TPS 2012 Full Year Results

11 March 2013

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

Announces Results for the Year and

Quarter Ended 31 December 2012

Key Features

·; Full year revenue up 9% to £15.7 million (2011: £14.4 million).

·; Order intake for 2012 was £7.1 million (2011: £23.0 million) as the Company focused on securing higher margin contracts.

·; Full year Loss before Interest, Tax, Depreciation, Amortisation and Stock Compensation increased to £6.3 million (2011: £5.1 million) relating to headcount changes and investments made during the first half of the year.

·; Headcount subsequently reduced from 235 in July 2012 to 176 at 31 December 2012, following a structural review of the Company.

·; Product focussed R&D held at £3.9 million (2011: £3.8 million).

·; Operating cash outflow of £7.4 million (2011: £6.3 million).

·; Net indebtedness reduced to £5.2 million (2011: £7.5 million) through the May 2012 stock conversion by TAO Sustainable Power Solutions Ltd ("TAO UK"), and the issue of £2.0 million of new A-Shares.

·; Carlos Neves, the former CFO, was appointed Chief Executive Officer in July 2012.

·; The Company remains critically dependant on TAO UK's loan funding and continues to explore options for addressing its ongoing financing requirements.

Commenting, Carlos Neves, Chief Executive Officer, said:

"The year has been one of considerable change. During the second half we have focused on reducing our cost base, seeking to win contracts with attractive margins whilst entering into negotiations on current contracts to improve our terms. We have also leveraged our investment in operational capability, functional management, and infrastructure.

I am pleased to report that the markets in which we operate are either stable or growing, while new opportunities in the rail, defence and oil & gas sectors are exciting and should provide the business with opportunities for sustaining revenue growth."

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 and 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, McQuay International and Eaton Aerospace. The Company also has commercial contracts with its ultimate parent company, Vale Soluções em Energia S.A. ("VSE"), the Brazilian energy solutions company, and with Tao Sustainable Power Solutions (UK) Ltd ("TAO UK"), which is a VSE wholly owned subsidiary and TPS's parent undertaking, owning 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 ongoing capital needs, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition, the need to protect proprietary rights to technology, government regulation, and other risks defined in this document and in statements filed from time to time with the applicable securities regulatory authorities.

Definition of non-GAAP financial measures

EBITDA is calculated as the net loss for the period less financial interest income and charges, foreign exchange gains and losses, tax charges and receipts, depreciation, amortization and stock compensation charges. The Company believes that EBITDA is useful supplemental information as it provides an indication of the operational results generated by its business activities prior to taking into account how those activities are financed and taxed and also prior to taking into consideration asset amortization. EBITDA is not a recognised measure under GAAP and, accordingly, should not be construed as an alternative to operating income or net loss determined in accordance with GAAP as an indicator of financial performance or of liquidity and cash flows. EBITDA does not take into account the impact of working capital changes, capital expenditures and other sources and uses of cash which are disclosed in the consolidated statement of cash flows. The Company's method of calculating EBITDA may differ from other issuers and may not be comparable to similar measures provided by other companies.

Chairman's Statement

2012 has been a year of considerable change for Turbo Power Systems Inc. ("TPS" or "the Company") as we have prepared for future growth.

Performance

Revenue in the year to 31 December 2012 ("2012") of £15.7 million was up by 9% compared with the previous year.

Order intake in 2012 was £7.1 million (2011: £23.0 million), as the Company increased its focus on ensuring that new contracts won were of a sufficient level of profitability.

2012's operating loss was £6.8 million, a year-on-year increase of 17%, due predominantly to the Company's investment in headcount (up by 20% to 187 average for 2012) and restructuring of the senior management team. The investment was undertaken to address the Company's expectation at the start of the year of increased customer demand.

In July 2012 the Company reviewed its bid pipeline, its projects and the skill base of its workforce to ensure that it was appropriate to meet current and future customer requirements. The outcome of the review was that during the second half of the year the Company reduced headcount from 235 in July to 176 in December (31 December 2011: 206).

Having increased research and development in 2010 and 2011 compared with earlier years, the Board has maintained these costs at a similar level during 2012 at £3.9 million (2011: £3.8 million).

General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, were up by 24% to £6.1 million (2011: £4.9 million), attributable to the higher staff costs, as a result of higher average headcount and the severance payments following the organisational restructure.

The loss before taxation for the year was £7.2 million (2011: loss £6.2 million).

Capital investment in 2012 amounted to £0.35 million (2011: £0.66 million) and related to production equipment, enhanced technology and software capabilities.

Funding

During the year Tao Sustainable Power Solutions (UK) Limited ("TAO UK"), TPS's majority shareholder, converted £8.55 million of debt financing into share equity in the Company. This increased TAO UK's ownership of the Company from 75.4% to 89.4%. TAO UK is a wholly owned subsidiary of Vale Soluções em Energia ("VSE") a Brazilian company.

The Company also undertook a funding in June 2012 of £2.0 million, by way of a private placement of A-Ordinary Shares in its subsidiary Turbo Power Systems Limited. The A-Ordinary Shares can be converted into Common Shares of the Company.

TAO UK agreed to increase the Company's existing debt financing facility to £6.09 million (31 December 2011: £8.15 million). This funding has been used to cover working capital needs and positioning the business to deliver growth in 2013 and beyond.

The Directors regularly review and consider the current and forecast activities of the Company in order to satisfy themselves as to the viability of operations. These ongoing reviews include consideration of current order book and future business opportunities, current development and production activities, customer and supplier exposure and forecast cash requirements and balances. These reviews show that further funding is expected to be required by the Company before it is forecast to become cash generative. Based on these budgets and forecasts TAO UK, the majority shareholder of Turbo Power Systems Inc., continues to support the Company through the existing loan arrangements and cash advances as and when required.

The Directors are aware that the Company remains critically dependent on loan funding but have a reasonable expectation that the Company has sufficient cash resources based on the expected parent company support which would be needed to continue in operational existence while the Company seeks to achieve its target of being cash flow positive. For these reasons, the Directors continue to adopt the going concern basis in preparing these consolidated financial statements, and disclose in Note 2 to the consolidated financial statements the conditions and events that cast significant doubt on the Company's ability to continue as a going concern. As in 2011, the auditor's report contains an emphasis of matter paragraph referencing this uncertainty relating to the going concern.

Strategy and Outlook

Looking ahead, the Board intends TPS to remain a technology-led company.

Carlos Neves was appointed as Chief Executive Officer of the Company in July 2012. Under Carlos' leadership, the Company has sought to realign the Company's focus as follows:

·; Improve the quality of the portfolio;

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

·; Consistent delivery of internal improvements.

The Company has been working closely with VSE on securing contracts in Brazil. So far VSE has secured a key contract with Petrobras, the major Brazilian Oil & Gas concern, for which the Company is negotiating a subcontracting agreement. For other opportunities, we have found that the negotiations have been taking longer than planned, but we still believe that the Company will be able to finalise these contracts during the first half of 2013.

Operationally, our focus is on efficiency and synergies. This will include rationalisation of our operating locations, particularly at Heathrow where the property lease expires in 2013, and looking to use our fixed assets in a more productive manner.

Since 2011 we have recognised that our customer base is increasingly keen to secure regional manufacturing capability outside the UK. Therefore during 2012, as part of the focus on improve the quality of TPS' portfolio, the Company initiated a very detailed analysis about partnership in markets like Brazil and India. The review is expected to be concluded and its recommendations approved by mid-2013.

As noted above, orders were down during 2012, as the Company focused on ensuring that new contracts were of a sufficient level of profitability in order to provide a long term future for the Company. The Company is undertaking an initiative to renegotiate the contracts with margins aligned with the objectives determined for each market sector. The initiative is making good progress, with the prospect of positive settlements in 2013. Other initiatives include a review of procurement and manufacturing processes.

The Board and I look forward to 2013's performance with measured confidence.

Rodrigo Braga

Interim Chairman

11 March 2013

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

The following information should be read in conjunction with Turbo Power Systems Inc. ("TPS") audited consolidated financial statements for the year ended 31 December 2012 and related notes, which are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the IASB. All amounts in the MD&A, audited consolidated financial statements and related notes are expressed in Sterling, unless otherwise noted.

This MD&A contains forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance, and underlying assumptions and other statements that are other than statement of historical fact. These statements are subject to uncertainties and risks including, but not limited to, the ability to meet ongoing capital needs, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition, the need to protect proprietary rights to technology, government regulation, and other risks defined in this document and in statements filed from time to time with the applicable securities regulatory authorities. Risk factors are discussed more fully in the Company's Annual Information Form.

This MD&A has been prepared as at 11 March 2013.

Business of the Company

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

The 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 the rail and industrial sectors. The long term relationships with customers in these markets have been built based on delivering competitive products with proven reliability.

The know-how developed over the last 30 years, on electrical machines and power electronics, allows the Company to explore its current and future portfolio and adjust accordingly to grow in markets and segments with the targeted profitability.

Way Forward

As a technology-led company that understands the challenges of the market, mainly regarding quality, costs and timing, it has sought to realign its objectives 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.

Improve the quality of the portfolio

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

The Company recognises that it currently has a concentration of revenues within just a few customers. The focus has now moved to enlarge the customer base with a view to diluting the impact of the current large customers, mainly where our capabilities, products and bespoken solutions are recognised and the value of our proposal can be fully appreciated.

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 we have. We firmly believe that these assets under the new structure put in place in 2012, and our continuous pursuit of efficiencies, will allow us to react faster and be even more integrated to fulfil the market's needs.

Consistent delivery of internal improvements

Due to its size and the flat management structure put in place in 2012, the Company has been able to drive a culture where each of the areas are more integrated and each is capable of a better understanding of the overall objectives of the Company and the roles and responsibilities of each individual. Now, under this scenario, the Company has been able to start a series of initiatives that will address long term revenue growth and cost reductions.

All the above objectives will continue the culture of cost consciousness and drive excess costs out of the business.

Current Operating Climate

Both the transport market and industrial sectors have been stable and started to show signs of growth in 2012. This has made it possible for TPS to deliver improved manufacturing output during 2012. Further growth is anticipated during 2013, supported by the existing order book and the visibility of future orders being bid.

As stated last year, governments are continuing to invest in infrastructure projects and, indeed, view transport initiatives such as new rail programmes as a way of helping to sustain their industries whilst providing necessary public transportation and having a positive impact on the environment.

In the defence arena, the Company has continued to identify specialist pockets of growth potential in areas where TPS' technology can be applied. We have initiated contact with potential future partners and will continue to investigate this market further and hope to see increased activity during the coming years.

Marine and Oil & Gas sectors development has seen the number of opportunities to utilise TPS products and technologies in 'new' markets increase markedly. A significant amount of market analysis and concept work started in 2011 and this will continue in 2013. The market potential is significant and the links with VSE, our ultimate parent, have provided the business with important leverages in Brazil. This has resulted in VSE contracting with a major Brazilian Oil & Gas company, for which we are negotiating a subcontracting agreement.

The requirements for high system efficiencies and sustainability are becoming important factors by which products and services are selected. TPS's technologies and know-how have allowed it to offer competitive solutions in the road to sustainability. These technologies are applicable to the renewable energy sector and to waste energy recovery applications. The technology is intended to enhance system efficiencies and thus contribute to the sustainability goals. The market potential for TPS technologies in this sector is significant and further development in these markets is anticipated.

The Company now reports its segmental operations in the Financial Statements Note 8 between Engineering (i.e. product creation) and Production (i.e. product sales). This is due to the significantly different nature of the activities and the different control processes in place. The Company operates in various markets and produces various products for those markets. All products that the Company manufactures and sells have been through the Company's product creation process and are unique to the Company.

Current Programmes

·; Transport

o Rail

The programme to develop the auxiliary power solution for Bombardier Systems' new Innovia ART Vehicle platform continues to make progress, while the business is also engaged in the overhaul and support of the CL165 vehicle auxiliary power solution for Chiltern Railways. The rate of delivery continues to grow on the major programmes (Bombardier Chicago Transit Authority and Bombardier Toronto). During 2012 the Sao Paulo monorail project has completed its qualification program and started production phase. To date we have delivered 27 units.

Deliveries on our overhaul and refurbishment programmes continue to be made to customers' call off requirements.

We continue to pursue new customers in the Rail market with the intention of providing platform solutions that are applicable for more than one project at a time.

o Aerospace

The Jettison Fuel Pump motor drives for Eaton Aerospace continue to be delivered in line with the customer's call-off rate. Now the Boeing 787 Dreamliner has entered into revenue service, orders quantities have increased in line with the aircraft build acceleration. While currently the 787 Dreamliner is being reviewed, our production schedule remains on track.

·; Industrial

o Laser Power Supplies

The demand from our customer continued during 2012 and provided steady production through the year. The expectation for 2013 is that demand will continue at a similar rate.

o Industrial Motors and Drives

The delivery of systems to our industrial motors and drives OEM (McQuay International) continues for the orders placed in early 2012. The customer's expectation is that the demand will keep increasing across the coming years. These units are for use in McQuay International's Magnitude WME Chiller.

Further development work is on-going to ensure the business remains competitive in this market.

The Becker laser blower products have seen a continuing demand throughout the year. A new Long Term Supply Agreement is in place for production deliveries in 2013 and 2014.

·; Defence

o 1MW High-Speed Generator

Having completed system trials of our high-speed machine in 2011, we delivered a new unit that was integrated into the customers' system in late 2012. We are anticipating demand for additional units and we are awaiting confirmation from the customer.

·; Marine/Oil & Gas

o Development

During the year the business has seen a marked increase in the number of opportunities to utilise its products and technologies in new markets. Market analysis and concept work which started in 2011 will continue in 2013. The market potential is significant and the links with VSE have provided the business with important access to the Brazilian market.

Listing

In July 2012 the Company delisted from the Toronto Stock Exchange ("TSX"). The Company still maintains a listing on the London Stock Exchange AIM.

At the Annual General Meeting in May 2012 various matters were agreed by the shareholders, including the proposed share consolidation. In light of the delisting from the TSX, the Directors considered that it was in the best interests of the Company not to continue with the share consolidation.

Auditors

In November 2012, the Company changed its independent auditors to PricewaterhouseCoopers LLP. This move was to align the Company with its major shareholder, TAO UK, and its ultimate parent, VSE. The Board considers that this change should bring both financial and operational efficiencies to the Company.

Summary

In summary, 2012 was a year of continued growth. The business is leveraging its investment in operational capability, functional management and infrastructure. The markets in which the business operates are either stable or growing. New opportunities in the Marine and Oil & Gas sectors are exciting and should provide the business with additional opportunities for sustained growth.

The Company remains critically dependent on loan fundingin 2013 to continue funding the growth in 2013 and beyond.

The current order book extends over the next two years. The need to win further substantial orders, execution of those orders and completion of development programmes in a consistent and timely manner are key to delivering management's plans for the improved results during 2013 and beyond.

Financial Performance

Total revenues in the year of £15.66 million were 9% higher than in the previous year, (2011: £14.40 million), primarily due to increased production volumes.

Research and product development costs increased by 3% to £3.90 million (2011: £3.78 million), as the Company's investment stabilises.

General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings, were up by £1.2 million (25%) to £6.1 million (2011: £4.9 million). The major element in the increase was higher staff costs, as a result of increased headcount during the first half of the year, the subsequent severance payments following the organisational restructure and the loan conversion costs. During the second half of the year the Company reduced headcount from 235 in July to 176 in December.

The Company recorded a loss before interest, tax, depreciation, amortization, and stock compensation of £6.27 million (2011: £5.10 million), primarily as a result of increased general and administration expenditure, which as noted above rose by £1.2 million.

The Company recorded an operating cash outflow before working capital movements of £6.08 million for the year (2011: £5.40 million). After adjusting for changes in working capital items and purchases of property, plant and equipment, the Company suffered an overall cash outflow before financing of £7.72 million (2011: £6.40 million).

Net cash inflow from financing during 2012 of £7.92 million (2011: £6.25 million), resulted in an overall net cash inflow for the year of £0.20 million (2011: outflow £0.15 million).

The Company finished the year with an unrestricted cash balance of £0.86 million (2011: £0.65 million) and held further cash of £0.03 million (2011: £0.34 million) associated with rent and utility deposits.

During the year ended 31 December 2012 the Company undertook significant transactions with related parties.

The Company has a loan facility from its majority investor TAO UK, to support working capital requirements, bearing interest at 6% and being repayable upon request after 1 January 2012. At the beginning of 2012 the loan balance outstanding was £8.17 million. During the year the Company increased the loan by £5.92 million and in May 2012 TAO UK converted £8.55 million (including rolled up interest) into equity in the Company and extended the repayment date to the 1 April 2014. As at the 31 December 2012 the amount outstanding is £6.09 million including rolled up interest. The Company raised invoices for £1.01 million (2011: £0.89 million) to VSE, the parent organization of TAO UK, for initial development activities under arms-length commercial contracts.

Going Concern

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

The Company is dependent upon the continued financial support of its intermediate parent undertaking TAO UK, who in turn is dependent on their parent undertaking Vale Soluções em Energia S.A (VSE), for such continued financial support in order to meet forecasted working capital requirements and support the Company's growth plans. If not secured, this may result in the curtailment of the Company's activities.

As at 31 December 2012 the Company had net operating outflows, with a net debt of £8.91 million, being £9.8 million of debt less £0.89 million of cash. The Company has a cumulative deficit of £93.42 million as at 31 December 2012 and continued to be loss making for the year then ended.

If the Company is unable to generate positive cash flows from operations or secure additional debt or equity financing these conditions and events would cast substantial 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 could be material, which would be necessary if the going concern assumption were not appropriate.

However the Directors believe that they will succeed in delivering the Company's projected financial performance and that support from TAO UK and, ultimately, VSE will remain in place to enable the Company to achieve its growth plans. Accordingly they have continued to adopt the going concern basis of preparation.

Summary of Quarterly Results

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

Research and development expenditure in 2012 was 3% higher than 2011. The decrease in December 2012 relates to the cyclicality of development projects.

Reflecting the benefit of the organisational restructure undertaken during the second half of 2012, general and administrative overheads have reduced in the last quarter.

Definition of non-GAAP financial measures

EBITDA is calculated as the net loss for the period less financial interest income and charges, foreign exchange gains and losses, tax charges and receipts, depreciation, amortization, and stock compensation charges. The Company believes that EBITDA is useful supplemental information as it provides an indication of the operational results generated by its business activities prior to taking into account how those activities are financed and taxed and also prior to taking into consideration asset amortization. EBITDA is not a recognised measure under GAAP and, accordingly, should not be construed as an alternative to operating income or net loss determined in accordance with GAAP as an indicator of financial performance or of liquidity and cash flows. EBITDA does not take into account the impact of working capital changes, capital expenditures and other sources and uses of cash which are disclosed in the consolidated statement of cash flows. The Company's method of calculating EBITDA may differ from other issuers and may not be comparable to similar measures provided by other companies.

Reconciliation of net loss to EBITDA result

Copies of Quarterly and Annual Results

The Company's full Financial Results and Managements' Discussion and Analysis are available on www.sedar.com and full financial statements will be mailed to shareholders during April 2013.

Copies of the quarterly and annual results are available from the Company's office at Unit 3 Summit Centre, Hatch Lane, West Drayton, Middlesex, UB7 0LJ, United Kingdom or available to view from the Company's website at www.turbopowersystems.com.

Turbo Power Systems Inc.

Consolidated statement of comprehensive loss

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The Notes are an integral part of these Consolidated Financial Statements

Turbo Power Systems Inc.

Consolidated statement of financial position

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Approved by the Board:

R B Braga, Interim Chairman

11 March 2013

The Notes are an integral part of these Consolidated Financial Statements

Turbo Power Systems Inc.

Consolidated statement of changes in equity

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The Notes are an integral part of these Consolidated Financial Statements.

Turbo Power Systems Inc.

Consolidated statement of cash flows

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The Notes are an integral part of these Consolidated Financial Statements

Turbo Power Systems Inc.

Notes to the consolidated financial statements

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1 Reporting entity

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

The Company conducts operations through its wholly owned subsidiary company, Turbo Power Systems Limited ("TPSL") and the main trading address is Unit 3, Heathrow Summit Centre, Skyport Drive, Hatch Lane, West Drayton, Middlesex UB7 0LJ, United Kingdom.

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

The Company's subsidiaries comprise:

TPSL has initiated commercialisation of its technology in relation to high speed permanent-magnet machine systems for power generation and industrial motor applications at its London location, whilst its operation based in North East England is an established provider of advanced power electronics.

2 Going concern

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

The Company is dependent upon the continued financial support of its intermediate parent undertaking TAO UK, who in turn is dependent on their parent undertaking Vale Soluções em Energia S.A (VSE), for such continued financial support in order to meet forecasted working capital requirements and support the Company's growth plans. If not secured, this may result in the curtailment of the Company's activities.

As at 31 December 2012 the Company had net operating outflows, with a net debt of £8.91 million, being £9.8 million of debt less £0.89 million of cash. The Company has a cumulative deficit of £93.42 million as at 31 December 2012 and continued to be loss making for the year then ended.

If the Company is unable to generate positive cash flows from operations or secure additional debt or equity financing these conditions and events would cast substantial 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 could be material, which would be necessary if the going concern assumption were not appropriate.

However the Directors believe that they will succeed in delivering the Company's projected financial performance and that support from TAO UK and, ultimately, VSE will remain in place to enable the Company to achieve its growth plans. Accordingly they have continued to adopt the going concern basis of preparation.  

3 Basis of preparation

These financial statements comply with and have been prepared in accordance with the recognition and measurement principles of IFRS in issue and effective at 31 December 2012.

The consolidated financial statements were authorised for issuance by the Board of Directors on 11 March, 2013.

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

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

4 Geographic Information

All property, plant and equipment was located within the United Kingdom during both periods ended 31 December 2012 and 31 December 2011.

5 Segmental analysis

The Company has historically operated from two facilities in the UK and run each location as a separate unit. During 2011 the Company underwent management and operational changes to bring the reporting segments in line with the strategy of designing and manufacturing integrated systems. Accordingly the Company's two reportable segments have changed from the power electronics segment, which is involved in the development and manufacture of electrical power supply and control systems and the electrical machines segment, which is involved in the development and commercialisation of high speed electrical machines.

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

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

The segmental report for 2012 has been presented on that basis, with the comparatives for 2011 presented on the same basis.

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. 

December 2011 figures have been restated to follow the more integrated operational structure, this restatement has no impact on the prior year's profit and loss, assets or liabilities.

6 Loss per share

Loss per 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.

Weighted average number of common shares:

Details of anti-dilutive potential securities outstanding not included in loss per share calculations at December 31 are as follows:

7 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.

On 25 May 2012 the Company issued 1,899,111,111 common shares to TAO UK as a result of the financing and conversion of debt in the Company, at a price of 0.45p per share.

On 31 May 2012, TPSL, as part of the financing, issued 444,444,444 A-Ordinary shares at 0.45p in a private placement to various existing A-Ordinary shareholders.

Other reserves

At 31 December 2012, other reserves comprise of the stock compensation reserve of £1,793,000 (2011: £1,756,000).

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.

8 Related party transactions

Transactions with the parent and ultimate parent company

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

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

A summary of the loan movement is:

Accrued interest is recorded within the loan balance £165,000 (2011: £353,000)

During 2012 the Company has transacted business with both TAO UK, totalling £nil (2011: £82,000), and with VSE, totalling £1,013,000 (2011: £888,000). Amounts outstanding as at 31 December 2012 are TAO UK owed £nil (2010: £63,000); VSE owed £nil (£nil) to the Company.

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

Key Management personnel compensation

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

Key management personnel compensation comprises the following: