RNS Number : 1159I
Turbo Power Systems Inc
14 November 2008
14 November 2008
TURBO POWER SYSTEMS INC. ANNOUNCES ITS RESULTS FOR
THE NINE MONTHS AND QUARTER ENDED 30 SEPTEMBER 2008
Highlights
* Production and development income in the quarter of �1.8 million (2007: �3.3 million)
* Operating loss before financial charges of �1.7 million in the quarter (2007: �1.6 million)
* Development spend reducing as programmes transition into production.
* Operating Cash outflow reduced from �2.48m in Q2 to �1.53m in Q3 (a reduction of 38%).
* Completion of the Qualification Testing of the equipment for the Eaton programme and the signing of the transition agreement with
Hamilton Sundstrand has significantly reduced exposure to additional unplanned aerospace costs going forward.
Paul Summers, CEO, said:
"Although development spend for the quarter has continued at a high level this has been steadily reducing as the quarter has progressed.
Engineering and/or production units have been shipped on several major programmes which (coupled with stabilised supplier payments) has
provided the business with improved cashflow during later part of the quarter. The delivery of engineering and production units is
anticipated to continue into Q4 which should result in an increasing cash balance during the remainder of the year.
The completion of the development phases of several contracts and reduced development spend on Hamilton Sundstrand (as a result of the
transition agreement) is anticipated to further reduce the overall development spend in Q4.
The cost savings implemented earlier in the year are starting to have an effect and, coupled with further cost savings being implemented
during Q4 should position the business to be able to demonstrate better results during 2009.
There continues to be a high level of interest from new and existing customers in the products TPS supplies despite the current economic
climate and we are in detailed discussions with several of our customers for follow-on production orders."
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 Ltd 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 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.
Notice of no auditor review of interim financial statements
Under Canadian National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim
financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying un-audited interim financial statements of the Company have been prepared by and are the responsibility of the
Company's management.
The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by
the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.
CHAIRMAN'S STATEMENT
This quarter's results reflect greater control of costs in the business that will be a sound base for the rest of 2008 and going in to
2009. Successful delivery of new products into production, and continual improvement in levels of after market service, will enable us to
build strategic relationships with a number of key customers. Over all, the business is being managed for improving margins and growth.
OPERATIONAL REVIEW
This MD&A has been prepared as at 14 November 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.
Q3 2008 Summary
* Development activities during the quarter have been reducing as contracts enter their final phases of engineering test and
production deliveries begin
* The completion of the Qualification Testing of the equipment for the Eaton programme and the signing of the transition agreement
with Hamilton Sundstrand has significantly reduced the vulnerability of the business to additional unplanned aerospace costs going forward.
* The two major rail programmes (CTA & Toronto) have both moved into the final phases of their development with engineering units
being delivered on both programmes.
* Activity at the Heathrow Electrical Machines Division has increased with :
* Commencement of the delivery of the 75 Industrial Motor and Drive units
* Further deliveries of the ALC Motors
* Delivery of the US Gas Electrical Machine and Drive
* Delivery of the Electrical Machine and Drive for the European Research organization.
* Cash outflow has stabilized during the later part of the quarter.
* Discussion have commenced with several of our customers for follow-on orders.
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 Design has been reviewed with the customer and material procurement has commenced. The unit is anticipated to complete in Q4 with
follow-on orders being discussed for delivery in 2009.
* Industrial motor and drive agreement
Delivery of the 75 units commenced in the quarter.
Discussions have commenced regarding follow-on orders for delivery in 2009 and beyond. 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.
* 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 delivered. 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 during the course
of 2009.
* European Programme
This order from a European Research Organization, acting on behalf of a major international manufacturing company, was for a high speed
electrical machine and variable frequency drive. The equipment has been delivered and discussions on follow on orders and for this and other
size ranges are ongoing.
* 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
Further units have been delivered in the period in preparation for shipment to North America for full systems level operational
evaluation by ALC's customer. This is expected to be completed in early 2009.
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")
* BT- Chicago Transit Authority
The initial engineering units have now been built and delivered to our customer. Modifications to address previously identified
technical issues are being incorporated into production units which are anticipated to be fully qualified by the end of 2008 and delivered
in Q1 2009.
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.
* BT- Toronto
The first 11 units have been delivered and work is underway on the next delivery scheduled for Q1 2009.
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.
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.
* Catering Converters
The order received at the end of Q2 for catering converters for Bombardier UK's TurboStar fleet of passenger has completed its design
phase and manufacturing is anticipated to commence at the end of Q4.
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. Discussions
are underway regarding production orders for the next generation of this equipment.
Aerospace
� Boeing 787
o Fuel Pump Control Equipment
The fuel pump control equipment developed for Eaton Aerospace is well into it*s final qualification testing and several production units
have now been delivered.
The schedule for delivery going forward will be matched to the requirements of Eaton/Boeing. TPS is awaiting information from Boeing/Eaton
on the effect (if any) of the recent strike at Boeing*s assembly plant on these schedules.
o Motor Controllers
During the period TPS and Hamilton Sundstrand have agreed to transition the contract to Hamilton Sundstrand for the provision of the
rack-mounted motor controllers being provided to control their ram air fan motors that are used as part of the power electronics cooling
system.
In transferring the engineering design and know-how to Hamilton Sundstrand, TPS will eliminate the requirement for any further expenditure
in both prototype testing and design refinement as the product completes its qualification testing.
FINANCIAL PERFORMANCE
Overview of the nine months ended 30 September 2008
Total revenues in the nine months of �5.85 million were 28% lower than the equivalent period in 2007 (2007: �8.09 million), primarily
due to a reduction in production volume on rail programmes. During the first half year our major rail production programmes reached
completion, but delays in final qualification on our current rail development programmes has resulted in a low production volume,
particularly in the second half of Quarter 2 and throughout Quarter 3. Development costs fell in Quarter 3 as most programmes are now in
final customer qualification stages, and our expenditure has reduced accordingly.
Administrative costs have decreased over the nine months as the impact of our cost review programmes takes effect and offsets the
increased operating charges 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 nine months increased to �5.6 million
(2007: �3.5 million) as a result of high development expenditure and low production output, but has fallen in Quarter 3 to �1.5 million from
�2.2 million in Quarter 2 of 2008.
Operating cash outflows before tax increased to �5.9 million (2007: �5.0 million) reflecting the increased development expenditure and
reduced income, but were significantly reduced in Quarter 3 at �1.5 million from �2.5 million in Quarter 2.
The Company finished the nine months 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.
On 15 August 2008 the Company amended the terms of the loan agreement in order to facilitate a further drawdown of �1.5 million. 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 �6.41 million for the nine months ended 30 September 2008 and has a cumulative deficit of �69.09
million as at 30 September 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.
Nine months ended 30 September 2008
Production Revenue
Production revenue in the nine months ended 30 September 2008 was �4.92 million compared with �7.08 million in 2007 and comprised
2008 2007
�'000 �'000
Power electronics 4,423 6,855
Electrical machines 496 220
_____ _____
4,919 7,075
_____ _____
The Power electronics division has seen a reduction in production volume as contracts on Bombardier Beijing, London Underground and
Toronto Transit H6 rail programmes completed. Sales volumes on the NREC programme were lower during 2008 compared to the same period in 2007
which had experienced a higher than normal demand rate.
Spares and service revenues within the Power electronics division were �0.53 million for the nine months (2007: �0.31 million).
In the Electrical machines division revenue was primarily from the Industrial Motor and Drive customer.
Development income
Development income in the nine months was �0.93 million compared with �1.02 million in 2007 and was primarily related to the high speed
generator contract.
2008 2007
�'000 �'000
Development income 932 1,017
_____ _____
Production costs
The cost of production revenues in the nine months amounted to �3.98 million (2007: �5.32 million).
2008 2007
�'000 �'000
Power electronics 3,568 4,544
Electrical machines 413 776
_____ _____
3,981 5,320
_____ _____
Production costs include certain fixed facilities costs attributable to the manufacturing operation.
Included in production costs for the nine months are stock compensation charges on options awarded of �0.04 million (2007: �0.08
million).
Research and product development
Research and product development expenditure in the nine months was �4.42 million compared with �3.90 million in 2007, and comprised
2008 2007
�'000 �'000
Research and product development expenditure 4,518 3,902
Accrued R&D tax credits (94) -
_____ _____
Total expenditure 4,424 3,902
_____ _____
R&D expenditure in the nine 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 nine months are stock compensation charges on options awarded of �0.03
million (2007: �0.29 million).
General and administrative
General and administrative costs of �3.13 million (2007: �3.02 million) consist mainly of staff costs and facilities costs, which have
increased following the relocation of the Gateshead operation to larger facilities. Also included are stock compensation charges on options
awarded of �0.04 million (2007: �0.17 million).
Amortisation
Amortisation was �0.50 million compared with �0.66 million in 2007. The reduction reflects a number of assets becoming fully amortised.
Interest income
Interest income for the nine months was �0.08 million compared with �0.27 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, June and August 2008 and comprise
2008 2007
�'000 �'000
Interest 217 87
Accretion of debt 45 62
_____ _____
262 149
_____ _____
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 and 15 August 2008 note issue was estimated at �2.39 million ( �2.64 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
nine months this charge amounted to �0.05 million (2007: �0.06 million).
Finance charges for the nine months were �0.11 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 nine 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 nine months
Cash outflow from operating activities
Operating cash outflow before movements in working capital was �5.57 million for the nine months (2007: �3.75 million), as a result of
higher incurred costs on development programmes and reduced production output in 2008.
Movements in stocks, work in progress and debtors and creditors resulted in a net cash outflow of �0.32 million during the nine months
(2007: outflow of �1.26 million).
Tax credits
During the nine 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 �0.16 million (2007: �0.60 million) and relate to production equipment and leasehold
property improvements.
Cash flow from financing activities
Cash inflow from financing in 2008 of �3.00 million during the nine months relates to net funds of �1.50 million received from the issue
of loan notes in June 2008 and a further �1.50 million in August 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 4
of 2008. These costs are included in the book value of the debt at 30 September 2008, and are expensed to the Consolidated Statements of
Loss using the effective interest method.
Cash inflow from financing in 2007 of �3.80 million during the nine 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 nine months
Overall the cash outflow for the period was �2.97 million. This compares with a cash outflow of �1.09 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 in 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
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)
September 2008 1,246 1,363 1,025 (1,849) (0.6)
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, but is reducing each quarter during 2008. 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 quarter ended 30 September 2008
Production revenue
Production revenue in the quarter ended 30 September 2008 was �1.25 million compared with �2.70 million in 2007 and comprised
2008 2007
�'000 �'000
Power electronics 860 2,616
Electrical machines 386 84
_____ _____
1,246 2,700
_____ _____
Revenues from the Power electronics division decreased as production contracts on Bombardier Beijing, London Underground and Toronto
Transit H6 rail programmes completed. 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 quarter was �0.55 million compared with �0.65 million in 2007, and was principally related to the new High
Speed Generator contract.
2008 2007
�'000 �'000
Development income 545 647
_____ _____
Production costs
The cost of production revenues in the quarter amounted to �0.95 million (2007 : �1.91 million).
2008 2007
�'000 �'000
Power electronics 831 1,663
Electrical machines 117 249
_____ _____
948 1,912
_____ _____
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 �nil (2007: �0.03 million).
Research and product development
Research and product development expenditure in the quarter was �1.36 million compared with �1.74 million in 2007, and comprised
2008 2007
�'000 �'000
Research and product development expenditure 1,413 1,736
Accrued R&D tax credits (50) -
_____ _____
Total expenditure 1,363 1,736
_____ _____
Included in research and product development costs for the three months are stock compensation charges on options awarded of �0.03
million (2007: �0.10 million).
General and administrative
General and administrative costs in the quarter of �1.03 million (2007: �1.08 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 are stock
compensation charges of �0.05 million (2007: �0.04 million).
Amortisation
Amortisation was �0.16 million compared with �0.22 million in 2007.
Interest income
Interest income in the quarter was �0.02 million compared with �0.11 million in 2007, as a result of lower maintained cash balances.
Interest expense and finance charges
Interest expenses arise from the issue of convertible bonds in July 2003, March 2005 and June and August 2008 and comprise
2008 2007
�'000 �'000
Interest payable 159 29
Accretion of debt 15 10
_____ _____
174 39
_____ _____
Cash flows for the quarter ended 30 September 2008
Cash outflow from operating activities
Operating cash outflow before movements in working capital was �1.46 million for the quarter (2007: �1.19 million).
Movements in stocks, work in progress, and debtors and creditors produced a net cash outflow of �0.07 million during the quarter (2007:
outflow of �0.84 million).
Tax credits
During the quarter the company received no research and development tax credits (2007: �nil).
Investing activities
Cash outflows from capital investments in the quarter were �0.01 million compared with �0.12 million in 2007.
Cash flow from financing activities
Cash inflow from financing in 2008 of �1.50 million during the quarter relates to net funds received from the issue of loan notes in
August 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 4 of 2008.
Cash outflow from financing in 2007 of �0.01 million during the quarter relates to financing costs related to 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 quarter was �0.08 million. This compares with an overall cash outflow of �2.11 million for the third
quarter of 2007.
Balance sheet as at 30 September 2008
The Company ended the period with an unrestricted cash balance of �1.27 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 �1.32 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 �2.65 million at 30 September 2008,
after depreciation charges of �0.50 million.
Long term liabilities have increased to �4.41 million at 30 September 2008 compared to �1.81 million at 31 December 2007, reflecting the
increase in Loan Notes following the loan financing completed in June and August 2008.
Net working capital at 30 September 2008, excluding cash balances, was �1.62 million, compared with �1.62 million as at 31 December
2007.
As at 30 September 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 24,046,050 outstanding share options and 23,357,142 outstanding warrants.
Contractual Obligations �'000 Payments Due by Period
at 30 September 2008
Total Less than 1 - 3 4 - 5 After
1 year years years 5 years
Convertible notes 4,789 4,789 - -
Operating leases 4,601 519 1,583 858 1,641
Total contractual obligations 9,390 519 6,372 858 1,641
Liquidity
Cash, cash equivalents and short-term investments at 30 September 2008 were �1.27 million, compared with �4.26 million at 31 December
2007.
Restricted cash at 30 September 2008 was �1.32 million, compared with �1.36 million at 31 December 2007.
The Company incurred a loss in the nine months of �6.41 million and has a cumulative deficit of �69.09 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 �3,000,000 (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 original
loan agreement provided for repayment over three years by way of regular quarterly repayments, commencing March 2009.
On 15 August 2008 the Company amended the terms of the 19 June 2008 loan agreement in order to permit a second drawdown of �1,500,000.
The new terms 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 after 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 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.
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.
Copies of Quarterly Results
Copies of the quarterly results are available from the Company's office at Unit 3 Summit Centre, Hatch Lane, West Drayton, Middlesex,
UB7 0LJ, United Kingdom or available to view from the Company's website at www.turbopowersystems.com
TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
UNAUDITED
Notes Quarter ended 30 September Nine months ended 30 Sept
2008 2007 2008 2007
�'000 �'000 �'000 �'000
restated restated
(note 1) (note 1)
Revenue 2,3 1,246 2,700 4,919 7,075
Development income 2,3 545 647 932 1,017
-------- -------- -------- --------
1,791 3,347 5,851 8,092
Expenses
Production costs 948 1,912 3,981 5,320
Research and product 5 1,363 1,736 4,424 3,902
development
General and administrative 1,025 1,083 3,132 3,026
Amortisation 161 218 496 660
-------- -------- -------- --------
3,497 4,949 12,033 12,908
Loss before extraordinary (1,706) (1,602) (6,182) (4,816)
items, interest, finance
charges and foreign exchange
Interest income 18 106 83 269
Interest expense 6 (174) (39) (262) (149)
Finance charge (70) (3) (112) (118)
Foreign exchange gain/(loss) 83 (128) 61 (23)
-------- -------- -------- --------
(143) (64) (230) (21)
-------- -------- -------- --------
Net loss and Comprehensive (1,849) (1,666) (6,412) (4,837)
loss ===== ===== ===== =====
Loss per share - basic 8 (0.6) p (0.5)p (2.0) p (1.6) p
Loss per share - diluted 8 (0.6) p (0.5)p (2.0) p (1.6) p
Weighted average number of 318,571,062 318,571,062 318,571,062 292,753,630
shares outstanding
TURBO POWER SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
Notes As at 30 September As at 31 December
2008 2007
�'000 �'000
Current assets
Cash and cash equivalents 1,265 4,235
Restricted cash 7 440 -
Trade and other receivables 2,065 2,871
Stock and work in progress 2,808 2,376
Prepayments 456 422
R&D tax credits receivable 262 208
-------- --------
7,296 10,112
-------- --------
Long-term assets
Restricted cash 7 879 1,362
Investments 12 25
Intangible assets 9 22 47
Goodwill 9 820 820
Property, plant and 9 1,798 2,106
equipment -------- --------
10,827 14,472
===== =====
Liabilities and shareholders'
equity
Creditors: amounts falling due
within
one year
Trade and other payables 3,605 3,700
Deferred income 365 555
-------- --------
3,970 4,255
-------- --------
Creditors: amounts falling due
after
more than one year
Warranty provision 151 151
Convertible notes 4,254 1,661
-------- --------
4,405 1,812
-------- --------
Capital and reserves
Common share capital 10 55,804 55,804
Class A Ordinary share 10 13,310 13,310
capital
Contributed surplus 2,423 1,964
Deficit (69,085) (62,673)
---------- ----------
Shareholders' funds 2,452 8,405
--------- ---------
10,827 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 (6,412)
(6,412)
Stock compensation 106
106
Issue of warrants 296
296
(note 11)
Contributed surplus 57
57
on issue of loan
notes
--------- --------- --------- --------- ---------
---------
Balance at 30 55,804===== 13,310===== 2,423===== -===== (69,085)======
2,452
September 2008
=====
TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Quarter ended 30 September Nine months ended 30 Sept
2008 2007 2008 2007
�'000 �'000 �'000 �'000
restated restated
(note 1) (note 1)
Net loss from operations (1,849) (1,666) (6,412) (4,837)
Amortisation 161 234 496 805
Accretion of debt 15 10 45 62
Adjustment to fair value of 6 13
investment
Stock compensation charges 25 168 106 540
Foreign currency instrument - (9) - 7
loss
Unrealised foreign exchange 83 108 61 16
(gain)/loss
Movement in net interest 98 (33) 126 (340)
accrual
--------- --------- --------- ---------
Cash outflow before movements (1,461) (1,188) (5,565) (3,747)
in
working capital
Decrease/(increase) in debtors (39) (352) 718 (436)
Decrease/(increase) in stock (173) (73) (432) (1,018)
Increase/(decrease) in 146 (411) (610) 199
creditors
--------- --------- --------- ---------
Net cash outflow from (1,527) (2,024) (5,889) (5,002)
operating activities before --------- --------- --------- ---------
tax
Tax credits - - 39 312
--------- --------- --------- ---------
Net cash outflow from
operating activities after tax (1,527) (2,024) (5,850) (4,690)
--------- --------- --------- ---------
Investing activities
Purchase of property, plant (10) (123) (163) (596)
and equipment
Grant income - 250 - 250
Movement in restricted funds (39) (208) 43 147
--------- --------- --------- ---------
Cash outflow from investing (49) (81) (120) (199)
activities --------- --------- --------- ---------
Financing activities
Net proceeds from financing 1,500 (6) 3,000 3,799
--------- --------- --------- ---------
Cash inflow/(outflow) from 1,500 (6) 3,000 3,799
financing activities --------- --------- --------- ---------
Increase/(decrease) in cash in (76) (2,111) (2,970) (1,090)
the period ====== ====== ====== ======
Cash and cash equivalents:
Beginning of period 1,341 7,690 4,235 6,669
---------- ---------- ---------- ----------
End of period 1,265 5,579 1,265 5,579
====== ====== ====== ======
Supplemental cash flow
information
Cash paid for interest 56 110 112 425
Cash received as interest 18 106 83 269
Convertible note issue costs of �250,000 are included within accounts payable at 30 September 2008
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 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 for annual financial
statements. The Company's interim statements should be read in
conjunction with the consolidated financial statements of the Company for the year ended 31 December 2007.
Derivative financial instruments are used by the Company to manage a portion of its exposure to foreign exchange rate fluctuations. The
Company does not utilise derivative financial instruments
for trading or speculative purposes. The Company enters into foreign currency options denominated in U.S. Dollars, to manage foreign
exchange rate fluctuation exposure on receipts from customers
billed in U.S. Dollars. These derivative contracts, not accounted for as hedges, are marked to market, and any changes in the market
value are recorded in income or expense when the changes occur.
The fair value of these instruments is recorded as accounts receivable or payable.
The Company's functional and reporting currency is Pound Sterling.
Going concern
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 �1.85 million for the
quarter ended 30 September 2008 and has a cumulative deficit
of �69.09 million as at 30 September 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.
Prior period adjustment
The Company has previously translated the operations of the Canadian parent company using the current rate method. During the fourth
quarter of 2007 it was identified that the functional currency
of the Canadian holding company is Sterling, and as such the translation of the transactions should not have been recorded under the
current rate method. Accordingly a correction has been made
with retrospective restatement of the 2007 comparative financial statements.
The foreign exchange differences arising on consolidation have been reclassified and taken to the income statement. This has resulted
in a prior year adjustment to cancel the Currency Adjustment
Reserve and increase the loss brought forward at 1 January 2007 in retained earnings by �68,000.
The Consolidated Statements of Loss and Comprehensive Loss, the Consolidated Statement of Changes in Equity, and the Consolidated
Statements of Cash Flows, together with the Segmental Analysis and
Loss per Share notes have been restated for 2007 to take account of the decrease in reported net loss of �92,000 for the nine months,
and the change to opening equity reserves.
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 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 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
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.
NINE MONTHS ENDED 30 SEPTEMBER 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
Nine months ended 30 September
Revenue 4,423 6,855 496 220 4,919 7,075
Development income 304 1,017 628 - 932 1,017
Amortisation (142) (104) (354) (556) (496) (660)
Interest income 42 134 41 135 83 269
Interest expense (131) (74) (131) (75) (262) (149)
Net loss (4,073) (1,190) (2,339) (3,647) (6,412) (4,837)
Capital expenditure 138 408 25 28 163 436
Quarter ended 30 September
Revenue 860 2,616 386 84 1,246 2,700
Development income 218 647 327 - 545 647
Amortisation (47) (34) (114) (184) (161) (218)
Interest income 10 53 8 53 18 106
Interest expense (87) (20) (87) (19) (174) (39)
Net loss (1,306) (359) (543) (1,307) (1,849) (1,666)
Capital expenditure 10 114 - 9 10 123
As at 30 September 2008/31
December 2007
Capital assets 584 588 1,214 1,518 1,798 2,106
Goodwill 820 820 - 0 820 820
Total assets 4,995 6,800 5,832 7,672 10,827 14,472
Total liabilities 4,578 3,523 3,797 2,544 8,375 6,067
Total income �'000 Nine months ended Quarter ended
30 September 30 September
2008 2007 2008 2007
UK 877 1,539 395 682
USA 3,614 4,605 1,202 1,766
Canada 1,189 1,554 84 712
Rest of world 171 394 110 187
--------- --------- --------- ---------
5,851 8,092 1,791 3,347
====== ====== ====== ======
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
4 Significant
Customers
During the nine months ended 30 September 2008, 50% of the Company's sales were derived from three customers
(2007: 54% from two customers). During the quarter ended 30 September 2008, 42% of the Company's sales were
derived from three customers (2007: 59% from two customers).
5 Research and product development
Research and product development expenditure incurred during the period comprised:
Nine months ended Quarter ended
30 September 30 September
2008 2007 2008 2007
�*000 �*000 �*000 �*000
Research and product 4,518 3,902 1,413 1,736
development cost
Accrued tax credits (94) - (50) -
-------- -------- -------- --------
4,424 3,902 1,363 1,736
===== ===== ===== =====
Total accrued tax credits receivable at 30 September 2008 amounted to �262,000 (31 December 2007: �208,000).
6 Interest expense
Nine months ended Quarter ended
30 September 30 September
2008 2007 2008 2007
�'000 �'000 �'000 �'000
Interest 217 87 159 29
Accretion of debt 45 62 15 10
--------- --------- --------- ---------
262 149 174 39
====== ====== ====== ======
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 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 September 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
comprehensive loss over the life of the loan using the effective interest
method.
Interest rate and currency of cash balances
Floating rate financial assets of �2,584,000 at 30 September 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 September 2008 amounted to �12,000 (31
December 2007: �25,000) and comprised an investment in a convertible
debenture.
At 30 September 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 0 12
Monetary assets 1,006 25
Debtors 794 215
Creditors 0 81
The Company utilises US Dollar forward option agreements to reduce exposure to adverse fluctuations in foreign exchange rates.
Included in net loss for the nine months ended 30 September 2008 is approximately �60,000 of foreign exchange gain resulting from the
translation of the financial statements of Turbo Power Systems Inc. (2007: loss of �11,000). The rates used to translate the assets and
liabilities as at 30 September 2008 was USD $1.818:�1 and CDN $1.887:�1 (30 September 2007 USD $:�2.048 and CDN $:�2.033).
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 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 nine months no gain or loss was realized on these options (2007:
loss of �7,000).
As at 30 September 2008 there was no unrealised gain from the contracts
included within prepayments (2007: �37,000). 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 September 2008 and 31December
2007 comprised:
2008 2007
�'000 �'000
Convertible notes due 11 March, 2010
1,789 1,789
Convertible notes due 30 June, 2011
3,000 -
------- -------
4,789 1,789
==== ====
At 30 September 2008, the Group's borrowings were at fixed rates of 6.5%
(2010 notes) and 15.0% (2011 notes).
The fair value of the loans at 30 September 2008 was �4,484,000 ( 31
December 2007: �1,661,000 )
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 Q1 2009.
The Company has also provided a property lease guarantee bond which is held
in escrow and totals �320,000.
At 30 September 2008 cash subject to restrictions totalled �1,319,000
(December 2007: �1,362,000).
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 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 September 2008 comprised �671,000 due from three
customers, representing 37% of the outstanding balance (2007: �1,404,000 due
from three customers, representing 56% of the outstanding balance).
Consequently, the Company has concentrations of credit risk with respect to
its accounts receivable.
Total accounts receivable of �1,790,000 are due as follows:
Not past due
� 1,362,000Past due for over one day but not more that 30 days
� 232,000Past due for over 30 days but not more than 60 days
� 86,000Past due for over 60 days
� 110,000Allowance for doubtful accounts
� nil
At 30 September 2008 and 31 December 2007 the allowance for doubtful
accounts was �nil.
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 valuation techniques using
non-observable market data or transaction prices. A number of factors such
as bid-offer spread, credit profile and model uncertainty are taken into
account, as appropriate, when values are calculated using valuation
techniques.
The fair value of short term financial assets and liabilities, including
cash and cash equivalents, restricted cash, trade and other receivables, and
trade and other payables as presented in the consolidated balance sheets
approximate their carrying value due to the short term period to maturity of
these financial instruments.
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 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 quarter and nine months ended
30 September 2008 was 318,571,062 (2007: 318,571,062 for the quarter, 292,753,630 for the nine months). The loss
for the quarter ended 30 September 2008 was �1,849,000 (2007: �1,666,000).
Anti-dilutive potential securities outstanding not included in the loss per common share calculation at 30 September 2008 total
252,311,525 (2007: 171,902,983).
9 Long - term assets
Cost Impairment Amortisation Net book value
�'000 �'000 �'000 �'000
At 30 September 2008:
Intangible assets 4,078 1,663 2,393 22
Goodwill 863 43 - 820
Property, plant and 8,946 - 7,148 1,798
equipment
-------- -------- -------- --------
Total long term assets 13,887 1,706 9,541 2,640
===== ===== ===== =====
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 September 2008 318,571,062 55,804 115,000,000 13,310
========= ===== ========= =====
No options or warrants were exercised during the nine months ended 30
September 2008.
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 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 original loan agreement
provided for repayment over three years by way of regular quarterly
repayments, commencing March 2009.
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
11 Financing (continued)
On 15 August 2008 the Company amended the terms of the 19 June 2008 loan
agreement in order to permit a second drawdown of �1,500,000. The new
terms 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
after 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 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.
In accounting for the Convertible loan notes issued for �3,000,000 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 �2,648,000 and
the conversion feature has been valued at �57,000. 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.
12 Stock options, warrants and compensation
expense
The number of options and warrants outstanding as at 30 September 2008, and the movement during the nine months then ended, are as
follows:
Options Warrants
Number Number
Outstanding at 1 30,847,250 10,500,000
January 2008
Issued 4,600,000 12,857,142
Cancelled (11,401,200) -
------------- ------------
Outstanding at 30 24,046,050 23,357,142
September 2008 ======== =======
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 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 5% and an expected life of 10 years have been assumed. The fair
value of the options issued during the quarter ended 30 September 2008 was
�0.02 per option.
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
12 Stock options, warrants and compensation expense (continued)
The stock based compensation expense for the nine months ended 30
September 2008, included in Production costs was �35,000 (2007: �80,000),
in Research and product development was �32,000 (2007: �290,000), and in
General and administrative costs was �39,000 (2007: charge of �170,000).
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.
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 liability
On 19 June 2008 the Company completed a �3,000,000 (gross) financing
agreement with institutional investors (note 11). The revised terms
agreed on 15 August 2008, to permit a second drawdown of funds, include a
risk premium amount payable to the participant investors on a 'change of
control' event of the Company. The amount payable is calculated as a
percentage of the total enterprise value ascribed at the time of sale,
and cannot be estimated at this time. Accordingly no provision has been
made in the accounts.
TURBO POWER SYSTEMS INC.
NINE MONTHS ENDED 30 SEPTEMBER 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 Post balance sheet event
On 10 October 2008 the Company announced that it had concluded an
agreement to transition the Boeing 787 Ram Fan Controller engineering
design and know-how back to Hamilton Sundstrand Corporation, after which
the existing contract will be terminated. This agreement removes the
potential exposure of the Company to additional development expenditure
and cash outflows, and eliminates the future contingent loss on the
contract previously reported.
17 Selected quarterly
information
The following table sets forth selected consolidated financial information of the Company for the eight most recent
quarters.
Revenue�*000 Net loss�*000 (Loss) per share UK pence
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)
September 2008 1,246 (1,849) (0.6)
This information is provided by RNS
The company news service from the London Stock Exchange
END
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