Results for the Third Quarter

19 November 2014

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

Announces Results for the Third Quarter

and Nine Months Ended 30 September 2014

Key Features Q3 vs Q2 2014

· Order intake increased 86% to £6.21 million (Q2 2014: £3.33 million).

· Revenue increased 3% to £4.29 million (Q2 2014: £4.16 million).

· Gross profit increased 56% to £1.28 million (Q2 2014: £0.82 million), with gross margin 30% (Q2 2014: 20%).

· Total expenses improved 12% to £1.34 million (Q2 2014: £1.53 million).

· Operating loss before other operating income improved 92% to £0.06 million (Q2 2014: £0.71 million).

· Net loss improved 94% to £0.05 million (Q2 2014: £0.90 million).

· Cash outflow from operations improved 72% to £0.12 million (Q2 2014: £0.43 million).

Key Features YTD 2014 vs YTD 2013

· Revenue decreased 17% to £11.75 million (YTD 2013: £14.24 million).

· Total expenses improved 26% to £4.67 million (YTD 2013: £6.31 million).

· Operating loss before other operating income increased 30% to £2.10 million (YTD 2013: £1.61 million).

· Cash outflow from operations improved 30% to £2.10 million (YTD 2013: £3.01 million).

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. At 30 September 2014, the loan outstanding from TAO UK amounted to £11.00 million (being principal of £9.89 million and accrued interest of £1.11 million), repayable on 01 April 2016.

Carlos Neves, Chief Executive Officer, said:

"We are pleased that order intake grew in Q3, as certain expected orders delayed from the first half of 2014 started to come through. Gross margin increased in the quarter, mainly due to increased production selling prices and our first intellectual property licensing contract.

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 12% quarter-upon-quarter and significantly improved the level of cash outflows 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.

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 19 November 2014.

Financial Performance

Quarterly Financial performance

Total revenue in the quarter ended 30 September 2014 of £4.29 million was 17% lower than the comparable quarter in 2013 (Q3 2013: £5.17 million).

Production revenue remained fell by 23% to £3.53 million (Q3 2013: £4.62 million), whilst development income increased by 36% to £0.76 million (Q3 2013: £0.56 million). Revenue recognisable from development contracts has reduced as they move into their testing phases, before follow on production orders are raised. We continue to actively seek to improve our pipeline of development projects and during the quarter signed our first intellectual property licensing contract.

Gross profit decreased by 32% to £1.28 million (Q3 2013: £1.87 million), with gross margin decreasing to 30% (Q3 2013: 36%) due to a delay of a profitable production contract into quarter 4 and the lower development revenue which typically attracts a higher gross margin. During the quarter the Company reviewed its current production contracts and made a provision of £0.20 million.

Research and product development costs in the quarter decreased 46% to £0.35 million (Q3 2013: £0.65 million), in line with the Board's plans for the Company to become more focused.

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 28% compared to 2013 to £0.87 million (Q3 2013: £1.20 million).

The Company has continued to control its costs without prejudicing the business' operational strengths, with a reduction in headcount of 22% compared with 30 September 2013 (30 September 2014: 121, 30 September 2013: 155) and the consolidation during the second half of 2013 of its operations to the Gateshead site.

Operating loss before other operating income was £0.06 million (Q3 2013: £0.18 million).

Other operating income of £0.05 million (Q3 2013: £0.04 million) was due to the release of the Regional Growth Fund grant.

Finance expense was £0.04 million (Q3 2013: £0.08 million). The decrease of £0.04 million was due the effects of changes in the £/US Dollar exchange rate.

The Company recorded a net loss of £0.05 million (Q3 2013: £0.21 million).

The Company recorded an operating cash inflow before working capital movements of £0.19 million for the quarter (Q3 2013: Outflow £0.10 million). After adjusting for changes in working capital items and purchases of property, plant and equipment the Company recorded an overall cash outflow of £0.21 million (Q3 2013: £0.57 million). There was an overall net cash outflow for the quarter of £0.21 million (Q3 2013: inflow £nil million).

The Company finished the quarter with unrestricted cash balances of £0.03 million (2013: £0.35 million) and held further cash of £0.10 million (2013: £0.03 million) associated with utility and customer bonds.

