RNS Number : 3925B
Turbo Power Systems Inc
15 August 2008
15 August 2008
TURBO POWER SYSTEMS INC. ANNOUNCES ITS RESULTS FOR
THE SIX MONTHS AND QUARTER ENDED 30 JUNE 2008
Highlights
* Production and development income in the quarter of �2.0 million (2007: �2.4 million)
* Operating loss before financial charges of �2.2 million in the quarter (2007: �1.9 million)
* New order announced today for Bombardier Derby for battery chargers on Turbostar train platform worth �0.6 million
* Amendment to the terms of the existing Loan Note entered into by the Company on the 19th June 2008 to facilitate drawdown of
remaining �1.5 million
Paul Summers, CEO, said:
"Q2 results have continued to be impacted by delays in transitioning a number of programmes from development into production, which is
expected to commence in the second half of the year.
In addition to the cost reductions announced earlier in the year and the completion of a number of development programmes, further cost
saving measures are being identified and implemented that are anticipated to impact overheads during the second half of the year. Business
processes are also being strengthened to enable the better management of current and future bids and development programmes.
The Company has also today separately announced that the terms of the Loan Note that was entered on the 19th June 2008 have been amended
in order to facilitate a further drawdown of �1.5 million, which is necessary to enable the Company to continue operating as a going
concern. Having reviewed the financial position of the Company, the Directors are of the opinion that they require the additional �1.5
million in order to meet short term cash requirements and continue trading. Having considered other alternatives within the very limited
time available, the Directors have agreed to accept these amendments to the Loan Notes. The Directors believe that with the benefit of the
additional �1.5m and the deferral of interest and capital payments, the Company has sufficient cash resources to enable the business to
achieve profitability and positive cashflow.
The Board's focus is on balancing the medium to long term growth opportunities with the key priority of achieving near term
profitability and cash generation."
For further information, please contact:
Turbo Power Systems Tel: +44 (0)20 8564 4460
Paul Summers, Chief Executive Officer
Richard Bayliss, Finance Director
Company Website: www.turbopowersystems.com
Gavin Anderson (PR) Tel: +44 (0)20 7554 1400
Ken Cronin
Michael Turner
KBC Peel Hunt Tel: +44 (0)20 7418 8900
Oliver Scott
Nicolas Marren
NOTES TO EDITORS
About Turbo Power Systems
Turbo Power Systems Inc (TSX:TPS.TU AIM:TPS.L). is a leading UK based designer and manufacturer of innovative power solutions. The
Group's products are all based on its core technologies of power electronics and high speed motors and generators and are sold into a number
of market sectors including aerospace, rail, and various industrial sectors. The Company's products provide improved efficiency and reduced
energy consumption compared to existing technologies.
Turbo Power System's existing customers include bluechip companies such as Hamilton Sundstrand, Bombardier, The National Rail Equipment
Company, Eaton Aerospace and Lotus.
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 ongoing capital
needs, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition, the need to protect
proprietary rights to technology, government regulation, and other risks defined in this document and in statements filed from time to time
with the applicable securities regulatory authorities.
Definition of Non-GAAP financial measures
EBITDA is calculated as the net loss for the period less financial interest income and charges, foreign exchange gains and losses, tax
charges and receipts, depreciation, amortisation, and stock compensation charges. The Company believes that EBITDA is useful supplemental
information as it provides an indication of the operational results generated by its business activities prior to taking into account how
those activities are financed and taxed and also prior to taking into consideration asset amortisation. EBITDA is not a recognised measure
under GAAP and, accordingly, should not be construed as an alternative to operating income or net loss determined in accordance with GAAP as
an indicator of financial performance or of liquidity and cash flows. EBITDA does not take into account the impact of working capital
changes, capital expenditures and other sources and uses of cash which are disclosed in the consolidated statement of cash flows. The
Company's method of calculating EBITDA may differ from other issuers and may not be comparable to similar measures provided by other companies.
CHAIRMAN'S STATEMENT
"The Q2 trading result reflects continuing engineering spend on programmes that will generate long-term revenues. Bringing the
development process under control and improving our management of technical and commercial risk will have the highest priority as we move
the business forward"
OPERATIONAL REVIEW
This MD&A has been prepared as at 13 August 2008.
Business of the Company
Turbo Power Systems
* Designs and manufactures high-speed permanent magnet based motors and generators for industrial, transport, power generation and
military applications, where technical performance, energy efficiency and power density requirements cannot be met by conventional
technology.
* Designs and manufactures power electronics products which include variable frequency drives and inverters, which combine with our
electrical machines to create an integrated solution, and a range of rugged power conversion products for rail and industrial applications.
Q2 2008 Summary
During the first six months of 2008, TPS's existing core business sectors of rail and industrial power electronics have seen reduced
production levels as existing production programmes concluded and new production programmes were delayed. Work on our new aerospace
programmes has continued to consume more resources than was expected and in particular the Hamilton Sundstrand programme suffered additional
cost overruns and delays in meeting development income milestones which have had a detrimental impact on EBITDA and cash flow. As a result,
the company has reported increased EBITDA losses and cash outflows compared to 2007 in both the first and second quarter. Cash outflows
before loan funding receipts in quarter two were �2.53 million as a result of reduced production shipments across our programmes and the
delay in commencing production on the Bombardier Chicago and Toronto programmes, delayed development receipts, and additional software
development costs on the Hamilton Sundstrand programme together with a reduction in credit terms provided by suppliers which resulted in increased cash outflow. The high level of payments made has resulted
in a significant reduction in the cash balances held by the company and has required the Company to seek drawdown of additional funding of
�1.5 million through the issue of the Loan Notes in the immediate future.
As part of the cost saving measures announced at the end of the last quarter, the Company completed a 10% reduction in manpower across
both sites. In addition there has been significant activity in reviewing our supply chain in order to reduce material costs and stock levels
across all of our existing product range. These cost saving measures are having an effect but in the short term have been offset by material
costs in preparation for achieving early deliveries once the production phases on our current development programmes begin.
Business process improvements are being implemented with particular attention being placed on revitalizing the reviews of bids, current
projects, order intake and cash collection. Through these improvements the business will be better able to:
* understand the commitments it is making prior to contract award
* deliver on its contracts and increase customer satisfaction
* appropriately scale itself to ensure it can be cash generative and profitable
Bidding activity is high across all sectors, in particular, the demand or our generators and motors is on the increase.
High Speed Electrical Machines
The optimal size range for electrical machines based on the Company's permanent magnet technology is between 15kW and 2MW.
Markets
The key markets for the Motor derivatives are:
* HVAC and Refrigeration
* Air and Gas Compression
* Turbo-Machinery
* Aerospace - Actuators, Pumps, Fans
* Ship Propulsion
* Rail Traction Motors
The key markets for Generator derivatives are:
* Distributed Generation (Gas Turbines)
* Micro-Generation
* Vehicle based auxiliary power generation
* Flywheel systems
Customers and Contracts
* 1MW high-speed generator for a US Defence Contractor
The 1MW high-speed generator contract announced in May is progressing from design into production of a demonstrator targeted for
delivery in Q4. Follow-on systems beyond the initial development system contract are expected in due course.
* Industrial motor and drive agreement
The industrial motor drive system has now been incorporated into the initial beta site location and has commenced life cycle and field
performance testing.
Procurement of materials in support of the US$2M production launch order is well underway, with all 75 systems programmed for
manufacture and delivery before the end of 2008. Formal product launch in early 2009. Once launched, the drive system will be used in both
new products and can also be supplied for retro-fit to reduce electrical consumption on existing installations world-wide.
The framework agreement anticipates sales of 500 systems over the first two years of production, and incorporates a manufacturing
agreement with an initial term of 5 years.
TPS is continuing discussions with the customer regarding the scaling of these systems to cover a wider range of product sizes.
* US Process Gas Customer
This order for a high speed electrical machine and variable frequency drive is for a development project from a North American
Industrial and Process Gas Company. The system has been successfully demonstrated and is expected to be delivered early in Q3. The products
utilize our own permanent magnet and inverter technologies giving a high performance and high efficiency solution.
Once the customer has completed its systems development phase it is anticipated that further
systems will be purchased.
* European Programme
This is an order from a European Research Organization, acting on behalf of a major international manufacturing company, for a high
speed electrical machine and variable frequency drive. Discussions on follow on orders and for other size ranges are well advanced.
* SKF
Extended reliability trials on the 35kW -70,000 rpm high speed motor and drive system have now completed satisfactorily. However, there
has been a delay in the customer's programme and discussions are currently underway with SKF regarding the timing and quantity of the likely
production volumes.
* ALC
UK Testing of the complete down-hole pump system incorporating the TPS motors is still ongoing, with the final high temperature trials
to be concluded prior to shipment to North America for full operational evaluation. This is expected to be completed in early 2009. Given
the current oil price, customer interest remains high, both in this motor design and other motors for similar applications.
High Performance Power Electronics
TPS designs and manufactures rugged power electronics products for rail, industrial and transport applications, all of which require
high reliability and availability in operation.
Markets
The key markets for the electronics products are:
* Auxiliary Power Conversion for Rail and Light Transit
* Variable Frequency Drives to complement HSEMs
* Motor Drives for aerospace application
* Industrial Pulsed Power Supplies
* Grid Connected Inverters
Customers and Contracts
* Bombardier Transportation-Canada ("BT")
o BT- Chicago Transit Authority
The initial prototype units have now been built and are undergoing functional testing at TPS. Modifications to address previously
identified technical issues will be incorporated into the test units to allow formal qualification testing. It is expected that the initial
planned quantities will be delivered during 2008 in support of the 2008 and 2009 train test programme.
The Chicago (and Toronto) designs incorporate a new generation of hardware and software microprocessor control system which the Company
is investing in as a common modular platform for all future rail products.
The base CTA contract is valued at some US$14 million including production, spares and engineering services, which with possible options
for additional cars, could increase the value to in excess of US$20 million.
o BT- Toronto
The Toronto prototypes also require functional tests to be followed by the formal qualification programme. Production release is
anticipated in Q3 with the first 11 units expected to ship by the end of 2008.
The contract for the initial quantity of 234 cars is expected to exceed US$8 million, with the potential for further option quantities
to extend that to some US$14 million.
o National Rail Equipment Co ("NREC").
Volume demand in Q2 2008 continued at a low run rate and is likely to remain at this lower level going forward as a result of the
customer reducing its outsourcing.
Other Rail Products
* PT3000
Regular small orders for the PT3000 At-Seat power supply, currently in operation with many UK operators including Virgin and National
Express, continue to be received, however there are a number of UK rolling stock refurbishment programmes currently under review where the
potential quantities of PT3000s are considerably larger.
PRC Industrial Lasers
TPS continues to see strong ongoing demand from PRC Lasers who have now standardized on the TPS high voltage power supply for their
complete range of industrial lasers. Recently TPS has developed a new "higher power" derivative which is now undergoing testing.
Aerospace
* Boeing 787
As reported previously our first steps in the commercial aerospace sector have represented a very steep learning curve, and undertaking
two major programmes effectively in parallel gave us little opportunity to apply the lessons learned on Eaton into the HS programme. As a
consequence the level and depth of engineering required on HS was underestimated and the resulting costs exceeded both our expectations and
the customer's contractual funding. Additionally, programme delays have deferred contracted stage payments from 2007 to 2008.
Dedicated production and test facilities have been put in place, and aerospace product assembly staff have been trained to support the
aggressive Boeing production ramp up this year going through into 2009.
Both the Eaton Aerospace programme (Override Jettison Pump Control Unit) and the Hamilton Sundstrand programme (Ram Fan Motor
Controller) are now undergoing safety of flight tests) with equipment delivered from TPS. Preparation for completing the equipment
qualification phase is well underway on both of these programmes.
The production delivery programme for both of these equipments is still being maintained despite the reported 787 delays from Boeing.
FINANCIAL PERFORMANCE
Overview of the six months ended 30 June 2008
Total revenues in the first half of 2008 fell to �4.06 million (2007: �4.75 million), including Development income of �0.39 million,
primarily related to the high speed machine contract and Production income of �3.67 million (2007: �4.38 million. Delays in final
qualification of the new Rail units, together with a reduced requirement on the NREC programme and completion of other rail contracts meant
that overall production volumes decreased during the half year.
Administrative costs including amortisation were higher than the first six months of 2007 as a result of the increased charges in 2008
related to the new Gateshead facility that became operational during the second quarter of 2007.
The group's loss before interest, tax, depreciation, amortisation and stock compensation for the six months increased to �4.0 million
(2007: �2.1 million) as a result of significantly higher development costs and reduced development income receipts.
Operating cash outflows before tax increased to �4.1 million (2007: �3.0 million) reflecting the increased development expenditure and
reduced development income.
The Company finished the half year with an unrestricted cash balance of �1.3 million and held further cash of �1.3 million associated
with performance bonds.
On 19 June 2008 the Company completed a �3,000,000 gross financing agreement with institutional investors. The financing comprised
secured Convertible Notes and Warrants. The Convertible Notes bear interest at 15% per annum and are convertible into an aggregate of
75,000,000 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of
�0.04 per share. The Convertible Notes are issuable upon drawdown of the loan, of which �1,500,000 were issued on 19 June 2008. The loan is
repayable over three years by way of regular quarterly repayments, commencing March 2009. The Warrants have a term of ten years and are
convertible into an aggregate of 12,857,142 of either Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems
Limited at an exercise price of �0.035 per share.
The Company has also today separately announced that the terms of the Loan Note that was entered on the 19th June 2008 have been amended
in order to facilitate a further drawdown of �1.5 million, which is necessary to enable the Company to continue operating as a going
concern. The new terms provide that if at any time, including once the Loan Note has been fully repaid, there is a change in control of TPS,
or its subsidiaries or substantially all of its assets, the Loan Note Holders will be entitled to receive a risk premium, calculated
according to the enterprise value ascribed to the Company under the transaction before deducting any balance of the Loan Notes and/or
interest outstanding. This risk premium will be equal to an initial payment of �1.5m plus 75% of the next �6m of enterprise value and 50% of
the remainder.
Other than the debt financing detailed above, the Company has had no transactions with related parties and there are no further proposed
transactions to disclose.
The Critical Accounting Estimates included within these statements are assessed on an unchanged basis from that disclosed in the
Company's Financial Statements for the year ended 31 December 2007.
These consolidated financial statements have been prepared on a going concern basis, which presumes that the Company will be able to
realise its assets and discharge its liabilities in the normal course of operations for the foreseeable future. The Company has incurred
cumulative losses including a loss of �4.56 million for the six months ended 30 June 2008 and has a cumulative deficit of �67.24 million as
at 30 June 2008. The Company's ability to continue as a going concern depends on its ability to generate positive cash flow from operations
or secure additional debt or equity financing.
Six months ended 30 June 2008
Production Revenue
Production revenue in the six months ended 30 June 2008 was �3.67 million compared with �4.38 million in 2007 and comprised
2008 2007
�'000 �'000
Power electronics 3,563 4,239
Electrical machines 110 136
_____ _____
3,673 4,375
_____ _____
The Power electronics division has seen a reduction in production volume as contracts on Bombardier Beijing, London Underground and
Toronto Transit H6 rail programmes approached completion. Sales volumes on the NREC programme were lower during 2008 compared to the same
period in 2007 which experienced a higher than normal demand rate.
Spares and service revenues within the Power electronics division were �0.39 million for the first six months (2007: �0.23 million).
In the Electrical machines division revenue was primarily from the Industrial Motor and Drive customer.
Development income
Development income in the six months was �0.39 million compared with �0.37 million in 2007 and was primarily related to the high speed
generator contract.
2008 2007
�'000 �'000
Development income 387 370
_____ _____
Production costs
The cost of product revenues in the six months amounted to �3.03 million (2007: �3.41 million).
2008 2007
�'000 �'000
Power electronics 2,737 2,881
Electrical machines 296 527
_____ _____
3,033 3,408
_____ _____
Production costs include certain fixed facilities costs attributable to the manufacturing operation.
Included in production costs for the six months are stock compensation charges on options awarded of �0.04 million (2007: �0.05
million).
Research and product development
Research and product development expenditure in the six months was �3.06 million compared with �2.17 million in 2007, and comprised
2008 2007
�'000 �'000
Research and product development expenditure 3,105 2,166
Accrued R&D tax credits (44) -
_____ _____
Total expenditure 3,061 2,166
_____ _____
R&D expenditure in the six months was greater than that incurred in 2007 as a result of the commencement of the high speed generator
development programme and higher investment into the Hamilton Sundstrand Ram Fan Controller programme than in the previous year.
Included in research and product development expenditure for the six months are stock compensation charges on options awarded of �0.06
million (2007: �0.19 million).
General and administrative
General and administrative costs of �2.11 million (2007: �1.94 million) consist mainly of staff costs and facilities costs, which have
increased following the relocation of the Gateshead operation to larger facilities. Also included is a credit to stock compensation charges
on options awarded of �0.01 million (2007: charge of �0.13 million), which has arisen following the Company recognising the high likelihood
that ex-employee's options may not vest.
Amortisation
Amortisation was �0.34 million compared with �0.44 million in 2007. The reduction reflects a number of assets becoming fully amortised.
Interest income
Interest income for the six months was �0.07 million compared with �0.16 million in 2007 reflecting a lower average cash balance.
Interest expense and finance charges
Interest expenses arise from the issue of convertible notes in July 2003, March 2005 and June 2008 and comprise
2008 2007
�'000 �'000
Interest 58 58
Accretion of debt 30 52
_____ _____
88 110
_____ _____
Convertible notes are considered to be compound financial instruments, and the liability component and the equity component must be
presented separately, as determined at initial recognition. The Company has valued the equity component of these bonds using the residual
value of equity component method, whereby the liability component is valued first using current market rate for comparable instruments, at
the time of issuance. The difference between the proceeds of the notes issued and the fair value of the liability is assigned to the equity
component. The debt component of
the 19 June 2008 note issue was estimated at �1,01 million ( �1.26 million less finance costs of �0.25 million). The March 2005 note issue
was estimated at �1.11 million. The equity element of the 2003 note issue was estimated at �0.91 million. The carrying value of the debt
element is increased over the term of the debt and this accretion expense is charged to the profit and loss account. During the six months
this charge amounted to �0.03 million (2007: �0.05 million).
Finance charges for the six months were �0.04 million (2007: �0.12 million) and were principally the operational charges for maintenance
of the Company's banking and performance bond facilities. During 2007 the Company recorded a charge of �0.08 million within finance charges
related to the redemption of Convertible Loan Notes.
During the six months the Company recorded a fair value adjustment charge of �0.01 million (2007: gain of �0.01 million) against the
investment in Altek Power Corporation.
Cash flows for the six months
Cash outflow from operating activities
Operating cash outflow before movements in working capital was �4.06 million for the year (2007: �2.56 million), as a result of higher
incurred costs on development programmes in 2008.
Movements in stocks, work in progress and debtors and creditors resulted in a net cash outflow of �0.31 million during the six months (2007:
outflow of �0.42 million).
Tax credits
During the six months the company received research and development tax credits of �0.04 million (2007: �0.31 million).
Investing activities
Purchases of long term tangible assets amounted to �0.15 million (2007: �0.47 million) and relate to production equipment and leasehold
property improvements.
Cash flow from financing activities
Cash inflow from financing in 2008 of �1.50 million during the six months relates to net funds received from the issue of loan notes in
June 2008, when the Company completed a �3.00 million (gross) financing agreement with institutional investors. Cash outflow related to
costs of financing amounting to �0.25 million will be incurred in Quarter 3 of 2008. These costs are included in the book value of the debt
at 30 June 2008, and are expensed to the Consolidated Statements of Loss using the effective interest method.
Cash inflow from financing in 2007 of �3.81 million during the six months relates to net funds received from the issue of shares in June
2007, when the Company completed a �4.00 million (gross) financing agreement with institutional investors. The financing comprised placing
of Common Shares in Turbo Power Systems Inc.
Overall cash outflow for the six months
Overall the cash outflow for the period was �2.89 million. This compares with a cash inflow of �1.02 million in 2007. Cash outflow was
significant due to the reduction in production volumes invoiced and collected, increased software development costs on the Hamilton
Sundstrand programme and a reduction the credit terms made available by suppliers to the Company.
Summary of quarterly results
The following table sets forth selected quarterly consolidated financial information of the Company for the last eight quarters;
All amounts in �'000 Revenue Research and product General and Net loss Loss per share
development administrative
September 2006 1,470 917 814 (1,623) (0.8)
December 2006 1,851 714 735 (1,123) (0.6)
March 2007 2,033 1,015 841 (1,403) (0.5)
June 2007 2,342 1,151 1,102 (1,768) (0.6)
September 2007 2,700 1,736 1,083 (1,666) (0.5)
December 2007 2,750 1,580 831 (1,578) (0.5)
March 2008 1,962 1,591 1,059 (2,287) (0.7)
June 2008 1,711 1,470 1,049 (2,276) (0.7)
Quarterly revenue has decreased during 2008 reflecting the completion of several rail contracts and the reduction in demand from
National Rail Equipment Company. Research and development expenditure has increased reflecting development activities on the new Bombardier
Chicago and Toronto rail programmes, continuing development on the Eaton and Hamilton Sundstrand Boeing 787 contracts and the commencement
of development on the High Speed Generator contract. General and administrative costs increased as the Gateshead facility relocated to
larger premises in quarter two of 2007.
Diluted earnings per share figures have not been provided as the loss in each period would be anti-dilutive.
Review of the three months ended 30 June 2008
Production revenue
Production revenue in the three months ended 30 June 2008 was �1.71 million compared with �2.34 million in 2007 and comprised
2008 2007
�'000 �'000
Power electronics 1,608 2,222
Electrical machines 103 120
_____ _____
1,711 2,342
_____
_____
Revenues from the Power electronics division decreased as production contracts on Bombardier Beijing, London Underground and Toronto
Transit H6 rail programmes approached completion. Sales volumes on the NREC programme were lower during 2008 compared to the same period in
2007 which experienced a higher than normal demand rate.
Revenue in the Electrical machines division relates primarily to the Industrial Motor and Drive contract.
Development income
Development income in the three months was higher in 2008 at �0.32 million compared with �0.03 million in 2007, and was principally
related to the new High Speed Generator contract.
2008 2007
�'000 �'000
Development income 317 29
_____ _____
Production costs
The cost of product revenues in the three months amounted to �1.53 million (2007 : �1.79 million).
2008 2007
�'000 �'000
Power electronics 1,389 1,469
Electrical machines 144 323
_____ _____
1,533 1,792
_____ _____
Production costs include certain facilities costs attributable to the manufacturing operation.
Included in production costs for the three months are stock compensation charges on options awarded of �0.01 million (2007: �0.03
million).
Research and product development
Research and product development expenditure in the three months was �1.47 million compared with �1.15 million in 2007, and comprised
2008 2007
�'000 �'000
Research and product development expenditure 1,514 1,151
Accrued R&D tax credits (44) -
_____ _____
Total expenditure 1,470 1,151
_____ _____
Included in research and product development costs for the three months are stock compensation charges on options awarded of �0.01
million (2007: �0.09 million).
General and administrative
General and administrative costs in the three months of �1.05 million (2007: �1.10 million) consist mainly of staff costs, facilities
costs and the costs associated with the Company's public listings. Included in general and administrative costs for the quarter is a credit
to stock compensation charges on options awarded of �0.03 million (2007: charge of �0.04 million), which has arisen following the Company
recognising the high likelihood that ex-employee's options may not vest.
Amortisation
Amortisation was �0.15 million compared with �0.22 million in 2007.
Interest income
Interest income in the three months was �0.03 million compared with �0.08 million in 2007.
Interest expense and finance charges
Interest expenses arise from the issue of convertible bonds in July 2003, March 2005 and June 2008 and comprise
2008 2007
�'000 �'000
Interest payable 29 22
Accretion of debt 15 37
_____ _____
44 59
_____ _____
During the quarter the Company recorded an impairment of �0.01 million (2007: gain of �0.01 million) against the investment in Altek
Power Corporation.
Cash flows for the three months ended 30 June 2008
Cash outflow from operating activities
Operating cash outflow before movements in working capital was �2.04 million for the quarter (2007: �1.49 million).
Movements in stocks, work in progress, and debtors and creditors produced a net cash outflow of �0.48 million during the quarter (2007:
outflow of �0.15 million).
Tax credits
During the quarter the company received research and development tax credits of �0.04 million (2007: �nil).
Investing activities
Cash outflows from capital investments in the three months were �0.06 million compared with �0.30 million in 2007.
Cash flow from financing activities
Cash inflow from financing in 2008 of �1.50 million during the three months relates to net funds received from the issue of loan notes
in June 2008, when the Company completed a �3.00 million (gross) financing agreement with institutional investors. Costs of financing
amounting to �0.25 million will be incurred in Quarter 3 of 2008.
Cash inflow from financing in 2007 of �3.88 million during the three months relates to net funds received from the issue of shares in
June 2007, when the Company completed a �4.00 million (gross) financing agreement with institutional investors. The financing comprised
placing of Common Shares in Turbo Power Systems Inc.
Overall cash outflow for the period
Overall the cash outflow during the three months was �1.03 million. This compares with an overall cash inflow of �1.95 million for the
second quarter of 2007 which had included significantly greater fundraising receipts. Before loan finance receipts, cash outflow in the
quarter was �2.53 million, and was a result of reduced customer receipts due to the reduction in shipped production, increased expenditure
on software development on the Hamilton Sundstrand programme and a reduction in credit terms by suppliers to the Company.
Balance sheet as at 30 June 2008
The Company ended the period with an unrestricted cash balance of �1.34 million compared with �4.24 million at 31 December 2007.
Substantially all of the Company's cash balances are denominated in Sterling.
In addition the Company had restricted cash amounts of �1.28 million relating to performance bonds entered into as part of contracts
with the Toronto Transit Commission and Bombardier (2007: �1.36 million).
Long term assets excluding restricted cash have decreased from �3.00 million at 31 December 2007 to �2.81 million at 30 June 2008, after
depreciation charges of �0.34 million.
Long term liabilities have increased to �2.88 million at 30 June 2008 compared to �1.81 million at 31 December 2007, reflecting the
increase in Loan Notes following the loan financing completed in June 2008.
Net working capital at 30 June 2008, excluding cash balances, was �1.61 million, compared with �1.62 million as at 31 December 2007.
As at 30 June 2008, the Company had 318,571,062 common shares issued and outstanding and 115,000,000 A ordinary shares issued and
outstanding. As at that date there were 30,311,298 outstanding share options and 23,357,142 outstanding warrants.
Contractual Obligations �'000 Payments Due by Period
at 30 June 2008
Total Less than 1 - 3 4 - 5 After
1 year years years 5
years
Convertible notes 3,289 300 2,989 - -
Operating leases 4,731 519 1,583 858 1,771
Total contractual obligations 8.020 819 4,572 858 1,771
Liquidity
Cash, cash equivalents and short-term investments at 30 June 2008 were �1.36 million, compared with �4.26 million at 31 December 2007.
Restricted cash at 30 June 2008 was �1.28 million, compared with �1.36 million at 31 December 2007.
The Company incurred a loss in the six months of �4.56 million and has a cumulative deficit of �67.24 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.
There have been no significant changes to the US Dollar options held by the Company, and the Company has not changed its approach to
Currency risk and Interest rate risk management from that disclosed in the annual statements at 31 December 2007.
Convertible bonds
On 11 March 2005 the Company completed a �8.00 million (gross) financing agreement with institutional investors. The financing comprised
Convertible Notes and Warrants. The Convertible Notes have a term of five years plus one day and bear interest at a rate of 6.5% per annum.
They are convertible into an aggregate of 66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of �0.12 per share. The
Convertible notes are unsecured. The Warrants have a term of five years and are convertible into an aggregate of 7,000,000 Common Shares in
Turbo Power Systems Inc. at an exercise price of �0.15 per share. On 28 December 2006 2,360,000 Convertible Notes were redeemed. On 6
January 2007 a further 2,000,000 Convertible Notes were redeemed. At 31 December 2007 there were 1,789,000 Convertible Notes outstanding.
On 11 July 2003, the Company completed a �5.00 million financing agreement with Island Investment (Securities) Ltd. and Argun
Investments Limited. The financing comprised Convertible Notes and Warrants. The Convertible Notes have a term of five years, bear an annual
interest rate of 3.5% and are convertible into an aggregate of 25 million Common Shares of Turbo Power Systems Inc. at a conversion price of
�0.20 per share. The Warrants had a term of three years and were convertible into an aggregate of 3.5 million Common Shares of Turbo Power
Systems Inc. at an exercise price of �0.15 per share. These warrants expired on 11 July 2007. On 28 December 2006 2,500,000 Convertible
Notes were redeemed. The remaining 2,500,000 Convertible Notes were redeemed on 6 January 2007.
On 19 June 2008 the Company completed a �3.00 million (gross) financing agreement with institutional investors. The financing comprised
secured Convertible Notes and Warrants. These Convertible Notes are secured over the assets of the Company. The Convertible Notes bear
interest at 15% per annum and are convertible into an aggregate of 75,000,000 of either Common Shares in Turbo Power Systems Inc. or
A-Ordinary shares in Turbo Power Systems Limited at an exercise price of �0.04 per share. The Convertible Notes are issuable upon drawdown
of the loan, of which �1,500,000 were issued on 19 June 2008. The loan is repayable over three years by way of regular quarterly repayments,
commencing March 2009. The Warrants have a term of ten years and are convertible into an aggregate of 12,857,142 of either Common Shares in
Turbo Power Systems Inc. or A-Ordinary shares in Turbo Power Systems Limited at an exercise price of �0.035 per share.
Subsequent to the balance sheet date the Company has amended the terms of the 19 June 2008 loan agreement in order to permit a second
drawdown of �1,500,000. The new terms will result in the interest and capital being repaid by way of a single terminal repayment in June
2012, and provide that if at any time, including once the Loan Note has been fully repaid, there is a change in control of TPS, or its
subsidiaries or substantially all of its assets, the Loan Note Holders will be entitled to receive a risk premium, calculated according to
the enterprise value ascribed to the Company under the transaction before deducting any balance of the Loan Notes and/or interest
outstanding. This risk premium will be equal to an initial payment of �1.5m plus 75% of the next �6m of enterprise value and 50% of the
remainder. The drawdown of this second drawdown is subject to shareholder EGM approval, which is to be held on 15 August 2008.
Financial instruments
There has been no change in the classifications adopted by the Company regarding its financial instruments and full analysis is provided
in the Company's financial statements for the year ended 31 December 2007.
CHANGES IN ACCOUNTING POLICY AND RECENT ACCOUNTING PRONOUNCEMENTS
(i) Changes in accounting policy
On January 1 2008 the Company adopted the new recommendations of Canadian Institute of Chartered Accountants (CICA) Handbook Section
1535, Capital Disclosures. This new handbook section establishes disclosure requirements about an entity's capital and how it is managed. It
requires the disclosure of information about an entity's objectives, policies and processes for managing capital.
On January 1 2008 the Company adopted the new recommendations of CICA Handbook Section 3862 Financial Instruments - Disclosures and
Section 3863 Financial Instruments - Presentation which replaces Section 3861 Financial Instruments - Disclosure and Presentation, revising
and enhancing disclosure requirements while carrying forward its presentation requirements. Section 3862 requires entities to provide
disclosures in their financial statements that enable users to evaluate the significance of financial instruments on the entity's financial
position and its performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the
period and at the balance sheet date, and how the entity manages those risks. Section 3863 establishes standards for presentation of
financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the
issuer, between liabilities and equities, the classification of related interest, dividends, losses and gains, and circumstances in which financial assets and financial liabilities are offset. These
new sections place increased emphasis on disclosure about the nature and extent of risks arising from financial instruments and how the
entity manages those risks.
The adoption of these standards has resulted in increased note disclosures in the Company's consolidated financial statements.
On January 1 2008 the Company adopted the new recommendations of CICA Handbook Section 3031, Inventories, which requires inventory to be
measured at the lower of cost or net realisable value and provides guidance on the methodology used to assign costs to inventory, it
disallows the use of the last-in first-out inventory costing methodology and requires that, when circumstances which previously caused
inventories to be written down below cost no longer exist, the amount of the write down is to be reversed. The adoption of this standard has
not affected the Company's existing policies.
(ii) Recent accounting pronouncements
New or updated CICA Handbook sections that have been issued but are not yet effective, and have a potential implication for the Company,
are as follows:
Section 3064 Goodwill and Intangible Assets
In February 2008 the CICA issued Handbook Section 3064 Goodwill and Intangible Assets, effective for interim and annual financial
statements relating to fiscal years beginning on or after October 1 2008. Section 3064, which replaces Section 3062 Goodwill and Other
Intangible Assets, and Section 3450 Research and Development Costs, establishes standards for the recognition, measurement and disclosure of
goodwill and intangible assets. This new standard is effective for the Company's fiscal year commencing January 1 2009. The Company is
currently assessing the impact of the new standard.
Harmonizing Of Canadian and International Standards
In February 2008, the Accounting Standards Board of the CICA confirmed its strategic plan which will abandon Canadian GAAP and affect a
complete convergence to the International Financial Reporting Standards. These new standards will be effective for the Company's interim
financial statements commencing January 1, 2011. The Company is closely monitoring changes arising from this convergence.
Internal Control over Financial Reporting
The management of the Company are responsible for establishing and maintaining adequate internal controls over financial reporting
within the Company to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial
statements for external purposes in accordance with Canadian GAAP. Further to the evaluation conducted at 31 December 2007, management has
concluded that following the departure of Stephen Sadler, CFO, the Company faces an increased risk as a result of limited resources and a
lack of segregation in duties within the finance department. The Company will look to recruit a replacement CFO and to further expand its
current knowledgebase, together with utilization of external experts, in order to minimize this risk. The Company does not consider that
this weakness in control environment has resulted in any material misstatements in the financial statements.
TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
UNAUDITED
Notes Quarter ended 30 June Six months ended 30 June
2008 2007 2008 2007
�'000 �'000 �'000 �'000
restated restated
(note 1) (note 1)
Revenue 2,3 1,711 2,342 3,673 4,375
Development income 2,3 317 29 387 370
-------- -------- -------- --------
2,028 2,371 4,060 4,745
Expenses
Production costs 1,533 1,792 3,033 3,408
Research and product 5 1,470 1,151 3,061 2,166
development
General and administrative 1,048 1,102 2,107 1,943
Amortisation 147 219 335 442
-------- -------- -------- --------
4,198 4,264 8,536 7,959
Loss before extraordinary (2,170) (1,893) (4,476) (3,214)
items, interest, finance
charges and foreign exchange
Interest income 29 75 65 163
Interest expense 6 (44) (59) (88) (110)
Finance charge (38) (12) (42) (115)
Foreign exchange (loss)/gain (53) 121 (22) 105
-------- -------- -------- --------
(106) 125 (87) 43
-------- -------- -------- --------
Net loss and Comprehensive (2,276) (1,768) (4,563) (3,171)
loss ===== ===== ===== =====
Loss per share - basic 8 (0.7) p (0.6)p (1.4) p (1.1) p
Loss per share - diluted 8 (0.7) p (0.6) p (1.4) p (1.1) p
Weighted average number of 318,571,062 285,254,837 318,571,062 279,630,958
shares outstanding
TURBO POWER SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
Notes As at 30 June As at 31 December
2008 2007
�'000 �'000
Current assets
Cash and cash equivalents 1,341 4,235
Restricted cash 7 401 -
Trade and other receivables 2,064 2,871
Stock and work in progress 2,635 2,376
Prepayments 468 422
R&D tax credits receivable 212 208
-------- --------
7,121 10,112
-------- --------
Long-term assets
Restricted cash 7 879 1,362
Investments 18 25
Intangible assets 9 30 47
Goodwill 9 820 820
Property, plant and equipment 9 1,941 2,106
-------- --------
10,809 14,472
===== =====
Liabilities and shareholders'
equity
Creditors: amounts falling due
within
one year
Trade and other payables 3,402 3,700
Deferred income 371 555
-------- --------
3,773 4,255
-------- --------
Creditors: amounts falling due
after
more than one year
Warranty provision 151 151
Convertible notes 2,726 1,661
-------- --------
2,877 1,812
-------- --------
Capital and reserves
Common share capital 10 55,804 55,804
Class A Ordinary share capital 10 13,310 13,310
Contributed surplus 2,281 1,964
Deficit (67,236) (62,673)
-------- ----------
--
Shareholders' funds 4,159 8,405
-------- ---------
-
10,809 14,472
====== ======
TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND DEFICIT
UNAUDITED
Common Share capital A Ordinary capital Contributed surplus Accumulated other income Deficit Total Equity
�'000 �'000 �'000 �'000 �'000 �'000
(restated) (restated)
(note 1) (note 1)
Balance at 1 January 51,919 6,123 1,981 (68) (53,636) 6,319
2007
as previously stated
Prior year 68 (68) -
adjustment (note1)
--------- --------- --------- --------- --------- ---------
Balance at 1 January 51,919 6,123 1,981 - (53,704) 6,319
2007
as restated
Net loss (6,415) (6,415)
Stock compensation 699 699
Conversion to shares 7,187 (716) (2,414) 4,057
Issue of shares 4,017 4,017
Share issue costs (132) (132)
Transitional (140) (140)
adjustment
--------- --------- --------- --------- --------- ---------
Balance at 31 55,804 13,310 1,964 - (62,673) 8,405
December 2007
Net loss (4,563) (4,563)
Stock compensation 81 81
Issue of warrants 236 236
(note 11)
--------- --------- --------- --------- --------- ---------
Balance at 30 June 55,804 13,310 2,281 - (67,236) 4,159
2008 ===== ===== ===== ===== ====== =====
TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Quarter ended 30 June Six months ended 30 June
2008 2007 2008 2007
�'000 �'000 �'000 �'000
restated restated
(note 1) (note 1)
Net loss from operations (2,276) (1,768) (4,563) (3,171)
Amortisation 147 340 335 587
Accretion of debt 15 21 30 36
Adjustment to fair value of 10 7
investment
Stock compensation charges (17) 159 81 372
Foreign currency instrument - (5) - 16
loss
Unrealised foreign exchange 53 (108) 22 (92)
(gain)/loss
Movement in net interest 26 (126) 32 (307)
accrual
--------- --------- --------- ---------
Cash outflow before movements (2,042) (1,487) (4,056) (2,559)
in
working capital
Decrease/(increase) in debtors (17) (129) 757 (84)
Decrease/(increase) in stock 192 (483) (259) (945)
Increase/(decrease) in (651) 467 (804) 610
creditors
--------- --------- --------- ---------
Net cash outflow from (2,518) (1,632) (4,362) (2,978)
operating activities before --------- --------- --------- ---------
tax
Tax credits 39 - 39 312
--------- --------- --------- ---------
Net cash outflow from
operating activities after tax (2,479) (1,632) (4,323) (2,666)
--------- --------- --------- ---------
Investing activities
Purchase of property, plant (57) (298) (153) (473)
and equipment
Movement in restricted funds 2 - 82 355
--------- --------- --------- ---------
Cash outflow from investing (55) (298) (71) (118)
activities --------- --------- --------- ---------
Financing activities
Net proceeds from 1,500 3,876 1,500 3,805
convertible notes
--------- --------- --------- ---------
Cash inflow/(outflow) from 1,500 3,876 1,500 3,805
financing activities --------- --------- --------- ---------
Increase/(decrease) in cash in (1,034) 1,946 (2,894) 1,021
the period ====== ====== ====== ======
Cash and cash equivalents:
Beginning of period 2,375 5,744 4,235 6,669
---------- ---------- ---------- ---------
-
End of period 1,341 7,690 1,341 7,690
====== ====== ====== ======
Supplemental cash flow
information
Cash paid for interest 18 155 56 315
Cash received as interest 29 75 65 163
Convertible note issue costs of �250,000 are included within accounts payable at 30 June 2008
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1 Basis of preparation
The consolidated financial statements of the Company have been prepared by management in accordance with Canadian Generally
Accepted Accounting Principles. The preparation of the consolidated
financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could
differ from those estimates. The consolidated financial statements have, in management's opinion, been properly prepared using
careful judgement with reasonable limits of materiality and within
the framework of the significant accounting policies summarised in the Company's financial statements for the year ended 31
December 2007, and the subsequent changes in accounting policies as
detailed below. Certain comparative amounts have been reclassified to
conform to the financial statement presentation adopted for 2008.
The Company's interim financial statements do not
conform in all respects to the requirements of Canadian GAAP f
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
2 Changes in accounting policies and recent accounting pronouncements
(i) Changes in accounting policies
On January 1 2008 the Company adopted the new recommendations of Canadian
Institute of Chartered Accountants (CICA) Handbook Section 1535, Capital
Disclosures. This new handbook section establishes disclosure requirements
about an entity's capital and how it is managed. It requires the disclosure
of information about an entity's objectives, policies and processes for
managing capital.
On January 1 2008 the Company adopted the new recommendations of CICA
Handbook Section 3862 Financial Instruments - Disclosures and Section 3863
Financial Instruments - Presentation which replaces Section 3861 Financial
Instruments - Disclosure and Presentation, revising and enhancing disclosure
requirements while carrying forward its presentation requirements. Section
3862 requires entities to provide disclosures in their financial statements
that enable users to evaluate the significance of financial instruments on
the entity's financial position and its performance and the nature and extent
of risks arising from financial instruments to which the entity is exposed
during the period and at the balance sheet date, and how the entity manages
those risks. Section 3863 establishes standards for presentation of financial
instruments and non-financial derivatives. It deals with the classification
of financial instruments, from the perspective of the issuer, between
liabilities and equities, the classification o
(ii) Recent accounting pronouncements
In February 2008 the CICA issued Handbook Section 3064 Goodwill and
Intangible Assets, effective for interim and annual financial statements
relating to fiscal years beginning on or after October 1 2008. Section 3064,
which replaces Section 3062 Goodwill and Other Intangible Assets, and Section
3450 Research and Development Costs, establishes standards for the
recognition, measurement and disclosure of goodwill and intangible assets.
This new standard is effective for the Company's fiscal year commencing
January 1 2009. The Company is assessing the impact of this new standard on
its consolidated financial statements.
In February 2008, the Accounting Standards Board of the CICA confirmed its
strategic plan which will abandon Canadian GAAP and affect a complete
convergence to the International Financial Reporting Standards. These new
standards will be effective for the Company's interim financial statements
commencing January 1, 2011. The Company is closely monitoring changes arising
from this convergence.
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
3 Segmental analysis
The Group's two reportable segments are the power electronics segment, which is involved in the development
and manufacture of electrical power supply and control systems and the electrical machines segment, which is
involved in the development and commercialisation of high speed electrical machines.
Corporate charges relating to the financing of the group and other related management activities are
allocated between the two reportable segments.
The power electronics and electrical machines segments both operate in the United Kingdom.
All amounts in �'000 Power Electrical machines Total
electronics
2008 2007 2008 2007 2008 2007
Six months ended 30 June
Revenue 3,563 4,239 110 136 3,673 4,375
Development income 86 370 301 - 387 370
Amortisation (95) (70) (240) (372) (335) (442)
Interest income 32 81 33 82 65 163
Interest expense (44) (55) (44) (55) (88) (110)
Net loss (2,767) (877) (1,796) (2,294) (4,563) (3,171)
Capital expenditure 129 294 24 19 153 313
Three months ended 30 June
Revenue 1,608 2,222 103 120 1,711 2,342
Development income 38 29 279 - 317 29
Amortisation (48) (35) (99) (184) (147) (219)
Interest income 14 37 15 38 29 75
Interest expense (22) (30) (22) (29) (44) (59)
Net loss (1,607) (779) (669) (989) (2,276) (1,768)
Capital expenditure 57 210 0 10 57 220
As at 30 June 2008/31 December
2007
Capital assets 623 588 1,318 1,518 1,941 2,106
Goodwill 820 820 0 0 820 820
Total assets 5,160 6,800 5,649 7,672 10,809 14,472
Total liabilities 4,166 3,523 2,484 2,544 6,650 6,067
Total income �'000 Six months ended Quarter ended
30 June 30 June
2008 2007 2008 2007
UK 482 857 238 457
USA 2,412 2,839 1,175 1,414
Canada 1,105 842 560 419
Rest of world 61 207 55 81
--------- --------- --------- ---------
4,060 4,745 2,028 2,371
====== ====== ====== ======
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
4 Significant
Customers
During the six months ended 30 June 2008, 61% of the Company's sales were derived from three customers
(2007: 54% from two customers). During the three months ended 30 June 2008, 66% of the Company's sales were
derived from four customers (2007: 45% from one customer). One of the customers in the three months ended
30 June 2008 was a new customer.
5 Research and product development
Research and product development expenditure incurred during the period comprised:
Six months ended Quarter ended
30 June 30 June
2008 2007 2008 2007
�'000 �'000 �'000 �'000
Research and product 3,105 2,166 1,514 1,151
development cost
Accrued tax credits (44) - -
(44)
-------- -------- -------- --------
3,061 2,166 1,470 1,151
===== ===== ===== =====
Total accrued tax credits receivable at 30 June 2008 amounted to �212,000 (31 December 2007: �208,000).
6 Interest expense
Six months ended Quarter ended
30 June 30 June
2008 2007 2008 2007
�'000 �'000 �'000 �'000
Interest 58 74 29 38
Accretion of debt 30 36 15 21
--------- --------- --------- ---------
88 110 44 59
====== ====== ====== ======
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
7 Financial instruments
The following is a summary of the accounting classifications the Company has
elected to apply to each of its significant categories of financial
instruments outstanding as at 30 June 2008:
Cash and cash equivalents: held
for trading
Restricted cash:
held for trading
Trade receivables:
loans and receivables
Investments:
held for trading
Trade payables:
other financial liabilities
Convertible notes:
other financial liabilities
Currency option contracts: held
for trading
Transaction costs incurred in arranging loan financing are deferred against
the loan creditor balance, and expensed to the statement of loss and
comprehensi
Interest rate and currency of cash balances
Floating rate financial assets of �2,621,000 at 30 June 2008 (31 December
2007: �5,597,000) comprised Sterling interest bearing bank accounts, money
market deposits and cash funds including restricted cash.
Fixed rate financial assets at 30 June 2008 amounted to �18,000 (31 December
2007: �25,000) and comprised an investment in a convertible debenture.
At 30 June 2008, the increase or decrease in net earnings for each 1% change
in interest rates on net financial assets was approximately �26,000 per annum
(31 December 2007: �55,000).
US dollar denominated Canadian dollar denominated
�'000 �'000
Investments - 18
Monetary assets 533 13
Debtors 1,185 297
Creditors 4 49
The Company utilises US Dollar forward option agreements to reduce exposure to fluctuations in foreign exchange rates.
Included in net loss for the six months ended 30 June 2008 is approximately �5,000 of foreign exchange loss resulting from the
translation of the financial statements of Turbo Power Systems Inc. (2007: loss of �15,000). The rates used to translate the assets and
liabilities as at 30 June 2008 was USD $1.994:�1 and CDN $2.014:�1 (30 June 2007 USD $2.004:�1 and CDN $2.122:�1).
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
7 Financial instruments (continued)
Derivative financial instruments
Certain of the Company's business transactions occur in currencies other
than Sterling. The Company entered into foreign exchange average rate option
contracts during the twelve months ended 31 December 2007 to reduce exposure
to fluctuations in foreign exchange rates on remittances from customers
denominated in U.S. Dollars.
During the six months no gain or loss was realized on these options (2007:
loss of �16,000).
As at 30 June 2008 there was no unrealised gain from the contracts included
within prepayments (2007: �28,000). The Company records unrealised gains or
losses arising from these contracts in the statement of loss and
comprehensive loss.
Maturity of financial liabilities
The maturity of the Group's borrowings at 30 June 2008 and 31December 2007
comprised:
2008 2007
�'000 �'000
Convertible notes due 11 March, 2010
1,789 1,789
Convertible notes due in period to 30 June, 2011
1,500 -
------- -------
Restricted cash
In 2004 the Company committed cash bonds in support of contracts placed by
the Toronto Transit Commission for the CLRV and H6 programmes. The
associated contracts required the bonds to remain in place until two years
after all equipment is delivered. According to the current contract schedule
that would result in the cash related to the H6 programme of �559,000 being
under the performance bond restriction until 2010.
During March 2007 the Company committed cash bonds totalling USD$800,000 in
support of contracts placed by Bombardier Transportation for the CTA and TTC
programmes. The associated contracts require the bonds to remain in place
until after development and the prototype equipment is delivered, which is
expected to occur during 2008.
The Company has also provided a property lease guarantee bond which is held
in escrow and totals �320,000.
At 30 June 2008 cash subject to restrictions totalled �1,280,000 (December
2007: �1,362,000).
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
7 Financial instruments (continued)
Credit risks
As seen below, the Company, in the normal course of business, is exposed to
credit risk from its global customers. The accounts receivable are subject
to normal industry risks in each geographical region in which the Company
operates. The Company attempts to manage these risks by dealing with
creditworthy, large well-established customers; however, due to the limited
number of potential customers in each market this is not always possible. In
these cases the Company reduces its exposure by obtaining up-front payments
from the end customer prior to delivery of goods.
Significant debtors at 30 June 2008 comprised �1,291,000 due from four
customers, representing 70% of the outstanding balance (2007: �1,082,000 due
from three customers, representing 58% of the outstanding balance).
Consequently, the Company has concentrations of credit risk with respect to
its accounts receivable.
Total accounts receivable of �1,847,000 are due as follows:
Not past due
Determination of fair value
The fair value of a financial instrument is the amount of consideration that
would be agreed upon in an arm's length transaction between knowledgeable,
willing parties who are under no compulsion to act. The fair value of a
financial instrument on initial recognition is the transaction price, which
is the fair value of the consideration given or received. Subsequent to
initial recognition, the fair values of financial instruments that are
quoted in active markets are based on bid prices for financial assets held
and offer prices for financial liabilities. When independent prices are not
available, fair values are determined by using valuation techniques which
refer to observable market data. These include comparisons with similar
instruments where market observable prices exist, discounted cash flow
analysis, option pricing models and other valuation techniques commonly used
by market participants. For certain derivatives, fair values may be
determined in whole or in part from
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
8 Loss per share
Loss per common share has been calculated using the weighted average number of shares in issue during the relevant financial
periods. The treasury stock method was used in determining the weighted average number of shares outstanding for each period.
The weighted average number of shares outstanding in the three months and six months ended 30 June 2008 was 318,571,062 (2007:
285,254,837 for the three months, 279,630,958 for the six months). The loss for the three months ended 30 June 2008 was �2,276,000
(2007: �1,768,000).
Anti-dilutive potential securities outstanding not included in the loss per common share calculation at 30 June 2008 total
221,076,773 (2007: 172,646,014).
9 Long - term assets
Cost Impairment Amortisation Net book value
�'000 �'000 �'000 �'000
At 30 June 2008:
Intangible assets 4,078 1,663 2,385 30
Goodwill 863 43 - 820
Property, plant and 8,935 - 6,994 1,941
equipment
-------- -------- -------- --------
Total long term assets 13,876 1,706 9,379 2,791
===== ===== ===== =====
At 31 December 2007:
Intangible assets 4,078 1,663 2,368 47
Goodwill 863 43 - 820
Property, plant and 8,782 - 6,676 2,106
equipment
-------- -------- -------- --------
Total long term assets 13,723 1,706 9,044 2,973
===== ===== ===== =====
10 Share capital - issued shares
Common A Ordinary
Number �'000 Number �'000
At 1 January 2007 273,944,592 51,919 56,250,000 6,123
Redemption of convertible notes - - 58,750,000 7,187
Share based compensation 176,470 17 - -
Shares issued, net of share issue costs 44,450,000 3,868 - -
-------------- -------- --------------- --------
-
At 31 December 2007 and 30 June 2008 318,571,062 55,804 115,000,000 13,310
========= ===== ========= =====
No options or warrants were exercised during the six months ended 30 June
2008.
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
11 Financing
On 11 July 2003 the Company completed a �5,000,000 financing agreement
with institutional investors. The financing comprised unsecured
Convertible Notes and Warrants. The Convertible Notes have a term of five
years and bear interest at a rate of 3.5% per annum. They were
convertible into an aggregate of 25,000,000 Common Shares in Turbo Power
Systems Inc. at a conversion price of �0.20 per share. The Warrants had a
term of three years and were convertible into an aggregate of 3,500,000
Common Shares in Turbo Power Systems Inc. at an exercise price of �0.15
per share, and lapsed on 10 July 2006.
On 11 March 2005 the Company completed a �8,000,000 (gross) financing
agreement with institutional investors. The financing comprised unsecured
Convertible Notes and Warrants. The Convertible Notes have a term of five
years plus one day and bear interest at a rate of 6.5% per annum. They
are convertible into an aggregate of 66,666,667 Common Shares in Turbo
Power Systems Inc. at a conversion price of �0.12 per share. The Warrants
have a term of five years and are convertible into an aggregate of
7,000,000 Common Shares in Turbo Power Systems Inc. at an exercise price
of �0.15 per share.
On 28 December 2006 the Company completed a �6,000,000 (gross) financing
agreement with institutional investors. The financing comprised 50,000,000
Common Shares in the company and 25,000,000 A-Ordinary shares in Turbo
Power Systems Limited. The financing included the issue of 3,500,000
Warrants, having a term of three years and being convertible into an
aggregate of 3,500,000 Common Shares in Turbo Power Systems Inc. at an
exercise price of �0.15 per share. These warrants were issued on 6 January
2007 (see note 12).
On 28 December 2006, per an agreement reached with the holders of the
convertible notes, the Company redeemed �2,500,000 of the 2003 Convertible
Loan Notes and �2,360,000 of the 2005 Convertible Loan Notes at a
redemption price of �0.08. The redemption was dependant upon the Company's
shares being approved for trading on the AIM exchange which occurred on 28
December 2006.
A further �2,500,000 of the 2003 Convertible Loan Notes and �2,000,000 of
the 2005 Convertible Loan Notes were redeemed in January 2007 at a
redemption price of �0.08.
The Company has incorporated the guidance provided by the CICA's Emerging
Issue Committee Abstract 96 "Accounting for the Early Extinguishment of
Convertible Securities Through (1) Early Redemption or Repurchase and (2)
Induced Early Conversion" (EIC96) in accounting for the early redemption of
the convertible notes. EIC96 provides guidance on the treatment of the fair
value of the conversion feature on the extinguishment of the convertible
debenture. Redemption of the convertible debentures in January 2007
resulted in an increase in deficit of �82,000 (2006: �73,000) and an
increase in retained deficit of �2,512,000 (2006: �2,600,000).
On 19 June 2008 the Company completed a �3,000,000 (gross) financing
agreement with institutional investors. The financing comprised secured
Convertible Notes and Warrants. The Convertible Notes bear interest at 15%
per annum and are convertible into an aggregate of 75,000,000 of either
Common Shares in Turbo Power Systems Inc. or A-Ordinary shares in Turbo
Power Systems Limited at an exercise price of �0.04 per share. The
Convertible Notes are issuable upon drawdown of the loan, of which
�1,500,000 were issued on 19 June 2008. The loan is repayable over three
years by way of regular quarterly repayments, commencing March 2009. The
Warrants have a term of ten years and are convertible into an aggregate of
12,857,142 of either Common Shares in Turbo Power Systems Inc. or
A-Ordinary shares in Turbo Power Systems Limited at an exercise price of
�0.035 per share.
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
11 Financing (continued)
In accounting for the Convertible loan notes issued for �1,500,000 the
Company has valued the debt and equity components by assigning the
proceeds based on the fair values of the principal repayments, interest
payments and the warrants issued compared to the proceeds. The warrants
have been valued using the Black-Scholes method ( see note 12 ), and have
a value of �236,000. The debt component has been valued at �1,264,000 and
no value has been assigned to the conversion feature. Transaction costs
of �250,000 have been deferred against the current loan balance and will
be expensed over the life of the loan using the effective interest
method. The Convertible Notes are secured over the assets of the Company.
Subsequent to the balance sheet date the Company has amended the terms of
the 19 June 2008 loan agreement in order to permit a second drawdown of
�1,500,000. The new terms will result in all interest and capital
repayments being deferred until maturity in June 2011, and provide that
if at any time, including once the Loan Note has been fully repaid, there
is a change in control of TPS, or its subsidiaries or substantially all
of its assets, the Loan Note Holders will be entitled to receive a risk
premium, calculated according to the enterprise value ascribed to the
Company, under the transaction before deducting any balance of the Loan
Notes and/or interest outstanding. This risk premium will be equal to an
initial payment of �1.5m plus 75% of the next �6m of enterprise value and
50% of the remainder.
The second drawdown is subject to shareholder EGM approval, which is to
be held on 15 August 2008. If approved, the modification to the repayment
terms of the Convertible Notes may result in a change to the lo
12 Stock options, warrants and compensation
expense
The number of options and warrants outstanding as at 30 June 2008, and the movement during the six months then ended, are as
follows:
Options Warrants
Number Number
Outstanding at 1 30,847,250 10,500,000
January 2008
Issued - 12,857,142
Cancelled (535,952) -
------------- ------------
Outstanding at 31 30,311,298 23,357,142
March 2008 ======== =======
The stock based compensation expense for the six months ended 30 June 2008,
included in Production costs was �35,000 (2007: �52,000), in Research and
product development was �57,000 (2007: �193,000), and in General and
administrative costs was a credit of �11,000 (2007: charge of �127,000).
The credit to stock compensation costs arises as a result of the Company
assessing the high likelihood that options held by ex-employees will be
forfeited before they vest, and accordingly the charge incurred to date is
therefore released back.
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
12 Stock options, warrants and compensation expense (continued)
On 19 June 2008 the Company issued 12,857,142 warrants as part of its
financing agreement with institutional investors (note 11). The fair
value of the warrants is calculated using the Black-Scholes
option-pricing model. A dividend yield of Nil, expected volatility of
75%, a risk free interest rate of 6% and an expected life of 10 years
have been assumed. The fair value of the warrants issued during the
quarter ended 30 June 2008 was �0.03 per warrant.
Subsequent to the period end, on 9 July 2008 the Company issued certain
directors with an aggregate of 4,600,000 stock options with an exercise
price of 3.8p per share, which vest over a 1 to 3 year period, and may
only be exercised once the Company share price has been not less than 12p
per share for the seven consecutive trading days prior to giving notice
of exercise.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including the expected price volatility. The
Company uses expected volatility rates, which are based on historical
volatility rates trended into future years. Changes in the subjective input
assumptions can materially affect the fair value estimate, and therefore
the existing models do not necessarily provide a reliable single measure of
the fair value of the Company's stock options.
13 Capital management
The Company defines capital that it manages as the aggregate of its cash
and cash equivalents, short term investments and equity comprising share
capital, contributed surplus and deficit. Its objectives when managing
capital are to ensure that the Company will continue as a going concern,
so that it can provide services to its customers and returns to its
shareholders.
The Company manages its capital structure and makes adjustments to it in
light of economic conditions. The Company, upon approval from its Board
of Directors, will make changes to its capital structure as deemed
appropriate under the specific circumstances.
The Company is not subject to any externally imposed capital requirements
and the Company's overall strategy with respect to management of capital
remains unchanged from the year ended 31 December 2007.
14 Contingent loss
The Company is currently working on a contract with Hamilton Sundstrand
which could result in future losses. Since discussions are ongoing on the
contract in question a reliable estimate of any contingent liability
cannot be made at this time and no amount has been accrued.
TURBO POWER SYSTEMS INC.
SIX MONTHS ENDED 30 JUNE 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
15 Related party transactions
On 19 June 2008 the Company completed a �3,000,000 (gross) financing
agreement with institutional investors (note 11). �1,000,000 of this
agreement has been placed with Impax Asset Management Limited, which
currently holds 14.35% of the issued share capital of the Company. A
further �1,000,000 has been placed with Gartmore Investment Limited,
which currently holds 11.85% of the issued share capital of the Company.
Both investors are considered to be insiders pursuant to Canadian
securities law.
16 Selected quarterly
information
The following table sets forth selected consolidated financial information of the Company for the eight most recent
quarters.
Revenue Net loss (Loss) per share UK pence
�'000 �'000
September 2006 1,470 (1,623) (0.8)
December 2006 1,851 (1,123) (0.6)
March 2007 2,033 (1,403) (0.5)
June 2007 2,342 (1,768) (0.6)
September 2007 2,700 (1,666) (0.5)
December 2007 2,750 (1,578) (0.5)
March 2008 1,962 (2,287) (0.7)
June 2008 1,711 (2,276) (0.7)
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR FKQKKCBKDQFD
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