15th Aug 2007 07:01
Turbo Power Systems Inc15 August 2007 15th August 2007 TURBO POWER SYSTEMS INC. ANNOUNCES ITS RESULTS FOR THE HALF YEAR AND SECOND QUARTER ENDED 30 JUNE 2007 Highlights • Production and development income increased by 93 percent to £4.7 million (2006: £2.4 million) • Loss before tax reduced by 9 percent to £3.3 million (2006: £3.6 million) after taking into account: • Increase in production costs of 104% (or £1.7 million) in line with production revenue increase • Increase in product development costs of 28% (or £0.5m) • Factory move costs of £0.2 million in Q2 • Orders announced in the half totalling US$ 24 million including: • NREC - US$2 million • Bombardier Chicago - US$14 million • Bombardier Toronto - US$8 million • Further NREC order announced today - US$3 million • New factory move successfully completed in June • Equity fundraising for £4.0 million completed in June Commenting on the results, Michael Hunt, Chief Executive said, " The first half of 2007 has seen further strong production growth and oursuccessful Gateshead factory relocation will provide increased capacity anddrive production efficiency. We have seen a significant increase in the orderbook including our acceptance on two further prestigious Bombardier programmesand further NREC business announced today. The £4 million raised in June hasallowed us to invest further in our development platform and makes us fullyfunded on current forecasts. " For further information, please contact: Turbo Power Systems Tel: +44 (0)20 8564 4460Michael Hunt, Chief Executive OfficerStephen Sadler, Chief Financial Officer Company Website: www.turbopowersystems.com Gavin Anderson (PR) Tel: +44 (0)20 7554 1400Ken CroninMichael Turner KBC Peel Hunt Tel: +44 (0)20 7418 8900Oliver ScottGordon Suggett NOTES TO EDITORS About Turbo Power Systems Turbo Power Systems Inc. designs and manufactures innovative power solutionswhich provide local, high quality, controllable electrical power. The Group'sproducts are sold into a number of markets but are all based on its coretechnologies of power electronics and high speed electrical machines. The Company's products all have in common the aim to provide improved energy efficiency and reduced energy consumption compared to existing technology. The Group operates across the following market sectors: • Direct Drive High-Speed Electrical Machines and Electronics • Specialist Drives and Motor applications (Aerospace, Oil and Gas) • High Voltage Power Supplies, Auxiliary Power Systems, Grid-Connected Inverters for Energy Recovery Systems and Renewable Technologies Forward looking statements This news release contains forward-looking statements. Forward-lookingstatements include statements concerning plans, objectives, goals, strategies,future events, or performance, and underlying assumptions and other statementsthat are other than statement of historical fact. These statements are subjectto uncertainties and risks including, but not limited to, the ability to meetongoing capital needs, product and service demand and acceptance, changes intechnology, economic conditions, the impact of competition, the need to protectproprietary rights to technology, government regulation, and other risks definedin this document and in statements filed from time to time with the applicablesecurities regulatory authorities. OPERATIONAL REVIEW Business of the Company Turbo Power Systems designs and manufactures innovative power solutions whichprovide local, high quality, controllable electrical and motive power. TheGroup's products can be tailored for use in a wide range of industries andapplications, but are all based on its core technologies of high speedelectrical machines and power electronics. The Group's site at Heathrow is the Head Office for UK operations and the designand manufacturing centre for Electrical Machines. The Group's site at Gatesheadis the design and manufacturing centre for Power Electronics. Strategy The Company's strategy is to build a high performance electric machines andpower electronics business which can demonstrate strong and sustainable growthin all of its technology areas and is not dependent on any single market sector,product or operating unit. Our sales strategy is to focus on developing long term relationships with strongpartners in each of our target market sectors where our technology typicallyforms part of a larger product supplied to the end customer. We will combine the skills of our two sites to match the requirements of ourcustomers. Review of operations During the second quarter, the move to the new factory in Gateshead wascompleted with minimum disruption to planned production levels. The layout inthe new facility, which provides the additional manufacturing and engineeringcapacity required for the significant planned growth in future productionvolumes, incorporates dedicated aerospace manufacturing and test areas, and hasbeen designed for optimum efficiency. The improved efficiency of the newmanufacturing cell structure, which combines both build and test, is expected tohave an impact in the second half of the year. The initial feedback from staff and customers to the new site has been extremelyencouraging, and we are confident that this first class facility will make astrong impression with customers looking to place future orders. Production revenue has continued to grow through the first half and P&L and cashflow results were encouraging in the first quarter. The second quarter has beenimpacted by exceptional costs associated with the Gateshead factory relocationand development costs associated with the new rail programmes. In addition aproportion of the development income scheduled for the first half has actuallybeen invoiced in July which has adversely impacted second quarter P&L but hasled to a strong start to the third quarter. The Company is currently engaged in more major development programmessimultaneously than ever before, with activity at a high level on the HamiltonSundstrand and Eaton aerospace programmes, Chicago and Toronto rail programmesand the Industrial Compression and ALC industrial motor projects. As aconsequence, development cost and recruitment of engineering staff hasincreased. In addition, in order to maintain our competitive position in the future, we aremaking an investment in 2007 to improve our rail development technology byintroducing the latest generation micro-processors and developing matchingsoftware, written to the latest IEEE quality standards. This new design platformwill be integral to all our future rail products and will increase performancein terms of functionality, flexibility and speed of operation. During 2008, the development activity on these programmes will be replaced bythe start of their production phases, continuing the growth in manufacturingrevenues, and releasing development engineering resource to be allocated tofurther new contracts. While development activities have been key to the results for the first half,underlying production contracts have continued to grow steadily with increasingmonthly volumes being seen from key customers such as National Railway EquipmentCompany in the USA. A number of the new development contracts will beginproduction deliveries in the second half of this year. We have announced today further production orders with the National RailwayEquipment Company worth $3 million, the bulk of which will be delivered in 2007. With the factory move in Gateshead now complete, new manufacturing processesbedded in and a number of development milestones due to be met in the thirdquarter, we expect to see stronger second half performance and continuedprogress towards profitability. Customers and Contracts Update TPS designs and manufactures motor/generator and power electronics technologyacross a range of sectors and applications but the Company's products all havein common the aim to provide improved efficiency and reduced energy consumptioncompared to existing technology. 1) Direct Drive Industrial High Speed Motors and Drives The TPS direct drive technology is designed to provide significant performanceimprovements and operating cost reductions for a wide range of industrialcompression and turbo-machinery applications. By eliminating the need formechanical gearboxes and conventional low speed motors and by operating moreefficiently across a wider range of load points, the customer's energyrequirements and costs can be reduced. SKF Following the successful completion of end-customer field trials, productionorders have now been released for the complete compressor product including theTPS motor and variable frequency drive and the SKF magnetic bearing system.Production deliveries of the drive and motor systems will begin in August at arate of 20 systems per month. Industrial Motor and Drive Agreement Initial testing of the new TPS high speed motor and electronics integrated withthe customer's compressor application has commenced in the USA, and preliminarydata confirms that the unit is meeting planned performance and efficiencytargets. Beta units are scheduled to be installed at friendly customer sites inOctober, with the product launch scheduled for January 2008, and initialproduction systems being scheduled for Q4 2007. 2) Specialist Motors and Drives In addition to the long-term design investment that the Company has made in thehigh speed electrical machine technology, the Company has accumulatedconsiderable expertise in motor and controller designs for aggressive and highperformance environments This expertise is now providing the basis for a newrange of products targeted at both the aerospace sector and the oil and gasmarkets. Eaton Aerospace Initial Jettison Fuel Pump motor drives have been supplied to Eaton Aerospace insupport of the Boeing System Integration Testing Laboratories. Formalqualification testing in the UK is now nearing completion and TPS is currentlycarrying out some additional safety of flight testing in support of the Boeingground power and initial aircraft flight programme dates. The programme isproceeding well and hardware manufacture in support of the initial 787 aircraftis still scheduled to begin later this year. Hamilton Sundstrand The HS 787 Ram Fan motor drive programme, which was placed with TPS late on inthe 787 programme, is running behind the original development schedule. Initialhardware is currently completing development and undergoing preliminary safetyof flight testing in support of the Boeing programme, with a target date forinitial hardware deliveries of August 2007. TPS is working closely with HamiltonSundstrand to complete the remaining development tasks and we are optimisticthat the schedule for initial production deliveries in 2007 will still bemaintained. Artificial Lift Company (Oil and Gas) Testing of the prototype down hole pump and motor system is being carried out ina test well at Great Yarmouth and will continue throughout August to prove outthe electrical and mechanical performance of the complete system. On successful completion of the UK trials, six motor modules will be provided byTPS in support of the operational oil field testing in North America in thespring of next year, when the systems will be then undergo endurance testingunder extremes of temperature and pressure. If this testing is successful then initial production quantities are expected tocommence in June 2008 and volumes will ramp up during the second half of 2008and into 2009. 3) Rail and Industrial Power Electronics TPS designs and manufactures rugged power electronics products for both rail andindustrial applications, all of which require high reliability and availabilityin operation. Bombardier Transportation-Canada Beijing Production is ongoing on the Beijing programme, and TPS has delivered theinitial 3 rail car sets of equipment. Commissioning of the complete cars iscurrently underway in China, and TPS has engineers on-site supportingBombardier. Production will continue at a rate of 4 auxiliary power units permonth until early 2008. The Company is supplying 40 car sets with a contractvalue of US$1.5M. Chicago Transit Authority Prototype development is underway on the CTA project, with customer designreviews having been successfully completed in July. The scheduled date forcompletion of the prototype qualification testing is December 2007, with initialproduction quantities in support of the customer testing programme planned forearly 2008. The base contract is valued at some US$14M including production, spares andengineering services, with possible options for additional cars which couldincrease the value to more than US$20M. The development project is currentlyunderway with the units scheduled for initial customer prototype vehiclesplanned for delivery in January 2008. Toronto Although placed some months later than CTA, the Toronto S1 programme has anaggressive schedule and also has a target prototype qualification testing dateof the end of 2007. The initial production schedule for 2008 is 15 car sets,with the rate ramping up into 2009. The contract for the initial quantity of 234cars is expected to exceed US$8M, with the potential for further optionquantities to extend