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 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 business, the Company understands the challenges of the market regarding quality, costs and timing. As noted in the 2013 Annual Report, TPS concentrates on three important pillars that will continue to be key to the successful implementation of its strategy:

· 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.

During the quarter the Company continued with the plan to develop its capabilities, products and bespoke solutions. The Research and Development budget has been focused on specific areas that can be used to assist in the contracts that the Company is currently bidding for. These contracts are of a long term nature and the Company is working closely with customers to ensure acceptable revenues and margins are obtained. During the quarter the Company signed follow-on contracts with UK Power Networks. Production contracts with Eaton Aerospace and PRC Lasers continue to produce increased revenues.

In line with the aim to simplify the operations of the Company, the Company signed its first intellectual property (IP) licensing deal. The Company had identified that it contained intellectual property that it was not able to exploit through its normal sales and production base and therefore sought to gain value through a licensing deal. The Company will continue to review the markets for its products and where it is unable to exploit the IP through its own channels enter into licensing arrangements. The Company sees benefits in this arrangement as it releases value for a prior expenditure and does not require extra working capital investment.

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 firmly believes that these assets, and our continuous pursuit of efficiencies, will allow TPS to react faster and be even more integrated to fulfil the market's needs.

The Company is increasing its value proposition by bringing more integrated products to its customers. This change in the way that the customers contract with the Company, as noted last quarter, is elongating the contract approval process in the short term. However, the recent contract design and production contracts with UK Power Networks are a start in this integrated process.

Consistent delivery of internal improvements

The Company seeks to further develop a culture of cost consciousness and to eliminate excess costs. Continuous improvements, which commenced in 2013, continued, including working with customers to review the quality and quantities of the products required. The Company has been working to increase the average selling price of the products in line with the value proposition.

Current Operations

During the quarter 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 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.

In July 2014 the Company announced a further $3.40 million order from Bombardier for auxiliary power units for the Toronto Transit Commission. Production of these units has commenced, with the first units ready for the customer in October 2014.

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 headcount has been reducing since its peak level of 223 in June 2012, with overall headcount at 30 September 2014 of 121, down 46% compared with the peak level and down 22% compared with 155 at 30 September 2013.

Support from TAO UK

The Company last extended its loan from its parent company, TAO UK on 13 May 2014, by £0.40 million. This takes the current loan position to £9.89 million. In addition, the Company has accrued unpaid interest of £1.11 million as at 30 September 2014. The loan is repayable on 1 April 2016.

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 quarter 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 fundingfrom 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.

Going Concern

These 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 realize 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 30 September 2014 the Company had net operating outflows, with a net debt of £14.38 million, being £14.41 million of debt less £0.03 million of cash. The Company has a cumulative deficit of £98.66 million as at 30 September 2014 and continued to be loss making for the period 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.

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.

The directors received a letter of support from its immediate parent undertaking, TAO UK, confirming its intention to continue to financially support its operations, for a period of twelve months commencing from 13th March 2014. In conjunction, TAO UK received a letter of support from its immediate parent undertaking, VSE, confirming its intention to continue financial support for the same twelve month period. In May 2014 TAO UK advanced an additional loan of £0.40 million to the Company. Although the letters of support do not cover the whole period for the purpose of the directors' going concern assessment of the Company, the directors of the Company have taken comfort from the above actions taken in forming their conclusion that they believe it is appropriate to prepare these financial statements on a going concern basis.

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.

Summary of Quarterly Results

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

Revenue increased in the quarter ended September 2014 by 3% to £4.29 million, mainly due to increased production revenues through MRO sales orders and development revenues from the UK Power Networks contract announced in April 2014.

Research and development expenditure continues to decrease compared with previous quarters, reflecting the continuing trend of focused activity and timing of external spend.

General and Administration expenses have decreased by 28% in the September 2014 quarter over 2013 due to the Company's drive to control its overhead costs and deliver a quarter on quarter trend of reduced costs.

Copies of Quarterly and Annual Results

The Company's full Financial Results and Managements' Discussion and Analysis for 2013, together with the first half year 2014 Financial Results and Managements' Discussion and Analysis are available on www.sedar.com. Full 2013 financial statements were mailed to shareholders during May 2014.

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 2014

Revenue

Revenue in the quarter ended 30 September 2014 was down by 17% to £4.29 million (2013: £5.17 million.)

Production revenue decreased by 23% from 2013 due to the completion of a current contract and the delay in receiving the follow on order which has now been received for delivery in quarter 4 and 2015/2016 but increased 10% over the previous quarter (Q2 2014: £3,917).

Development income, which is recognised on a percentage complete basis, increased by 38% due to the company actively seeking to improve its pipeline of development projects through new projects including the UK Power Network projects and signing its first intellectual property licensing contract in the quarter.

Cost of Sales

The cost of sales was £3.02 million (2013: £3.30 million). The revenue in the quarter has resulted in a change of the mix of products that have been delivered. The lower development revenue has impacted gross margins as this has attracted higher gross margin. Following a review of current production contracts a provision for future losses of £0.20 million was made in the quarter.

During the period the Company has continued to work with customers to increase certain unit production selling prices and/or effect design changes to allow material and cost decreases to be implemented. Negotiations have now concluded with one customer and reflect an increase in selling price while other negotiations are continuing.

Research and product development

Research and product development expenditure in the quarter was £0.35 million (2013: £0.65 million). The level of expenditure has reduced as the projects move between phases. Expenditure tends to be higher at the middle of projects as prototypes are made, incurring external and material costs. At the start and end of projects expenditure tends to be lower for either design reviews or test reviews. The Company continues to focus on targeted research and development expenditure.

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 28% compared to 2013 to £0.87 million (2013: £1.20 million).

The Company has continued to control its costs without prejudicing the business operational strengths, with a reduction in headcount and the consolidation of its operations in the second half of 2013 to the Gateshead site.

Other operating income

Other operating income of £0.05 million (2013: £0.04 million) was due to the release of the government grant

Finance income/expense

Finance expense of £0.04 million (2013: £0.08 million) arose from the interest on the loans from TAO UK (2014: £0.17 million, 2013: £ 0.08 million) and the effects of foreign exchange movements (2014 gain £0.13 million, 2013:gain £ 0.11 million).

Cash flows for the quarter ended 30 September 2014

Cash outflow from operating activities

The Company recorded an operating cash inflow before working capital movements of £0.19 million for the quarter (2013: Outflow £0.01 million). After adjusting for changes in working capital items and purchases of property, plant and equipment the Company suffered an overall cash outflow of £0.21 million (2013: £0.57 million).

Investing activities

Cash outflows from capital investments in the quarter were £0.09million (2013: £0.09).

Financing activities

The Company did not increase the loan in the quarter (2013: £0.57 million).

Overall cash outflow for the period

Overall the cash outflow during the quarter was £0.21 million (2013: inflow £nil million).

Review of the nine months ended 30 September 2014

Revenue

Revenue in the nine months ended 30 September 2014 was £11.75million (2013: £14.24 million.)

Production revenue decreased 12%, due to the completion of a current contract and the delay in receiving the follow on order which has now been received for delivery in quarter 4 and 2015/2016. This was offset by an increase in MRO sales in the period.

Development income, which is recognised on a percentage complete basis, has decreased by 49% due to project timings as we continue to actively seek to improve our pipeline of development projects.

Cost of Sales

The cost of sales was £9.78 million (2013: £9.54 million). The revenue in the period has resulted in a change of the mix of products that have been delivered. The lower development revenue has impacted gross margins as this has attracted higher gross margin.

During the period the Company has continued to work with customers to increase certain unit production selling prices and/or effect design changes to allow material and cost decreases to be implemented. Changes have been agreed with some customers and negotiations are continuing with another.

Research and product development

Research and product development expenditure in the nine months was £1.23 million (2013: £2.37 million), down 48%.

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 14% compared to 2013 to £2.91 million (2013: £3.38 million).

However, the June 2013 quarter included a one-time release of the asset retirement provision of £0.50 million. Excluding this one-time release there is an underlying reduction of 25% (£0.97 million) in general and administration costs for the first nine months of 2014.

The Company has continued to control its costs without prejudicing the business operational strengths, with a reduction in headcount and the consolidation of its operations in the second half of 2013 to the Gateshead site.

Other operating income

Other operating income of £0.18 million (2013: £0.53 million) was due to the release of the government grant.

Finance income/expense

Finance expense of £0.47 million (2013: £0.23 million) arose from the interest on the loans from TAO UK (2014: £0.46 million, 2013: £ 0.23 million) and the effects of foreign exchange movements (2014 loss £0.01 million, 2013: £ nil million).

Cash flows for the nine months ended 30 September 2014

Cash outflow from operating activities

The Company recorded an operating cash outflow before working capital movements of £1.73 million for the nine months (2013: £1.70 million).

After adjusting for changes in working capital items and purchases of property, plant and equipment the Company suffered an overall cash outflow of £2.22 million (2013: £3.18 million).

Investing activities

Cash outflows from capital investments in the nine months were £0.15 million (2013: £0.17 million).

Financing activities

The company received £0.40 million from the increase of the TAO UK loan in May 2014. (2013: £2.67 million)

Overall cash outflow for the period

Overall the cash outflow during the nine months was £1.82 million (2013: outflow £0.51 million).

Balance sheet as at 30 September 2014

The Company ended the period with an unrestricted cash balance of £0.03 million (31 December 2013: £1.85 million). Substantially all of the Company's cash balances are denominated in Sterling.

In addition, the Company had restricted cash amounts of £0.10 million (31 December 2013: £0.13 million), principally relating to deposits for rent and utilities and customer bonds.

Non-current assets have decreased from £0.77 million at 31 December 2013 to £0.72 million at 30 September 2014, after depreciation and amortisation charges of £0.22 million.

Loans and borrowings have increased by £0.87 million to £11.00 million. The loan and interest are shown as a non-current liability as it is repayable on 1 April 2016. The Company is continuing its discussions with VSE about the alternatives available to the Company when the loans of £11.00 million become repayable on 1 April 2016.

Net current assets at 30 September 2014, excluding restricted cash balances included under current assets, were £2.54 million (31 December 2013: £3.97 million).

As at 30 September 2014, 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 30,707,273 outstanding share options.

Contractual Obligations

Shareholders' equity

The movement in shareholders' deficit comprised:

As at 19 November 2014, 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 30,707,273 outstanding share options.

Liquidity

Cash and cash equivalents at 30 September 2014 were £0.03 million (31 December 2013: £1.85 million).

Restricted cash at 30 September 2014 was £0.10 million (31 December 2013: £0.13 million).

The Company reported a loss in the nine months of £2.39 million and has a cumulative deficit of £98.66 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 2013.

Currency risk management

The Company's expenditure is principally denominated in Sterling, which is funded from Sterling cash balances. Exchange differences, which arise on consolidation of the Company's Canadian operations, are included in exchange adjustments within the income statement. At 30 September 2014 the Sterling equivalent of Canadian Dollar denominated net liabilities amounted to £1,200 (31 December 2013: net liabilities £12,000).

The Company receives a significant proportion of its revenue in US Dollars. As such the Company routinely maintains a significant receivables balance in US Dollars, which are revalued at each period end. At 30 September 2014 the Sterling equivalent of the US Dollar denominated assets amounted to £2.35 million (31 December 2013: £2.89 million).

To manage its foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, the Company uses forward foreign exchange contracts.

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.

The Company invests surplus cash funds in short term money market deposits with financial institutions and cash funds which have at least a short term credit rating of F1.

Financial instruments

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

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

Fair value estimation

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

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

Derivative financial instruments

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

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

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

Financial Risk Management and Capital Structure

The Company's risk management programme remains as detailed on page 51 in the Annual Report and Financial Statements 31 December 2013. There have been no significant changes to the risks identified since 31 December 2013.

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

Related Party Transactions

On 13 May 2014, the Company announced that it had extended the loan financing agreement with TAO UK, its parent undertaking, to provide the Company with access to a further £0.40 million of debt financing to support working capital requirements, under the same terms and conditions as the previous loans. These loans are repayable on 1 April 2016.

Critical accounting policies and estimates

These interim condensed 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 realize its assets and discharge its liabilities in the normal course of operations. As at 30 September 2014 the Company had net operating cash outflows. The Board believes the Company will require additional funding which, if not raised, may result in the curtailment of activities. The Company has a cumulative deficit of £98.66 million as at 30 September 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 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 2013.

