|
Balance, 30 September 2009
|
|
(39)
|
|
|
|
-------
|
(b) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meets its financial obligations as they fall due. The Company manages exposure to liquidity risk by close monitoring of supplier and other liabilities and by focusing on debtor collection and conversion of working capital held in stock balances. When considered necessary the Company has obtained equity and long term debt investment to provide short term liquid working capital in order to meet its obligations.
The following tables details the Company's contractual maturities for its financial liabilities, including interest payments and operating lease commitments, as at 30 September 2009:
|
Payments due by period |
|||||||
|
Total |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 and thereafter |
|
|
Trade and other payables Convertible notes |
2,516 6,226 |
2,516 58 |
- 1,818 |
- 4,350 |
- - |
- - |
- - |
|
Operating leases |
3,173 |
- |
478 |
481 |
478 |
244 |
1,492 |
|
______ |
______ |
______ |
______ |
______ |
______ |
______ |
|
|
11,915 |
2,574 |
2,296 |
4,831 |
478 |
244 |
1,492 |
|
|
______ |
______ |
______ |
______ |
______ |
______ |
______ |
|
(c) Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the fair value of recognized assets and liabilities or future cash flows or the Company's results of operation.
Foreign exchange
Certain of the Company's business transactions occur in currencies other than Pound Sterling.
The Company's currency exposure, being those exposures arising from transactions, the net currency gains and losses from which will be recognised in the profit and loss account, is shown below.
|
US dollar denominated |
Canadian dollar denominated |
|||
|
£'000 |
£'000 |
|||
|
Cash |
602 |
3 |
||
|
Accounts receivable |
504 |
39 |
||
|
Accounts payable |
25 |
29 |
Included in net loss for the quarter ended 30 September 2009 is approximately £0.05 million of foreign exchange loss resulting from the translation of the financial statements of Turbo Power Systems Inc. (31 December 2008: gain of £0.14 million). The rates used to translate the assets and liabilities as at 30 September 2009 was USD $1.592:£1 and CDN $1.729:£1 (31 December 2008 USD $1.448:£1 and CDN $1.770:£1).
At 30 September 2009 the increase or decrease in net earnings for each 1% change in exchange rates against Pound Sterling on net financial assets was approximately £11,000 (31 December 2008: £10,000)
Interest rate
Floating rate financial assets of £1.57 million at 30 September 2009 (31 December 2008: £2.41 million) comprised Sterling interest bearing bank accounts, money market deposits and cash funds including restricted cash.
At 30 September 2009 the increase or decrease in net earnings for each 1% change in interest rates on net financial assets was approximately £16,000 per annum (31 December 2008: £24,000).
As at 30 September 2009 the Company does not have any variable rate financial liabilities and is not exposed to interest rate risk on its fixed rate convertible notes. The Company may be exposed to interest rate risk in the future as the fixed rate convertible notes mature.
9. Capital management
The Company defines capital that it manages as the aggregate of convertible notes and equity comprising share capital, contributed surplus and deficit. Its objectives when managing capital are to ensure that the Company will continue as a going concern, so that it can provide services to its customers and returns to its shareholders.
The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company, upon approval from its Board of Directors, will make changes to its capital structure as deemed appropriate under the specific circumstances.
The Company is not subject to any externally imposed capital requirements and the Company's overall strategy with respect to management of capital remains unchanged from the year ended 31 December 2008.
10. Loss per share
Loss per common share has been calculated using the weighted average number of shares in issue during the relevant financial periods. The treasury stock method was used in determining the weighted average number of shares outstanding for each period.
|
Quarter ended 30 September |
Nine months ended 30 September |
|||||
|
2009 |
2008 |
2009 |
2008 |
|||
|
Numerator for basic EPS calculation: Net loss |
£344,000 |
£1,849,000 |
£946,000 |
£6,412,000 |
||
|
Denominator |
||||||
|
For basic net loss - weighted average shares outstanding |
319,873,611 |
318,571,062 |
319,570,902 |
318,571,062 |
||
As the Company experienced a loss in both years 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 anti-dilutive potential securities outstanding not included in EPS calculations at 30 September are as follows:
|
30 September |
||||||
|
2009 |
2008 |
|||||
|
Common shares potentially issuable |
||||||
|
-persuant to warrants |
23,357,142 |
23,357,142 |
||||
|
-under stock options |
26,474,900 |
24,046,050 |
||||
|
-persuant to loan note conversions |
89,908,333 |
89,908,333 |
||||
|
-persuant to A Ordinary stock conversion |
115,000,000 |
115,000,000 |
||||
|
__________ |
__________ |
|||||
|
254,740,375 |
252,311,525 |
|||||
11. Long term assets
|
Cost |
Amortisation |
Net book value |
|||
|
£'000 |
£'000 |
£'000 |
|||
|
At 30 September 2009: |
|||||
|
Intangible assets |
767 |
767 |
0 |
||
|
Property, plant and equipment |
9,015 |
7,813 |
1,202 |
||
|
-------- |
-------- |
-------- |
|||
|
Total long term assets |
9,782 ===== |
8,580 ===== |
1,202 ===== |
||
|
At 31 December 2008: |
|||||
|
Intangible assets |
767 |
754 |
13 |
||
|
Property, plant and equipment |
8,953 |
7,329 |
1,624 |
||
|
-------- |
-------- |
-------- |
|||
|
Total long term assets |
9,720 ===== |
8,083 ===== |
1,637 ===== |
||
12. Share capital - issued shares
|
|
Common
|
|
|
|
Number
|
£’000
|
|
|
|
|
|
At 1 January 2008 and 31 December 2008
|
318,571,062
|
55,804
|
|
Issued during the three months ended 30 September 2009
|
1,664,368
|
24
|
|
|
---------------
|
--------
|
|
|
|
|
|
At 30 September 2009
|
320,235,430
|
55,828
|
|
|
---------------
|
--------
|
On 14 July 2009 the Company issued 1,664,368 Common Shares of no par value to holders of its 2005 Series Convertible Loan Notes, in consideration for payment of the interest due on those loan notes for the period 1 January 2009 to 30 June 2009, at a price of 1.4p per share.
No options or warrants were exercised during the nine months ended 30 September 2009 or year ended 31 December 2008.
13. A Ordinary equity
|
|
A Ordinary
|
|
|
|
Number
|
£’000
|
|
|
|
|
|
At 1 January 2008 and 31 December 2008
|
115,000,000
|
13,310
|
|
|
---------------
|
--------
|
|
At 30 September 2009
|
115,000,000
|
13,310
|
|
|
---------------
|
--------
|
Holders of A Ordinary Shares of Turbo Power Systems Limited carry no voting rights, cannot attend any shareholder meetings and, in the event of winding-up of the Limited Company 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 Turbo Power Systems Inc. on request by the holder, having given 61 days notice. Under certain take over or change in control events, the Ordinary Shares are exchangeable under "super exchange" rights, converting for 3 common shares of Turbo Power Systems Inc. for every Ordinary Share held.
During the preparation of the consolidated financial statements for the year ended 31 December 2008, the Company determined that the Ordinary Shares, previously presented as a separate component of equity in the Company's balance sheet, should be recognized as non-controlling interests. The reclassification resulted in a decrease in Class A Ordinary share capital presented as part of capital and reserves, an increase in the total shareholders' (deficit) and an increase in non-controlling interests of £13,310,000 as at December 31, 2007. The Company has accounted for the change in accounting policy on a retroactive basis. As the A Ordinary Shares are non-participating interests in Turbo Power Systems Limited and are non-voting, no current year or cumulative net losses has been allocated to the A Ordinary Shares.
14. Convertible notes and warrants
Convertible notes are considered to be compound financial instruments, and the liability component and the equity component must be presented separately, as determined at initial recognition. The Company has valued the equity component of these notes using the residual value of equity component method, whereby the liability component is valued first using the current market rate for comparable instruments, at the time of issuance. The difference between the proceeds of the bonds issued and the fair value of the liability is assigned to the equity component.
On 11 July 2003, the Company completed a £5,000,000 financing agreement with institutional investors. The financing comprised convertible notes and warrants. The convertible notes had a term of five years, bearing an annual interest rate of 3.5% and were convertible, at the option of the holders, into an aggregate of 25 million common shares of the Company at a conversion price of £0.20 per share. The convertible notes could be converted from 11 July 2004. The warrants had a term of three years and were convertible into an aggregate of 3.5 million common shares of the Company at an exercise price of £0.15 per share. The convertible notes were unsecured.
On 11 March 2005 the Company completed an £8,000,000 (gross) financing agreement with institutional investors. The financing comprised unsecured convertible notes and warrants. The convertible notes have a term of five years plus one day and bear interest at a rate of 6.5% per annum. They are convertible, at the option of the holder, into an aggregate of 66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of £0.12 per share. The warrants have a term of five years and are convertible into an aggregate of 7,000,000 Common Shares in Turbo Power Systems Inc. at an exercise price of £0.15 per share. The convertible notes are unsecured.
On 6 January 2007 £2,500,000 of the 2003 convertible notes and £2,000,000 of the 2005 convertible notes were converted at a conversion price of £0.08. Immediately following the conversion on 6 January 2007 the remaining face value of 2003 and 2005 convertible notes were £nil and £1,789,000 respectively.
The Company incorporated the guidance provided by the CICA's Emerging Issue Committee Abstract 96 "Accounting for the Early Extinguishment of Convertible Securities Through (1) Early Redemption or Repurchase and (2) Induced Early Conversion" (EIC96) in accounting for the early redemption of the convertible notes. EIC96 provides guidance on the treatment of the fair value of the conversion feature on the extinguishment of the convertible notes. Conversion of the convertible notes resulted in a decrease in loss and comprehensive loss during 2007 of £47,000 and an additional increase in deficit of £2,414,000.
On 19 June 2008 the Company completed a financing agreement with institutional investors for potential financing of up to £3,000,000 (gross) comprised of secured convertible notes and warrants. The convertible notes were issuable in £750,000 increments over a three year period from the date of the agreement. The Company issued £1,500,000 of convertible notes under the agreement on 19 June 2008. The financing comprised secured convertible notes and warrants. The convertible notes bear interest at 15% per annum and are convertible into an aggregate of 75,000,000 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of £0.04 per share. The notes required quarterly interest and quarterly principal payments commencing March 2009.
On 15 August 2008 the Company amended the terms of the 19 June 2008 loan agreement and issued an additional £1,500,000 of convertible notes under the amended terms. The new terms result in all interest and principal repayments being deferred until maturity on 19 June 2011, and provide that if at any time, including once the convertible notes governed by the 19 June 2008 agreement have been fully repaid, there is a change in control of the Company, or its subsidiaries or substantially all of its assets, the holders of the convertible notes will be entitled to receive a risk premium, calculated according to the enterprise value ascribed to the Company, under the transaction after deducting any balance of the convertible notes and/or interest outstanding. This risk premium will be equal to an initial payment of £1,500,000 plus 75% of the next £6,000,000 of enterprise value and 50% of the remainder. The amendment was treated as a debt extinguishment and, as a result, the Company recorded a debt extinguishment charge of £115,000.
On 23 June 2009 the 2008 Loan Note Holders agreed to amend the terms of the 19 June 2008 loan agreement to temporarily remove the requirement to maintain a cash balance in excess of £750,000 until 31 December 2009, in order to allow more flexibility in working capital. As part of this agreement the Company has undertaken, within 2009, to address its plans for repayment of all existing Loan Notes.
15. Stock options, warrants and compensation expense
The number of options and warrants outstanding as at 30 September 2009, and the movement during the nine months then ended, are as follows:
|
Options |
Warrants |
||||
|
Number |
Number |
||||
|
Outstanding at 1 January 2009 |
17,651,700 |
23,357,142 |
|||
|
Issued |
- |
- |
|||
|
Cancelled |
(124,200) |
- |
|||
|
------------- |
------------ |
||||
|
Outstanding at 31 March 2009 |
17,527,500 |
23,357,142 |
|||
|
Issued |
10,000,000 |
- |
|||
|
Cancelled |
(1,022,600) |
- |
|||
|
------------- |
------------ |
||||
|
Outstanding at 30 June 2009 |
26,504,900 |
23,357,142 |
|||
|
Issued |
- |
- |
|||
|
Cancelled |
(30,000) |
- |
|||
|
Outstanding at 30 September 2009 |
26,474,900 ======== |
23,357,142 ======= |
The stock based compensation expense for the quarter ended 30 September 2009, included in Production costs was £4,000 (2008: £nil), in Research and product development was £10,000 (2008: Credit of £25,000), and in General and administrative costs was £21,000 (2008: £50,000). The stock based compensation expense for the nine months ended 30 September 2009, included in Production costs was £21,000 (2008: £35,000), in Research and product development was £45,000 (2008: £32,000), and in General and administrative costs was £76,000 (2008: £39,000).
On 29 June 2009 the Company issued 10,000,000 stock options to senior management, at an exercise price of £0.015 per share. These options vest after a period of 3 years.
The fair value of the stock options is the estimated fair value at grant date. The fair value is calculated using the Black-Scholes option-pricing model. In calculating the fair value of the options granted during the quarter ended 30 June 2009 a dividend yield of Nil, expected volatility of 85%, a risk free interest rate of 5% and an expected option life of 5 years have been assumed. The fair value of the stock options granted during the quarter ended 30 June 2009 was £0.01 per share.
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected price volatility. The Company uses expected volatility rates, which are based on historical volatility rates trended into future years. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company's stock options
Related Shares:
TPS.L