that to some US$14M. National Rail Equipment Co. NREC continues to expand its market share for environmentally compliant shuntinglocomotives, and as a result has placed further purchase orders with TPS.Today's announcement of a further production order adds $3M to our order bookwith the bulk of these units scheduled to be delivered between now and December2007. NREC will remain the major customer for rail and traction equipment until theBombardier CTA and Toronto contracts enter production in the latter half of2008, and the NREC production cell in the new facility has been planned toprovide for significant increases in monthly capacity. NREC marketing activitieshave extended to cover Europe and Australasia as well as North America, andprospects for future growth look promising. Toronto Transit Commission - H6 Subway Programme Production is proceeding smoothly, with contract completion scheduled for earlymid-2008. PRC Production demand from the customer for the pulsed laser power supply continuesto be maintained at good monthly quantity levels, with a high level of customersatisfaction in the equipment performance. TPS is currently evaluating a "highpower" design which would complement the existing product. FINANCIAL PERFORMANCE REVIEW OF HALF YEAR TO 30 JUNE 2007 Overview The first half of 2007 saw the company continue to demonstrate strong growth inproduction turnover as more programmes moved into the production phase. Firstquarter development income was also strong and EBITDA and cash flow performancein that quarter were encouraging. Second quarter EBITDA was impacted by anabsence of development income from programme milestone payments, combined withthe costs of the Gateshead factory relocation and development expenditure on thenew rail programmes and new development platform. With the factory move nowcomplete and a number of development milestones met in the third quarter thecompany expects to see improved performance in the second half of the year. Production turnover has been increasing smoothly through 2006 and 2007 and inthe first quarter we recorded turnover in excess of £2.0 million for the firsttime. This was followed by second quarter production turnover of £2.3 million.As in previous quarters the great majority of this revenue was from powerelectronics at the Gateshead site but production quantities of SKF motors atHeathrow commenced shipping in March and are scheduled to increase in the secondhalf of 2007. Our contract with NREC for rail traction electronics has made anincreasing contribution to revenues as the customer has experienced good salessuccess and this programme was our largest contributor to turnover in the firsthalf. Of the £0.37 million of development income recorded for the half year £0.34million was in the first quarter and comprised receipts from Bombardier on theToronto, Chicago and Beijing programmes as well as receipts from HamiltonSundstrand on the 787 programme. No further contract milestones on our majordevelopment programmes fell in the second quarter and as a result only £0.03million was billed. However, milestones on the Eaton, Toronto and Beijingprogrammes were met in July and development income billed in the third quarteralready totals £0.28 million. Development costs of £2.2 million throughout the half year comprise continuedwork on our aerospace and major rail development programmes as well as costsassociated with a new development platform to be used for future rail andaerospace business. Administrative expenses for the half year were £1.9 million. Included in thisfigure in the second quarter are expenses related to the relocation of ourGateshead factory totaling £0.2 million. The relocation is now complete and aswell as resolving medium term capacity constraints we expect the new productionlayout to have a direct effect on production efficiency. The loss before interest, tax, depreciation, amortisation and stock compensationfor the half year was (£2.4) million. Second quarter EBITDA of (£1.5) millionreflects the lack of development income and the factory move costs. Cash outflows before movements in working capital of £2.6 million for the halfyear included interest payments in January of £331,000 to convertible noteholders relating to the period 1 July 2006 to 31 December 2006. The followingconvertible note interest payment, paid in July 2007, was significantly less at£56,000 following the redemption of £9.36 million of the convertible notes inlate December 2006 and early January 2007. Also included in cash outflows beforemovements in working capital are Gateshead relocation costs not capitalized of£0.2 million. Continuing production growth and the purchase of long lead time items led tosignificant stock increases in the half year of £945,000. Tax credits received in the first half of £312,000 comprise research anddevelopment tax credit claims for the year to 31 December 2006. Long term assets purchased of £0.5 million principally represent the investmentin fixed assets at the company's new production facilities in Gateshead. Thecompletion of the move should allow TPS to claim in the region of £250,000 ofgrant funding from the development agency, One North East in the second half of2007. Movements in restricted funds of £335,000 represent net movements in performancebond cash during the half year as certain performance bonds reached maturityincluding the release of performance bond cash on the cancelled CLRV programme. Net receipts from an institutional equity placing during the second quartercontributed £3.9 million. The overall increase in cash during the half year was £1.0 million leaving theCompany with an unrestricted cash balance of £7.7 million and further restrictedcash of £1.1 million at 30 June 2007. Revenue Production revenue in the six months ended 30 June 2007 was £4.38 millioncompared with £2.16 million in 2006 and comprised 2007 2006 £'000 £'000 Power electronics 4,239 2,079Electrical machines 136 82 ----- ----- 4,375 2,161 The Power Electronics division has again seen strong turnover growth, both as aresult of increased volumes on established programmes and the start ofproduction runs on new contracts. Output volumes have grown significantly on themajority of production contracts and in particular, National Railway EquipmentCo which is the highest contributor to revenues for the half year. Spares and service revenues were £0.2m for the half year (2006: £0.5m). In the Electrical Machines division revenue for the quarter related principallyto the SKF contract and initial units on the Industrial motor and driveprogramme. Development income Development income in the six months was £0.37 million compared with £0.29million in 2006 and included receipts from Hamilton Sundstrand on the Boeing 787Dreamliner programme, and initial incomes from Bombardier on both the ChicagoTransit and Toronto Transit programmes. 2007 2006 £'000 £'000 ----- -----Development income 370 292 Production costs The cost of product revenues in the six months amounted to £3.41 million (2006:£1.67 million) and reflects the growth in production revenue. 2007 2006 £'000 £'000 Power electronics 2,881 1,346Electrical machines 527 326 ----- ----- 3,408 1,672 Production costs include certain fixed facilities costs attributable to themanufacturing operation. Included in production costs for the six months are stock compensation chargeson options awarded of £52,000 (2006: £17,000). Research and product development Research and product development expenditure in the six months was £2.17 millioncompared with £1.69 million in 2006, and comprised 2007 2006 £'000 £'000 Research and product development expenditure 2,166 1,733Accrued R&D tax credits - (40) ----- -----Total expenditure 2,166 1,733 Product development costs increased in the six months as development workcommenced on both the Eaton contract and the Hamilton Sundstrand contract forthe Boeing 787 Dreamliner and the Bombardier Chicago and Toronto Railprogrammes. Included in research and product development expenditure for the six months arestock compensation charges on options awarded of £193,000 (2006: £122,000). No R&D tax credits were accrued in the six months as the majority of the Group'sdevelopment resource moved on to commercial programmes. General and administrative General and administrative costs of £1.94 million (2006: £1.57 million) consistmainly of staff costs and facilities costs. Included in this category areGateshead move costs of £0.20 million which have not been capitalized. Alsoincluded are stock compensation charges on options awarded of £127,000 (2006:£96,000). Amortisation Amortisation was £0.44 million compared with £0.66 million in 2006. Thereduction reflects a number of assets becoming fully written down. Interest income Interest income for the six months was £0.16 million compared with £0.15 millionin 2006. Interest expense and finance charges Interest expense and finance charges arise from the issue of convertible bondsin July 2003 and March 2005, and the redemption of bonds and issue of shares inJanuary 2007, and comprised 2007 2006 £'000 £'000 Finance charges 115 -Interest payable 58 288Amortisation of deferred finance charges - 81Debt accretion 52 194 ----- ----- 225 563 Finance charges for the six months were £115,000 (2006: £nil) and were made upas below: - During 2006 the company purchased U.S. dollar denominated currency contracts covering expected dollar income from programmes scheduled for 2006 and 2007. The value of the option as at 30 June 2007 was £28,000, resulting in a net decrease and cost during the six months of £16,000 (2006: £nil). - During the six months the company redeemed 4,500,000 loan notes, resulting in a net charge of £82,000 (2006: £nil). - Charges related to the restricted cash movements and performance bonds totaled £17,000 (2006: £nil). Convertible bonds are considered to be compound financial instruments, and theliability component and the equity component must be presented separately, asdetermined at initial recognition. The Company has valued the equity componentof these bonds using the residual value of equity component method, whereby theliability component is valued first using current market rate for comparableinstruments, at the time of issuance. The difference between the proceeds of thebonds issued and the fair value of the liability is assigned to the equitycomponent. The equity element of the March 2005 bond issue was estimated at£1.11 million. The equity element of the 2003 bond issue was estimated at£0.91 million. The carrying value of the debt element is increased over the termof the debt and this accretion expense is charged to the profit and lossaccount. During the six months this charge amounted to £52,000 (2006: £194,000). CASH FLOWS FOR THE SIX MONTHS Cash outflow from operating activities Operating cash outflow before movements in working capital was £2.56 million forthe period (2006: £1.97 million). Included in this amount are interest paymentsto convertible note holders of £0.33 million for the period 1 July 2006 to 31December 2006 and Gateshead move costs of £161,000. Movements in stocks, work in progress and debtors and creditors produced a netcash outflow of £0.42 million during the period (2006: outflow of £0.39million). Tax credits During the six months the company received research and development tax creditreceipts of £0.31 million (2006: £nil). Investing activities Purchases of long term tangible assets amounted to £0.47 million (2006: £0.05million) and principally relate to the new Power Electronics facility inGateshead. Cash inflows related to movements in restricted funds of £0.36 million (2006:£nil) are the net result of the cancellation of performance bonds previouslyprovided of £250,000 and £515,000, and the creation of new bonds totaling£410,000. Cash flow from financing activities Cash inflow from financing in the six months of £3.81 million relates to netreceipts of £3.88 million from an institutional placing of £4,000,000 (gross)completed in June 2007, and the payment of final expenses of £7,000 in relationto the fundraising in December 2006, when the Company completed a £6,000,000(gross) financing agreement with institutional investors. Overall cash flow for the six months Overall the cash inflow for the period was £1.02 million. This compares with acash outflow of £2.41 million in 2006. BALANCE SHEET AS AT 30 JUNE 2007 The Company ended the period with an unrestricted cash balance of £7.69 millioncompared with £6.67 million at 31 December 2006. Substantially all of theCompany's cash balances are denominated in Sterling. In addition the Company had restricted cash amounts of £1.14 million relating toperformance bonds entered into as part of contracts with the Toronto TransitCommission and Bombardier Transportation (2006: £1.50 million). Long term assets excluding restricted cash have decreased from £3.69 million at31 December 2006 to £3.41 million at 30 June 2007, after depreciation charges of£0.44 million and additions in plant and equipment of £0.31. Long term liabilities have decreased to £1.87 million at 30 June 2007 comparedto £6.13 million at 31 December 2006, reflecting the reduction in Loan Notesfollowing the redemption of £4,500,000 notes in January 2007. Net working capital at 30 June 2007, excluding cash balances, was £1.38 million,compared with £0.85 million as at 31 December 2006. As at 30 June 2007, the Company had 318,571,062 common shares issued and115,000,000 A shares. As at that date there were 32,237,681 outstanding shareoptions and 10,500,000 outstanding warrants. REVIEW OF SECOND QUARTER TO 30 JUNE 2007 Revenue Production revenue in the quarter ended 30 June 2007 was £2.34 million comparedwith £1.19 million in 2006 and comprised 2007 2006 £'000 £'000 Power electronics 2,222 1,130Electrical machines 120 62 ----- ----- 2,342 1,192 ===== ===== The Power Electronics division has again demonstrated strong turnover growth,both as a result of increased volumes on established programmes and the start ofproduction runs on new contracts. Spares and service revenues were £0.1m for the quarter (2006: £0.2m). In the Electrical Machines division revenue for the quarter related principallyto the SKF contract. Development income Development income in the quarter was £0.03 million compared with £0.19 millionin 2006. 2007 2006 £'000 £'000 Development income 29 193 ===== ===== Production costs The cost of product revenues in the quarter amounted to £1.79 million (2006:£0.94 million) and reflects the growth in production revenue. 2007 2006 £'000 £'000 Power electronics 1,469 763Electrical machines 323 175 ----- ----- 1,792 938 Production costs include certain fixed facilities costs attributable to themanufacturing operation. Included in production costs for the quarter are stock compensation charges onoptions awarded of £26,000 (2006: £17,000). Research and product development Research and product development expenditure in the quarter was £1.15 millioncompared with £0.87 million in 2006, and comprised 2007 2006 £'000 £'000 Research and product development expenditure 1,151 892Accrued R&D tax credits - (25) ----- ------Total expenditure 1,151 867 ===== ====== Product development costs increased in the quarter as development work commencedon the Bombardier Chicago and Toronto programmes. Included in research and product development expenditure for the quarter arestock compensation charges on options awarded of £89,000 (2005: £66,000). No R&D tax credits were accrued in the quarter as the majority of the Group'sdevelopment resource moved on to commercial programmes. General and administrative General and administrative costs of £1.10 million (2006: £0.82 million) consistmainly of staff costs and facilities costs. Included in this category areGateshead move costs of £0.20 million which have not been capitalized. Alsoincluded are stock compensation charges on options awarded of £44,000 (2006:£55,000). Amortisation Amortisation was £0.22 million compared with £0.27 million in 2006. Thereduction reflects a number of assets becoming fully written down. Interest income Interest income for the three months was £0.08 million compared with£0.07 million in 2006. Interest expense and finance charges Interest expense and finance charges arise from the issue of convertible bondsin July 2003 and March 2005, and the redemption of bonds and issue of shares inJanuary 2007, and comprised 2007 2006 £'000 £'000 Finance charges 12 -Interest payable 29 154Amortisation of deferred finance charges - 41Debt accretion 30 97 ----- ----- 71 292 ===== ===== CASH FLOWS FOR THE THREE MONTHS Cash outflow from operating activities Operating cash outflow before movements in working capital was £1.49 million forthe period (2006: £0.74 million). Movements in stocks, work in progress and debtors and creditors produced a netcash outflow of £0.15 million during the period (2006: outflow of £0.49million). Investing activities Purchases of long term tangible assets amounted to £0.30 million (2006: £0.03million) and principally relate to the new Power Electronics facility inGateshead. Cash flow from financing activities Cash inflow from financing in the three months relates to net receipts of £3.88million from an institutional placing of £4,000,000 (gross) completed in June2007. Overall cash flow for the three months Overall the cash inflow for the period was £1.95 million. This compares with acash outflow of £1.25 million in 2006. TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENTS OF NET LOSS, COMPREHENSIVE LOSS AND LOSS DEFICITUNAUDITED Notes Six months ended 30 June 2007 2006 £'000 £'000 (unuadited) (unaudited)Statement of Net Loss Revenue 2,3 4,375 2,161Development income 2 370 292 -------- -------- 4,745 2,453ExpensesProduction costs 3,408 1,672Research and product 4 2,166 1,693developmentGeneral and administrative 1,943 1,570Amortisation 442 662 -------- -------- 7,959 5,597 Loss before interest and (3,214) (3,144)finance charges Interest income 163 147Interest expense and 5 (225) (563)finance chargesForeign exchange gains/ (losses) 13 (11) -------- -------- (49) (427) -------- --------Net loss for the period (3,263) (3,571) ======== ======== Statement of ComprehensiveLoss Net loss (3,263) (3,571)Exchange adjustment on consolidation 92 61 -------- --------Comprehensive loss for the period (3,171) (3,510) ======== ======== Statement of Loss Deficit Loss deficit, beginning of period (53,636) (44,718)Net loss for the period (3,263) (3,571)Adjustment on adoption of 1 CICA3855 (140) - Equity adjustment on issue 11 of shares (2,512) - -------- -------Loss deficit, end of period (59,551) (48,289) ======== ======= Loss per share - basic 7 (1.2) p (1.9) pLoss per share - diluted 7 (1.2) p (1.9) p TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENTS OF NET LOSSUNAUDITED Notes Three months ended 30 June 2007 2006 £'000 £'000 (unaudited) (unaudited)Statement of Net Loss Revenue 2,3 2,342 1,192Development income 2 29 193 -------- -------- 2,371 1,385ExpensesProduction costs 1,792 938Research and product 4 development 1,151 867General and administrative 1,102 818Amortisation 219 271 -------- -------- 4,264 2,894 Loss before interest and finance charges (1,893) (1,509) Interest income 75 68Interest expense and 5 finance charges (71) (292)Foreign exchange gains 13 21 -------- -------- 17 (203) -------- --------Net loss for the period (1,876) (1,712) ======== ======== Statement of ComprehensiveLoss Net loss (1,876) (1,712)Exchange adjustment on consolidation 108 (28) -------- --------Comprehensive loss for the period (1,768) 1,740) ======== ======== Loss per share - basic 7 (0.7) p (0.9) pLoss per share - diluted 7 (0.7) p (0.9) p TURBO POWER SYSTEMS INC.CONSOLIDATED BALANCE SHEETSUNAUDITED Notes As at 30 June As at 31 December 2007 2006 £'000 £'000 (unaudited) (unaudited)Current assetsCash and cash equivalents 7,690 6,669Restricted cash 8 - 765Trade and other receivables 1,857 1,544Stock and work in progress 2,175 1,230Prepayments 388 419Tax recoverable 520 718 -------- -------- 12,630 11,345 -------- --------Long-term assetsRestricted cash 8 1,141 731Prepayments 254 254Investments 9 34 31Intangible assets 9 63 77Goodwill 9 820 820Deferred finance charges 9 - 145Tangible assets 9 2,242 2,361 -------- -------- 4,554 4,419 -------- -------- 17,184 15,764 ========= ======== Liabilities and shareholders'equityCreditors: amounts fallingdue withinone yearTrade and other payables 3,175 3,109Deferred income 641 206 -------- -------- 3,816 3,315 -------- --------Creditors: amounts fallingdue aftermore than one yearWarranty provision 303 303Convertible notes 1,570 5,827 -------- -------- 1,873 6,130 -------- --------Capital and reservesShare capital and other 10 equity 71,022 60,023instrumentsAccumulated other comprehensiveincome 24 (68)Loss deficit (59,551) (53,636) --------- ---------Shareholders' funds 11,495 6,319 --------- --------- 17,184 15,764 ========= ========= TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENT OF CHANGES IN EQUITYUNAUDITED Common A Other Accumulated Loss Total Share Ordinary equity other deficit Equity capital capital income £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1 January 2006 44,753 - 2,144 (128) (44,718) 2,051 Loss for the period (6,318) (6,318) Exchange gain 60 60 Stock compensation 511 511 Conversion to shares 3,383 4,320 (674) (2,600) 4,429 Issue of shares 4,059 2,000 6,059 Expiry of warrants 117 117 Fundraising costs (393) (197) (590) ----------------------------------------------------------------------------- Balance at 31 December 2006 51,919 6,123 1,981 (68) (53,636) 6,319 Loss for the period (3,263) (3,263) Exchange gain 92 92 Stock compensation 372 372 Conversion to shares 7,379 (638) (2,512) 4,229 Issue of shares 4,017 4,017 Fundraising costs (131) (131) Charge arising on adoption of CICA Section 3855 - Financial Instruments - Recognition and Measurement (140) (140) --------------------------------------------------------------------------- Balance at 30 June 2007 55,805 13,502 1,715 24 (59,551) 11,495 =========================================================================== TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED Six months ended 30 June Notes 2007 2006 £'000 £'000 (unaudited) (unaudited) Net loss from operations (3,263) (3,571)Amortisation 587 743Accretion of debt 36 194Stock compensation charges 372 235Foreign currency instrument loss 16 -Movement in net interest accrual (307) - --------- ---------Cash outflow before movements inworking capital (2,559) (2,399)Decrease/(increase) in debtors (84) (129)Decrease/(increase) in stock (945) (414)Increase/(decrease) in creditors 610 583 --------- ---------Net cash outflow from operating activities before tax (2,978) (2,359) --------- ---------Tax credits 312 - --------- ---------Net cash outflow from operating activities after tax (2,666) (2,359) --------- ---------Investing activitiesPurchase of long-term assets (473) (48)Movement in restricted funds 355 - --------- ---------Cash outflow from investing activities (118) (48) --------- ---------Financing activitiesEquity placing 11 4,001 -Net expense from equity placing 11 (196) - --------- ---------Cash inflow from financing activities 3,805 - --------- ---------Increase/(decrease) in cash in the period 1,021 (2,407) ========= ========= Cash and cash equivalents:Beginning of period 6,669 6,525 --------- ---------End of period 7,690 4,118 ========= ========= TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED Three months ended 30 June Notes 2007 2006 £'000 £'000 (unaudited) (unaudited) Net loss from operations (1,876) (1,712)Amortisation 340 352Accretion of debt 21 97Stock compensation charges 159 138Foreign currency instrument loss/(gain) (5) -Movement in net interest accrual (126) (40) --------- ---------Cash outflow before movements inworking capital (1,487) (1,165)Decrease/(increase) in debtors (129) 54Decrease/(increase) in stock (483) (251)Increase/(decrease) in creditors 467 137 --------- ---------Net cash outflow from operating activities before tax (1,632) (1,225) --------- ---------Tax credits - - --------- ---------Net cash outflow from operating activities after tax (1,632) (1,225) --------- ---------Investing activitiesPurchase of long-term assets (298) (29)Movement in restricted funds - - --------- ---------Cash outflow from investing activities ( 298) (29) --------- ---------Financing activitiesEquity placing 11 4,001 -Net expense from equity placing 11 (125) - --------- ---------Cash inflow from financing activities 3,876 - --------- ---------Increase/(decrease) in cash in the period 1,946 (1,254) ========= ========= Cash and cash equivalents:Beginning of period 5,744 5,372 ---------- ---------End of period 7,690 4,118 ========== ========= TURBO POWER SYSTEMS INC.SIX MONTHS ENDED 30 JUNE 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED 1 Basis of preparation The consolidated financial statements of the Company have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles (Canadian GAAP). The Company provides a reconciliation from Canadian GAAP to International Financial Reporting Standards in Note 21 of the Consolidated Financial Statements for the year ended 31 December 2006. 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 consolidated financial statements include the accounts of Turbo Power Systems Inc. ("the Company"), and the accounts of its wholly owned subsidiary company Turbo Power Systems Limited (collectively "the Group"). The significant accounting policies are consistent with prior years. Certain comparative figures have been reclassified to conform to the financial statement presentation adopted for 2006. 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 2006. These interim financial statements are prepared in accordance with the requirements of Canadian GAAP for interim financial statements as recommended by CICA Handbook section 1751 "Interim Financial Statements". These consolidated financial statements follow the same accounting policies and methods of application as for the Company's 31 December 2006 financial statements, except as described below: Going concern These consolidated financial statements have been prepared on a going concern basis, which presumes that the Company will be able to realise its assets and discharge its liabilities in the normal course of operations for the foreseeable future. The Company has incurred cumulative losses including a loss of £3.26 million for the six month period ended June 30, 2007 and has a cumulative deficit of £59.55 million as at 30 June 2007. 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. On January 1 the Company adopted new CICA accounting standards comprising CICA Handbook Section 3855 "Financial Instruments - Recognition and Measurement", Section 1530 "Comprehensive Income", and Section 3251, "Equity". As a result of adopting these requirements, a new statement has been added to report movements in Comprehensive Loss, after Net Loss, and consists of the gains and losses from the translation of the Company's self-sustaining foreign operations. Accumulated other income is presented as a separate section within the Statement of Changes in Equity. In determining the fair value of financial instruments, as required by Section 3855, the carrying value of the Convertible debt was decreased by £140,000, and the net value of the Deferred Finance Charges was offset against the Convertible debt balance, resulting in the elimination of the deferred finance charge asset, and a reduction in the Convertible debt balance of £145,000. TURBO POWER SYSTEMS INC.SIX MONTHS ENDED 30 JUNE 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED 1 Basis of preparation (continued) Derivative financial instruments are used by the Company to manage a portion of its exposure to foreign exchange rate fluctuations. The Company does not utilise derivative financial instruments for trading or speculative purposes. The Company enters into foreign currency options denominated in U.S. Dollars, to manage foreign exchange rate fluctuation exposure on receipts from customers billed in U.S. Dollars. These derivative contracts, not accounted for as hedges, are marked to market, and any changes in the market value are recorded in income or expense when the changes occur. The fair value of these instruments is recorded as accounts receivable or payable. Most of the Company's operations are conducted by its United Kingdom subsidiaries in Sterling. All numbers reported in these financial statements are stated in Sterling unless otherwise noted. 2 Segmental analysis The Group'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 group and other related management activities are allocated between the two reportable segments. The power electronics and electrical machines segments both operate in the United Kingdom. All amounts in £'000 Power Electrical Total electronics machines 2007 2006 2007 2006 2007 2006Six months ended 30 JuneRevenue 4,239 2,079 136 82 4,375 2,161Development income 370 292 - - 370 292Interest income 81 45 82 45 163 90Interest expense (113) (253) (112) (253) (225) (506)Amortisation (70) (70) (372) (592) (442) (662)Net loss (877) (979) (2,386) (2,592) (3,263) (3,571)Capital expenditure 294 39 19 24 313 63 Three months ended 30 JuneRevenue 2,222 1,130 120 62 2,342 1,192Development income 29 193 - - 29 193Interest income 37 19 38 20 75 39Interest expense (35) (131) (36) (132) (71) (263)Amortisation (35) (45) (184) (226) (219) (271)Net loss (779) (439) (1,097) (1,273) (1,876) (1,712)Capital expenditure 210 21 10 23 220 44 TURBO POWER SYSTEMS INC.SIX MONTHS ENDED 30 JUNE 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED 2 Segmental analysis (continued) As at Jun Dec Jun Dec Jun Dec 2007 2006 2007 2006 2007 2006 Total assets 5,012 3,868 12,172 11,896 17,184 15,764Total liabilities 2,953 2,159 2,736 7,286 5,689 9,445 3 Significant Customers During the six month period ended 30 June 2007, 54% of the Company's revenue was from two customers (2006: 39% from three customers). During the three months to 30 June 2007, 45% of the Company's revenue was from one customer (2006: 65% from four customers). 4 Research and product development Research and product development expenditure incurred during the period comprised: Six months ended Three months ended 30 June 30 June 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Research and product development cost 2,166 1,733 1,151 892 Accrued tax credits - (40) - (25) -------- -------- -------- -------- Total expenditure 2,166 1,693 1,151 867 ======== ======== ======== ======== Total accrued tax credits receivable at 30 June 2007 amounted to £181,000 (31 December 2006: £490,000). 5 Interest expense and finance charges Six months ended Three months ended 30 June 30 June 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Finance charges 115 - 12 - Interest payable 58 288 29 154 Amortisation of deferred finance charges - 81 - 41 Debt accretion 52 194 30 97 --------- --------- --------- --------- 225 563 71 292 ========= ========= ========= ========= TURBO POWER SYSTEMS INC.SIX MONTHS ENDED 30 JUNE 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED 6 Financial Instruments Certain of the Company's business transactions occur in currencies other than Sterling. The Company had a foreign exchange average rate option contract in place during the six months ended 31 June 2007 (2006: nil) to reduce exposure to fluctuations in foreign exchange rates on remittances from customers denominated in U.S. Dollars. The Company holds an average rate option over $5.898million U.S. Dollars at a strike rate of 2.00 U.S. Dollars which expires on 27 December 2007. During the period a loss of £16,000 was realised on this option (2006: £nil). As at 30 June 2007 the unrealised gain from the contract included within prepayments was £28,000 (2006: £nil). 7 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. The weighted average number of shares outstanding in the six months was 279,630,958 (2006: 191,165,301). No fully diluted earnings per share have been reported as the Company has made losses in both years and the effect would be anti-dilutive. The loss for the six months ended 30 June 2007 was £3,263,000 (2006: £3,571,000). The weighted average number of shares outstanding in the three months ended 30 June 2007 was 285,254,837 (2006: 191,051,924). The loss for the three months ended 30 June 2007 was £1,876,000 (2006: £1,712,000) Anti-dilutive potential securities outstanding not included in the loss per common share calculation at 30 June 2007 total 172,646,014 (2006: 120,735,449) 8 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 all equipment is delivered. According to the current contract schedule that would result in the cash related to the H6 programme being under the performance bond restriction until 2010. In March 2007 the CLRV contract was cancelled and the cash bond of £515,000 in respect of this programme was cancelled and the cash became unrestricted. In September 2005 the Company committed cash bonds of £250,000 in support of a development contract. The contract required the bonds to remain in place until completion of certain contract milestones. These milestones were completed in January 2007 when the bond was cancelled and the cash became unrestricted. During March 2007 the Company committed cash bonds totalling £410,000 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. At 30 June 2007 cash subject to restrictions totalled £1,141,000 (December 2006: £1,496,000) and is secured over an equivalent cash balance. TURBO POWER SYSTEMS INC.SIX MONTHS ENDED 30 JUNE 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED 9 Long - term assets Cost Impairment Amortisation Net book value £'000 £'000 £'000 £'000 At 30 June 2007: Investments 107 73 - 34 Intangible assets 4,079 1,663 2,353 63 Goodwill 863 43 - 820 Tangible assets 8,653 - 6,411 2,242 -------- -------- -------- -------- Total long term assets 13,702 1,779 8,764 3,159 ======== ======== ======== ======== At 31 December 2006: Investments 104 73 - 31 Intangible assets 4,074 1,663 2,334 77 Goodwill 863 43 - 820 Deferred finance 474 - 329 145 Tangible assets 8,350 - 5,989 2,361 -------- -------- -------- -------- Total long term assets 13,865 1,779 8,652 3,434 ======== ======== ======== ======== 10 Share capital - issued shares Common A Ordinary Number £'000 Number £'000 At 1 January 2006 190,510,259 44,753 - - Conversion of convertible notes 541,665 65 - - Redemption of convertible notes 32,450,000 3,435 31,250,000 4,320 Issue of common shares, net of share issue costs 50,442,668 3,666 25,000,000 1,803 --------------- -------- ----------- -------- At 31 December 2006 273,944,592 51,919 56,250,000 6,123 =============== ======== =========== ======== Redemption of convertible notes - - 58,750,000 7,379 Issue of common shares, net of share issue costs 44,626,470 3,886 - - -------------- -------- ----------- -------- At 30 June 2007 318,571,062 55,805 115,000,000 13,502 ============== ======== =========== ======== No options or warrants were exercised during the six months ended 30 June 2007. On 7 June 2007 the Company completed a £4,000,000 placing agreement with institutional investors for 44,450,000 Common shares of no par value in Turbo Power Systems Inc., at a price of £0.09 per placing share. TURBO POWER SYSTEMS INC.SIX MONTHS ENDED 30 JUNE 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED 11 Financing On 11 July 2003 the Company completed an £5,000,000 financing agreement with institutional investors. The financing comprised unsecured Convertible Notes and Warrants. The Convertible Notes have a term of five years and bear interest at a rate of 3.5% per annum. They are convertible into an aggregate of 25,000,000 Common Shares in Turbo Power Systems Inc. at a conversion price of £0.20 per share. The Warrants had a term of three years and were convertible into an aggregate of 3,500,000 Common Shares in Turbo Power Systems Inc. at an exercise price of £0.15 per share. 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 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. On 28 December 2006 the Company completed a £6,000,000 (gross) financing agreement with institutional investors. The financing comprised 50,000,000 Common Shares in the company and 25,000,000 A-Ordinary shares in Turbo Power Systems Limited. The financing included the issue of 3,500,000 Warrants, having a term of three years and being convertible into an aggregate of 3,500,000 Common Shares in Turbo Power Systems Inc. at an exercise price of £0.15 per share. These warrants were issued on 6 January 2007 (see Note 13). On 28 December 2006, per an agreement reached with the holders of the convertible notes, the Company redeemed £2,500,000 of the 2003 Convertible Loan Notes and £2,360,000 of the 2005 Convertible Loan Notes at a redemption price of £0.08. The redemption was dependant upon the Company's shares being approved for trading on the AIM exchange which occurred on 28 December 2006. A further £2,500,000 of the 2003 Convertible Loan Notes and £2,000,000 of the 2005 Convertible Loan Notes were redeemed in January 2007 at a redemption price of £0.08. The Company has 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 debenture. Redemption of the convertible debentures in January 2007 resulted in an increase in deficit of £82,000 and an increase in retained deficit of £2,512,000. 12 Stock options, warrants and compensation expense The number of options and warrants outstanding as at 30 June 2007, and the movement during the six months then ended, are as follows: Options Warrants Number Number Outstanding at 1 January 2007 21,567,281 7,000,000 Cancelled (1,089,600) - Issued 11,760,000 3,500,000 ---------- ---------- Outstanding at 30 June 2007 32,237,681 10,500,000 ========== ========== TURBO POWER SYSTEMS INC.SIX MONTHS ENDED 30 JUNE 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED 12 Stock options, warrants and compensation expense (continued) The stock based compensation expense for the six month period ended 30 June 2007, included in Production costs was £52,000 (2006: £17,000), in Research and product development was £193,000 (2006: £122,000), and in General and administrative costs was £127,000 (2006: £96,000). On 6 January 2007 the Company issued 3,500,000 warrants as part of its financing agreement with institutional investors (see Note 11). 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 values of the options granted during the quarter ended 31 March 2007 a dividend yield of Nil, expected volatility of 65%, a risk free interest rate of 5.0% and an expected option life of 5 years have been assumed, and for options granted during the quarter ended 30 June 2007 a dividend yield of Nil, expected volatility of 75%, a risk free interest rate of 5.0% and an expected option life of 5 years have been assumed The fair value of the stock options granted during the quarters ended 31 March 2007 and 30 June 2007 was £0.06 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. 13 Selected quarterly information The following table sets forth selected consolidated financial information of the Company for the eight most recent quarters. Revenue Net loss (Loss) per share UK £'000 £'000 pence September 2005 809 (1,584) (0.9)December 2005 874 (1,249) (0.6)March 2006 969 (1,859) (1.0)June 2006 1,192 (1,712) (0.9)September 2006 1,470 (1,624) (0.8)December 2006 1,851 (1,124) (0.6)March 2007 2,033 (1,387) (0.5)June 2007 2,342 (1,876) (0.7) This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
TPS.L