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 2013.

Turbo Power Systems Inc.

Condensed consolidated interim income statement

Unaudited

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

Turbo Power Systems Inc.

Condensed consolidated interim statement of financial position

Unaudited

Approved by the Board:

F Senhora, Chairman

19 November 2014

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

Turbo Power Systems Inc.

Condensed consolidated interim statement of changes in equity

Unaudited

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

Turbo Power Systems Inc.

Condensed consolidated interim statement of cash flows

Unaudited

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

Turbo Power Systems Inc.

Notes to the condensed consolidated interim financial statements

Unaudited

1 Reporting entity

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

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

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

These condensed consolidated interim financial statements of the Company as at and for the nine months ended 30 September 2014 comprises of the Company and its subsidiaries. The Company's subsidiaries comprise:

2 Goingconcern

These 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 realize 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 30 September 2014 the Company had net operating outflows, with a net debt of £14.38 million, being £14.41 million of debt less £0.03 million of cash. The Company has a cumulative deficit of £98.66 million as at 30 September 2014 and continued to be loss making for the period 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 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, will remain in place to enable the Company to meet budgeted and forecasted working capital requirements and support the Company's growth plans.

The directors received a letter of support from its immediate parent undertaking, TAO UK, confirming its intention to continue to financially support its operations, for a period of twelve months commencing from 13th March 2014. In conjunction, TAO UK received a letter of support from its immediate parent undertaking, VSE, confirming its intention to continue financial support for the same twelve month period. In May 2014 TAO UK advanced an additional loan of £0.40 million to the Company. Although the letters of support do not cover the whole period for the purpose of the directors' going concern assessment of the Company, the directors of the Company have taken comfort from the above actions taken in forming their conclusion that they believe it is appropriate to prepare these financial statements on a going concern basis.

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 2013, and using the same methods of computation.

The condensed consolidated interim financial statements were authorised for issuance by the Board of Directors on 19 November 2014.

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 interim condensed 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 realize its assets and discharge its liabilities in the normal course of operations. As at 30 September 2014 the Company had net operating cash outflows. The Board believes the Company will require additional funding which, if not raised, may result in the curtailment of activities. The Company has a cumulative deficit of £98.66 million as at 30 September 2014. The Company has received additional funding of £0.40 million from TAO UK during the second quarter of 2014. The Company is discussing with TAO UK about the alternatives available to the Company when the loans (including unpaid interest) of £11.00 million become repayable on 1 April 2016.

Further information on Going Concern is provided in Note 2.

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

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

5 Segmental analysis

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

Geographic Segmental Information

All property, plant and equipment were located within the United Kingdom during both periods ended 30 September 2014 and 30 September 2013.

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

Details of anti-dilutive potential securities outstanding not included in EPS calculations at 30 September 2014 are as follows:

7 Derivative financial instrument

The notional principal amounts of the outstanding forward foreign exchange contracts at 30 September 2014 were £nil (2013: £nil).

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 was repayable upon demand commencing 2 January 2012. The repayment term has been renegotiated and the loan is now due upon demand commencing 1 April 2016.

On 13 May 2014 a further extension to the loan financing of £0.40 million was agreed. 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 2014 (2013: all loans drawn down in full). Unpaid accrued interest of £1,059,000 (30 September 2013: £505,000) 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 30 September 2014, other reserves comprise of the stock compensation reserve of £1,823,000 (31 December 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

During the nine months ended 30 September 2014 and 30 September 2013 the Company undertook no significant transactions (save for the loans and accrued interest referred to below) with related parties.

Accrued interest of £1,112,000 (31 December 2013: £644,000) is recorded within non-current liabilities - loans and borrowings.

Save for the Loans and Borrowings (see Note 8 above) and accrued interest, there were no amounts outstanding at 31 December 2013 and 30 September 2014 between the Company and TAO UK and the Company and VSE.

Transactions are conducted within the normal course of business for supply of engineering design services and are transacted at exchange amount, which is the amount agreed for the transaction.

Key Management personnel compensation

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

Key management personnel compensation comprises the following: