Results for Q4 and the Year Ended 31 December 2014

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

Announces Results for the Fourth Quarter

and Year Ended 31 December 2014

TPS reports a Pre-Tax profit in the fourth quarter 2014

Key Features Q4 vs Q3 2014

· Pre-tax profit of £0.08 million (Q3 2014: loss £0.05 million).

· Cash inflow from operations improved to £1.38 million (Q3 2014: outflow £0.12 million).

· Order intake decreased 25% to £4.66 million (Q3 2014: 6.21 million).

· Revenue decreased 20% to £3.42 million (Q3 2014: £4.29million).

· Gross profit increased 9% to £1.40 million (Q3 2014: £1.28 million), with gross margin 41% (Q3 2014: 30%).

· Total expenses reduced 14% to £1.16 million (Q3 2014: £1.34 million).

· Operating profit recovered to £0.26 million (Q3 2014: loss £0.01 million).

Key Features FY 2014 vs FY 2013

· Revenue decreased 20% to £15.17 million (2013: £18.96 million).

· Total expenses reduced 32% to £5.83 million (2013: £8.63 million).

· Operating loss before other operating income decreased 37% to £1.86 million (2013: £2.95 million).

· Cash outflow from operations improved 77% to £0.77 million (YTD 2013: £3.34 million).

On 20 February 2015 the Company announced that the Board are conducting a strategic review of the Company's business and as part of this review are looking at a potential sale of the Company. The Board has appointed Lincoln International LLP to assist in this process. The Company is a Canadian Business Corporation, registered in Yukon, Canada and is not subject to the provisions of the UK City Code on Takeovers and Mergers. Further announcements will be made in due course, as appropriate. In the meantime there can be no certainty that any potential transaction will proceed, or as to the terms of any such transaction. The Company may discontinue the strategic review process at any time.

The Company remains critically dependent on the existing loan and continuing financial support by TPS's ultimate parent company, Vale Soluções em Energia S.A. ("VSE"), the Brazilian energy solutions company, which owns 89.4% of the issued share capital of the Company through its wholly owned subsidiary Tao Sustainable Power Solutions (UK) Ltd ("TAO UK"). VSE is dependent on its major shareholders Vale SA ("Vale"), Brazil's largest mining company, and Banco Nacional de Desenvolvimento Econômico e Social ("BNDES"), Brazil's national development bank. During December 2014 the loan was increased by £0.59 million so that as at 31 December 2014 the loan outstanding from TAO UK amounted to £11.76 million (being principal of £10.48 million and accrued interest of £1.28 million), which is repayable on 1 April 2017 following a two year extension to the repayment date to 1 April 2017 as announced on 16 March 2015.

Carlos Neves, Chief Executive Officer, said:

"We are pleased to announce that TPS returned to Pre-Tax profitability in the quarter, and reported a return to operating profit for the half year.

We continued to implement our strategy of bidding for profitable production and development contracts, whilst maintaining a disciplined and considered approach to costs which has resulted in a reduction in our total expenses by 14% quarter-upon-quarter and significantly improved the level of cash flows from operations.

We continue to see opportunities available where TPS's excellence in the manufacture of innovative designs and its ability to implement new ideas are valued by our customers."

For further information, please contact:

Notes to Editors

About Turbo Power Systems

Company Website: www.turbopowersystems.com 

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

Turbo Power System's existing customers include blue chip companies such as Bombardier Transportation, Daikin Applied, Eaton Aerospace and UK Power Networks. The Company also has commercial contracts with its ultimate parent company, Vale Soluções em Energia S.A. ("VSE"), the Brazilian energy solutions company, which through Tao Sustainable Power Solutions (UK) Ltd ("TAO UK"), which is a VSE wholly owned subsidiary and TPS's parent undertaking, owns 89.4% of the issued share capital of the Company. VSE is dependent on its major shareholders Vale SA ("Vale"), Brazil's largest mining company, and Banco Nacional de Desenvolvimento Econômico e Social ("BNDES"), Brazil's national development bank.

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

This review has been prepared as at 16 March 2015.

Financial Performance

This is my second Chairman's statement since joining the Board on 3 March 2014 and as of the date of this report my first full year with the Company.

I am pleased with the progress the Company has made, especially during the second half of the year as the Company moved into an operating profit of £0.26 million from a loss of £1.92 million in the first half.

During 2014 Turbo Power Systems Inc. ("TPS" or "the Company") has benefited from the continuous improvements that were started in 2012, especially implementing efficiencies in the business and renegotiating pricing on certain long-term contracts.

