Turbo Power Systems Inc.
TSX : TPS
AIM : TPS

Turbo Power Systems Inc.

May 15, 2009 02:00 ET

Turbo Power Systems Inc. (TPS) Announces Results for the First Quarter Ended 31 March 2009

CALGARY, ALBERTA--(Marketwire - May 15, 2009) - Turbo Power Systems Inc. (TSX:TPS) (AIM:TPS) -

Highlights

- Production and development income for the quarter of Pounds Sterling 2.7 million (2008: Pounds Sterling 2.0 million)

- Total revenues in Q1 increased by 39% over Q4 2008

- Losses reduced to Pounds Sterling 0.37 million in the quarter (2008: Pounds Sterling 2.29 million loss) giving a quarterly EBITDA loss of Pounds Sterling 0.06 million (2008: EBITDA loss Pounds Sterling 2.0 million).

- Operating Cash outflow of Pounds Sterling 0.5 million (2008: Pounds Sterling 1.8million).

- US$10 million of orders announced since 1 January 2009 for motor technology, rail and industrial laser power supplies.

Paul Summers, CEO, said:

"Good progress continues to be made with further reductions in development spend and increased production compared to Q4 08. We have managed our cash balances through a difficult time in the business cycle and believe that our cash position will strengthen during the year as production volumes increase on our major programmes.

"The majority of our markets are still proving to be resilient to the current economic turmoil, despite some slow down experienced in the industrial sector. Order intake has been strong since the beginning of the year bringing our total order book to in excess of Pounds Sterling 25 million."

NOTES TO EDITORS

About Turbo Power Systems

Turbo Power Systems Inc (TSX:TPS) (AIM:TPS). 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 blue chip companies such as Bombardier Transportation and Eaton Aerospace.

Forward looking statements

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

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.

OPERATIONAL REVIEW

This review has been prepared as at 14 May 2009.

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.

Business Summary

Strategic Direction

TPS primary business focus is on the following markets:

- Transport

-- Power Electronics for The Rail Industry

- Energy

-- Grid Link Inverters

-- Motors & Generators

- Industrial Equipment

-- Motors & Generators

-- Power Supplies

- Defence

-- Power Electronics

-- Motors & Generators

Whilst the business will continue to service existing programmes in other areas (eg. aerospace and automotive) it will behave in a reactive manner to these markets and only engage in new programmes that meet the requirements of the business in terms of risk, cash flow and profitability.

The vision for the business can be summarised as follows:

"Be a world class provider of specialist Power Electronics and Electrical Machines maximising stakeholder benefit"

The business will achieve this through:

- Market leading technologies and programme delivery

- Long term partnerships with our customers

- Strong year on year organic growth

- A culture of continuous improvement of individual and business performance and capability

- Accelerating business growth by acquisitions

In terms of the development of the business this means we intend to:

- Structure the business to achieve the projected turnover without outside investment or acquisitions

- Develop technological advantage and customer partnerships in the following business sectors :

-- Transport

-- Energy

-- Industrial

-- Defence

- Be a preferred supplier to a limited number of key customers

- Balance business activities across development, production and after sales

Current Operating Climate

The majority of our customers and markets are still proving to be resilient to the current economic turmoil. Additionally the spread of markets provides some degree of resilience to downturns in any one sector.

Governments are continuing to grow their infrastructure and, indeed, see transport initiatives such as new rail programmes as a way of helping to sustain their industries whilst providing necessary public transportation and having a positive effect on the environment.

The defence spend in both the US & UK appears relatively stable and the future opportunities for TPS technology appear favourable. We will be investigating this market more over the course of this year and hope to see increased activity during the coming years.

As a result of the many Green Initiatives the energy sector is still seeing significant growth and we will be looking to strengthen our position during the course of this year.

The industrial sector is the most vulnerable to the downturn and although there is continued activity and interest we are experiencing some delays in new orders being placed and a reduction in the call off rate on some of our existing contracts.

The weak pound is making TPS more competitive in its North American market and many of our current contracts are U.S. Dollar based. We are therefore benefiting from the increased US Dollar to Sterling exchange rate. The exposure to exchange rate fluctuations is something that the business is very conscious of and management take measures in our contracting, purchasing and financial arrangements to mitigate against exchange rate risk.

Current Programmes

- Transport

-- Rail

Deliveries continue on the major programmes (Chicago Transit Authority and Toronto). Deliveries have also commenced on some of our smaller programmes (TurboStar, Delta Rail). The recent KL Programme has been initiated but, due to component lead times deliveries are not expected to commence until towards the end of the year.

-- Aerospace

The Jettison Fuel Pump motor drives for Eaton Aerospace continue being delivered in line with the customer's reduced call-off rate.

During the second half of 2008 the business determined that it was not in its best interests to continue with the RAM Fan motor drive contract with Hamilton Sundstrand and is in the process of completing the transition of this contract back to Hamilton Sundstrand.

- Energy

-- Oil

Contracted work in the energy sector has centered around the Artificial Lift Company (ALC) down hole pumps. The delivered units have now completed their early field trials and we are awaiting the outcome of their discussions with their customers regarding further orders.

-- Solar Energy

There has been continued European funded R&D work in this area relating to Grid linked inverters. The output of which is being used as the basis for our business development activities for the future in the energy sector.

- Industrial

-- Laser Power Supplies

We have continued to deliver the product to our customer (PRC), albeit at a reduced rate of delivery.

-- Industrial Motors and Drives

The delivery of the initial Industrial Motors and Drives are now being used in Beta testing by our customer and await the decision of this customer to start production of the next batch of units.

TPS also completed the delivery of several proto-type and development units during 2008 to other major industrial equipment providers such as a North American industrial and process gas company, a Far Eastern steel manufacturer and a European industrial research company. These customers are now evaluating the products (and their own systems) with a view to developing their overall systems into a commercial offering.

- Defence

The contract awarded during 2008 for a 1MW high-speed generator by a US defence contractor has progressed into manufacture but experienced problems during final testing. These problems are anticipated to be resolved and the unit delivered during Q2. The full system is now scheduled to be trialed during the summer of 2009. Dependant on a successful outcome of these trials further orders are anticipated later in the year.

Financial Performance

Total revenues in the quarter of Pounds Sterling 2.70 million were 25% higher than in Q1 2008 (2008: Pounds Sterling 2.03 million), primarily due to Pounds Sterling 1.38 million of development income. During the first quarter of the year our major rail production programmes commenced initial production, but our industrial customers reduced their demand as the weakened world economy impacted their business volumes.

Both Research and product development costs and General and administrative costs have remained at the reduced levels established in the latter part of 2008 following significant cost reduction initiatives.

The group's loss before interest, tax, depreciation, amortisation and stock compensation for the quarter decreased to Pounds Sterling 0.06 million (2008: Pounds Sterling 2.00 million) as a result of increased revenues and significantly reduced development charges.

Operating cash outflows before tax reduced to Pounds Sterling 0.46 million (2008: Pounds Sterling 1.84 million), and the Company finished the quarter with an unrestricted cash balance of Pounds Sterling 0.58 million and held further cash of Pounds Sterling 1.36 million associated with performance bonds.

During the quarter 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 the prior year and as disclosed in the Company's Financial Statements for the year ended 31 December 2008.

Going Concern

These consolidated financial statements have been prepared on the basis of Canadian generally accepted accounting principles ("Canadian GAAP") applicable to a 'going concern', which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 31 March 2009 the Company had net cash outflows from operations therefore may require additional funding which, if not raised, may result in the curtailment of activities. The Company has incurred cumulative losses including a loss of Pounds Sterling 0.37 million in the first quarter of 2009 and has a cumulative deficit of Pounds Sterling 72.60 million as at 31 March 2009. 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.

Management regularly reviews and considers the current and forecast activities of the Company in order to satisfy itself as to the viability of operations. These ongoing reviews include consideration of current order book and future business opportunities, current development and production activities, customer and supplier exposure and forecast cash requirements and balances. Based on these evaluations management consider that the Company is able to continue as a going concern.

There can be no assurances that the Company's activities will be successful or sufficient and as a result there is doubt regarding the "going concern" assumption and, accordingly, the use of accounting principles applicable to a going concern. These consolidated financial statements do not reflect adjustments that would be necessary if the "going concern" assumption were not appropriate. If the "going concern" assumption were not appropriate for these consolidated financial statements, then adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, would be necessary.

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 Pounds Production Research and General and
Sterling '000 revenue product administrative
development
June 2007 2,342 1,151 1,102
September 2007 2,700 1,736 1,083
December 2007 2,750 1,580 831

March 2008 1,962 1,591 1,059
June 2008 1,711 1,470 1,049
September 2008 1,246 1,363 1,025
December 2008 1,862 841 816

March 2009 1,383 881 916


All amounts in Pounds Net loss Loss per Net cash flow Net cash flow
Sterling '000 share from operating from capital
investment
June 2007 (1,768) (0.6) (1,632) (298)
September 2007 (1,666) (0.5) (2,024) (123)
December 2007 (1,578) (0.5) (1,379) (37)

March 2008 (2,287) (0.7) (1,844) (96)
June 2008 (2,276) (0.7) (2,479) (57)
September 2008 (1,849) (0.6) (1,527) (10)
December 2008 (3,151) (1.0) 195 (8)

March 2009 (368) (0.1) (458) (14)


Production revenues decreased in the first quarter of 2009 reflecting the completion of the initial volumes on the Industrial Motor and Drive contract. Research and development expenditure has remained at a decreased level compared with previous years reflecting the reduction in development activities on the Bombardier Chicago and Toronto rail programmes which are now completing their development phases, together with the reduced development requirement as a result of the transition agreement on the Hamilton Sundstrand contract for the Boeing 787. General and administrative costs increased in the first quarter as a result of increased stock compensation charges compared with the previous quarter but remain lower than in previous years following initiatives to reduce general and administrative overhead.

Diluted earnings per share figures have not been provided as the loss in each period would be anti-dilutive.

Copies of Quarterly and Annual Results

The Company's full Financial Results and Managements' Discussion and Analysis are available on www.sedar.com and full financial statements are expected to be mailed to shareholders during May 2009.

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

Review of the quarter ended 31 March 2009

Production revenue

Production revenue in the quarter ended 31 March 2009 was Pounds Sterling 1.38 million compared with Pounds Sterling 1.96 million in 2008



2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Power electronics 1,383 1,955
Electrical machines - 7
-------------------------------
1,383 1,962
-------------------------------
-------------------------------


Revenues from the Power electronics division decreased compared with 2008 due to a smaller volume of rail programmes in full production during Q1 2009 and lower demand from our industrial equipment customers following the weakened global economic environment.

There was no revenue in the Electrical machines division during the first Quarter of 2009 following completion of the initial production volumes on the Industrial motor and drive contract in Quarter 4 of 2008.

Development income

Development income in the quarter was Pounds Sterling 1.31 million compared with Pounds Sterling 0.07 million in 2008, and was principally related to the Industrial motor and drive contact and the sale of access rights to certain engineering design and methods in relation to that product.



2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Development income 1,312 70
-------------------------------
-------------------------------


Production costs

The cost of production revenues in the quarter amounted to Pounds Sterling
1.01 million (2008 : Pounds Sterling 1.50 million).

2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Power electronics 860 1,348
Electrical machines 146 152
-------------------------------
1,006 1,500
-------------------------------
-------------------------------


Production costs include certain facilities costs attributable to the
manufacturing operation.

Research and product development

Research and product development expenditure in the quarter was Pounds
Sterling 0.88 million compared with Pounds Sterling 1.59 million in 2008,
and comprised


2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Research and product development
expenditure 881 1,591
-------------------------------
Total expenditure 881 1,591
-------------------------------
-------------------------------


General and administrative

General and administrative costs in the quarter of Pounds Sterling 0.92 million (2008: Pounds Sterling 1.06 million) consist mainly of staff costs, facilities costs and the costs associated with the Company's public listings.

Amortisation

Amortisation was Pounds Sterling 0.17 million compared with Pounds Sterling 0.19 million in 2008.

Interest income

Interest income in the quarter was Pounds Sterling 0.001 million compared with Pounds Sterling 0.04 million in 2008, as a result of lower maintained cash balances and reduced interest rates.

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



2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Interest payable 159 29
Accretion of debt 42 15
-------------------------------
201 44
-------------------------------
-------------------------------


Cash flows for the quarter ended 31 March 2009

Cash outflow from operating activities

Operating cash outflow before movements in working capital was Pounds Sterling 0.07 million for the quarter (2008: Pounds Sterling 2.01 million)

Movements in stocks, work in progress, and debtors and creditors produced a net cash outflow of Pounds Sterling 0.39 million during the quarter (2008: inflow of Pounds Sterling 0.17 million), as materials for production of the Bombardier Toronto and Chicago rail programmes were acquired and supplier payments were increased to reduce overall creditor exposure.

Investing activities

Cash outflows from capital investments in the quarter were Pounds Sterling nil compared with Pounds Sterling 0.10 million in 2008.

Overall cash outflow for the period

Overall the cash outflow during the quarter was Pounds Sterling 0.47 million. This compares with an overall cash outflow of Pounds Sterling 1.86 million for the first quarter of 2008.

Balance sheet as at 31 March 2009

The Company ended the period with an unrestricted cash balance of Pounds Sterling 0.58 million compared with Pounds Sterling 1.05 million at 31 December 2008. Substantially all of the Company's cash balances are denominated in Sterling.

In addition the Company had restricted cash amounts of Pounds Sterling 1.36 million principally relating to performance bonds entered into as part of contracts with the Toronto Transit Commission and Bombardier (2008: Pounds Sterling 1.35 million).

Long term assets excluding restricted cash have decreased from Pounds Sterling 1.64 million at 31 December 2008 to Pounds Sterling 1.49 million at 31 March 2009, after depreciation charges of Pounds Sterling 0.17 million.

Long term liabilities have increased to Pounds Sterling 4.86 million at 31 March 2009 compared to Pounds Sterling 4.70 million at 31 December 2008, reflecting the increase in the value of the debt element of the Loan Notes and the interest accruing during the quarter.

Net working capital at 31 March 2009, excluding restricted cash balances, was Pounds Sterling 0.92 million, compared with Pounds Sterling 0.94 million as at 31 December 2008.

As at 31 March 2009, 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 17,606,300 outstanding share options and 23,357,142 outstanding warrants.

Contractual Obligations



Payments due by period Pounds Sterling '000
Total 2009 2010 2011 2012 2013 2014 and
thereafter

Trade and other payables
Convertible notes 3,123 3,123 - - - - -
6,284 116 1,818 4,350 - - -
Operating leases 3,525 352 478 481 478 244 1,492
-----------------------------------------------
12,932 3,591 2,296 4,831 478 244 1,492
-----------------------------------------------


Shareholders' equity

The movement in shareholders' equity comprised

2009 Pounds
Sterling '000

As at 1 January (14,083)
Loss for the quarter (368)
Stock compensation expense 44
-----------------
As at 31 December (14,407)
-----------------
-----------------


As at 14 May 2009 the Company had 318,571,062 common shares issued and outstanding. As at that date there were 17,576,300 outstanding share options and 23,357,142 outstanding warrants.

Liquidity

Cash, cash equivalents and short-term investments at 31 March 2009 were Pounds Sterling 0.58 million, compared with Pounds Sterling 1.05 million at 31 December 2008.

Restricted cash at 31 March 2009 was Pounds Sterling 1.36 million, compared with Pounds Sterling 1.35 million at 31 December 2008.

The Company incurred a loss in the quarter of Pounds Sterling 0.37 million and has a cumulative deficit of Pounds Sterling 72.60 million. The Company's ability to continue as a going concern depends on its ability to generate positive cash flows from operations or secure additional debt or equity financing.

The Company has not changed its approach to Currency risk and Interest rate risk management from that of the prior year and as disclosed in the annual statements at 31 December 2008.

Currency risk management

Principally all of the Company's expenditure is denominated in Sterling, which is funded from Sterling cash balances. Exchange differences, which arise on consolidation of the Company's Canadian operations, are included in exchange adjustments within the income statement. At 31 March 2009 the Sterling equivalent of Canadian Dollar denominated net assets amounted to Pounds Sterling 11,000 (31 December 2008: Pounds Sterling 52,000).

Interest rate risk management

The analysis of the Company's financial assets and borrowings analysed between floating and fixed interest rates is shown below;




Mar 2009 Dec 2008
Pounds Pounds
Sterling '000 Sterling '000

Floating rate financial assets 1,939 2,402

Fixed rate borrowings 2005 Bond (1,789) (1,789)

Fixed rate borrowings 2008 Bond (3,000) (3,000)


The fixed rate borrowings for the 2005 Bond are at 6.5% per annum, and for the 2008 Bond are at 15% per annum.

The Company invests surplus cash funds in short term money market deposits with financial institutions and cash funds which have at least a short term credit rating of F1. The maturity of the deposits is between one and three months.

Convertible bonds

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 notes using the residual value of equity component method, whereby the liability component is valued first using the current market rate for comparable instruments, at the time of issuance. The difference between the proceeds of the bonds issued and the fair value of the liability is assigned to the equity component.

On 11 July 2003, the Company completed a Pounds Sterling 5,000,000 financing agreement with institutional investors. The financing comprised convertible notes and warrants. The convertible notes had a term of five years, bearing an annual interest rate of 3.5% and were convertible, at the option of the holders, into an aggregate of 25 million common shares of the Company at a conversion price of Pounds Sterling 0.20 per share. The convertible notes could be converted from 11 July 2004. The warrants had a term of three years and were convertible into an aggregate of 3.5 million common shares of the Company at an exercise price of Pounds Sterling 0.15 per share. The convertible notes were unsecured.

On 11 March 2005 the Company completed an Pounds Sterling 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, at the option of the holder, into an aggregate of 66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of Pounds Sterling 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 Pounds Sterling 0.15 per share. The convertible notes are unsecured.

On 6 January 2007 Pounds Sterling 2,500,000 of the 2003 convertible notes and Pounds Sterling 2,000,000 of the 2005 convertible notes were converted at a conversion price of Pounds Sterling 0.08. Immediately following the conversion on 6 January 2007 the remaining face value of 2003 and 2005 convertible notes were Pounds Sterling nil and Pounds Sterling 1,789,000 respectively.

The Company 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 notes. Conversion of the convertible notes resulted in a decrease in loss and comprehensive loss during 2007 of Pounds Sterling 47,000 and an additional increase in deficit of Pounds Sterling 2,414,000.

On 19 June 2008 the Company completed a financing agreement with institutional investors for potential financing of up to Pounds Sterling 3,000,000 (gross) comprised of secured convertible notes and warrants. The convertible notes were issuable in Pounds Sterling 750,000 increments over a three year period from the date of the agreement. The Company issued Pounds Sterling 1,500,000 of convertible notes under the agreement on 19 June 2008. 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 Pounds Sterling 0.04 per share. The notes required quarterly interest and quarterly principal payments commencing March 2009.

On 15 August 2008 the Company amended the terms of the 19 June 2008 loan agreement and issued an additional Pounds Sterling 1,500,000 of convertible notes under the amended terms. The new terms result in all interest and capital repayments being deferred until maturity on 19 June 2011, and provide that if at any time, including once the convertible notes governed by the 19 June 2008 agreement have been fully repaid, there is a change in control of the Company, or its subsidiaries or substantially all of its assets, the holders of the convertible notes 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 convertible notes and/or interest outstanding. This risk premium will be equal to an initial payment of Pounds Sterling 1,500,000 plus 75% of the next Pounds Sterling 6,000,000 of enterprise value and 50% of the remainder. The amendment was treated as a debt extinguishment and, as a result, the Company recorded a debt extinguishment charge of Pounds Sterling 115,000.

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 2008.

The Company's financial assets and liabilities consist primarily of the cash and cash equivalents, restricted cash, trade receivables, investments, trade payables, convertible notes and currency option contracts.



(a) Classification and carrying amount

31 March 2009 Pounds Held-for Loans and Other Carrying
Sterling '000 trading receivables liabilities amount

Asset (liability)

Cash and cash equivalent 582 - - 582
Restricted cash 1,357 - - 1,357
Trade receivables - 1,064 - 1,064
Trade payables - - (3,123) (3,123)
Convertible notes - - (4,684) (4,684)
------------------------------------------
Total 1,939 1,064 (7,807) (4,804)


31 December 2008 Pounds Held-for Loans and Other Carrying
Sterling '000 trading receivables liabilities amount

Asset (liability)

Cash and cash equivalent 1,054 - - 1,054
Restricted cash 1,348 - - 1,348
Trade receivables - 1,255 - 1,255
Trade payables - - (3,406) (3,406)
Convertible notes - - (4,512) (4,512)
-------------------------------------------
Total 2,402 1,255 (7,918) (4,261)


(b) Carrying value and fair market value

Mar Dec
2009 2008
Pounds Pounds
Sterling '000 Sterling '000
Carrying Carrying
amount Fair value amount Fair value
Asset (liability)

Cash and cash equivalent 582 582 1,054 1,054
Restricted cash 1,357 1,357 1,348 1,348
Trade receivables 1,064 1,064 1,255 1,255
Trade payables (3,123) (3,123) (3,406) (3,406)
Convertible notes (4,684) (4,684) (4,512) (4,512)
--------------------------------------------
Total (4,804) (4,804) (4,261) (4,261)


Related Party Transactions

There were no related party transactions during the quarter ended 31 March 2009 or the quarter ended 31 March 2008.

Critical accounting estimates

The consolidated financial statements are prepared in accordance with Canadian Generally Accepted Accounting, which require estimates and assumptions to be made that affect the amounts reported in the consolidated financial statements.

The consolidated financial statements and this discussion and analysis have been recorded and reported in GBP Sterling.

The preparation of these financial statements requires estimates and assumptions to be made that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Research & Development tax credits receivable

The Company accrues for tax credits receivable relating to certain research and development expenditure incurred by the Company. These amounts are based on determinations by management of expenditures that qualify for the related tax credits. The nature and amount of these accruals are subject to measurement uncertainty and the effect on the consolidated financial statements of resulting adjustments in future periods could be significant. Adjustments, if any, will be reflected in the period that the relevant taxation authorities assess the tax claims. As at 31 March 2009, tax debtors recoverable included Pounds Sterling 144,000 (31 December 2008: Pounds Sterling 144,000) of accrued tax credits.

Warranty provision

In establishing the accrued warranty liability, estimates are made of the likelihood that products sold will experience warranty claims. The estimates are based on the number of units subject to warranty, the likely failure rate and associated costs of replacement and the nature of the contract. Should these estimates prove to be incorrect, the actual costs incurred may be different from those provided for in the warranty provisions. As at 31 March 2009, provisions for warranty claims were Pounds Sterling 184,000 (31 December 2008: Pounds Sterling 184,000).

Review of the carrying value of long-term assets

The Company regularly reviews the carrying value of all of its long-term assets to determine whether or not any write down is required for impairment in the carrying value of these assets. The carrying values are based on the higher of the asset's net realisable value and the value from utilisation of the asset in the ongoing operations of the Company. The determination of the net realisable value requires estimates to be made of future revenues. If future revenues are significantly lower than these estimates, then the Company may be required to make additional impairment provisions in future periods.

Intangibles

Intangible assets including patent rights and designs and deferred development expenditures are considered to have a finite life and as such are amortised on a straight-line basis over their estimated useful life. The carrying value is reviewed for impairment by applying a fair value test at least annually. In determining fair value the future cash flows, discounted at 12% per annum, expected to be generated resulting from the patent and deferred development assets over the expected application life of those assets are compared with the carrying value of the assets. If the carrying value exceeds the fair value an impairment is recognised.

Stock-based compensation

Assumptions that affect the Company's application of the fair value method to expense employee options and warrants issued in connection with the debt offering include the determination of volatility factors and the life of the options issued.

Allowance for doubtful accounts

The Company reviews the status of its customer accounts at least monthly, and recognises a provision against any balance which is considered to be doubtful. At 31 March 2009 a provision of Pounds Sterling 39,000 was required (31 December 2008: Pounds Sterling 39,000).

Implementation of new accounting policies

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 adoption of this standard has not changed the Company's accounts.

Section 1000 Financial Statement Concepts

On 1 January 2009 the Company adopted the new recommendations of CICA Handbook Section 1000, Financial Statement Concepts, to clarify the criteria for recognition of an asset and the timing of expense recognition. The new requirements are effective for annual financial statements relating to fiscal years beginning on or after 1 October 2008. The adoption of this standard has not impacted the Company's consolidated financial statements.

New accounting pronouncements - not yet adopted

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 1582 Business combinations

This section replaces Section 1581 Business Combinations and applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period of the Company beginning on or after January 1, 2011. Section 1582 is not expected to have a significant impact on the financial statements.

Section 1601 Consolidated Financial Statements

In January 2009, the CICA issued Handbook Section 1601, Consolidated Financial Statements, which replaces Handbook Section 1600, Consolidated Financial Statements carries forward the existing Canadian guidance on aspects of the preparation of consolidated financial statements subsequent to acquisition other than non-controlling interests. The section establishes the standards for preparing consolidated financial statements and is effective for fiscal years beginning on or after January 1, 2011. The Company may elect to early adopt this section and if so, will be required to early adopt Section 1582, Business Combinations and Section 1602, Non-controlling Interests.

Section 1602 Non-controlling Interests

In January 2009, the CICA issued new Handbook Section 1602, Non-controlling Interests, which establishes standards for the accounting of non-controlling interests of a subsidiary in the preparation of consolidated financial statements subsequent to a business combination. This standard is effective for fiscal years beginning on or after January 1, 2011. The Company may elect to early adopt this section and if so, will be required to early adopt Section 1582, Business Combinations and Section 1601, Consolidated Financial Statements.

Harmonizing of Canadian and International Financial Reporting Standards (IFRS)

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 and is in the early stages of identifying the changes required to its accounting policies and the required adjustments to its financial statements with its external financial advisors. Key financial staff have received initial training on the process of conversion to IFRS and have established links with appropriate external financial advisors to support this process.

Risks and uncertainties

The development and commercialisation plans for the Group's products presented in this Management's Discussion & Analysis are forward-looking statements and as such are subject to a number of risks and uncertainties including those detailed below.

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

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

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

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

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

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

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

Internal Control

The Board of Directors has overall responsibility for the accounting policies and ensuring that the Group maintains an adequate system of internal financial control to provide them with reasonable assurance that assets are safeguarded and of the reliability of financial information used for the business and for publication. There are inherent limitations in any system of internal financial control and, accordingly, even the most effective system can provide only reasonable, and not absolute, assurance with respect to the preparation of financial information and the safeguarding of assets.

Management, under the supervision and with the participation of the Chief Executive Officer and the Finance Director, is also responsible for establishing and maintaining adequate internal controls over financial reporting within the Company. Management have designed and evaluated the effectiveness of the Company's Internal Controls over Financial Reporting to provide reasonable assurance that the financial reporting is reliable and that the consolidated financial statements are prepared in accordance with Canadian GAAP. Based on the latest evaluation, management has concluded that the following potential weaknesses existed as at 31 March 2009, but that they are sufficiently mitigated through appropriately designed controls. Management has determined that these controls are effective and provide reasonable assurance that the financial reporting is reliable and in accordance with Canadian GAAP.

Limited resources

Given the Company's size, we have limited resources within the finance department. This impacts on our ability to provide comprehensive knowledge in certain areas of financial accounting, as detailed below. The Company is highly reliant on the knowledge of a limited number of employees and on the performance of mitigating procedures during its financial close and consolidation process to ensure that the consolidated financial statements are presented fairly and in all material respects. The Company will continue to recruit resources and enhance its current knowledgebase, as necessary, to further strengthen the internal controls over financial reporting.

Income taxes

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

Complex and non-routine transactions

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

Disclosure controls

Our management has evaluated, under the supervision and with the participation of the Chief Executive Officer and the Finance Director, the design and effectiveness of the Company's disclosure controls and procedures during the period ended 31 March 2009. Management has concluded that these controls, as defined in Multilateral Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings are effective and that material information relating to the Company was made known to them and was recorded, processed and reported within the applicable time periods.

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.



TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
UNAUDITED

Notes Quarter ended 31 March
2009 2008
Pounds Pounds
Sterling Sterling
'000 '000
unaudited unaudited

Revenue 3,4 1,383 1,962
Development income 3,4 1,312 70
-------- --------
2,695 2,032

Expenses
Production costs 1006 1,500
Research and product development 5 881 1,591
General and administrative 916 1,059
Amortisation 168 188
-------- --------
2,971 4,338

Loss before interest, restructuring,
finance charges and foreign exchange (276) (2,306)

Interest income 1 36
Interest expense 6 (201) (44)
Finance income/(charge) (17) (4)
Foreign exchange gain 125 31
-------- --------
(92) 19
-------- --------
Net loss and Comprehensive loss (368) (2,287)
-------- --------

Loss per share - basic 10 (0.1) p (0.7) p
Loss per share - diluted 10 (0.1) p (0.7) p

Weighted average number of shares
outstanding 318,571,062 318,571,062


TURBO POWER SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED

Notes As at 31 March As at 31 December
2009 2008
Pounds Pounds
Sterling '000 Sterling '000
unuadited

Current assets

Cash and cash equivalents 8 582 1,054
Restricted cash 8 562 552
Trade and other receivables 8 1,064 1,255
Stock and work in progress 1,935 1,685
Investments - -
Prepayments 483 372
R&D tax credits receivable 144 144
-------- --------
4,770 5,062
-------- --------

Long-term assets
Restricted cash 8 795 796
Intangible assets 11 7 13
Property, plant and equipment 11 1,487 1,624
-------- --------
7,059 7,495
-------- --------
-------- --------

Liabilities and shareholders' equity
Creditors: amounts falling due within
one year
Trade and other payables 3,123 3,406
Deferred income 165 166
-------- --------
3,288 3,572
-------- --------

Creditors: amounts falling due after
more than one year
Warranty provision 184 184
Convertible notes 14 4,684 4,512
-------- --------
4,868 4,696
-------- --------

Non controlling interest
Class A Ordinary share capital 13 13,310 13,310

Capital and reserves
Common share capital 12 55,804 55,804
Contributed surplus 2,393 2,349
Deficit (72,604) (72,236)
---------- ----------
Shareholders' funds (14,407) (14,083)
--------- ---------
7,059 7,495
--------- ---------
--------- ---------


TURBO POWER SYSTEMS INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND DEFICIT UNAUDITED


Common Contributed Deficit Total
Share surplus Equity
capital
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
unaudited unaudited unaudited unaudited

Balance at 1 January 2008 55,804 1,964 (62,673) (4,905)
Net loss (9,563) (9,563)
Stock compensation 123 123
Equity portion on issue of
convertible notes 262 262
--------- --------- --------- ---------
Balance at 31 December
2008 55,804 2,349 (72,236) (14,083)
Net loss (368) (368)
Stock compensation 44 44
--------- --------- --------- ---------
Balance at 31 March 2009 55,804 2,393 (72,604) (14,407)
--------- --------- --------- ---------
--------- --------- --------- ---------


TURBO POWER SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

Quarter ended 31 March
2009 2008
Pounds Pounds
Sterling Sterling
'000 '000
unaudited unaudited

Net loss from operations (368) (2,287)
Amortisation 168 188
Accretion of debt 42 15
Adjustment to fair value of investment - (3)
Stock compensation charges 44 98
Unrealised foreign exchange (gain)/loss (101) (31)
Movement in net interest accrual 142 6
--------- ---------
Cash inflow/(outflow) before
movements in working capital (73) (2,014)

Decrease/(increase) in debtors 80 774
Decrease/(increase) in stock (250) (451)
Increase/(decrease) in creditors (215) (153)
--------- ---------

Net cash outflow from operating
activities (458) (1,844)
--------- ---------
Investing activities
Purchase of property, plant and equipment (23) (96)
Movement in restricted funds 9 80
--------- ---------

Cash outflow from investing activities (14) (16)
--------- ---------

Increase/(decrease) in cash in the
period (472) (1,860)
--------- ---------
--------- ---------

Cash and cash equivalents:
Beginning of period 1,054 4,235
---------- ----------

End of period 582 2,375
---------- ----------
---------- ----------


Quarter ended 31 March 2009

Notes to the Consolidated Financial Statements

(Unaudited)

1. Basis of preparation and going concern

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 2008, and the subsequent changes in accounting policies as detailed in Note 2 below.

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 2008.

The Company's functional and reporting currency is Pound Sterling.

Going concern

These consolidated financial statements have been prepared on the basis of Canadian generally accepted accounting principles ("Canadian GAAP") applicable to a 'going concern', which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at 31 March 2009 the Company had net cash outflows from operations therefore may require additional funding which, if not raised, may result in the curtailment of activities. The Company has incurred cumulative losses including a loss of Pounds Sterling 0.37 million in the first quarter of 2009 and has a cumulative deficit of Pounds Sterling 72.60 million as at 31 March 2009. 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.

Management regularly reviews and considers the current and forecast activities of the Company in order to satisfy itself as to the viability of operations. These ongoing reviews include consideration of current order book and future business opportunities, current development and production activities, customer and supplier exposure and forecast cash requirements and balances. Based on these evaluations management consider that the Company is able to continue as a going concern.

There can be no assurances that the Company's activities will be successful or sufficient and as a result there is doubt regarding the "going concern" assumption and, accordingly, the use of accounting principles applicable to a going concern. These consolidated financial statements do not reflect adjustments that would be necessary if the "going concern" assumption were not appropriate. If the "going concern" assumption were not appropriate for these consolidated financial statements, then adjustments to the carrying values of the assets and liabilities, the reported expenses and the balance sheet classifications, which could be material, would be necessary.

2. Changes in accounting policies and recent accounting pronouncements

Changes in accounting policies

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 1 October 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 1 January 2009. The adoption of this standard has not changed the Company's accounts.

Section 1000 Financial Statement Concepts

On January 1, 2009, the Company adopted the new recommendations of CICA Handbook Section 1000, Financial Statement Concepts, to clarify the criteria for recognition of an asset and the timing of expense recognition. The new requirements are effective for annual financial statements relating to fiscal years beginning on or after October 1, 2008. The adoption of this standard did not impact the Company's consolidated financial statements.

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 1582 Business combinations

This section replaces Section 1581 Business Combinations and applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period of the Company beginning on or after 1 January 2011. Section 1582 is not expected to have a significant impact on the financial statements.

Section 1601 Consolidated Financial Statements

In January 2009, the CICA issued Handbook Section 1601, Consolidated Financial Statements, which replaces Handbook Section 1600, Consolidated Financial Statements carries forward the existing Canadian guidance on aspects of the preparation of consolidated financial statements subsequent to acquisition other than non-controlling interests. The section establishes the standards for preparing consolidated financial statements and is effective for fiscal years beginning on or after January 1, 2011. The Company may elect to early adopt this section and if so, will be required to early adopt Section 1582, Business Combinations and Section 1602, Non-controlling Interests.

Section 1602 Non-controlling Interests

In January 2009, the CICA issued new Handbook Section 1602, Non-controlling Interests, which establishes standards for the accounting of non-controlling interests of a subsidiary in the preparation of consolidated financial statements subsequent to a business combination. This standard is effective for fiscal years beginning on or after January 1, 2011. The Company may elect to early adopt this section and if so, will be required to early adopt Section 1582, Business Combinations and Section 1601, Consolidated Financial Statements.

Harmonizing of Canadian and International Financial Reporting Standards (IFRS)

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 1 January 2011. The Company is closely monitoring changes arising from this convergence.

3. Segmental analysis

The Company'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 Company and other related management activities are allocated between the two reportable segments.

The power electronics and electrical machines systems segments both operate in the United Kingdom. Except for the Investments held by the Company which are located in Canada, all of the Company's assets are located in the United Kingdom.



Power Electrical machines Total
electronics
2009 2008 2009 2008 2009 2008
Pounds Pounds Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling Sterling Sterling
'000 '000 '000 '000 '000 '000
Quarter ended 31
March
Revenue 1,383 1,955 - 7 1,383 1,962
Development
income 36 48 1,276 22 1,312 70
Amortisation (57) (47) (111) (141) (168) (188)
Interest income - 18 1 18 1 36
Interest expense (100) (22) (101) (22) (201) (44)
Profit/(Loss)
for the period (693) (1,160) 325 (1,127) (368) (2,287)

Capital
expenditure 21 72 2 24 23 96


Power Electrical machines Total
electronics
Mar Dec Mar Dec Mar Dec
2009 2008 2009 2008 2009 2008
Pounds Pounds Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling Sterling Sterling
'000 '000 '000 '000 '000 '000

Total assets 4,288 4,624 2,771 2,871 7,059 7,495
Capital assets 494 532 1,000 1,105 1,494 1,637
Total
liabilities 4,234 4,596 3,922 3,672 8,156 8,268


Total income Quarter ended
31 March

2009 2008
Pounds Pounds
Sterling Sterling
'000 '000

UK 224 244
USA 2,310 1,237
Canada 24 545
Rest of World 137 6
-------------------------
2,695 2,032


4. Significant customers

In the quarter ended 31 March 2009, 72% of the Company's sales were derived
from three customers ( 2008: 68% from three customers. The three customers
included in 2009 were also customers during the 2008 period.


5. Research and product development
Quarter ended
31 March

2009 2008
Pounds Pounds
Sterling '000 Sterling '000
Sales of prototypes and development
contributions 1,312 70
------------------------------
------------------------------

Research and product development
expenditure 881 1,591
------------------------------
------------------------------


In accordance with the Company's accounting policy, tax credits for research and development expenditures are netted against the related expenditure. At 31 March 2009 the Company had accrued tax credits amounting to Pounds Sterling 144,000 ( 31 December 2008: Pounds Sterling 144,000 ).These amounts are based on determinations by management of expenditures that qualify for the related tax credits. The nature and amount of these accruals are subject to measurement uncertainty and the effect on the consolidated financial statements of resulting adjustments in future periods could be significant. Adjustments, if any, will be reflected in the period that these are assessed by the relevant taxation authorities.


6. Interest expense



Quarter ended
31 March

2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Interest 159 29
Accretion of debt 42 15
-----------------------------
201 44
-----------------------------
-----------------------------


7. Financial instruments

The Company's financial assets and liabilities consist primarily of the cash and cash equivalents, restricted cash, trade receivables, investments, trade payables, convertible notes and currency option contracts.



Classification and carrying amount

31 March 2009 Pounds Held-for Loans and Other carrying
Sterling '000 trading receivables liabilities amount

Asset (liability)

Cash and cash equivalent 582 - - 582
Restricted cash 1,357 - - 1,357
Trade receivables - 1,064 - 1,064
Trade payables - - (3,123) (3,123)
Convertible notes - - (4,684) (4,684)
------- ------ --------- -------
Total 1,939 1,064 (7,807) (4,804)


31 December 2008 Pounds Held-for Loans and Other carrying
Sterling '000 trading receivables liabilities amount

Asset (liability)

Cash and cash equivalent 1,054 - - 1,054
Restricted cash 1,348 - - 1,348
Trade receivables - 1,255 - 1,255
Trade payables - - (3,406) (3,406)
Convertible notes - - (4,512) (4,512)
------- ------ --------- --------
Total 2,402 1,255 (7,918) (4,261)


Carrying value and fair market value

31 March 2009 31 December 2008
Pounds Pounds
Sterling '000 Sterling '000
Carrying Carrying
amount Fair value amount Fair value
Asset (liability)

Cash and cash equivalent 582 582 1,054 1,054
Restricted cash 1,357 1,357 1,348 1,348
Trade receivables 1,064 1,064 1,255 1,255
Trade payables (3,123) (3,123) (3,406) (3,406)
Convertible notes (4,684) (4,684) (4,512) (4,512)
------- -------- -------- --------
Total (4,804) (4,804) (4,261) (4,261)


8. Financial Risk Management

The Company has exposure to counterparty credit risk, liquidity risk and market risk associated with its financial assets and liabilities. The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. The Board of Directors has established the Audit Committee which is responsible for developing and monitoring the Company's compliance with risk management policies and procedures. The Audit Committee regularly reports to the Board of Directors on its activities.

The Company's risk management program seeks to minimize potential adverse effects on the Company's financial performance and ultimately shareholder value. The Company manages its risks and risk exposures through a combination of insurance and sound business practices.

The Company's financial instruments and the nature of the risks which they may be subject to are set out in the following table.



Foreign Interest
Credit Liquidity Exchange Rate
Risk Risk Risk Risk

Cash and cash equivalents Yes Yes Yes
Restricted cash Yes Yes Yes
Trade receivables Yes Yes
Trade payables Yes Yes
Convertible notes Yes


(a) Credit Risk

Credit risk arises from cash held with banks and credit exposure to customers, including outstanding accounts receivables. The maximum exposure to credit risk is equal to the carrying value (net of allowances) of the financial assets. The objective of managing counterparty credit risk is to prevent losses on financial assets. The Company assesses the credit quality of counterparties, taking into account their financial position, past experience and other factors.

Cash and cash equivalents

Cash and cash equivalents consist of bank balances and short-term investments with terms of less than three months or less. Credit risk associated with cash and cash equivalents is minimized substantially by ensuring that these financial assets are investment in debt instruments of highly rated financial institutions. As at 31 March 2009 the Company had cash and cash equivalents consisting of cash on hand and deposits with banks of Pounds Sterling 582,000 (31 December 2008 - Pounds Sterling 1,054,000. As at 31 March 2009, the Company does not expect any counterparties to fail to meet their obligations.

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 was delivered. According to the current contract schedule that would result in the cash related to the H6 programme of Pounds Sterling 475,000 being under the performance bond restriction until 2010.

During March 2007 the Company committed cash bonds totaling 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.

The Company has also provided a property lease guarantee bond which is held in escrow and totals Pounds Sterling 320,000.

At 31 March 2009 cash subject to restrictions totalled Pounds Sterling 1,357,000 (31 December 2008: Pounds Sterling 1,348,000).

Trade receivables

Trade receivables consist primarily of trade accounts receivable from billings of product sales and development income. The Company's credit risk arises from the possibility that a counterparty which owes the Company money is unable or unwilling to meet its obligations in accordance with the terms and conditions in the contracts with the Company, which would result in a financial loss for the Company. This risk is mitigated through established credit management techniques, including monitoring counterparty' creditworthiness, setting exposure limits and monitoring exposure against these customer credit limits. 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.

The carrying amount of accounts receivable are reduced through the use of an allowance for doubtful accounts and the amount of the loss is recognized in the statement of operations in other expenses. When a receivable balance is considered uncollectable, it is written off against the allowance for accounts receivable. Subsequent recoveries of amounts previously written off reduce other expenses in the statement of operations.

Significant debtors at 31 March 2009 comprised Pounds Sterling 587,000 due from two customers, representing 58% of the outstanding balance (31 December 2008: Pounds Sterling 505,000 due from three customers, representing 49% of the outstanding balance). Consequently, the Company has concentrations of credit risk with respect to its accounts receivable.



March 2009 December 2008
Balance % Balance %
Pounds Pounds
Sterling Sterling
'000 '000

Customer 1 466 46 225 22

Customer 2 121 12 155 15

Customer 3 - - 125 12

Other 424 42 517 51
------ ---- ------ ----
Total 1,011 100 1,022 100
------ ---- ------ ----


The following table outlines the details of the aging of the Company's
receivables and related allowance for doubtful accounts as at 31 March 2009
and 31 December 2008:


Mar Dec
2009 2008
Pounds Pounds
Sterling '000 Sterling '000

Trade 1,011 1,022
Other miscellaneous receivables 53 233
------- -------
1,064 1,255
------- -------
Not past due 701 730
Past due for over one day but not more
than 30 days 220 187
Past due for over 30 days but not more
than 60 days 76 98
Past due for over 60 days 53 46
Less: allowance for doubtful accounts (39) (39)
------- -------
Total accounts receivable, net 1,011 1,022
------- -------


Pounds Sterling '000
Allowance for doubtful accounts
Balance, 1 January 2009 (39)
Increase in provision for doubtful accounts -
Effect of foreign currency exchange rate changes -
-------
Balance, 31 March 2009 (39)
-------


(b) Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meets its financial obligations as they fall due. The Company manages exposure to liquidity risk by close monitoring of supplier and other liabilities and by focusing on debtor collection and conversion of working capital held in stock balances. When considered necessary the Company has obtained equity and long term debt investment to provide short term liquid working capital in order to meet its obligations.

The following tables details the Company's contractual maturities for its financial liabilities, including interest payments and operating lease commitments, as at 31 March 2009:



Payments due by period
Total 2009 2010 2011 2012 2013 2014 and
thereafter
Trade and other
payables 3,123 3,123 - - - - -
Convertible notes 6,284 116 1,818 4,350 - - -
Operating leases 3,525 352 478 481 478 244 1,492
-----------------------------------------------
12,932 3,591 2,296 4,831 478 244 1,492
-----------------------------------------------
-----------------------------------------------


(c) Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the fair value of recognized assets and liabilities or future cash flows or the Company's results of operation.

Foreign exchange

The Company's currency exposure, being those exposures arising from transactions, the net currency gains and losses from which will be recognised in the profit and loss account, is shown below.



US dollar Canadian
denominated dollar
denominated
Pounds Pounds
Sterling '000 Sterling '000

Cash 935 4

Accounts receivable 636 8

Accounts payable 38 10


Included in net loss for the quarter ended 31 December 2008 is approximately Pounds Sterling 101,000 of foreign exchange gain resulting from the translation of the financial statements of Turbo Power Systems Inc. (31 December 2008: gain of Pounds Sterling 142,000). The rates used to translate the assets and liabilities as at 31 March 2009 was USD $1.421:Pounds Sterling 1 and CDN $1.776:Pounds Sterling 1 (31 December 2008 USD $1.448:Pounds Sterling 1 and CDN $1.770:Pounds Sterling 1).

Interest rate

Floating rate financial assets of Pounds Sterling 1,939,000 at 31 March 2009 (31 December 2008: Pounds Sterling 2,413,000) comprised Sterling interest bearing bank accounts, money market deposits and cash funds including restricted cash.

At 31 March 2009, the increase or decrease in net earnings for each 1% change in interest rates on net financial assets was approximately Pounds Sterling 19,000 per annum (31 December 2008: Pounds Sterling 24,000).

As at 31 March 2009 the Company does not have any variable rate financial liabilities and is not exposed to interest rate risk on its fixed rate convertible notes. The Company may be exposed to interest rate risk in the future as the fixed rate convertible notes mature.

9. Capital management

The Company defines capital that it manages as the aggregate of convertible notes 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 2008.

10. 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.



Quarter ended 31 March
2009 2008
Numerator for basic EPS
calculation:
Net loss Pounds Sterling 368,000 Pounds Sterling 2,287,000

Denominator
For basic net loss -
weighted average shares
outstanding 318,571,062 318,571,062


As the Company experienced a loss in both years all potential common shares outstanding from dilutive securities are considered anti-dilutive and are excluded from the calculation of loss per share.

Details of anti-dilutive potential securities outstanding not included in EPS calculations at March 31 are as follows:




Quarter ended
31 March

2009 2008

Common shares potentially issuable
-persuant to warrants 23,357,142 10,500,000
-under stock options 17,606,300 30,464,398
-persuant to loan note conversions 89,908,333 14,908,333
-persuant to A Ordinary stock conversion 115,000,000 115,000,000
------------- -------------
245,871,775 170,872,731


11. Long term assets

Cost Amortisation Net book
value
Pounds Pounds Pounds
Sterling Sterling Sterling
'000 '000 '000
At 31 March 2009:
Intangible assets 767 760 7
Property, plant and equipment 8,976 7,489 1,487
-------- -------- --------
Total long term assets 9,743 8,249 1,494
-------- -------- --------
-------- -------- --------

At 31 December 2008:
Intangible assets 767 754 13
Property, plant and equipment 8,953 7,329 1,624
-------- -------- --------
Total long term assets 9,720 8,083 1,637
-------- -------- --------
-------- -------- --------


12. Share capital - issued shares

Common
Pounds Sterling
Number '000

At 1 January 2008 and 31 December 2008 318,571,062 55,804
--------------- --------
At 31 March 2009 318,571,062 55,804
--------------- --------


No options or warrants were exercised during the quarter ended 31 March 2009
or year ended 31 December 2008.

13. A Ordinary equity

A Ordinary
Number Pounds Sterling
,000
At 1 January 2008 and 31 December 2008 115,000,000 13,310
--------------- --------
At 31 March 2009 115,000,000 13,310
--------------- --------


Holders of A Ordinary Shares of Turbo Power Systems Limited carry no voting rights, cannot attend any shareholder meetings and, in the event of winding-up of the Limited Company are entitled to a maximum distribution of Pounds Sterling 500,000 in aggregate, to rank before the Common Shares. The A Ordinary shares are convertible into an equal number of Common Shares of Turbo Power Systems Inc. on request by the holder, having given 61 days notice. Under certain take over or change in control events, the Ordinary Shares are exchangeable under "super exchange" rights, converting for 3 common shares of Turbo Power Systems Inc. for every Ordinary Share held.

During the preparation of the consolidated financial statements for the year ended 31 December 2008, the Company determined that the Ordinary Shares, previously presented as a separate component of equity in the Company's balance sheet, should be recognized as non-controlling interests. The reclassification resulted in a decrease in Class A Ordinary share capital presented as part of capital and reserves, an increase in the total shareholders' (deficit) and an increase in non-controlling interests of Pounds Sterling 13,310,000 as at December 31, 2007. The Company has accounted for the change in accounting policy on a retroactive basis. As the A Ordinary Shares are non-participating interests in Turbo Power Systems Limited and are non-voting, no current year or cumulative net losses has been allocated to the A Ordinary Shares.

14. Convertible notes and warrants

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 notes using the residual value of equity component method, whereby the liability component is valued first using the current market rate for comparable instruments, at the time of issuance. The difference between the proceeds of the bonds issued and the fair value of the liability is assigned to the equity component.

On 11 July 2003, the Company completed a Pounds Sterling 5,000,000 financing agreement with institutional investors. The financing comprised convertible notes and warrants. The convertible notes had a term of five years, bearing an annual interest rate of 3.5% and were convertible, at the option of the holders, into an aggregate of 25 million common shares of the Company at a conversion price of Pounds Sterling 0.20 per share. The convertible notes could be converted from 11 July 2004. The warrants had a term of three years and were convertible into an aggregate of 3.5 million common shares of the Company at an exercise price of Pounds Sterling 0.15 per share. The convertible notes were unsecured.

On 11 March 2005 the Company completed an Pounds Sterling 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, at the option of the holder, into an aggregate of 66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of Pounds Sterling 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 Pounds Sterling 0.15 per share. The convertible notes are unsecured.

On 6 January 2007 Pounds Sterling 2,500,000 of the 2003 convertible notes and Pounds Sterling 2,000,000 of the 2005 convertible notes were converted at a conversion price of Pounds Sterling 0.08. Immediately following the conversion on 6 January 2007 the remaining face value of 2003 and 2005 convertible notes were Pounds Sterling nil and Pounds Sterling 1,789,000 respectively.

The Company 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 notes. Conversion of the convertible notes resulted in a decrease in loss and comprehensive loss during 2007 of Pounds Sterling 47,000 and an additional increase in deficit of Pounds Sterling 2,414,000.

On 19 June 2008 the Company completed a financing agreement with institutional investors for potential financing of up to Pounds Sterling 3,000,000 (gross) comprised of secured convertible notes and warrants. The convertible notes were issuable in Pounds Sterling 750,000 increments over a three year period from the date of the agreement. The Company issued Pounds Sterling 1,500,000 of convertible notes under the agreement on 19 June 2008. 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 Pounds Sterling 0.04 per share. The notes required quarterly interest and quarterly principal payments commencing March 2009.

On 15 August 2008 the Company amended the terms of the 19 June 2008 loan agreement and issued an additional Pounds Sterling 1,500,000 of convertible notes under the amended terms. The new terms result in all interest and principal repayments being deferred until maturity on 19 June 2011, and provide that if at any time, including once the convertible notes governed by the 19 June 2008 agreement have been fully repaid, there is a change in control of the Company, or its subsidiaries or substantially all of its assets, the holders of the convertible notes 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 convertible notes and/or interest outstanding. This risk premium will be equal to an initial payment of Pounds Sterling 1,500,000 plus 75% of the next Pounds Sterling 6,000,000 of enterprise value and 50% of the remainder. The amendment was treated as a debt extinguishment and, as a result, the Company recorded a debt extinguishment charge of Pounds Sterling 115,000.

15. Stock options, warrants and compensation expense

The number of options and warrants outstanding as at 31 March 2009, and the movement during the three months then ended, are as follows:



Options Warrants
Number Number
Outstanding at 1 January 2009 17,651,700 23,357,142
Issued - -
Cancelled (45,400) -
------------- ------------
Outstanding at 31 March 2009 17,606,300 23,357,142
------------- ------------
------------- ------------


The stock based compensation expense for the three months ended 31 March 2009, included in Production costs was Pounds Sterling nil (2008: Pounds Sterling 24,000), in Research and product development was Pounds Sterling 20,000 (2008: Pounds Sterling 45,000), and in General and administrative costs was Pounds Sterling 24,000 (2008: Pounds Sterling 29,000).

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.

Contact Information

  • Turbo Power Systems Inc.
    Alan Baird
    Marketing Communications
    44 (0)20 8564 4460
    Website: www.turbopowersystems.com
    or
    Kreab Gavin Anderson (PR)
    Ken Cronin
    +44 (0)20 7554 1400
    or
    Kreab Gavin Anderson (PR)
    Michael Turner
    +44 (0)20 7554 1400
    or
    KBC Peel Hunt Ltd
    Nicholas Marren
    +44 (0)20 7418 8900
    or
    KBC Peel Hunt Ltd
    Daniel Harris
    +44 (0)20 7418 8900