Results for the Third Quarter

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

Announces Results for the Third Quarter and Nine Months Ended 30 September 2015

TPS reports a Pre-Tax profit for Q3,

and update on Strategic Review, including Loan Waiver

Financial highlights Q3 2015 vs Q3 2014

· Pre-Tax profit of £0.17 million (Q3 2014: loss £0.05 million).

· Revenue 24% lower at £3.25 million (Q3 2014: £4.29 million).

· Gross profit increased 8% to £1.38 million (Q3 2014: £1.28 million), with an increase in gross margin to 42% (Q3 2014: 30%).

· Total expenses for the period reduced by 23% to £1.03 million (Q3 2014: £1.34 million).

· Operating profit of £0.35 million, an improvement of £0.36 million versus the same period of last year (Q3 2014: loss £0.01 million).

Financial highlights YTD 2015 vs YTD 2014

· Pre-Tax profit of £0.28 million represents a turnaround of £2.67 million (YTD 2014: Loss £2.39 million).

· Order intake decreased 32% to £6.52 million (YTD 2014: £9.54 million), impacted by both the Company's more stringent selection process and uncertainties about the ultimate outcome of the Strategic Review.

· Revenue decreased 3% to £11.41 million (YTD 2014: £11.75 million).

· Gross profit increased to £4.79 million (YTD 2014: £2.57 million), driven by a gross margin recovery to 42% (YTD 2014: 22%).

· Total expenses for the period reduced by 14% to £4.01 million (YTD 2014: £4.67 million).

· Operating profit £0.81 million (YTD 2014: loss £1.92 million).

· Cash outflow from operating activities reduced 41% to £1.22 million (YTD 2014: £2.07 million).

Strategic Review and Loan Waiver

· Strategic Review of the Company's business, announced February 2015, is ongoing.

· As part of seeking to facilitate the Strategic Review, Tao Sustainable Power Solutions (UK) Ltd ("TAO UK"), which owns 89.4% of the issued share capital of the Company, has waived the entire outstanding loan of £10.48 million and all unpaid accrued interest of £1.89 million. TAO UK has agreed this waiver for the potential benefit of all TPS shareholders.

· Whilst the Loan Waiver is positive news for the Company, the Board notes that all expressions of interest received to date as part of the Strategic Review from potential offerors for 100% of the issued and to be issued share capital of the Company on a debt-free, cash-free basis have been indicatively priced at a substantial discount to the share price.

· The Board continues to regularly discuss with its majority owner how best to proceed with the Strategic Review.

· Further announcements will be made in due course, as appropriate.

Funding

As previously reported, the Company remains critically dependent on continuing financial support by TPS's 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 parent company Vale S.A. ("Vale"), Brazil's largest mining company. On 24 August 2015, the Company announced that the shareholding of VSE had changed to make VSE a wholly owned subsidiary of Vale S.A.

As at 30 September 2015 the loan outstanding from TAO UK amounted to £12.29 million (being principal of £10.48 million and accrued interest of £1.81 million), which was repayable on 1 April 2017. As reported above, as at 12 November the total amount owed of £12.37 million was waived by TAO UK.

Carlos Neves, Chief Executive Officer, said:

"We are delighted to announce that TPS has made a pre-tax profit for the fourth consecutive quarter, achieving, on a cumulative basis in 2015, a 42% gross margin (2014: 22%) and a pre-tax profit of £0.28 million (2014: loss £2.39 million). This demonstrates how focused our teams are on contract profitability and product creation efficiencies.

The implementation of our strategy and decisions made over the past 2 years have driven this result. The clear focus on improving the quality of our portfolio, superior execution within design for manufacturing and the ongoing delivery of internal improvements are achieving the expected results whilst creating a solid foundation for our continued and sustainable growth.

Our sales pipeline opportunities remain good, however the order intake of £6.52 million (2014: £9.54 million) has been impacted by both a more stringent selection process and by uncertainties about the ultimate outcome of the Strategic Review. Whilst this is expected to adversely affect performance in quarter 4, nevertheless we are confident that the year's results will still produce a significant improvement over 2014.

The strategy, current results, the increasing opportunities pipeline and the Loan Waiver re-affirm the Board's measured confidence for 2016."

For further information, please contact:

Notes to Editors

About Turbo Power Systems

Company Website: www.turbopowersystems.com 

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

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

Turbo Power System's existing customers include blue chip companies such as Bombardier Transportation, Daikin Applied and Eaton Aerospace. Tao Sustainable Power Solutions (UK) Ltd ("TAO UK"), which is a wholly owned subsidiary of Vale S.A., Brazil's largest mining company, owns 89.4% of the issued share capital of the Company.

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

Notice of no auditor review of interim financial statements

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

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

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

This review has been prepared as at 12 November 2015.

OPERATIONAL REVIEW

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 providing bespoke solutions to transport, industrial, energy and defence 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 high efficiency, space constraints, environmental considerations and volume production demands across the world.

TPS has a proven and worldwide track record developed over the last 30 years delivering equipment in many sectors, especially in rail and industrial. Long term relationships with global blue chip companies in these markets have been built based on TPS's expertise in high-speed electrical machines and power electronics enabling the Company to design and manufacture competitive quality products with proven reliability.

Way Forward

As a technology-led business, the Company understands the challenges of the market regarding quality, costs and timing. Since 2013 TPS has concentrated on three important pillars that have driven the successful strategy of the drive to profitability:

· Improve the quality of the portfolio;

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

· Consistent delivery of internal improvements.

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

Market Overview

Transport:

Rail is a growing sector with huge investment globally and it is a critical development infrastructure in many developing countries. As an established supplier for auxiliary power units and battery charges TPS can use its systems expertise to expand into traction systems and electric distribution systems.

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

Industrial:

The HVAC Systems market has been a major market for the Company where TPS has a long standing relationship with Daikin, a major OEM in this market. The Company continues to work closely with Daikin on the design and production of its next generation product lines. The Company continues to work with its customers of high speed direct connected motors and variable frequency drives for air/gas compression and blowers market.

Energy:

The energy recovery sector in which TPS is focusing is a growing sector, driven by continued increasing energy demand and cost. There are limited systems suppliers in this market who can bring TPS' expertise, experience and can interchange technologies and solutions to meet the market requirements. TPS has the pedigree and experience with grid linked inverters, which the Company believes is a growing sector. The Company is focusing on specialised niche applications (i.e. inverters for smart grid), where added value can be demonstrated, and the low carbon renewable energy market, such as wind turbines.

Defence:

Within this market, the Company has identified the growing sector in the electrification of naval vessels. TPS's technologies are suitable for energy recovery and efficiency, permanent magnet motors for traction systems and emission mitigation in marine systems which is being driven by recent marine regulations. Recently completed projects and current bids should provide the necessary track record for potential expansion within this market. The Company continues to look to capitalise on its track record with the 1MW generator in this market.

Current Operations

The Company is pleased to announce that the installation and commissioning of all the smart grid units for UK Power Networks was completed in the quarter. These units will now enter into field-testing for the next 12 months, with a view to long-term production commencing after that. Initial feedback from UK Power Networks has been very positive about operations to date. As previously announced, in April 2015 the Company was the winner of the UK Energy Innovations "Best Electricity Network Improvement" Award 2015, for its innovation in energy management with this product.

Production will commence in Q4 for the orders received from Wabtec Rail for the air conditioning power unit for the Class 321. During the quarter, the Company enhanced the design of the demonstrator that had previously been well received by the customer and train operator. Production income will continue through 2016.

Wabtec Rail is a large rail refurbishment company in the UK and provides products and services from new locomotives to aftermarket maintenance in the global market. The Company believes that these new orders show the strength of the product offering into the rail refurbishment market, in line with its strategy.

Revenue in the quarter of £3.25 million is 24% below the September quarter 2014 (£4.29 million) and 21% below the second quarter of 2015 (£4.09 million), as the Company continues to concentrate on profitable activities. The Company's focus on profitable contracts has increased the gross margin to 42% in the quarter (2014 Q3: 30%).

The Company completed production of the Bombardier Toronto Rocket units in the quarter. Production of the Bombardier Sao Paulo Monorail units is expected to recommence in Quarter 4, 2015. The Company is in active discussions with Bombardier to supply the next generation of units to the Chicago Transit Authority and for other production contracts including monorail and light rail auxiliary power units.

During 2015, the Company has been implementing a new Enterprise Resource Management system. This has involved a move away from several individual systems into the unified Epicor system. The Company believes that this is now showing benefits in its day-to-day processes and operations. A post implementation review is underway to further improve processes and systems. The final areas for integration are project management and customer relationship management, which are planned for Quarter 4. The full benefits of this implementation are expected to begin in 2016.

The Company is enhancing its well-established quality control system, currently ISO9001, AS9100 (Aerospace standards) and OHSAS 18001 (Health & Safety standards), by embarking on IRIS (International rail standards) certification. This is due to be completed in 2016. It is hoped that this will benefit the quality control processes, reduce the cost of engaging with new customers, as an extension of their quality control systems, and consequently increase our sales opportunities within the sector.

The overhead base has been reducing since its peak level in June 2012, with overall expenses for the nine months ended 30 September 2015 of £4.01 million, down 14% compared to 30 September 2014: £4.67 million and down 48% compared to 30 September 2012: £8.33 million.

Headcount at 30 September 2015 was 108, down 17 (14%) from June 2015: 125, as the Company continues to look for process changes that will lead to future efficiencies.

Strategic Review

On 20 February 2015 shareholders were informed that the Board was conducting a Strategic Review of the Company's business and as part of this review is looking at a potential sale of the Company. The Board appointed Lincoln International LLP to assist in this process.

The Board notes that 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.

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.

As part of the Strategic Review, TAO has waived the entire outstanding loan and all unpaid accrued interest. This will strengthen the Company's financial position and provide a potential benefit to all of shareholders of TPS.

Whilst the Loan Waiver is positive news for the Company, the Board notes that all expressions of interest received to date as part of the Strategic Review from potential offerors for 100% of the issued and to be issued share capital of the Company on a debt-free, cash-free basis have been indicatively priced at a substantial discount to the share price. The Board continues to regularly discuss with its majority owner how best to proceed with the Strategic Review.

The Strategic Review is ongoing, further announcements will be made in due course, as appropriate.

Support from Vale / TAO UK, including Loan Waiver

As at 30 September 2015 the current loan amount is £10.48 million plus accrued unpaid interest of £1.18 million.

The Company has not drawn down any additional loan during 2015 and continues to fund its own operations, but has not paid any of the accrued interest.

As an indication of continuing support to the Company, as announced today Vale / TAO has waived the loan principal of £10.48 million and accrued interest of £1.89 million. TAO UK has agreed this waiver for the potential benefit of all TPS shareholders.

Summary

In summary, the Company continued to implement the strategy of bidding for profitable production and development contracts. Encouragingly, these results for the third quarter 2015 show the fourth consecutive quarter of profitability for the Company.

The Board will continue to 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 Board are aware that there have been instances during the year where potential customers have refrained from concluding business with the Company until any uncertainty caused by the Strategic Review has been settled. However, notwithstanding these instances the Company has continued to report a pre-tax profit in the quarter compared to the loss reported last year.

The Company will continue to actively pursue exciting new projects with new customers to increase the diversity of both its customer base and its 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 build on this improved performance and achieve annual profitability.

Our sales pipeline opportunities remain good, however the order intake of £6.52 million (2014: £9.54 million) has been impacted by both a more stringent selection process and by uncertainties about the ultimate outcome of the Strategic Review. Whilst this is expected to adversely affect performance in quarter 4, nevertheless we are confident that the year's results will still produce a significant improvement over 2014.

The strategy, current results, the increasing opportunities pipeline, and the Loan Waiver re-affirm the Board's measured confidence for 2016.

Going Concern

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

As previously reported, the Company is critically dependent upon i) customers paying to contractual terms in order to meet budgeted and forecasted working capital requirements and; ii) the continued financial support of its intermediate parent undertaking TAO UK, a wholly owned subsidiary of Vale. If not continued, this may result in the curtailment of the Company's activities.

As at 30 September 2015 the Company had net operating outflows, with a net debt of £14.91 million, being £15.17 million of debt, including rolled up interest accruals of £1.81 million, less £0.26 million of cash. The Company has a cumulative reserves deficit of £98.44 million as at 30 September 2015 and was profit making for the quarter and nine months then ended.

If the Company is unable to generate positive cash flows from operations, ensure the continued financial support from TAO UK, a wholly owned subsidiary of Vale, 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 condensed consolidated interim 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 was 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, a wholly owned subsidiary of Vale, 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 Vale 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.

Summary of Quarterly Results

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

Revenue reduced to £3.25 million in the third quarter due to the reduction in production revenues mainly attributed to completing the Bombardier Toronto Rocket contract and the suspension of the Bombardier Sao Paulo contract until quarter 4 2015.

Research and development expenditure is showing as reduced in the quarter due to the positive effect of the R&D tax credit of £0.25 million.

General and administration expenses of £0.83 million were 5% below September 2014: £0.87 million.

Copies of Quarterly and Annual Results

The Company's full Financial Results and Managements' Discussion and Analysis for 2014, together with the Third quarter 2015 Financial Results and Managements' Discussion and Analysis are available on www.sedar.com. Full 2014 financial statements were mailed to shareholders during May 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

Review of the quarter ended 30 September 2015

Revenue

Revenue in the quarter ended 30 September 2015 was down 24% at £3.25 million (Q3 2014: £4.29 million.)

Production revenue for the quarter reduced by 20% to £2.82 million (Q3 2014: £3.53 million) as production on the Toronto Rocket units for Bombardier came to the end of the contract and the suspension of the Bombardier Sao Paulo contract until quarter 4 2015.

Development revenue decreased by 45% to £0.42 million (Q3 2014: £0.76 million) as revenue on development contracts commenced in 2014, including UK Power Networks, is concluded.

Cost of Sales

The cost of sales reduced 38% to £1.87 million (Q3 2014: £3.02 million).

Gross Profit

Gross profit increased by 8% to £1.38 million (Q3 2014: £1.28 million), with gross margin increasing to 42% (Q3 2014: 30%) reflecting the Company's commitment to increase the profitability of both its current and new contracts.

Research and product development

Research and product development costs in the quarter decreased by 66% to £0.12 million (Q3 2014: £0.35 million). In the quarter there was a benefit from the UK Government's Research and development expenditure credit scheme (RDEC tax credits) of £0.25 million gross of tax (2014 Q3: £nil). During the quarter the Company received a net amount of £0.20 million related to 2014 and has accrued for an estimated claim related to 2015.

General and administrative costs

General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, were down 5% at £0.83 million (Q3 2014: £0.87 million). The Company has continued to control its costs without prejudicing the business operational strengths. The headcount as at 30 September was 13 lower at 108 (30 September 2014: 121).

Operating profit

Operating profit before other operating income was £0.35 million (Q3 2014: loss £0.06 million).

Other operating income

There was no other operating income arising from the Regional Growth Fund in the quarter whilst the Company continues to review the project and its key milestones (Q3 2014: £0.05 million).

Finance expense

Finance expense of £0.18 million (Q3 2014: £0.04 million) arose from the interest on the loans from TAO UK (Q3 2015: £0.18 million, Q3 2014: £ 0.17 million) and the effects of foreign exchange movements (Q3 2015: £nil, Q3 2014: gain £ 0.13 million).

Taxation

Taxation comprises of tax deemed paid on R&D tax credits of £0.10 million (Q3 2014: £nil) and tax accrued on future R&D tax credit claims of £0.03 million (Q3 2014: £nil)

Net profit

The Company recorded a net profit before tax of £0.17 million (Q3 2014: loss £0.05 million). Net profit for the quarter after tax was £0.03 million (Q3 2014: loss £0.05 million).

Review of the nine months ended 30 September 2015

Revenue

Revenue in the nine months ended 30 September 2015 was slightly down by 3% to £11.41 million (Q3 2014: £11.75million.)

Production revenue for the nine months reduced by 9% to £9.60 million (Q3 2014: £10.60 million) as production was completed on the Toronto Rocket units for Bombardier.

Development revenue increased by 59% to £1.82 million (Q3 2014: £1.15 million) as revenue is recognised on development contracts commenced in 2014, including revenue related to UK Power Networks and licencing revenue.

Cost of Sales

The cost of sales reduced 28% to £6.62 million (Q3 2014: £9.18 million), net of release of a provision for a loss-making contract.

Gross Profit

Gross profit increased by 163% to £4.80 million (Q3 2014: £2.57 million), with gross margin increasing to 42% (Q3 2014: 22%) reflecting the Company's commitment to increase the profitability of both its current and new contracts.

Research and product development

Research and product development costs in the quarter decreased by 10% to £1.11 million (Q3 2014: £1.23 million), due to the timing of certain external expenditure and the R&D tax credits of £0.25 million (Q3 2014: £nil).

General and administrative costs

General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, were down by 8% to £2.68 million (Q3 2014: £2.91 million). The Company has continued to control its costs without prejudicing the business operational strengths. The headcount has reduced as at 30 September 2015 to 108 (31 December 2014: 125).

Operating profit

Operating profit before other operating income was £0.79 million (Q3 2014: loss £2.10 million).

Other operating income

There was no other operating income arising from the Regional Growth Fund in the nine months whilst the Company continues to review the project and its key milestones (Q3 2014: £0.18 million).

Finance expense

Finance expense of £0.53 million (Q3 2014: £0.47 million) arose from the interest on the loans from TAO UK (Q3 2015: £0.53 million, Q3 2014: £ 0.46 million) and the effects of foreign exchange movements (Q3 2015: £nil, Q3 2014: Loss £ 0.01 million).

Taxation

Taxation comprises of tax deemed paid on R&D tax credits of £0.10 million (Q3 2014: £nil) and tax accrued on future R&D tax credit claims of £0.03 million (Q3 2014: £nil)

Net profit

The Company recorded a net profit before tax of £0.28 million (Q3 2014: loss £2.39 million). Net profit after tax for the nine months was £0.14 million (Q3 2014: loss £2.39 million).

Cash flows for the nine months ended 30 September 2015

Operating cash flows

The Company recorded an operating cash inflow before working capital movements of £0.87 million for the nine months (2014: outflow £1.73 million).

After adjusting for changes in working capital items the Company suffered an overall cash outflow from operations of £1.22 million (Q3 2014: £2.11 million).

Investing activities

Cash outflows from capital investments in the nine months were £0.34 million (Q3 2014: £0.15 million). Capital investments include the costs associated with the implementation of the Epicor Enterprise Resource Management system during 2015, plant and equipment and capitalised research and development costs relating to new product generation.

Financing activities

There were no financing activities in the nine months ended 30 September 2015 (Q3 2014: £0.40 million).

Overall cash outflow for the period

Overall the cash outflow during the nine months was £1.56 million (Q3 2014: Outflow £1.82 million).

Balance sheet as at 30 September 2015

The Company ended the period with an unrestricted cash balance of £0.26 million compared with £1.83 million at 31 December 2014. Substantially all of the Company's cash balances are denominated in Sterling.

In addition, the Company had restricted cash amounts of £0.07 million (31 December 2014: £0.07 million), relating to utilities deposits and a performance bond for one customer contract.

Non-current assets have increased from £0.78 million at 31 December 2014 to £0.90 million at 30 September 2015, after depreciation and amortisation charges of £0.22 million.

Loans and borrowings have increased by interest of £0.53 million to £12.29 million. The loan and interest are shown as a non-current liability repayable on 1 April 2017. 

Subsequent to the balance sheet date, TAO UK has waived the entire outstanding loan and all unpaid accrued interest.

Net current assets at 30 September 2015, excluding restricted cash balances included under current assets, were £4.73 million (31 December 2014: £3.28 million).

As at 30 September 2015, the Company had 3,336,865,922 common shares issued and outstanding and 892,777,778 A ordinary shares issued and outstanding. As at that date there were 15,080,909 outstanding share options.

Contractual Obligations

Shareholders' equity

The movement in shareholders' deficit comprised:

As at 12 November 2015, the Company had 3,336,865,922 common shares issued and outstanding and 892,777,778 A ordinary shares issued and outstanding. As at that date there were 15,080,909 outstanding share options.

Liquidity

Cash and cash equivalents at 30 September 2015 were £0.26 million (31 December 2014: £1.83 million).

Restricted cash at 30 September 2015 was £0.07 million (31 December 2014: £0.07 million).

The Company reported a profit in the period of £0.14 million and has a cumulative deficit of £98.44 million. The Company's ability to continue as a going concern depends on its ability to generate positive cash flows from operations or secure additional debt or equity financing.

The Company has not changed its approach to Currency risk and Interest rate risk management from that of the prior year and as disclosed in the annual statements at 31 December 2014.

Currency risk management

The Company's expenditure is principally denominated in Sterling, which is funded from Sterling cash balances. Exchange differences, which arise from foreign currency transactions, are included in exchange adjustments within the income statement. At 30 September 2015 the Sterling equivalent of Canadian Dollar denominated net liabilities amounted to £2,000 (31 December 2014: net liabilities £3,250).

The Company receives a significant proportion of its revenue in US Dollars (including from contracts with Canadian customers). As such the Company routinely maintains a significant receivables balance in US Dollars, which are revalued at each period end. At 30 September 2015 the Sterling equivalent of the US Dollar denominated assets amounted to £0.14 million (31 December 2014: £1.93 million).

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

Interest rate risk management

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

The fixed rate borrowings are at 6.0% per annum.

Financial instruments

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

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

Fair value estimation

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

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

Derivative financial instruments

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

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

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

Financial Risk Management and Capital Structure

The Company's risk management programme remains as detailed on page 51 in the Annual Report and Financial Statements for the year ended 31 December 2014. There have been no significant changes since 31 December 2014.

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

Related Party Transactions

On 16 March 2015 the Company announced that it had agreed a one year extension in the term of its existing loan financing agreement which will now be repayable on 1 April 2017.

On 12 November 2015, TAO UK waived the entire outstanding loan and all unpaid accrued interest. TAO UK has agreed this waiver for the potential benefit of all TPS shareholders.

Critical accounting policies and estimates

These condensed consolidated interim financial statements have been prepared on the basis of International Financial Reporting Standards applicable to a going concern, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 30 September 2015 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 £98.44 million as at 30 September 2015.

Further information on Going Concern is provided in Note 2.

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

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

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the financial year are disclosed on page 42 in the Annual Report and Financial Statements for 31 December 2014.

Principal Risks and Uncertainties

Internal Control

The Board of Directors has overall responsibility for the accounting policies and ensuring that the Company maintains an adequate system of internal financial control to provide them with reasonable assurance that assets are safeguarded and of the reliability of financial information used for the business and for publication. More detail on the Company's internal control can be found on page 27 of the Annual Report and Financial Statements for the year ended 31 December 2014.

Turbo Power Systems Inc.

Condensed consolidated interim income statement

Unaudited

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

Turbo Power Systems Inc.

Condensed consolidated interim statement of financial position

Unaudited

________________________________________________________________________________

Approved by the Board:

F Senhora, Chairman

12 November 2015

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

Turbo Power Systems Inc.

Condensed consolidated interim statement of changes in equity

Unaudited

________________________________________________________________________________

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

Turbo Power Systems Inc.

Condensed consolidated interim statement of cash flows

Unaudited

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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 interim financial statements

Unaudited

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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"), whose main trading address is 1 Queens Park, Queensway North, Team Valley Trading Estate, Gateshead NE11 0QD, United Kingdom.

The Company's parent undertaking is TAO Sustainable Power Solutions (UK) Limited ("TAO UK"), a company registered in England and Wales, UK. Following the announcement on 24 August 2015, where the Company announced that the shareholding of VSE had changed to make VSE a wholly owned subsidiary of Vale S.A., the Company's ultimate parent company is Vale S.A. ("VSE"), a company registered in Brazil.

These condensed consolidated interim financial statements of the Company as at and for the quarter ended 30 September 2015 comprises of the Company and its subsidiaries. The Company's subsidiaries comprise:

2 Going concern

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

As previously reported, the Company is critically dependent upon i) customers paying to contractual terms in order to meet budgeted and forecasted working capital requirements and; ii) the continued financial support of its intermediate parent undertaking TAO UK, which is a wholly owned subsidiary of Vale. If not continued, this may result in the curtailment of the Company's activities.

As at 30 September 2015 the Company had net operating outflows, with a net debt of £14.91 million, being £15.17 million of debt, including rolled up interest accruals of £1.81 million, less £0.26 million of cash. The Company has a cumulative reserves deficit of £98.44 million as at 30 September 2015 and was profit making for the quarter and nine months then ended.

If the Company is unable to generate positive cash flows from operations, ensure the continued financial support from TAO UK, and ultimately Vale, 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 condensed consolidated interim 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 was 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 Vale ( which is Brazil's largest mining company), will remain in place to enable the Company to meet budgeted and forecasted working capital requirements and support the Company's growth plans. Although there are no formal letters of support in place for the purpose of the directors' going concern assessment of the Company, the directors of the Company have taken comfort from the actions taken by TAO UK, in that loans have been provided throughout 2014 and that the majority of the Board are Vale 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 condensed consolidated interim financial statements have been prepared in accordance with IAS34 Interim Financial Reporting.

The Company's condensed consolidated interim financial statements were prepared in accordance with the accounting policies set out in Note 3 to the consolidated financial statements for the year ended 31 December 2014, and using the same methods of computation.

The condensed consolidated interim financial statements were authorised for issuance by the Board of Directors on 12 November 2015.

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

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

4 Critical accounting judgements and key sources of estimation uncertainty

These condensed consolidated interim financial statements have been prepared on the basis of International Financial Reporting Standards applicable to a 'going concern', which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 30 September 2015 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 reserves deficit of £98.44 million as at 30 September 2015.

Further information on Going Concern is provided in Note 2.

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

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

5 Segmental analysis

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

Geographic Segmental Information

All property, plant and equipment were located within the United Kingdom during both periods ended 30 September 2015 and 30 September 2014.

6 Profit/(loss) per share

Profit/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 2014 all potential common shares outstanding from dilutive securities are considered anti-dilutive and are excluded from the calculation of diluted loss per share.

Details of dilutive potential securities outstanding included in EPS calculations at 30 September 2015 are as follows:

7 Derivative financial instrument

The notional principal amounts of the outstanding forward foreign exchange contracts at 30 September 2015 were £0.65 million (30 September 2014: £nil, 31 December 2014: £0.65 million).

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 30 September 2015 (31 December2014: all loans drawn down in full). Unpaid accrued interest of £1.81 million (31 December 2014: £1.28 million) 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 30 September 2015, other reserves comprise of the stock compensation reserve of £1,823,000 (31 December 2014: £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

During the periods ended 30 September 2014 and 30 September 2015 the Company undertook no significant transactions with related parties.

Accrued interest of £1.81 million is recorded within trade and other payables (31 December 2014: £1.28 million)

Save for the loans and borrowings (see Note 8 above) and accrued interest, there were no amounts outstanding at 31 December 2014 and 30 September 2015 between the Company and TAO UK, and the Company and Vale.

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. One executive officer participates in the share option programme, where the options are fully vested and the costs of which have been accounted over that vesting period.

Key management personnel compensation comprises the following:

10 Post Balance Sheet Event

Waiver of the loan from TAO UK to TPS

On 12 November 2015, TAO UK waived the entire outstanding loan (£10.48 million) and all unpaid accrued interest (£1.89 million) as of that date. TAO UK has agreed this waiver for the potential benefit of all TPS shareholders.