Performance

Order intake in the year to 31 December 2014 ("2014") of £18.00 million (2013: £17.40 million) was up 3%, as the Company built on the objective to win and deliver profitable contracts.

Revenue in 2014 of £15.17 million was down 20% compared with the previous year's £18.96 million, primarily due to reduced production volumes due to delays in customer requirements on existing contracts.

2014's operating loss was £1.66 million, a year-on-year improvement of 30%, due predominantly to management's actions in better controlling costs, winning profitable projects and negotiating increased margins on certain long-term contracts.

During 2014, the Company reaffirmed its relationship with its existing customer base, with new orders from Bombardier for the Toronto Rocket product and further production and development orders from Daikin for existing products and new designs. These orders follow the strategy of driving the Company towards annual profitability.

2014 is the first full year of the benefit of consolidating the Company's UK based operations in Gateshead. Headcount was adjusted from 142 in December 2013 to 125 in December 2014, a reduction of 12%, to deal with the revenue decrease of 20%.

Research and development net costs have reduced by 40% to £1.75 million (2013: £2.90 million), with a better focus and in line with the Board's plans for the year. Costs were £1.91 million prior to a research and development tax credit of £0.16 million that is due to the Company from HM Revenue & Customs (2013: £nil).

General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listing, were reduced by 30% to £3.46 million (2013: £5.01 million). This reflects the full year benefit of the consolidation of the Company's UK based operations in Gateshead with the closing of its Heathrow facility during 2013.

Other operating income represents the release of the Regional Growth Fund grant to the income statement. The release during the year was £0.23 million (2013: £0.57 million), with a cumulative amount released to date of £0.80 million.

The loss before taxation for the year was £2.31 million (2013: loss £2.85 million), an improvement of 19%.

Capital investment in 2014 amounted to £0.28 million (2013: £0.24 million) and related to production equipment, internally generated development costs, computer equipment and a new enterprise resource planning business system.

Professor Colin Besant

I would like to take this opportunity to remember Professor Colin Besant, a Non-executive director, who passed away on 19 July 2014, aged 78.

Colin had been a Professor of Manufacturing Engineering at Imperial College since 1986 where he and his team developed patented axial flux technology for use in high speed generators. In 1993, Professor Besant transformed the achievements of Imperial College into a commercial reality through the establishment of TPS. TPS later expanded its technology base to include high performance electric motors and generators, drives and power electronics.

As customers and employees past and present will know, Colin's commitment and dedication to TPS was ever present serving as former Chairman and Chief Executive Officer of TPS and as a Board member since 1994.

The Board greatly misses Colin's engineering excellence and his enthusiasm, vision and wisdom.

Regional Growth Fund

During 2011 the Company made a successful application for a grant under the Regional Growth Fund. The grant is to promote investment in the North East of England, through capital expenditure and job security and creation. The first tranche (£0.75 million) of the award was received in February 2013, a second tranche (£0.25 million) in June 2013 and a final tranche (£0.04 million) was received in March 2014.

The Company has to maintain an average of 152 jobs secured or created, over the 5 years of the project. The Company's plan envisages that the average headcount over the five year period will exceed this requirement.

Funding

During the year Tao Sustainable Power Solutions (UK) Limited ("TAO UK"), TPS's majority shareholder, agreed to increase the Company's existing debt financing facility, including accrued interest, to £11.76 million (31 December 2013: £10.13 million). This funding has been used to cover working capital needs and to set the Company ready to deliver growth in 2015. TAO UK is a wholly owned subsidiary of Vale Soluções em Energia ("VSE") a Brazilian company.

The loan repayment date of 1 April 2016 was further extended on 16 March 2015 to 1 April 2017.

The Directors regularly review and consider the current and forecast activities of the Company in order to satisfy themselves 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 budgets and forecasts TAO UK continues to support the Company through the existing loan arrangements and cash advances as and when required.

The Company is critically dependent upon i) customers paying to contractual terms and ii) the continued financial support of its intermediate parent undertaking TAO UK, which in turn is dependent on its parent undertaking VSE (which in turn is dependent on its major shareholders Vale SA, Brazil's largest mining company, and Banco Nacional de Desenvolvimento Econômico e Social (BNDES), Brazil's national development bank, for such continued financial support in order to meet budgeted and forecasted working capital requirements and support the Company's growth plans. If not secured, this may result in the curtailment of the Company's activities.

The Directors are aware that the Company remains critically dependent on loan funding, but have a reasonable expectation that the Company has sufficient cash resources based on the expected parent company support, which would be needed to continue in operational existence while the Company seeks to achieve its target of being cash flow positive. For these reasons, the Directors continue to adopt the Going Concern basis in preparing these Consolidated Financial Statements, and disclose in Note 2 to the Consolidated Financial Statements the conditions and events that cast significant doubt on the Company's ability to continue as a going concern.

As in 2013, the Independent Auditor's report contains an Emphasis of Matter paragraph referencing this uncertainty relating to the going concern.

Strategic Review

Subsequent to the year end, on 20 February 2015 shareholders were informed that the Board are conducting a strategic review of the Company's business and as part of this review are looking at a potential sale of the Company. The Board has appointed Lincoln International LLP to assist in this process. The Company is a Canadian Business Corporation, registered in Yukon, Canada and is not subject to the provisions of the UK City Code on Takeovers and Mergers. Further announcements will be made in due course, as appropriate. In the meantime there can be no certainty that any potential transaction will proceed, or as to the terms of any such transaction. The Company may discontinue the strategic review process at any time.

Strategy and Outlook for the Business

Looking ahead, the Board intends TPS to remain a technology-led company. The commitment to embrace new ideas and fund research and development will drive products that are more efficient to operate and provide a competitive advantage in the market place.

As detailed last year, the Board has realigned the Company's focus as follows:

· Improve the quality of the portfolio;

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

· Consistent delivery of internal improvements.

The Company continues to operate a development programme, which leads the design of new efficient and cost effective products and a manufacturing base that exports units across the globe. The Company believes that by having design and manufacture work closely together better allows the required synergies and efficiencies to be realised.

The focus on diversifying the customer base has moved forward in 2014 with the signing of significant new contracts. For instance, the contract with UK Power Networks (UKPN), who distribute more than a quarter of the UK's electricity through its networks of substations, underground cables and overhead lines across London, the South East and the East of England. The Company will supply the prototypes for the ground-breaking new design of electrical energy controller for trials on the electricity distribution networks in the London and Brighton areas. This contract demonstrates the Company's ability to produce these specialised units as well as the design work. The Company will, therefore, be building its expertise in the grid linked market as well as the stand alone rail power market.

The Company has also licensed parts of its intellectual property (IP) for the first time in 2014. The licensing of IP was identified as a very efficient way to explore the markets that are not the current focus of the Company. This allows the Company to capitalise on its prior expenditure, and produce a new revenue stream for the Company, with the potential for further opportunities in the market place.

During the year the Company continued to actively pursue exciting new projects with new customers to increase the diversity of both our customer base and our technology portfolio, with the right level of profitability. This drive, which coupled with a continued focus on operational efficiencies throughout the business, is a key part of the plan to further improve performance and achieve annual profitability.

The Board and I look forward to 2015's performance with measured confidence.

Fernando Senhora

Chairman

16 March 2015

Management's discussion and analysis ("MD&A")

The following information should be read in conjunction with Turbo Power Systems Inc. ("TPS") audited consolidated financial statements for the year ended 31 December 2014 and related notes, which are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the IASB. All amounts in the MD&A, audited consolidated financial statements and related notes are expressed in Sterling, unless otherwise noted.

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.

This MD&A has been prepared as at 16 March 2015.

Business of the Company

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

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

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

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

Way Forward

As a technology-led company, we understand the challenges of the market regarding quality, costs and timing. Since 2013 we have concentrated on three important pillars that will continue to be key to achieving our long term strategy, as follow:

· Improve the quality of the portfolio;

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

· Consistent delivery of internal improvements.

Improve the quality of the portfolio

The Company aims to optimise, simplify, standardise and automate wherever possible the following portfolio categories: products offered, operational sites, inventory, receivables and staffing.

The Company made improvements from 2013, working to dilute the concentration of revenues from its then largest customers, sectors and geographies. An example of this are the contracts won with UK Power Networks during 2014. The focus remains on developing our capabilities, products and bespoke solutions and recognising where the value of our proposal can be fully appreciated.

In 2013 the Company closed its facility at Heathrow and consolidated manufacturing at the Gateshead facility. This has led to a more efficient use of space and in addition eased the ability to identify opportunities to optimise our inventory levels. The integration of the two sites has gone well in 2014, with continuous production to customers. The overall cost saving on facilities has been reflected in the lower operating costs during 2014 and this will continue in the future.

TPS has in place a rigorous process to control the Company's outstanding debtors. Currently the Company has a small number of large debtors and works to ensure that any overdue balances are effectively managed. Given that older contracts are with large multinational companies, this continues to be an area of major emphasis for the Company. The long-term nature of the contracts gives the Company guaranteed revenue, but can lead to longer payment cycles by the customer. For newer contracts the Company is seeking to implement a process of controlling debtors by the use of irrevocable letters of credit. The Company does not have a history of bad debts, but seeks to further improve its working capital position.

The Company has always undertaken maintenance, repair and overhaul ("MRO") activities. The Company implemented changes in the internal management of this area to accelerate growth in these MRO activities where the Company's expertise can bring added value to customers. Due to this added value the Company believes that this can be a profitable revenue stream in the future. MRO revenue grew 36% in 2014 to £ 1.65 million (2013: £ 1.21 million).

Superior execution within design development, manufacturing operations and support activities

The Company recognises that its 30 years of experience together with the talented and highly skilled workforce are the most important assets it has. The Board remains focussed on the continuous pursuit of efficiencies, so as to allow TPS to react faster and be even more integrated to fulfil the market's needs.

The Board acknowledges the major changes undertaken by the Company over the past few years and now wishes to consolidate and build on that experience.

In this report last year the Board noted that as part of its continuous improvement process, the Board undertook two studies during 2013.

· The first study was into the Company's intended markets and product line alignment. The outcome was to ensure that the Company focused on the markets with profitability and long-term growth potential. During 2014 the Company has continued to target the Rail market as an important market, but has also focused on the Industrial and Energy markets, where its products and skills have a unique selling point. In addition, as part of this study, the correct technology ideas were identified and our research and development road map was aligned accordingly.

· The second study reviewed the Company's organizational structure put in place in 2012 combined with the output of the markets study mentioned above. During the year the Company implemented a change in the internal structure that led to a different management structure within the engineering design and development departments. These departments have been re-aligned into market sectors to allow focus on the specific needs. The Company operates a skills based structure that allows individual engineers to move between market sectors as the need arises.

The Board believes that these changes are in line with results of the studies and are starting to bring the desired results in terms of improved productivity and organisational control.

Consistent delivery of internal improvements

The changes discussed above are part of the Company's drive for a culture where each of the areas are more integrated and capable of better understanding the overall objectives of the Company. In 2013 the roles and responsibilities of each department and individuals initially focussed on better cost control, delivered with excellence. The focus for 2014 was to achieve profitable revenue growth, through improvement in project monitoring and supply chain management.

Continuous improvements achieved in 2014 include:

· During 2014 the Company undertook a study into its IT infrastructure. Building on the past implementations of salesforce.com as the customer relationship manager, Creo as the engineering design and control database, and qPulse as the document management system, the Company selected Epicor as its enterprise resource planning software. Epicor covers the whole spectrum from order to cash collection, specifically bringing together inventory ordering, production management and financial reporting. The Company undertook a detailed review of its requirements and chose Epicor as being able to match those requirements with little or no customisation. The Company expects to benefit from the integration that Epicor brings in streamlining the processes and remove duplication within different systems. During 2015, it is envisaged to implement project management improvements by using Epicor and improve upon inventory control and reporting.

· The Company has continued to work with customers to review the quality and quantities of the products required. This has led to a greater appreciation of the value delivered by the Company through its products. The Company has completed an increase of the average selling price of one of its major products based on that value proposition.

· The Company has been working closely with its supply chain during the year. This cooperative approach has resulted in long-term agreements that fix in the supply base costs for ongoing contracts. Where a longer-term agreement has not been possible, the Company has been arranging new tender processes and value based purchasing. The Company has not compromised on its products' reputation for high quality and ease of maintenance.

· Where the Company has been manufacturing products for only a short time, the Company has instigated a process of "design for manufacture". This is to ensure that the Company's designs are optimal for manufacturing processes. The Company produces technology led solutions to customer problems, but once a product commences manufacture there are always improvements that can be implemented without prejudice to the design efficiency.

All the above objectives will continue the culture of cost consciousness and seek to eliminate excess costs.

Current Sectors

· Transport

o Rail

The Company continues its major partnership with Bombardier. During the year the Company concluded its negotiation for further units of the Bombardier Toronto Rocket units. This order will ensure that production continues into 2015. However, due to a strike at the Bombardier production facility at Thunder Bay in Canada, shipment deliveries have been delayed from 2014 into 2015. The Bombardier Sao Paulo unit continued in production until September 2014, when shipments were halted due to a delay with the introduction of the Monorail train in Sao Paulo. Shipments are expected to recommence in October 2015 and continue into 2018.

