Turbo Power Systems 3rd Quarter Results

4 November 2013

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

Announces Results for the Third Quarter

Ended 30 September 2013

Key Features

· Order intake:

- Quarter increased 122% to £2.57 million (Q3 2012: £1.16 million).

- Year to date increased 282% to £14.60 million (Q3 2012: £3.82 million).

· Revenue:

- Quarter increased 46% to £5.17 million (Q3 2012: £3.56 million).

- Year to date increased 18% to £14.24 million (Q3 2012: £12.12 million).

· Gross profit:

- Quarter increased 64% to £1.87 million (Q3 2012: £1.14 million), at a margin of 36% (Q3 2012: 32%).

- Year to date increased 43% to £4.70 million (Q3 2012: £3.27 million), at margin of 33% (Q3 2012: 27%).

· Cost management - overhead expense:

- Quarter reduced by 29% to £2.05 million (Q3 2012: £2.88 million), with headcount at 30 September 2013 at 155, down 21% (40 heads) since 30 September 2012.

- Year to date reduced 24% to £6.31 million (Q3 2012: £8.33 million).

· Net loss:

- Quarter reduced by 87% to £0.21 million (Q3 2012: £1.67 million).

- Year to date reduced by 75% to £1.30 million (Q3 2012: £5.21 million).

· Cash outflow from operating activities:

- Quarter reduced by 39% to £0.57 million (Q3 2012: £0.93 million).

- Year to date reduced by 45% to £3.01 million (Q3 2012: £5.45 million).

· Continuing financial support by TAO Sustainable Power Solutions (UK) Limited ("TAO UK"), TPS's parent undertaking.

- An additional loan of £0.57 million was received in August 2013.

- We remain critically dependent on this loan funding, with an extension to the current loan expected in the current quarter.

- Balance of loan from TAO UK outstanding at 30 September 2013 was £8.59 million, repayable on 1 April 2014. The Company is actively continuing its discussions with TAO UK about the alternatives available to the Company when the loan becomes repayable.

Carlos Neves, Chief Executive Officer, said:

"The continuous focus on improving terms with customers and on winning contracts with better margins is shown in these results. Coupled with the benefits from our cost reduction programme, we have reduced the Company's net loss in the quarter by 87% and year to date by 75%.

We will continue to focus on reducing our cost base and look for further operational efficiencies, and this is now becoming part of the mind-set of our organisation. We will also continue to concentrate on increasing our order intake in line with the first three quarters of this year. The order intake year to date stands at £14.6 million, a significant improvement over 2012 of £3.82 million, driven by continuous production orders from our major customers.

We will intensify our efforts on bringing new projects and on enlarging our customer base by winning contracts in markets where TPS's expertise provides the opportunity for attractive margins."

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, 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, 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.

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 4 November 2013.

Financial Performance

Quarterly Financial performance

Total revenues in the quarter ended 30 September of £5.17 million were 46% higher than 2012 (2012: £3.56 million), primarily driven by increased production volumes from our major customers.

Research and product development costs in the quarter decreased 33% to £0.65 million (2012: £0.97 million) attributable to movements in the timing of project expenditures, as these move out into the following quarter.

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 31% compared to 2012 to £1.20 million (2012: £1.74 million). As previously described the Company is seeking to contain costs without prejudicing the business operational strengths, this review has resulted in a 21% reduction in headcount compared with 30 September 2012 (30 September 2013: 155, 30 September 2012: 195) and is a major contribution to the decrease of £0.54 million in costs as compared to the same quarter in 2012.

Other operating income of £0.04 million was due to the release of the government grant (2012: £nil).

The Company recorded a net loss of £0.21 million (2012: £1.67 million) as a result of increased operating margin on production contracts and cost savings.

The Company recorded an operating cash outflow before working capital movements of £0.01 million for the quarter (2012: £1.35 million). After adjusting for changes in working capital items and purchases of property, plant and equipment the Company suffered an overall cash outflow of £0.57 million (2012: £0.93 million). The receipt of £0.57 million from the increase in loan funding from TAO resulted in a £nil overall net cash flow for the quarter. (2012: Outflow £0.20 million).

The Company finished the quarter with unrestricted cash balances of £0.35 million (2012: £0.86 million) and held further cash of £0.03 million (2012: £0.03 million) associated with utility bonds.

During the quarter the Company undertook a significant transaction with a related party, TAO UK its parent undertaking, negotiating (as noted above) an extension of its loan by £0.57 million, repayable on 1 April 2014.

OPERATIONAL REVIEW

Business of the Company

Turbo Power Systems is a technology-led business 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.

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 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 both 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 detailed in its 2012 Annual Report dated 11 March 2013, the Company understands the challenges of the market, particularly regarding quality, costs and timing. Accordingly it has sought to realign its objectives to focus on:

· Improved quality of the product portfolio;

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

· Consistent delivery of internal improvements.

Improve the quality of the portfolio

The Board aims to optimise, simplify, standardise and automate wherever possible TPS's product offering, 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 Board recognises that TPS's 30 years of experience and the talented and highly skilled workforce are the most important assets the Company has. It firmly believes that these assets under the new structure put in place in 2012 and the continuous pursuit of efficiencies will allow TPS 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 during the second half of 2012, the Board 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 Board has been able to start a series of initiatives that will address long term revenue growth and cost reductions.

These measures will together continue the culture of cost consciousness and drive excess costs out of the business.

Current Operations

During the quarter the Company continued to grow its order book through working with current customers to secure new production contracts. These orders cover both the rail market and the industrial motors and drive market. They continue to demonstrate that the Company is a major player in its chosen markets.

The majority of the new orders have been for further production of current products. The Company is actively seeking new opportunities where its new designs and engineering design talent can be utilised. This involves working with current customers and seeking out new customers where our design capability brings value. During the quarter, the Company has continued to focus on developing new more modular designs that will allow for production opportunities over the next few years.

The third quarter saw a decrease in Engineering design revenue due to the timing of project effort on current design programmes. The revenue is accounted for under the cost to complete basis, whereby revenue is recorded so as to reflect a steady profit over the life of the contract.

The Company continues to focus on its costs, both for production costs and overheads. The gross margin % in September 2013 was 33.0%, 22.2% above 2012's 27.0%. So with revenue up 18%, the Company has also increased its margin by £1.42 million (43%) over the same period in 2012.

The overhead base has been reducing since its peak level in the second quarter 2012, with headcount at 30 September 2013 at 155, down 21% since 30 September 2012.

Heathrow Facility

During the quarter, the Company gave notice to terminate the short-term extension to the lease on the Heathrow facility. The Company is due to leave the Heathrow premises by 30 November 2013.

A contract has been agreed on a serviced office facility in the Heathrow area.

Regional Growth Fund Grant

In February 2013 the Company announced the £750,000 award of the first tranche of a Regional Growth Fund grant ("the grant"). The second tranche of the £250,000 was received in June 2013. The remainder of the grant is expected Q1 2014.

The Company first applied for the Grant in the first quarter of 2011. The Company is to safeguard 152 jobs in aggregate in the 5 year monitoring period. The Company's accounting policy recognises the benefit of the Grant over the expected life of the assets to which it relates. To date the Company has recognised £497,000 of the £1,000,000 received. It is expected that the remainder will be recognised over the next 2 to 3 years, as the Company monitors its forecasts.

Support from TAO UK

The Company extended its loan from its parent company, TAO UK on 2 April 2013, by £2.10 million and by £0.57 million on 30 August. This takes the current loan position to £8.59 million. In addition, the Company has accrued unpaid interest of £0.51 million as at 30 September 2013. The Company is expecting to secure a further increase in the current loan from TAO UK during the current quarter.

The loan is repayable on 1 April 2014, and is therefore shown as a current liability as it is now repayable within one year.

The Company is actively continuing its discussions with TAO UK about the alternatives available to the Company when the loan becomes repayable.

Summary

In summary, the business is leveraging its investment in operational capability, functional management and infrastructure. The Board believes that the markets in which the business operates are either stable or growing.

The Company remains critically dependent on loan funding to continue funding the growth in 2013 and beyond. An extension to the current loan is expected from TAO UK during the fourth quarter of 2013. The Company is actively continuing its discussions with TAO UK about the alternatives available to the Company when the loans, currently amounting to £8.59 million, become repayable on 1 April 2014.

The current order book extends over the next two years, which shows an improvement if compared with the previous year position. Nevertheless, there is potential to win further substantial orders that we will be pursued as a priority. The win, execution and completion of those orders and development programmes in a consistent and timely manner is key to deliver management's plans for the continued improved results during the remainder of 2013 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 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. The Company expects to receive additional funding from TAO UK during the last quarter of 2013. The Company is actively continuing its discussions with TAO UK about the alternatives available to the Company when the loans of £8.59 million become repayable on 1 April 2014.

As at 30 September the Company had net operating outflows, with a net debt of £12.63 million, being £12.97 million of debt less £0.34 million of cash. The Company has a cumulative deficit of £94.72 million as at 30 September 2013 and continued to be loss making for the period 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 shows selected quarterly consolidated financial information of the Company for the last eight quarters:

Revenues increased during 2013 to date, mainly due to the continuation of production orders.

Research and development expenditure is slightly decreased compared with previous years, reflecting the continuing trend of focused activity and timing of external spend.

General and Administration increased in the September 2013 quarter over the June quarter, because the June quarter included a £0.50 million release of the asset retirement obligation provision for the Heathrow facility.

The on-going cost saving activities have delivered is 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 2012, together with the Third quarter 2013 Financial Results and Managements' Discussion and Analysis are available on www.sedar.com.Full 2012 financial statements have been mailed to shareholders during April 2013.

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 2013

Revenue

Revenue in the quarter ended 30 September 2013 was £5.17 million (2012: £3.56 million.)

Production revenue increased by 78%, due to the continuation of production orders for industrial products and the additional orders for spares.

Development income, which is recognised on a percentage complete basis, has decreased as we have completed or approached completion on existing contracts. We are actively seeking to improve our pipeline of development projects.

Cost of Sales

The cost of sales was £3.30 million (2012: £2.41 million) net of release of provisions for loss making contracts. 

The Company continues with loss making production contracts in 2013. During the period it has worked with customers to increase certain unit production selling prices and/or effect design changes to allow material and cost decreases to be implemented. Further negotiations continue.

Research and product development

Research and product development expenditure in the quarter was £0.65 million (2012: £0.97 million).

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 31% compared to 2012 to £1.20 million (2012: £1.74 million). The major elements in the decrease of £0.54 million were due to the cost savings from the continuing cost saving activities.

Other operating income

Other operating income of £0.04 million was due to the release of the government grant (2012: £nil).

Finance income/expense

Finance expense of £0.08 million (2012: £0.07 million) arose from the interest on the loans from TAO UK and the effects of foreign exchange movements.

Cash flows for the quarter ended 30 September 2013

Cash outflow from operating activities

The Company recorded an operating cash outflow before working capital movements of £0.01 million for the quarter (2012: £1.35 million). After adjusting for changes in working capital items and purchases of property, plant and equipment the Company suffered an overall cash outflow of £0.57 million (2012: £0.93 million). Receipt of £0.57 million from the increase in loan funding from TAO resulted in a £nil overall net cash flow for the quarter. (2012: Outflow £0.20 million).

Investing activities

Cash outflows from capital investments in the quarter were £0.09 million (2012: £0.01 million).

Financing activities

The Company received £0.57 million (2012: £nil) from the increase of the TAO UK loan in August 2013.

Overall cash outflow for the period

Overall the cash flow during the quarter was £nil (2012: Outflow £0.21 million).

Review of the nine months ended 30 September 2013

Revenue

Revenue in the nine months ended 30 September 2013 was £14.24 million (2012: £12.12 million).

Production revenue increased by 24%, due to the continuation of production orders for industrial products and additional orders for spares.

Development income, which is recognised on a percentage complete basis, has decreased as we have completed or approached completion on existing contracts. We are actively seeking to improve our pipeline of development projects.

Cost of Sales

The cost of sales in the period amounted to £9.54 million (2012: £8.85 million) net of release of provisions for loss making contracts. 

The Company continues with loss making production contracts in 2013. During the period it has worked with customers to increase certain unit production selling prices and/or effect design changes to allow material and cost decreases to be implemented. Further negotiations continue.

Research and product development

Research and product development expenditure in the period was £2.37 million (2012: £3.15 million).

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 26% compared to 2012 to £3.38 million (2012: £4.59 million). The major elements in the decrease of £1.21 million were due to the continuing cost savings activities and the one-time release of the asset retirement provision for the Heathrow facility of £0.50 million (2012: £nil), offset by higher facility costs from the expansion of the Gateshead site as the Company continues the re-balancing of its facility requirements.

Other operating income

Other operating income of £0.53 million was due to the release of the government grant (2012: £nil).

Finance income/expense

Finance expense of £0.23 million (2012: £0.15 million) arose from the interest on the loans from TAO UK and the effect of foreign exchange movements.

Cash flows for the nine months ended 30 September 2013

Cash outflow from operating activities

The Company recorded an operating cash outflow before working capital movements of £1.70 million for the period (2012: £4.42 million). After adjusting for changes in working capital items and purchases of property, plant and equipment the Company suffered an overall cash outflow of £3.18 million (2012: £5.77 million). Receipt of £2.67 million from the increase in loan funding from TAO UK (2012: £2.82 million) and £1.00 million of net cash inflow from the grant during the period (2012: £Nil) resulted in an overall net cash outflow for the period of £0.51 million (2012: Outflow £0.57 million).

Investing activities

Cash outflows from capital investments in the period were £0.17 (2012: £0.32 million).

Financing activities

The Company received £2.67 million from the increase of the TAO UK loan in April 2013. (2012: £5.20 million from the increase in loan from TAO UK and issue of A shares).

Overall cash outflow for the period

Overall the cash outflow during the period was £0.51 million (2012: £0.32 million).

Balance sheet as at 30 September 2013

The Company ended the period with an unrestricted cash balance of £0.34 million compared with £0.86 million at 31 December 2012. Substantially all of the Company's cash balances are denominated in Sterling.

In addition, the Company had restricted cash amounts of £0.03 million (31 December 2012: £0.03 million), principally relating to utilities deposits.

Non-current assets have decreased from £0.83 million at 31 December 2012 to £0.77 million at 30 September 2013, after depreciation and amortisation charges of £0.24 million.

Loans and borrowings have increased by £2.67 million to £8.59 million. The loan and interest are shown as a current liability repayable on 1 April 2014. The Company is actively continuing its discussions with TAO UK about the alternatives available to the Company when the loans of £8.59 million become repayable on 1 April 2014.

Net current liabilities at 30 September 2013, excluding restricted cash balances included under current assets, were £4.94 million, compared with net current liabilities of £2.94 million as at 31 December 2012.

As at 30 September 2013, 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 4 November 2013, 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 2013 were £0.34 million, compared with £0.86 million at 31 December 2012.

Restricted cash at 30 September 2013 was £0.03 million, compared with £0.03 million at 31 December 2012.

The Company reported a loss in the quarter of £0.21 million and has a cumulative deficit of £94.72 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 2012.

Currency risk management

Principally all of the Company's expenditure is 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 2013 the Sterling equivalent of Canadian Dollar denominated net liabilities amounted to £9,500 (31 December 2012: net liabilities £12,000).

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.

Financial Risk Management and Capital Structure

The Company's risk management programme remains as detailed on page 51 in the Annual Report and Accounts 31 December 2012. There have been no significant changes since 31 December 2012.

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

Related Party Transactions

On 2 April 2013 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 £2.10 million of debt financing to support working capital requirements, under the same terms and conditions as the previous loans. During the third quarter on 30 August 2013 there was a further £0.57 million extension to the loan financing under the same terms and conditions as previous loans. These loans are repayable on 1 April 2014.

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 2013 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 £94.72 million as at 30 September 2013.

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 Accounts for 31 December 2012.

Principal Risks and Uncertainties

The Company considers its strategic, operational and financial risks and identifies actions to mitigate these risks and uncertainties. There has been no significant change to the principal risks and uncertainties faced by the Company since 31 December 2012.

The principal risk that the Company faces is the inability to access funds in order to settle its liabilities as they fall due. To mitigate these risks the Company plans to secure additional loan funding from its parent undertaking TAO UK. The Company is actively continuing its discussions with TAO UK about the alternatives available to the Company when the loans of £8.59 million become repayable on 1 April 2014.

Risks and uncertainties

The development and commercialisation plans for the Group's products presented in these Condensed Consolidated Interim Financial Statements and Management's Discussion & Analysis are forward-looking statements and as such are subject to a number of risks and uncertainties including those detailed below and in the Going Concern section above.

The business entails risks and uncertainties that affect the outlook and eventual results of the business and commercialisation plans. The primary risks relate to meeting the product development and commercialisation milestones, which require that the products exhibit the functionality, cost, durability, and performance required in a commercial product.

There is a risk that the markets for certain of our products may never develop, or that market acceptance might take longer to develop than anticipated. Our business planning process recognises and, to the extent possible, attempts to manage these risks by pursuing diverse markets for each of our products. Within these markets our commercialisation plan is focused on products that we believe have a competitive advantage.

We develop both subsystems and complete systems across our high speed motors, generators and power electronics product ranges and these development programmes are subject to risk. These risks include problems or delays due to technical difficulties and inability to meet design performance goals, including power output, life and reliability. We mitigate these risks to the extent possible through detailed project management, formal design reviews, reviews by external experts, contingency plans which anticipate likely problems, safety reviews, training and testing programs related to the operation and maintenance of the products.

We seek to maintain our technology lead through our strong intellectual property position, which will act as a barrier against competitors, and by continuing to invest in technology development. However, there can be no assurance that our present or future issued patents will protect our technology lead. We also rely upon know-how and trade secrets to maintain our technology lead. However, there is no assurance that this information can be completely protected.

Another market driver for products is the development of government policy related to the environment. Unfavourable decisions related to environmental policies (such as noise and exhaust emission levels) could result in delays in the introduction of our electrical machine products. We mitigate, to the extent possible, the effects of changes in government regulations by developing products for diverse geographic locations.

We cannot predict with certainty our future revenues or results from our operations. If we experience significant cost overruns on any of our programs and we cannot obtain additional funds to cover such overruns or additional cash requirements, certain research and development activities may be delayed, resulting in changes or delays to our commercialisation plans. We may be required to raise additional capital through the issuance of equity or debt. We seek to mitigate this risk by securing funding commitments from a variety of sources and through adjustments to our development plans, by being financially conservative in our expenditures and by maintaining good communications with our major shareholder, TAO UK, and investment bankers to assist us should we need to access the public or private capital markets.

We are also subject to normal operating risks such as credit risks and foreign currency risks. Foreign currency sales and purchases are made in Euros, Canadian and US Dollars. Over time, currency balances are matched, to the extent possible, to planned currency purchases.

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. There are inherent limitations in any system of internal financial control and, accordingly, even the most effective system can provide only reasonable, and not absolute, assurance with respect to the preparation of financial information and the safeguarding of assets.

Management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, is also responsible for establishing and maintaining adequate internal controls over financial reporting within the Company. Management have designed and evaluated the effectiveness of the Company's Internal Controls over Financial Reporting to provide reasonable assurance that the financial reporting is reliable and that the consolidated financial statements are prepared in accordance with International Financial Reporting Standards. Based on the latest evaluation, management has concluded that the following potential weaknesses existed as at 30 September 2013, but that they are sufficiently mitigated through appropriately designed controls. Management has determined that these controls are effective and provide reasonable assurance that the financial reporting is reliable and in accordance with IFRS.

Limited resources

Given the Company's size, it has limited resources within the Finance department. This impacts on its ability to provide comprehensive knowledge in certain areas of financial accounting, as detailed below. The Company is highly reliant on the knowledge of a limited number of employees and on the performance of mitigating procedures during its financial close and consolidation process to ensure that the consolidated financial statements are presented fairly and in all material respects.

Income taxes

Income tax law is a highly technical area that requires an in-depth understanding of national, international, federal and provincial tax laws and the Company's Finance staff has only a fair and reasonable knowledge of the rules related to income tax accounting and reporting. Although this represents a weakness in the Company's control environment, the Company retains and will continue to retain the services of external experts to provide advice and guidance on income tax accounting and disclosures. The Company does not consider that this weakness in control environment has resulted in any material misstatements of the financial statements.

Complex and non-routine transactions

At times the Company records complex and non-routine transactions which are extremely technical in nature and require an in-depth understanding of IFRS. The Company's Finance staff has a fair and reasonable knowledge of the rules related to IFRS. There is potential that these transactions could be recorded incorrectly resulting in potential material misstatement of the financial statements of the Company. Where the Company identifies a transaction as potentially complex or non-routine it will utilize the services of external experts to provide guidance and advice.

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:

J Francisco, Chairman

4 November 2013

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

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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 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") and the 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 quarter and nine months ended 30 September 2013 comprises of the Company and its subsidiaries. The Company's subsidiaries comprise:

2 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 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. The Company expects to receive additional funding from TAO UK during the last quarter of 2013. The Company is actively continuing its discussions with TAO UK about the alternatives available to the Company when the loans of £8.59 million become repayable on 1 April 2014.

As at 30 September the Company had net operating outflows, with a net debt of £12.63 million, being £12.97 million of debt less £0.34 million of cash. The Company has a cumulative deficit of £94.72 million as at 30 September 2013 and continued to be loss making for the period 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 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 2012, and using the same methods of computation.

The condensed consolidated interim financial statements were authorised for issuance by the Board of Directors on 4 November 2013.

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 Derivative financial instruments and hedging activities

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.

The Company designates certain derivatives as either:

a) Hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge);

b) Hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge); or

c) Hedges of a net investment in a foreign operation (net investment hedge).

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement.

5 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 2013 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 £94.72 million as at 30 September 2013. The Company expects to receive additional funding from TAO UK during the last quarter of 2013. The Company is currently in discussions with TAO UK about the alternatives available to the Company when the loans of £9.10 million become repayable on 1 April 2014.

Further information on Going Concern is provided in Note 2.

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

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

6 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 2013 and 30 September 2012.

7 Loss per share

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

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 2013 are as follows:

8 Derivative financial instrument

The notional principal amounts of the outstanding forward foreign exchange contracts at 30 September 2013 were £0.86 million (2012: £nil).

9 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. The loan is secured by a fixed and floating charge over the assets of the Company's subsidiary Turbo Power Systems Limited.

The Company has drawn down on all its borrowing facilities as at 30 September 2013 (2012: all loans drawn down in full). Unpaid accrued interest of £505,000 (2012: £165,000) is recorded in the loan amount.

The Company expects to receive additional funding from TAO UK during the last quarter of 2013. The Company is actively continuing its discussions with TAO UK about the alternatives available to the Company when the loans of £8.59 million become repayable on 1 April 2014.

10 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 2013, other reserves comprise of the stock compensation reserve of £1,818,137 (31 December 2012: £1,793,865) and the hedging reserve of £42,000 (31 December 2012: £nil).

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.

11 Related party transactions

Transactions with the parent and ultimate parent company

During the period ended 30 September 2013 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 £2.67 million of debt financing to support working capital requirements, under the same terms and conditions as the previous loans.

Accrued interest £505,000 is recorded within trade and other payables (31 December 2012: £165,000)

During the nine months ended 30 September 2013 the Company transacted business with TAO UK totalling £nil (2012: £nil), and with VSE, totalling £550,890 (2012: £ 199,978). Amounts outstanding as at 30 September 2013 are: the Company owes TAO UK £nil (31 December 2012: £nil); VSE owes £nil (31 December 2011: £nil) to the Company.

All transactions were conducted within the normal course of business for supply of engineering design services and were 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: