Turbo Power Systems Inc. (“TPS” or the “Company ... · General and administrative costs,...

Press Release13 March 2014

Turbo Power Systems Inc. (“TPS” or the “Company”) Announces Results for the Year and Quarter

Ended 31 December 2013 Key Features

Full year revenue up 21% to £19.0 million (2012: £15.7 million).

Order intake for 2013 was £17.4 million (2012: £7.1 million), a 145% increase.

Full year total expenses reduced to £8.6 million (2012: £10.8 million).

Net loss reduced to £2.9 million (2012: £7.2 million), an improvement of 60%.

Operating cash outflow of £3.3 million (2012: £7.4 million), an improvement of 55%.

Continuing financial support by TAO Sustainable Power Solutions (UK) Limited (“TAO UK”), TPS’s parent undertaking. - Balance of loan from TAO UK outstanding at 31 December 2013 was £10.13 million (2012: £6.1

million), including interest. - An additional loan of £3.6 million was received during 2013. - The Company remains critically dependent on this loan funding. - The loan repayment date has today been rescheduled from 1 April 2014 to 1 April 2016.

Carlos Neves, Chief Executive Officer, said: “During 2013 Turbo Power Systems continued to focus on improving its gross margins (up from 2012: 25% to 2013: 30%) and reducing its cost base to give an improvement of 60% in the net loss. Since the major structural adjustments were implemented and concluded in 2013, Turbo Power Systems is now actively pursuing exciting new projects with new customers to increase the diversity of both our customer base and our technology portfolio, with the right level of profitability. We have a new sales team in place since year-end to drive this initiative forward, which coupled with our continued focus on operational efficiencies throughout the business, is a key part of the plan to further improve performance and achieve profitability. I look forward to 2014’s performance with measured confidence.” For further information, please contact:

Turbo Power Systems Tel: +44 (0)191 482 9200

Carlos Neves, Chief Executive Officer Charles Rendell, Chief Financial Officer

Kreab Gavin Anderson (financial public relations) Tel: +44 (0)20 7074 1800

Robert Speed

finnCap (NOMAD, broker and financial advisor) Tel: +44 (0)20 7220 0500

Ed Frisby, Henrik Persson

Notes to Editors About Turbo Power Systems Company Website: www.turbopowersystems.com Turbo Power Systems Inc (AIM:TPS.L) is a leading UK based designer and manufacturer of innovative power solutions. TPS’s products are all based on its core technologies of high speed motors and generators and power electronics which are sold into a number of market sectors including aerospace, rail, and various industrial sectors. The Company’s products provide high performance while improving efficiency and reducing process energy consumption compared to existing technologies. Turbo Power System’s existing customers include blue chip companies such as Bombardier Transportation, Daikin 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, through Tao Sustainable Power Solutions (UK) Ltd (“TAO UK”), which is a VSE wholly owned subsidiary and TPS’s parent undertaking, which owns 89.4% of the issued share capital of the Company. Forward looking statements

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.

Chairman’s Statement This is my first Chairman’s statement since joining the Board on 3 March 2014 and I am pleased to be able to report on the 2013 activities and financial results. During 2013 Turbo Power Systems Inc. (“TPS” or “the Company”) has benefited from management action, growing revenue and significantly reducing operating costs. Performance Order intake in 2013 was £17.4 million (2012: £7.1 million), as the Company built on the objective to win and deliver profitable contracts. Revenue in the year to 31 December 2013 (“2013”) of £19.0 million was up by 21% compared with the previous year’s £15.7 million. 2013’s operating loss was £2.4 million, a year-on-year improvement of 65%, due predominantly to management’s actions in better controlling costs, bringing profitable projects and negotiating increased margins on certain contracts. During 2013, the Company continued to review its bid pipeline, projects and the skill base of its workforce to ensure that this was all appropriate to meet the strategy of driving the Company towards profitability. During the year there was a one off benefit of £0.28 million (2012: £nil) associated with consolidating the Company’s UK based operations in Gateshead. Headcount has been reduced in line with this review from 179 in December 2012 to 142 in December 2013 a reduction of 21%. Research and development costs have reduced to £2.9 million (2012: £3.9 million), since we became more focused and in line with the Board’s plans for the year. General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company’s public listings, were reduced by 18% to £5.0 million (2012: £6.1 million), attributable to the efficiencies generated on staff costs following the Company’s restructuring activities which began in the second half of 2012. Other operating income represents the release of the Regional Growth Fund grant to the income statement. The release of £0.57 million represented the cumulative amount to the end of 2013 (2012: £nil), as this was the first year that the grant was received. It is expected that the release for 2014 would be £0.20 million on a normalised basis. The loss before taxation for the year was £2.9 million (2012: loss £7.2 million), an improvement of 60%. Capital investment in 2013 amounted to £0.24 million (2012: £0.35 million) and related to production equipment, enhancing TPS’s technology / software capabilities and rationalisation of facilities. Regional Growth Fund During 2011 the Company made an application for a grant under the Regional Growth Fund, which was approved. The grant is to promote investment in the North East of England, through capital expenditure and job security and creation. The Company has to maintain an average of 152 jobs secured or created, over the 5 years of the project. The Company’s plan envisages that the average headcount over the five year period will exceed this requirement. The first tranche (£0.75 million) of the award was received in February 2013, and a further tranche (£0.25 million) in June 2013. Funding Tao Sustainable Power Solutions (UK) Limited (“TAO UK”), TPS’s majority shareholder, agreed to increase the Company’s existing debt financing facility, including interest, to £10.13 million (31 December 2012: £6.09 million). This funding has been used to cover working capital needs and to deliver growth in 2013. TAO UK is a wholly owned subsidiary of Vale Soluções em Energia (“VSE”) a Brazilian company. The loan repayment date of 1 April 2014 was further extended to 1 April 2016. 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 2012, the Independent Auditor’s report contains an Emphasis of Matter paragraph referencing this uncertainty relating to the going concern. Chairman During the year Rodrigo Braga was Interim Chairman until 27 August 2013 when José Francisco de Azevedo was appointed Chairman. José Francisco de Azevedo subsequently resigned on 3 March 2014 when I, Fernando Senhora, became Chairman. Strategy and Outlook Looking ahead, the Board intends TPS to remain a technology-led company. The commitment to embrace new ideas and fund research and development will drive products that are more efficient to operate and provide a competitive advantage in the market place. As detailed in 2012 the Company’s Directors have realigned the Company’s focus as follows:

Improve the quality of the portfolio;

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

Consistent delivery of internal improvements. The Company continues to operate a development programme, which leads the design of new efficient and cost effective products and a manufacturing base that exports units across the globe. The Company believes that by having design and manufacture work closely together better allows the required synergies and efficiencies to be realised. The Company has been working closely with VSE on securing contracts in Brazil. During 2013 the Company signed a key contract through VSE with Petrobras, the major Brazilian Oil & Gas concern. While this contract was delivered with success, the next phases and further enquiries regarding new projects are being discussed with Petrobras. The focus on increasing our customer base has resulted in a new contract in 2013 with SCOMI of Malaysia. SCOMI is one of only three integrated monorail system providers in the world. Again, the success of this initial contract is leading to further potential orders as markets such as India, Malaysia and Brazil continue the investment in monorails. In 2013, the Company moved production of the electrical machines products to Gateshead and closed the facility at Heathrow. This is part of the focus on efficiency and synergies that was begun in 2012. This move also gave us the opportunity to attract and develop employees with new skills from within the North East of England manufacturing workforce. Since the major structural adjustments were implemented and concluded in 2013, we are now actively pursuing exciting new projects with new customers to increase the diversity of both our customer base and our technology portfolio, with the right level of profitability. We have a new sales team in place since year-end to drive this initiative forward, which coupled with our continued focus on operational efficiencies throughout the business, is a key part of the plan to further improve performance and achieve profitability. The Board and I look forward to 2014’s performance with measured confidence. Fernando Senhora Chairman 13 March 2014

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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 2013 and related notes, which are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the IASB. All amounts in the MD&A, audited consolidated financial statements and related notes are expressed in Sterling, unless otherwise noted. This MD&A contains forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance, and underlying assumptions and other statements that are other than statement of historical fact. These statements are subject to uncertainties and risks including, but not limited to, the ability to meet ongoing capital needs, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition, the need to protect proprietary rights to technology, government regulation, and other risks defined in this document and in statements filed from time to time with the applicable securities regulatory authorities. This MD&A has been prepared as at 13 March 2014.

Business of the Company

Turbo Power Systems is a technology-led Company that designs and manufactures high-speed electric motors, generators and power electronics systems and provides bespoke solutions to transport, industrial, energy conversion, and military markets. Its track record in engineering innovation, which has been built and tested over a number of years, allows the Company to meet challenging design and manufacturing briefs with specific requirements relating to environmental performance and performance to volume demands across the world. TPS has a proven and worldwide track record in the development and deployment of equipment in many sectors, but especially in rail and industrial. Long term relationships with customers in these markets have been built based on delivering competitive products with proven reliability. The expertise developed over the last 30 years, on high-speed electrical machines and power electronics, allows the Company to explore its current and future portfolio and adjust accordingly to grow successfully in its chosen markets. Way Forward As a technology-led company, we understand the challenges of the market regarding quality, costs and timing. Since last year we concentrated on three important pillars that will continue to be key to succeed in our strategy, as follow:

Improve the quality of the portfolio;

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

Consistent delivery of internal improvements. Improve the quality of the portfolio The Company aims to optimise, simplify, standardise and automate wherever possible the following portfolio categories: products offered, operational sites, inventory, receivables and staffing. The Company made improvements from last year, but recognises that it can further dilute the concentration of revenues among its customers, sectors and geographies. The focus remains on developing our capabilities, products and bespoke solutions and recognising where the value of our proposal can be fully appreciated. The Company has closed its facility at Heathrow and consolidated manufacturing at the Gateshead facility. This has led to a more efficient use of space and in addition eased the ability to identify opportunities to optimise our inventory levels. While this sadly involved the loss of some long standing skilled employees, the Company was able to attract new skills from within the North East of England manufacturing workforce. TPS has in place a rigorous process to control the Company’s outstanding debtors. Currently the Company has a small number of large debtors and works to ensure that any overdue balances are effectively managed. For newer contracts the Company is seeking to implement a process of controlling debtors by the use of

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irrevocable letters of credit. The Company does not have a history of bad debts but seeks to improve its working capital position The Company has always undertaken maintenance, repair and overhaul (“MRO”) activities. The Board plans to accelerate growth in these MRO activities where the Company’s expertise can bring added value to customers. Due to this added value the Company believes that this can be a profitable revenue stream in the future. Superior execution within design development, manufacturing operations and support activities The Company recognises that its 30 years of experience together with the talented and highly skilled workforce are the most important assets it has. The Board firmly believes that these assets under the new structure put in place in 2012, and our continuous pursuit of efficiencies, will allow TPS to react faster and be even more integrated to fulfil the market’s needs. The Board acknowledges the major changes undertaken by the Company over the past few years and now wishes to consolidate and build on that experience. As part of this continuous improvement process, the Board undertook two studies during the year. The first study was into the Company’s intended markets and product line alignment. The outcome was to ensure that the Company focused on the markets with profitability and long-term growth potential. In addition, as part of this study, the correct technology ideas were identified and our research and development budget aligned accordingly. The second study, which is a continuation of the exercise done in the middle of 2012, is reviewing the Company’s organizational structure put in place in 2012 combined with the output of the markets study mentioned above. While the Board acknowledge the skills and experience of the workforce, it is important to understand that these are being controlled and directed in an efficient manner. Consistent delivery of internal improvements Since the new management structure was put in place in 2012, the Company has been able to drive a culture where each of the areas are more integrated and capable of better understanding the overall objectives of the Company. During 2013, the roles and responsibilities of each department and individuals initially focussed on better cost control, delivered with excellence. The focus for 2014 is to achieve profitable revenue growth. Continuous improvements achieved in 2013 include:

The Company has been working with customers to review the quality and quantities of the products required. This has led to a greater appreciation of the value delivered by the Company through its products. The Company has been working to increase the average selling price of the products in line with that value proposition.

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

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

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

Transport

o Rail The Company continues its major partnership with Bombardier. During the year Bombardier issued purchase orders for the order of 300 units for the Chicago Transit Authority 5000 series car and associated spare parts. These orders will ensure that production continues into 2015. The Company completed deliveries under the current contract of the Bombardier Toronto Rocket units in the year. Currently the Company is in negotiation for further units, where orders are expected in 2014. The Bombardier Sao Paulo unit continues in production with 121 units shipped by 31 December 2013.

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

o Aerospace The Jettison Fuel Pump motor drives for Eaton Aerospace continue to be delivered in line with the customer’s call-off rate. Now the Boeing 787 Dreamliner has entered into revenue service, orders quantities have increased in line with the aircraft build acceleration, continuing to remain a stable revenue stream.

Industrial

o Laser Power Supplies The demand from our customers continued during 2013 and provided steady production through the year. The expectation for 2014 is that demand will continue at a similar rate. The Company has been seeking to expand in this area with reviews of potential new customers and market appraisals.

o Industrial Motors and Drives During 2013 McQuay International was renamed to Daikin Applied, following its recent acquisition by Daikin of Japan. The Company is seeking to expand the previous US centric relationship to the global reach of Daikin. Current orders are continuing and the Company’s expectation is that this demand will continue in the coming years. Further development work is on-going on newer designs for electric motors and drives to ensure the business remains competitive in this market. 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 2014.

Defence

o 1MW High-Speed Generator The Company expected that this unit would continue in production in 2013. However, due to changes in funding at our main customer this has not been possible. The Company is now actively seeking new markets into which to expand with this product range.

Marine/Oil & Gas

o Development In 2013, the Company signed a significant technology development agreement with VSE and Petrobras within the Oil & Gas market in Brazil. The development has progressed well during the year and initial negotiations are underway to extend the contract further. The Company sees this as an important market for future growth in both development design revenue and production revenues. However, this is also seen as a market where acceptance by the customer for production takes a considerable period. Business Model TPS operates by selling engineering design services and manufacture of high-speed electric machines and power electronics. The design and manufacture could be undertaken as separate activities or as one single contract, depending on the needs of the customer. The Company seeks to retain ownership of the intellectual property created as a result of any design activities. The Company also undertakes speculative research and development activities in order to remain at the forefront of technology. Engineering design contracts are accounted for as long-term contracts, where revenue is matched to costs incurred to provide recognition of profit based on the activity undertaken. For manufactured units, revenue and profit is recognised as the units are delivered.

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TPS seeks to capitalise on the special design capabilities within the Company. This can be in the form of increased down payments on long-term contracts or increased revenue for that part of a contract. A typical contract would involve an upfront down payment to cover engineering design work followed by milestones as value is transferred, followed by a per unit sales rate as units are manufactured. The Company would provide a warranty on units delivered for typically one or two years, then moving to undertaking repairs on a revenue bearing basis. The Company can also undertake maintenance, repair and overhaul of units that were not manufactured by the Company. This revenue is accounted for under production. Summary In summary, 2013 was a year where the Company continued to grow revenue and implemented significant initiatives which decreased our net loss. The business has continued the review of operational efficiencies and made substantial savings in overheads. The Company remains critically dependent on loan funding in 2014 to continue funding the planned growth in 2014 and beyond. As a positive sign the current order book extends over the next two years. Nevertheless the need to win further substantial orders, execution of those orders and completion of development programmes in a consistent and timely manner are key to delivering management’s plans for the improved results during 2014 and beyond. Financial Performance Total revenues in the year of £18.96 million were 21% higher than in the previous year, (2012: £15.66 million), primarily due to increased production volumes. Research and product development costs decreased by 26% to £2.90 million (2012: £3.90 million). The Company continues its investment in new technologies to increase its technical capabilities for new marketplaces. General and administrative costs, which consist mainly of staff costs, facilities costs and the costs associated with the Company’s public listings, were down by £1.11million (18%) to £5.01 million (2012: £6.12 million). The major element was the reduction in headcount in permanent and temporary staff in the year from 179 in 2012 to 142 by the end of December 2013. The Company has also sought to reduce its operating costs by reviewing the facility requirements in Heathrow which now operates from smaller office facility in the same locality. This move gave rise to a one-off benefit in 2013 of £ 0.28 million for the release of the asset retirement obligation following consolidation of our UK facilities in Gateshead (2012: £nil). The Company recorded a loss before interest, tax, depreciation, amortization, and stock compensation of £1.91 million (2012: £6.27 million), primarily as a result of increased production revenues, higher margins and decreased general and administration expenditure, which as noted above fell by £1.47 million. The Company recorded an operating cash outflow before working capital movements of £3.06 million for the year (2012: £6.35 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 £2.58 million (2012: £7.72 million). Net cash inflow from financing during 2013 of £3.57 million (2012: £7.92 million), resulted in an overall net cash inflow for the year of £0.99 million (2012: inflow £0.20 million). This included a receipt of a government grant, under the Regional Growth Fund, of £1.00 million (2012: £nil) The Company finished the year with an unrestricted cash balance of £1.85 million (2012: £0.86 million) and held further cash of £0.13 million (2012: £0.03 million) associated with rent and utility deposits. During the year ended 31 December 2013 the Company undertook significant transactions with related parties. The Company has a loan facility from its majority investor TAO UK, to support working capital requirements, bearing interest at 6% and being repayable upon request after 1 April 2014. At the beginning of 2013 the loan balance outstanding was £6.08 million. During the year the Company increased the loan by £3.57 million. As at 31 December 2013 the amount outstanding is £10.13 million, including rolled up interest of £0.65 million. The repayment date of the loan has been extended to 1st April 2016. The Company raised invoices for £0.09

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million (2012: £1.01 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 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 budgeted and forecasted working capital requirements and support the Company’s growth plans. If not secured, this may result in the curtailment of the Company’s activities. As at 31 December 2013 the Company had net operating outflows, with a net debt of £12.62 million, being £14.47 million of debt less £1.85 million of cash. The Company has a cumulative deficit of £96.27 million as at 31 December 2013 and continued to be loss making for the year then ended. If the Company is unable to generate positive cash flows from operations, ensure the continued financial support from TAO UK and ultimately VSE, or secure additional debt or equity financing these conditions and events would cast significant doubt regarding the going concern assumption and, accordingly, the use of accounting principles applicable to a going concern. These consolidated financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which 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 financial support from TAO UK and, ultimately, VSE will remain in place to enable the Company to meet budgeted and forecasted working capital requirements and support the Company's 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: All amounts in £’000

Revenue Research and product development

General and administrative

Net loss Loss per share

March 2012 4,525 953 1,336 (2,061) (0.14) June 2012 4,039 1,219 1,516 (1,475) (0.07) September 2012 3,555 974 1,736 (1,669) (0.05) December 2012 3,545 758 1,530 (1,959) (0.08)

15,664 3,904 6,118 (7,164) (0.34)

March 2013 3,760 648 1,428 (950) (0.03) June 2013 5,308 1,066 747 (139) (0.00) September 2013 5,174 653 1,203 (214) (0.01)

December 2013 4,714 530 1,633 (1,548) (0.05)

18,956 2,897 5,011 (2,851) (0.09)

Research and development expenditure in 2013 was 26% lower than 2012. The Company continues to invest in new technologies to maintain its technical capabilities in the future.

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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 2014. Copies of the quarterly and annual results are available from the Company’s office at 1 Queens Park, Queensway North, Team Valley Trading Estate, Gateshead, NE11 0QD, United Kingdom or available to view from the Company's website at www.turbopowersystems.com.

Turbo Power Systems Inc. Consolidated statement of comprehensive loss

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Notes Quarter ended

31 December Year ended 31

December 2013 2012 2013 2012 £’000 £’000 £’000 £’000 Revenue 6 4,714 3,545 18,956 15,664 Cost of sales (3,732) (2,879) (13,276) (11,724)

Gross profit 982 666 5,680 3,940 Expenses Distribution costs (162) (131) (721) (729)

Research and product development (530) (758) (2,897) (3,904)

General and administrative (1,633) (1,529) (5,011) (6,118)

Total expenses (2,325) (2,418) (8,629) (10,751) Other operating income 34 - 567 - Other gains - net 21 - 21 -

Operating loss (1,288) (1,752) (2,361) (6,811)

Finance income - 6 - 6 Finance expense (260) (213) (490) (359)

Loss before tax (1,548) (1,959) (2,851) (7,164)

Income tax expense - - - -

Net Loss (1,548) (1,959) (2,851) (7,164)

Cash flow hedges (42) - - -

Total comprehensive loss for the periods

(1,590) (1,959) (2,851) (7,164)

Loss per share – basic and diluted 7 0.05p 0.08p 0.09p 0.34p

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

Turbo Power Systems Inc. Consolidated statement of financial position

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Notes As at 31 December

As at 31 December

2013 2012

£’000 £’000 Current assets Restricted cash 125 28 Inventories 2,759 2,695 Trade and other receivables 3,853 3,540 Prepayments 238 298 Derivative financial instruments 8 21 - Cash and cash equivalents 1,849

857

8,845

7,418

Non-current assets Intangible assets 77 63 Property, plant and equipment 695 770

772

833

Total assets 9,617

8,251

Current liabilities Trade and other payables 4,336 3,730 Provisions 414 221

4,750

3,951

Non-current liabilities Loans and borrowings 9 10,134 6,085 Provisions 461

1,122

10,595

7,207

Total liabilities 15,345 11,158 Equity (deficit) Share capital 10 71,408 71,408 Convertible shares 10 17,310 17,310 Other reserves 1,823 1,793 Retained deficit (96,269)

(93,418)

Equity (deficit) (5,728) (2,907) Total liabilities and equity (deficit) 9,617 8,251

Approved by the Board: F Senhora, Chairman 13 March 2014 The Notes form an integral part of these condensed consolidated interim financial statements.

Turbo Power Systems Inc. Consolidated statement of changes in equity

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Common

Share capital

Convertible Shares

Otherreserves

Accumulated deficit

Total

£’000 £’000 £’000 £’000 £’000 Balance as at 1 January 2012 62,862 15,310 1,756 (86,254) (6,326)

Net loss - - - (7,164) (7,164)

Stock compensation - - 37 - 37

Issue of shares 8,546 2,000 10,546

Balance as at 31 December 2012

71,408 17,310 1,793 (93,418) (2,907)

Net loss - - - (2,851) (2,851)

Stock compensation - - 30 - 30

Balance as at 31 December 2013

71,408 17,310 1,823 (96,269) (5,728)


Turbo Power Systems Inc. Consolidated statement of cash flows

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Year ended 31 December

Notes 2013 2012 £’000 £’000 Cash flows from operating activities Net Loss for the period (2,851) (7,164) Adjustments for: Finance income - (6) Finance expense 490 359 Foreign exchange 3 - Grant Release (567) - Depreciation of property, plant and equipment 266 295 Amortization of intangible assets 36 49 Movement in asset retirement obligation (263) 48 Movement in warranty provision 16 54 Movement in onerous contract provision (221) (319) Disposal of intangible asset - 300 Share based payment expense 30 37

Operating cash flows before movements in working

capital (3,061) (6,347)

Changes in working capital items (Increase)/decrease in inventories (64) 506 (Increase)/decrease in restricted cash (97) 315 Increase in trade and other receivables (313) (337) Decrease in prepayments 60 28 Decrease/(increase) in trade and other payables 606 (1,320) Decrease in provisions (468) (217)

Cash generated by operations (3,337) (7,372) Interest received - 6 Grant received 1,000 -

Net cash from operating activities (2,337) (7,366)

Investing activities Purchase of property, plant and equipment (191) (272) Purchase of intangible assets (49) (78)

Net cash used in investing activities (241) (350)

Cash Flows from financing activities Proceeds from increase in loans 3,570 5,920 Fundraising proceeds - 10,546 Loan settlement - (8,546)

Net cash from financing activities 3,570 7,920

Net increase in cash and cash equivalents 992 204 Cash and cash equivalents at the beginning of the

period 857 653

Cash and cash equivalents at the end of the period 1,849 857


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”). The main trading address is 1 Queens Park, Queensway North, Team Valley Trading Estate, Gateshead, NE11 0QD, United Kingdom. The Company’s intermediate parent undertaking is TAO Sustainable Power Solutions (UK) Limited (“TAO UK”), a company registered in England and Wales, UK. The Company’s ultimate parent undertaking is Vale Soluções em Energia S.A. (“VSE”), a company registered in Brazil. The Company’s subsidiaries comprise:

Trading status

Place of incorporation

% Ownership

Turbo Power Systems Limited Trading England 100% Turbo Power Systems Development Limited Dormant England 100% Intelligent Power Systems Limited Dormant England 100% Nada-Tech Limited Dormant England 100%

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 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 budgeted and forecasted working capital requirements and support the Company’s growth plans. If not secured, this may result in the curtailment of the Company’s activities. As at 31 December 2013 the Company had net operating outflows, with a net debt of £12.62 million, being £14.47 million of debt less £1.85 million of cash. The Company has a cumulative deficit of £96.27 million as at 31 December 2013 and continued to be loss making for the year then ended. If the Company is unable to generate positive cash flows from operations, ensure the continued financial support from TAO UK and ultimately VSE, or secure additional debt or equity financing these conditions and events would cast significant doubt regarding the going concern assumption and, accordingly, the use of accounting principles applicable to a going concern. These consolidated financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which 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 financial support from TAO UK and, ultimately, VSE will remain in place to enable the Company to meet budgeted and forecasted working capital requirements and support the Company's growth plans. Accordingly they have continued to adopt the going concern basis of preparation.


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3 Basis of preparation These financial statements comply with and have been prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards (IFRSs) in issue and effective at 31 December 2013. The consolidated financial statements were authorised for issuance by the Board of Directors on 13 March, 2014. 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 Derivative financial instruments The Company uses foreign exchange forwards to help manage its foreign exchange risk. The Company classifies these derivatives as financial assets at fair value through profit and loss. Derivatives are classified as current assets. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the group has transferred substantially all risks and rewards of ownership. Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the income statement within ‘Other gains – net’ in the period in which they arise. 5 Critical accounting judgements and key sources of estimation uncertainty These consolidated financial statements have been prepared on the basis of International Financial Reporting Standards applicable to a ‘going concern’, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 31 December 2013 the Company had net operating cash outflows. Therefore the Company may require additional funding which, if not raised, may result in the curtailment of activities. The Company has a cumulative deficit of £96.27 million as at 31 December 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 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 operates an integrated operation structured along the lines of product research and development, and production. The Board and management make strategic decisions and review the results of the Company on this basis. Corporate charges relating to the financing of the Company and other related management activities are allocated between the two reportable segments. The Board together with the Chief Executive Officer and the Chief Financial Officer are the chief operating decision makers for the Company.


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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.

31 December 2013 Production Development Unallocated Total £’000 £’000 £’000 £’000

Revenue 16,422 2,534 - 18,956

Segment operating profit/(loss) 280 (2,662) 21 (2,361) Finance expense - - (490) (490)

Net loss and total comprehensive loss 280 (2,662) (469) (2,851)

Total assets 6,756 475 2,386 9,617 Total liabilities (3,252) (1,084) (11,009) (15,345)

31 December 2012 Production Development Unallocated Total

£’000 £’000 £’000 £’000 Revenue 12,678 2,986 - 15,664

Segment operating loss (2,469) (4,342) - (6,811) Finance expense - - (353) (353)

Net loss and total comprehensive loss (2,469) (4,342) (353) (7,164)

Total assets 5,481 1,766 1,004 8,251 Total liabilities (2,623) (1,328) (7,207) (11,158)

Geographic Segmental Information

Quarter ended 31 December

Year ended 31 December

Total Revenues by destination 2013 2012 2013 2012 £’000 £’000 £’000 £’000 UK 785 543 2,853 2,248 USA 1,024 837 3,768 4,240 Canada 2,530 2,017 10,288 6,991 Rest of world 375 148 2,047 2,185

4,714 3,545 18,956 15,664

All property, plant and equipment were located within the United Kingdom during both periods ended 31 December 2013 and 31 December 2012.


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

31 Dec 2013 31 Dec 2012 Loss attributable to ordinary shareholders £2,851,000 £7,164,000 Weighted average number of shares outstanding 3,336,865,922 2,584,485,837

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:

31 Dec 2013 31 Dec 2012 Issued common shares at 1 January 3,336,865,922 1,437,754,811 Effect of common shares issued in May 2012 - 1,146,731,026 ____________ ____________ Weighted average number of common shares at 31

December 3,336,865,922 2,584,485,837

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

31 Dec 2013 31 Dec 2012 Common shares potentially issuable: - under stock options 30,707,273 31,007,273 - pursuant to A Ordinary stock conversion 892,777,778 892,777,778 ____________ ____________ 923,485,051 923,785,051 ____________ ____________

8 Derivative financial instruments

31 Dec 2013 31 Dec 2012 Assets Liabilities Assets Liabilities

£’000 £’000 £’000 £’000 Forward Exchange Contracts 21 - - -

Total 21 - - -

Less non-current portion: - - - -

Current portion 21 - - -

The notional principal amounts of the outstanding forward foreign exchange contracts at 31 December 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. In March 2014 the repayment date was further extended to 1 April 2016. The loan is secured by a fixed and floating charge over the assets of the Company’s subsidiary TPSL.


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31 Dec 31 Dec 2013 2012 Fixed rate loans £’000 £’000 Due within one year - - Due after one year 10,134 6,085

Total 10,134 6,085

The Company has drawn down on all its borrowing facilities as at 31 December 2013 (2012: all loans drawn down in full). Unpaid interest of £645,000 (2011: £165,000) is recorded in the loan amount. 10 Share capital and options

Share Capital Common Shares Convertible Shares

(A Ordinary Shares) Number £’000 Number £’000

At 1 January 2012 1,437,754,811 62,862 448,333,334 15,310 Shares issued 1,899,111,111 8,546 444,444,444 2,000

At 31 December 2012 3,336,865,922 71,408 892,777,778 17,310

At 31 December 2013 3,336,865,922 71,408 892,777,778 17,310

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. Issue of common 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 2013, other reserves comprise of the stock compensation reserve of £1,823,000 (2012: £1,793,000).


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Potential issue of common shares 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.

31 Dec 31 Dec

2013 2012

Under stock option plan 30,707,273 31,007,273

Pursuant to A Ordinary stock conversion 892,777,778 892,777,778

923,485,051 923,785,051

11 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. In March 2014 the repayment date was further extended to 1 April 2016. A summary of the loan movement is: £’000

Balance as at 1 January 2013 6,085 Date of drawdown 2 April 2013 2,100 30 August 570 27 November 2013 300 11 December 2013 600 Accrued interest 2013 479

Balance at 31 December 2013 10,134

Accrued interest is recorded within the loan balance £645,000 (2012: £165,000) During 2013 the Company has transacted business VSE, totalling £92,500 (2012: £1,013,000). Amounts outstanding as at 31 December 2013 are VSE owe £27,750 (2012:£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:


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Quarter Ended 31 December Year Ended 31 December 2013 2012 2013 2012 £’000 £’000 £’000 £’000 Salaries 350 318 879 844 Bonus and other payments - 13 - 164 Pension contributions 23 43 62 78 Stock compensation expense 6 (4) 30 37

379 370 971 1,123

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