The Rail market is a major market for the Company and we continue to pursue new customers with the intention of providing platform solutions that are applicable for more than one project at a time. During 2013 the Company entered into an agreement to supply units to SCOMI for the Malaysian market. The Company shipped units during 2014, with the final shipments expected in mid-2015. The Company is actively pursuing opportunities with other major rail companies in both the UK and in export markets such as USA, India, and Brazil.

o Aerospace

The Jettison Fuel Pump motor drives for Eaton Aerospace continue to be delivered in line with the customer's call-off rate. As the Boeing 787 Dreamliner has entered into revenue service, orders quantities continue to increase in line with the aircraft build acceleration and remain a stable revenue and profitable stream.

· Industrial

o Laser Power Supplies

The demand from our customers continued during 2014 and provided steady production through the year. The expectation for 2015 is that demand will continue at a similar rate. The Company noted last year that it would be seeking to expand in this area with reviews of potential new customers and market appraisals. Currently, the Company is still in negotiations with new customers.

o Industrial Motors and Drives

The Company has a major ongoing relationship with Daikin and is seeking to expand the previous US centric relationship to the global reach of Daikin. Current orders are continuing and the Company's expectation is that this demand will continue in the coming years.

Further development work is on-going on newer designs for electric motors and drives to ensure the business remains competitive in this market.

· Defence

o High speed motor design

Following the market reviews in 2013, the Company identified that there were unique characteristics to the product range that would be applicable to this market. The Company has entered into a small design agreement for a low power but high speed motor. It is hoped that this initial agreement will lead to a further contract for the design of a large multi megawatt motor. Currently this is envisaged to be design work with the end customer performing the manufacture. This approach has been adopted to reduce the level of working capital required to complete the project and concentrate on the higher value intellectual property (IP) created by design work.

· Energy

o Development

During the year the Company announced a major contract with UK Power Networks to supply the prototypes for the ground-breaking new design of electrical energy controller for trials on the electricity distribution networks in the London and Brighton areas. This contract demonstrates the Company's ability to produce these specialised units as well as the design work. The Company will, therefore, be building its expertise in the grid linked market as well as the stand alone rail power market.

The increasing occurrence of low carbon technologies connecting to the electricity network, as a consequence of the planned transition to a low carbon economy, is increasing the load on low voltage (LV) distribution networks. The Company's electrical energy controller achieves a controllable coupling for the LV feeders of multiple substations, through which the load on each sub-station can be balanced to reduce the likelihood of over-loading of transmission equipment. Based on loading profiles, capacity sharing at peak load times is achieved by allowing the transfer of power between substations as well as from one electrical phase to another within the same substation. This is expected to enable low carbon technologies to be accommodated through existing substations, reducing the requirement for additional infrastructure.

This contract has opened up the low carbon renewable energy market with other opportunities being offered to the Company. Opportunities exist in the small and medium scale renewables market, such as wind turbines, which the Company is looking to exploit as the technology moves towards more mainstream acceptance and the industry matures.

The Company continues to pursue the energy efficiency market for its electric motors and generators. Market studies have been conducted into energy recovery systems and the Board believes that TPS's technology would work very well with the push into the energy space. The Company is currently exploring opportunities with partners to provide systems that can be self-sufficient for energy recovery and subsequent energy generation at on site locations. The Company sees this as an important market for future growth in both development design revenue and production revenues. However, this is also seen as a market where acceptance by the customer for production takes a considerable period.

Business Model

TPS operates by selling engineering design services and manufacture of high-speed electric machines and power electronics. The design and manufacture could be undertaken as separate activities or as one single contract, depending on the needs of the customer. The Company seeks to retain ownership of the intellectual property created as a result of any design activities. The Company also undertakes speculative research and development activities in order to remain at the forefront of technology.

Engineering design contracts are accounted for as long-term contracts, where revenue is matched to costs incurred to provide recognition of profit based on the activity undertaken. For manufactured units, revenue and profit is recognised as the units are delivered.

TPS seeks to capitalise on the special design capabilities within the Company. This can be in the form of increased down payments on long-term contracts or increased revenue for that part of a contract. A typical contract would involve an upfront down payment to cover engineering design work followed by milestones as value is transferred, followed by a per unit sales rate as units are manufactured.

The Company also licenses parts of its intellectual property where the situation and customer needs are appropriate. This allows the Company to capitalise on its prior expenditure but without the need for full scale production. This is a new revenue stream for the Company, with the potential for further opportunities in the market place, and is accounted for under the development segment.

The Company would provide a warranty on units delivered for typically one or two years, then moving to undertaking repairs on a revenue bearing basis. The Company can also undertake maintenance, repair and overhaul of units that were not manufactured by the Company. This revenue is accounted for under the production segment.

Principal Risks and Uncertainties

Summary

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

We believe that the orders signed in the year confirm the opportunities available arising from TPS's excellence in the manufacture of innovative designs and its ability to implement new ideas are valued by customers.

The Company remains critically dependent on loan funding from its ultimate parent VSE (which in turn is dependent on its major shareholders Vale and BNDES) to continue funding the planned growth in 2015 and beyond.

The operating profit in the second half of the year is supplemented by the current order book that extends over the next two years. Nevertheless the need to win further substantial orders, execution of those orders and completion of development programmes in a consistent and timely manner are key to delivering management's plans for the improved results during 2015 and beyond.

Internal Control

The Board of Directors has overall responsibility for the accounting policies and ensuring that the Company maintains an adequate system of internal financial control to provide them with reasonable assurance that assets are safeguarded and of the reliability of financial information used for the business and for publication. More detail on the Company's internal control can be found on page 34 of the Annual Report and Financial Statements for the year ended 31 December 2014.

Financial Performance

Order intake during the year amounted to £18.00 million (2013: £17.40 million), as the Company concluded contracts with new customers. The current order book covers revenue for 2015 through to 2018, as the Company enters into long term supply contracts.

Total revenues in the year of £15.17 million were 20% lower than in the previous year, (2013: £18.96 million), primarily due to reduced production volumes and delays in customer requirements on existing contracts.

Research and product development costs decreased by 40% to £1.75 million (2013: £2.90 million). The Company continues its investment in new technologies to increase its technical capabilities for new marketplaces. In 2014 the Company capitalised internally generated development costs of £0.09 million (2013: £nil) and provided for the research and development tax credit due to the Company from HM Revenue and Customs of £0.16 million (2013: £nil).

General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, were down by £1.55 million (30%) to £3.46 million (2013: £5.01 million). The major element was the adjustment in headcount in permanent and temporary staff in the year from 142 in 2013 to 125 by 31 December 2014. The Company has also sought to reduce its operating costs by moving all operations to Gateshead and closing the Heathrow office during 2013, with a full year benefit in 2014. The Company has also reviewed the asset retirement provision and has released £0.26 million as a one-off benefit in 2014 (2013: benefit £0.28 million).

The Company reduced its loss before interest, tax, depreciation, amortization, foreign exchange and stock compensation by £0.62 million (32%) to £1.29 million (2013: £1.91 million), primarily as a result of expenses, which fell by £2.67 million, offset by lost margin on sales of £1.71 million and reduced grant income of £0.34 million.

The Company recorded an operating cash outflow before working capital movements of £1.55 million for the year (2013: £3.06 million). After adjusting for changes in working capital items and purchases of property, plant and equipment, the Company suffered an overall cash outflow before financing of £1.01 million (2013: £2.58 million), an improvement of £1.57 million.

Net cash inflow from financing during 2014 of £0.99 million (2013: £3.57 million), resulted in an overall net cash outflow for the year of £0.02 million (2013: inflow £0.99 million). 2013 included a receipt of a government grant, under the Regional Growth Fund, of £1.00 million (2014: £nil)

The Company finished the year with an unrestricted cash balance of £1.83 million (2013: £1.85 million) and held further cash of £0.07 million (2013: £0.13 million) associated with a performance bond, rent and utility deposits.

During the year ended 31 December 2014 the Company undertook significant transactions with related parties. The Company has a loan facility from its majority investor TAO UK, to support working capital requirements, bearing interest at 6% and being repayable upon request after 1 April 2016. At the beginning of 2014 the loan balance outstanding was £9.49 million. During the year the Company increased the loan by £0.99 million (2013: £3.57 million). As at 31 December 2014 the amount outstanding is £11.76 million, including rolled up interest of £1.28 million. Since the year end on 16 March 2015 the repayment date of the loan has been extended to 1st April 2017.

The Company raised no invoices to VSE, the parent organisation of TAO UK, in 2014 (2013: £0.09 million, for initial development activities under arms-length commercial contracts).

Going Concern

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

The Company is critically dependent upon i) customers paying to contractual terms and ii) the continued financial support of its intermediate parent undertaking TAO Sustainable Power Solutions (UK) Limited (TAO UK), who in turn is dependent on their parent undertaking VSE (which in turn is dependent on its major shareholders Vales S.A. (Vale) and Banco Nacional de Desenvolvimento Econômico e Social (BNDES)). The Company relies on TAO for continued financial support in the form of the loan made available to the Company, and in order to meet any shortfall in budgeted or forecasted working capital requirements and support the Company's growth plans. If not secured, this may result in the curtailment of the Company's activities.

As at 31 December 2014 the Company had net operating outflows, with a net debt of £14.26 million, being £16.09 million of debt less £1.83 million of cash. The Company has a cumulative deficit of £98.58 million as at 31 December 2014 and was loss making for the year then ended.

If the Company is unable to generate positive cash flows from operations, ensure the continued financial support from TAO UK and ultimately VSE and its major shareholders, or secure additional debt or equity financing these conditions and events indicate the existence of material uncertainty which may cast significant doubt regarding the going concern assumption and, accordingly, the use of accounting principles applicable to a going concern.

However the Directors believe that they will succeed in delivering the Company's projected financial performance and that financial support from TAO UK and, ultimately, VSE, which is dependent its major shareholders, Vale, Brazil's largest mining company, and BNDES, Brazil's national development bank, will remain in place to enable the Company to meet budgeted and forecasted working capital requirements and support the Company's growth plans. Although there are no formal letters of support in place for the purpose of the directors' going concern assessment of the Company, the directors of the Company have taken comfort from the actions taken by TAO UK, in that loans have been provided throughout 2014 and that the majority of the Board are VSE representatives, in forming their conclusion that they believe it is appropriate to prepare these financial statements on a going concern basis. Accordingly, they have continued to adopt the going concern basis of preparation.

These consolidated financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, which would be necessary if the going concern assumption were not appropriate.

Summary of Quarterly Results

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

Research and development expenditure in 2014 was 40% lower than 2013. The Company continues to invest in new technologies to maintain its technical capabilities in the future and has capitalised £0.09 million of internally generated development costs (2013: £nil), and reduced the net cost of research and development by recognising £0.16 million of research & development tax credit due from HM Revenue & Customs in December 2014.

The Company has continued to control its general and administrative costs. 2014 benefitted in December 2014 by £0.26 million (June 2013: benefit £0.50 million: December 2013: charge £0.24 million) from one-off for the releases of asset retirement provisions.

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 will be mailed to shareholders during April 2015.

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

Turbo Power Systems Inc.

Condensed consolidated income statement

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

Turbo Power Systems Inc.

Condensed consolidated statement of financial position

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Approved by the Board:

F Senhora, Chairman

16 March 2015

Turbo Power Systems Inc.

Condensed consolidated statement of changes in equity

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

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

Turbo Power Systems Inc.

Condensed consolidated statement of cash flows

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

Turbo Power Systems Inc.

Notes to the condensed consolidated financial statements

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1 Reporting entity

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

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

The Company's intermediate parent undertaking is TAO Sustainable Power Solutions (UK) Limited ("TAO UK"), a company registered in England and Wales, UK. The Company's ultimate parent undertaking is Vale Soluções em Energia S.A. ("VSE"), a company registered in Brazil.

The Company's subsidiaries comprise:

2 Goingconcern

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

The Company is critically dependent upon i) customers paying to contractual terms and ii) the continued financial support of its intermediate parent undertaking TAO UK, who in turn is dependent on their parent undertaking VSE (which in turn is dependent on its major shareholders Vale and BNDES) for such continued financial support in order to meet budgeted and forecasted working capital requirements and support the Company's growth plans. If not secured, this may result in the curtailment of the Company's activities.

As at 31 December 2014 the Company had net operating outflows, with a net debt of £14.26 million, being £16.09 million of debt less £1.83 million of cash. The Company has a cumulative deficit of £98.58 million as at 31 December 2014 and was loss making for the year then ended.

If the Company is unable to generate positive cash flows from operations, ensure the continued financial support from TAO UK and ultimately VSE, or secure additional debt or equity financing these conditions and events indicate the existence of material uncertainty which may cast significant doubt regarding the going concern assumption and, accordingly, the use of accounting principles applicable to a going concern.

These consolidated financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications. which would be necessary if the going concern assumption were not appropriate. This could be material.

However the Directors believe that they will succeed in delivering the Company's projected financial performance and that financial support from TAO UK and, ultimately, VSE, which is dependent its major shareholders, Vale, Brazil's largest mining company, and BNDES, Brazil's national development bank, will remain in place to enable the Company to meet budgeted and forecasted working capital requirements and support the Company's growth plans. Although there are no formal letters of support in place for the purpose of the directors' going concern assessment of the Company, the directors of the Company have taken comfort from the actions taken by TAO UK, in that loans have been provided throughout 2014 and that the majority of the Board are VSE representatives, in forming their conclusion that they believe it is appropriate to prepare these financial statements on a going concern basis. Accordingly, they have continued to adopt the going concern basis of preparation.

3 Basis of preparation

These financial statements comply with and have been prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards (IFRSs) in issue and effective at 31 December 2014.

The consolidated financial statements were authorised for issuance by the Board of Directors on 16 March 2015.

The consolidated financial statements have been prepared under the historical cost convention.

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

4 Critical accounting judgements and key sources of estimation uncertainty

These consolidated financial statements have been prepared on the basis of International Financial Reporting Standards applicable to a 'going concern', which assume that the Company will continue in operation for the foreseeable future and will be able to realise its assets and discharge its liabilities in the normal course of operations. As at 31 December 2014 the Company had net operating cash outflows. Therefore the Company may require additional funding which, if not raised, may result in the curtailment of activities. The Company has a cumulative deficit of £98.58 million as at 31 December 2014

Further information on Going Concern is provided in Note 2.

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

Estimates and underlying assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future period affected.

5 Segmental analysis

The Company operates an integrated operation structured along the lines of product research and development, and production. The Board and management make strategic decisions and review the results of the Company on this basis. Corporate charges relating to the financing of the Company and other related management activities are allocated between the two reportable segments.

The Board together with the Chief Executive Officer and the Chief Financial Officer are the chief operating decision makers for the Company.

Both segments operate in the United Kingdom. Except for the investments held by the Company which are located in Canada, all of the Company's assets are located in the United Kingdom.

Geographic Segmental Information

All property, plant and equipment was located within the United Kingdom during both periods ended 31 December 2013 and 31 December 2014. All significant revenue for 2014 and 2013 is related to the sale of goods.

6 Loss per share

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

As the Company experienced a loss in both full 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 loss per share calculations at December 31 are as follows:

8 Loans and borrowings

On 22 October 2010 the Company agreed to a loan facility with TAO UK, which bears interest at 6% per annum and is repayable upon demand commencing 2 January 2012. During 2012 the repayment term was renegotiated and the loan became due upon demand commencing 1 April 2014. In March 2014 the repayment date was further extended to 1 April 2016. The repayment date was extended by one year on 16 March 2015 to 1 April 2017. The loan is secured by a fixed and floating charge over the assets of the Company's subsidiary TPSL.

The Company has drawn down on all its borrowing facilities as at 31 December 2014 (2013: all loans drawn down in full).

Unpaid interest of £1,279,000 (2013: £645,000) is recorded in the loan amount.

9 Share capital and options

Share capital and other reserves

Share Capital

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

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

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

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

Other reserves

At 31 December 2014, other reserves comprise of the stock compensation reserve of £1,823,000 (2013: £1,823,000).

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

10 Related party transactions

Transactions with the parent and ultimate parent company

On 16 June 2010 the Company completed a fundraising and investment transaction that resulted in TAO UK, the wholly owned UK subsidiary of the Brazilian energy solutions company VSE, investing £6.5 million in exchange for 1,083,333,334 Common Shares in the Company, giving TAO UK a 75.4% controlling stake in the Company on an undiluted basis. The transaction was recorded at exchange amount. On 25 May 2012 the Company issued 1,899,111,111 common shares to TAO UK as a result of the conversion of £8.54 million of debt in the Company, at a price of 0.45p per share, increasing the controlling share to 89.4%

On 22 October 2010 the Company agreed a loan facility with TAO UK (as subsequently amended), which bears interest at 6% per annum and is repayable upon demand commencing 2 January 2012. The loan is secured by a fixed and floating charge over the assets of the Company's subsidiary Turbo Power Systems Limited. During 2012 the loan repayment date was extended to 1 April 2014. Since the year end, on 16 March 2015 the repayment date was further extended to 1 April 2017.

A summary of the loan movement is:

Accrued interest is recorded within the loan balance £1,279,000 (2013: £645,000)

During 2014 the Company has transacted business with VSE, totalling £nil (2013: £92,500). Amounts outstanding as at 31 December 2014 are VSE owe £nil (2013:£27,750) to the Company.

All transactions were conducted within the normal course of business for supply of engineering design services and were transacted at arms-length.

Key Management personnel compensation

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

Key management personnel compensation comprises the following: