TIDMTPS
RNS Number : 4792Z
Turbo Power Systems Inc
15 March 2017
TURBO POWER SYSTEMS
Press Release
15 March 2017
The information communicated in this announcement contains
inside information.
Turbo Power Systems Inc. ("TPS" or the "Company")
Announces Results for the Fourth Quarter
And Year Ended 31 December 2016
Financial highlights: FY 2016 vs. FY 2015
-- Order intake increased 29% in 2016 to GBP13.89 million (2015: GBP10.77 million)
-- Revenue increased 4% to GBP13.92 million (2015: GBP13.39 million).
-- Gross profit increased 8% to GBP5.57 million (2015: GBP5.14
million), with gross margin % up 200 basis points to 40% (2015:
38%), after exceptional provision for a specific warranty claim of
GBP0.65 million (2015: GBP0.50 million).
-- Research and development increased 23% to GBP1.82 million (2015 GBP1.47 million).
-- Operating loss of GBP0.60 million (2015: GBP0.09 million).
-- Adjusted Operating Profit(*) up 138% at GBP0.38 million (2015: GBP0.16 million).
-- Net loss reduced by 10% to GBP0.77 million (2015: Loss GBP0.85 million).
Financial highlights: Q4 2016 vs. Q4 2015
-- Order intake decreased 7% to GBP3.94 million (Q4 2015 GBP4.25 million).
-- Revenue increased 66% to GBP3.27 million (Q4 2015: GBP1.97 million).
-- Gross profit increased to GBP1.06 million (Q4 2015: GBP0.35
million), with gross margin % increased 2400 basis points 32% (Q4
2015: 18%), after exceptional provision for a specific warranty
claim of GBP0.65 million (2015: GBP0.50 million).
-- Research and development increased by 39% to GBP0.50 million (Q4 2015: GBP0.36 million).
-- Operating loss of GBP0.75 million (2015: GBP0.90 million).
-- Adjusted Operating Profit(*) increased to GBP0.08 million (2015: loss GBP0.40 million).
* Adjusted Operating Profit excludes a specific warranty claim,
a Regional Grant Fund termination payment, a R&D tax credit
from prior year recorded in 2015 and a bonus accrual made in 2016
for 2015. A reconciliation for the year is provided below in the
section titled Definition of non-GAAP financial measures.
Strategic Review:
Strategic Review of the Company's business, remains ongoing. The
Board notes, as previously reported, that all expressions of
interest received to date from potential offerors for 100% of the
issued and to be issued share capital of the Company on a
debt-free, cash-free basis have been indicatively priced at a
substantial discount to the prevailing share price. Further
announcements will be made in due course, as appropriate.
Funding:
As previously reported, the Company remains dependent on
continuing financial support by TPS's parent company, Vale S.A.
("Vale"), Brazil's largest mining company, which owns 89.4% of the
issued share capital of the Company through its wholly owned
subsidiary Tao Sustainable Power Solutions (UK) Ltd ("TAO UK").
Today, pursuant to the terms of the existing agreement announced
on 29 March 2016, the Company exercised its option to extend the
repayment date of the GBP314,000 loan 6, from 1 April 2017 to 1
April 2018. All other conditions remain the same. At 31 December
2016 the loan amount including accrued interest is GBP0.33 million
(2015: GBPnil)
Regional Growth Fund:
The Company previously stated that it was in negotiations about
the future of the project underpinned by funding from the Regional
Growth Fund ("RGF"). After having consulted with TAO UK the Board
decided in December 2016 to terminate the project early. As a
consequence of this early termination, a repayment requirement of
GBP419,400 has arisen. The cash sum has been settled directly with
the RGF by TAO UK, as guarantor. Further details are set out
below.
Carlos Neves, Chief Executive Officer, said:
"I am extremely proud of the whole TPS team for the results
achieved in 2016. The improved performance versus the previous year
in revenues, gross margin and investments in R&D confirms the
turnaround being achieved by the business. Adjusted Operating
Profit of GBP0.38 million is up 138% from 2015 and it demonstrates
the sustainable profitability achieved by the business.
The increasing order intake in 2016 is a testament to the
Company's product offering that coupled with the strong pipeline of
enquiries give us confidence in the outlook for 2017."
For further information, please contact:
Turbo Power Systems Tel: +44 (0)191 482 9200
Carlos Neves, Chief Executive
Officer
Charles Rendell, Chief Financial
Officer
Kreab (financial public relations) Tel: +44 (0)20 7074 1800
Robert Speed
finnCap (NOMAD, broker and Tel: +44 (0)20 7220 0500
financial advisor)
Henrik Persson, Emily Watts
Notes to Editors
About Turbo Power Systems
Company Website: www.turbopowersystems.com
Company Twitter: https://twitter.com/turbopowersys
Turbo Power Systems Inc. (AIM: TPS.L) is a leading UK based
designer and manufacturer of innovative power solutions. TPS's
products are all based on its core technologies of high-speed
motors and generators and power electronics, which are sold into a
number of market sectors including transport, industrial, energy
and defence sectors. The Company's products provide high
performance while improving efficiency and reducing process energy
consumption compared to existing technologies.
Turbo Power System's existing customers include blue chip
companies such as Bombardier Transportation, Daikin Applied and
Eaton Aerospace. Tao Sustainable Power Solutions (UK) Ltd ("TAO
UK"), which is a wholly owned subsidiary of Vale S.A., Brazil's
largest mining company, owns 89.4% of the issued share capital of
the Company.
Forward looking statements
This press release contains forward-looking statements.
Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events, or performance, and
underlying assumptions and other statements that are other than
statement of historical fact. These statements are subject to
uncertainties and risks including, but not limited to, the ability
to meet on-going capital needs, product and service demand and
acceptance, changes in technology, economic conditions, the impact
of competition, the need to protect proprietary rights to
technology, government regulation, and other risks defined in this
document and in statements filed from time to time with the
applicable securities regulatory authorities.
This Review has been prepared as at 15 March 2017.
Operational Review
This is my fourth Chairman's statement. I continue to be pleased
with the strong progress the Company has made through all those
years and particularly during 2016, full details of which are
reported under Performance below.
Performance
Order intake in the year to 31 December 2016 ("2016") of
GBP13.89 million (2015: GBP10.77 million) was an increase of 29%,
as Turbo Power Systems Inc. ("TPS" or "the Company) concentrated on
its key objective to win and deliver profitable contracts.
The impact of the uncertainty over the Strategic Review has led
to a delay in signing contracts for certain long term opportunities
until the outcome is determined. However, as in the prior year
existing customers continued to understand the strategic value that
TPS's products bring to them and placed further orders for existing
product lines.
Revenue in 2016 of GBP13.92 million was up 4% (2015: GBP13.39
million). As reported in the third quarter results issued on 31
October 2016, customer delivery schedule changes during the fourth
quarter adversely impacted the profits. Encouragingly, deliveries
have recommenced during early 2017.
Benefits from the continuous improvement initiatives continued
to deliver improvements in both gross margin up 8% to GBP5.57
million (2015: GBP5.14 million) and gross margin percentage up 200
basis points to 40% (2015: 38%).
The Company reported a contingent liability as at 31 December
2015 in relation to further costs that might be arising from a
specific warranty claim. Having reviewed the current situation,
especially in relation to our long term customer relationships and
insurance proceeds that might be receivable, the Company has
provided a further GBP0.65 million as at 31 December 2016 (2015:
GBP0.50 million) to cover any further potential negotiations. Any
payment related to this matter will be dependent on agreement with
our customer on all matters that are critical for maintaining the
long term relationship between the two companies.
Excluding this provision, gross margin is up 10% to GBP6.22
million (2015: GBP5.64 million) and gross margin percentage up 300
basis points to 45% (2015: 42%).
Continuing the positive trend from 2015, Adjusted EBITDA (see
section titled Definition of non-GAAP financial measures for
reconciliation) for 2016 was up 38% at GBP0.61 million (2015:
GBP0.44 million).
Adjusted operating profit for 2016 (see section titled
Definition of non-GAAP financial measures for reconciliation)
increased 138% to GBP0.38 million (2015: GBP0.16 million) due to
investment in research and development, sales and marketing and
operational expense increases but a GBP2.32 million improvement
since 2014 (2014: loss GBP1.94 million).
The reduced net loss of GBP0.77 million (2015: GBP0.85 million)
continues to demonstrate the positive trend of the past 4 years
towards profitability. Of the improvement of GBP0.08 million,
GBP0.60 million was due to lower interest expense. Interest expense
in 2016 was GBP0.01 million (2015: GBP0.61 million, which was
waived by the lender in November 2015).
The Company ended the year with a total equity of GBP3.13
million (2015: GBP3.48 million surplus).
Regional Growth Fund ("RGF") - Termination
During 2011 the Company made a successful application for a
grant under the Regional Growth Fund. The grant is to promote
investment in the North East of England, through capital
expenditure and job security and creation. The first tranche
(GBP0.75 million) of the award was received in February 2013, a
second tranche (GBP0.25 million) in June 2013 and a final tranche
(GBP0.04 million) in March 2014. The total received was GBP1.10
million.
During December 2016 the Company decided to terminate the RGF
project. As part of the early termination the Company was required
to repay GBP419,400 of the grant previously received. Having
previously provided GBP242,000, the Company suffered an additional
loss of GBP177,400 which is reflected in the Income Statement on
the "Other Operating Expense" line in line with prior year
disclosure.
The GBP419,400 has been settled directly by TPS's 89.4% majority
owner Tao Sustainable Power Solutions (UK) Limited ("TAO UK"),
which resulted in a capital contribution of GBP419,400 addition to
reserves. This accounting is in line with transactions of this
nature between parent companies and subsidiaries.
Funding
During March 2016, the Company took a loan from TAO UK, TPS's
majority shareholder, of GBP0.3 million leaving the Company with a
debt at the year-end of GBP0.3 million (31 December 2015: Nil). TAO
UK is a wholly owned subsidiary of Vale Soluções em Energia ("VSE")
a Brazilian company, itself a wholly owned subsidiary of VALE S.A.,
Brazil's largest mining company. Following the year end, in March
2017, TAO UK extended the loan repayment date to 1 April 2018. All
other conditions remain the same.
The Directors regularly review and consider the current and
forecast activities of the Company in order to satisfy themselves
as to the viability of operations. These ongoing reviews include
consideration of current order book and future business
opportunities, current development and production activities,
customer and supplier exposure and forecast cash requirements and
balances. Based on these budgets and forecasts TAO UK has continued
to support the Company through the existing loan arrangements and
cash advances as and when required.
The Company is dependent upon major customers paying to
contractual terms in order to meet budgeted and forecasted working
capital requirements and support the Company's growth plans. If
not, this may result in the curtailment of the Company's
activities.
The Directors are aware that the Company remains dependent on
its own cash flow, but have a reasonable expectation that the
Company has sufficient cash resources to achieve its target of
being cash flow positive. For these reasons, the Directors continue
to adopt the Going Concern basis in preparing these Consolidated
Financial Statements, and disclose in Note 2 to the Consolidated
Financial Statements the conditions and events that cast
significant doubt on the Company's ability to continue as a going
concern.
As in 2015, the Independent Auditor's report contains an
Emphasis of Matter paragraph referencing this uncertainty relating
to the going concern.
The TPS team
On 7 September 2016 Livia Castro and Rodrigo Lauria joined the
Board of Turbo Power Systems Inc as Non-Executive Directors. Both
Ms Castro and Mr Lauria are in full time employment with VALE S.A.
Together Livia and Rodrigo bring a wealth of experience in finance,
budgeting and control and in corporate strategic planning to the
Company.
The Board appreciates the sales and marketing activities to
promote our brand and products, engineers working in design and
development, the staff who manufacture the products and those
support staff responsible for the smooth delivery of goods and
operations of the Company. I thank them all for their continued
support and drive in providing quality products with on time
delivery.
The knowledge and creativity of our people and the ability to
deliver customer satisfaction in an increasingly demanding and
competitive environment are key determinants of our success. Based
in the North East of England, our workforce is a mix of local
experience and international talent.
The Company maintained its excellent Health & Safety record
during 2016. It continues to improve the training programme and
reporting methods. The Board would like to thank the employees for
their participation in the new focus groups and their Health &
Safety awareness.
Strategic Review
On 20 February 2015 shareholders were informed that the Board
are conducting a strategic review of the Company's business and as
part of this review are looking at a potential sale of the Company.
The Board has appointed Lincoln International LLP to assist in this
process. The Company is a Canadian Business Corporation, registered
in Yukon, Canada and is not subject to the provisions of the UK
City Code on Takeovers and Mergers.
Further announcements were made during 2015 and 2016 explaining
that all expressions of interest received to date as part of the
Strategic Review from potential offerors for 100% of the issued and
to be issued share capital of the Company on a debt-free, cash-free
basis have been indicatively priced at a substantial discount to
the share price.
The Board continues to regularly discuss with its majority owner
how best to proceed with the Strategic Review. Further
announcements will be made in due course, as appropriate. In the
meantime there can be no certainty that any potential transaction
will proceed, or as to the terms of any such transaction. The
Company may discontinue the strategic review process at any
time.
Strategy and Outlook for the Business
Looking ahead, the Board intends TPS to remain a technology-led
company. Our commitment to embrace new ideas and fund research and
development will drive products that are more efficient to operate
and provide a competitive advantage in the market place.
The Company continues to operate a development programme, which
leads the design of new efficient and cost effective products and a
manufacturing base that exports units across the globe. The Board
believes that by having design and manufacture working closely
together better allows the required synergies and efficiencies to
be realised.
Building on the UK Energy Innovation Award in 2015, the Company
was a winner in the 2016 Elektra Awards for its innovative 100kW
DC-DC power module utilising silicon carbide. In addition, the
Company was a winner in the UK Rail Industry Awards, Traction and
Rolling Stock category, for its novel refurbishment solution that
enables Class 321 trains to utilise power from an otherwise
un-utilised source. We are very pleased to be recognised in both
the Energy and the Rail sectors for our innovative designs.
During the year the Company continued to actively pursue
exciting new projects with new customers to increase the diversity
of both our customer base and our technology portfolio, with the
right level of profitability. This drive, which coupled with a
continued focus on operational efficiencies throughout the
business, is a key part of the plan to further improve performance
and achieve annual profitability.
The Board and I look forward to 2017's performance with measured
confidence.
Fernando Senhora
Chairman
15 March 2017
Management's discussion and analysis ("MD&A")
The following information should be read in conjunction with
Turbo Power Systems Inc. ("TPS") audited consolidated financial
statements for the year ended 31 December 2016 and related notes,
which are prepared in accordance with International Financial
Reporting Standards ("IFRS") as issued by the IASB. All amounts in
the MD&A, audited consolidated financial statements and related
notes are expressed in Sterling, unless otherwise noted.
This MD&A contains forward-looking statements.
Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events, or performance, and
underlying assumptions and other statements that are other than
statement of historical fact. These statements are subject to
uncertainties and risks including, but not limited to, the ability
to meet ongoing capital needs, product and service demand and
acceptance, changes in technology, economic conditions, the impact
of competition, the need to protect proprietary rights to
technology, government regulation, and other risks defined in this
document and in statements filed from time to time with the
applicable securities regulatory authorities.
This MD&A has been prepared as at 15 March 2017.
Business of the Company
Turbo Power Systems is a technology-led Company that designs and
manufactures high-speed permanent magnet electric motors,
generators and power electronics systems and provides bespoke
solutions to transport, industrial, energy conversion, and defence
markets.
Its track record in engineering innovation, which has been built
and tested over a substantial number of years, allows the Company
to meet challenging design and manufacturing briefs with specific
requirements relating to environmental performance and performance
to volume demands across the world.
TPS has a proven and worldwide track record in the development
and deployment of equipment in many sectors, especially in rail and
industrial. Long term relationships with customers in these markets
have been built based on delivering competitive products with
proven reliability.
Developed over the last 30 years, expertise in high-speed
electrical machines and power electronics, allows the Company to
explore its current and future portfolio and adjust accordingly to
grow successfully in its chosen markets.
Business Model
TPS operates by selling engineering design services and
manufacture of high-speed electric machines and power electronics.
The design and manufacture could be undertaken as separate
activities or as one single contract, depending on the needs of the
customer. The Company seeks to retain ownership of the intellectual
property created as a result of any design activities. The Company
also undertakes speculative research and development activities in
order to remain at the forefront of technology.
Engineering design contracts are accounted for as long-term
contracts, where revenue is matched to costs incurred to provide
recognition of profit based on the activity undertaken.
For manufactured units, revenue and profit is recognised as
units are delivered.
TPS seeks to capitalise on the special design capabilities
within the Company. This can be in the form of increased down
payments on long-term contracts or increased revenue for that part
of a contract. A typical contract involves an upfront down payment
to cover engineering design work followed by milestone payments
followed by a per unit sales rate as units are manufactured.
The Company also licenses parts of its intellectual property
where the situation and customer needs are appropriate. This allows
the Company to capitalise on its prior expenditure but without the
need for full scale production. This is a relatively new revenue
stream for the Company, with the potential for further
opportunities in the market place, and is accounted for under the
development segment.
The Company typically provides a warranty on units delivered for
typically one or two years, then moving to undertaking repairs on a
revenue bearing basis.
The Company can also undertake maintenance, repair and overhaul
of units that were not manufactured by the Company. This revenue is
included in the production segment.
Way Forward
As a technology-led company, we understand the challenges of the
market regarding quality, costs and timing. We continue to
concentrate on three important pillars that will be key to
achieving our long term strategy, as follow:
-- Improve the quality of the portfolio;
-- Superior execution within design development, manufacturing
operations and support activities; and
-- Consistent delivery of internal improvements.
Improve the quality of the portfolio
The Company aims to optimise, simplify, standardise and automate
wherever possible the following portfolio categories: products
offered, operational sites, inventory, receivables and
staffing.
The Company strives to improve, working to dilute the
concentration of revenues from its then largest customers, sectors
and geographies.
The focus remains on developing TP's capabilities, products and
bespoke solutions and recognising where the value of our proposal
can be fully appreciated. The Company commenced design for standard
products in the Rail and the Industrial markets during 2016 but has
yet to exploit this commercially.
TPS has in place a rigorous process to control the Company's
outstanding debtors. Currently the Company has a small number of
large debtors and works to ensure that any overdue balances are
effectively managed. Given that the majority of contracts are with
large multinational companies, this continued to be an area of
major emphasis for the Company. The long-term nature of the
contracts gives the Company guaranteed revenue, but can lead to
longer payment cycles by the customer. For newer contracts the
Company is seeking to implement a process of controlling debtors by
the use of such instruments as irrevocable letters of credit, or
smaller more immediate delivery contracts.
The Company has always undertaken maintenance, repair and
overhaul ("MRO") activities. As noted last year the Company
implemented changes in the internal management of this area to
accelerate growth in these MRO activities where the Company's
expertise can bring added value to customers. During 2016 the
revenue from MRO increased by 52% to GBP2.0 million, providing
early validation of the emphasis that the Company has placed on
this area. Due to this added value the Company believes that this
will continue to be a growing and profitable revenue stream in the
future.
Superior execution within design development, manufacturing
operations and support activities
The Company recognises that its 40 years of experience together
with the talented and highly skilled workforce are the most
important assets it has. The Board remains focussed on the
continuous pursuit of efficiencies, so as to allow TPS to react
faster and be even more integrated to fulfil the market's
needs.
The Company focused on some innovative research and development
activities during the year:
-- Development of an efficient, compact and lightweight DC-DC
converter that achieves galvanic isolation up to ratings of 100kW
for the rail industry. Whilst the development is proven at voltages
appropriate for third rail supply, the scope can be extended to
higher voltage supply to exploit other geographic markets, such as
the European market.
-- Development of a new robust and compact "at seat power
supply" for use in UK rail Diesel Multiple Units (DMUs) which have
limited battery capacity available for on board power supply.
-- Development of an AC-AC converter for use as a "Smart grid
transformer" in domestic dwellings to enable increased utilisation
of existing electricity distribution assets.
-- Next Generation Soft Open Point converters utilising silicon
carbide technology to achieve greater efficiency when embedded into
Smart Grid applications.
The Board believes that the broad range of experience that the
Company has in power electronics has been demonstrated as meeting
the new requirements of the burgeoning smart grid market.
Consistent delivery of internal improvements
Our employees are conscious of the need for a consistent and
continued generation of efficiencies as part of their normal Key
Performance Indicators ("KPIs"). Accordingly the Company has
encouraged everyone in the organisation, irrespective of the
efficiency value or size, to keep thinking of alternatives and new
solutions.
Continuous improvements achieved in 2016 include:
-- The Company worked to change the focus of Health & Safety
process implementation and reporting from centralised committees to
focus groups based on specific types of operations. The objective
is to ensure that Health & Safety matters continue to be
considered at all levels within the Company.
-- The Company reviewed the training methods employed in the
dissemination of Health & Safety information to employees. The
three year web based training programme was renewed for a further
three years after it was found to provide a solid foundation for
the Company's employees. Additional training and video sessions
were also added to the Health and Safety programme.
-- In 2015 the Company implemented Epicor as its Enterprise
Resource Planning (ERP) system, specifically bringing together
inventory management, purchasing, production management and
financial reporting. The Company undertook a detailed review of its
requirements and chose Epicor as being able to match those
requirements with only limited customisation. During 2016 the
Company widened the scope of Epicor reporting and included a
project management reporting module. Given the long term nature of
some of the projects, time and expense management has always been a
high priority. The integrated approach of Epicor is ideal for time
and expense recording and then providing high quality reports for
project status review.
All the above objectives will continue the culture of Health and
Safety consciousness and seek to implement efficient processes.
All the details discussed on the three pillars above are part of
the Company's drive for a new culture where each of the areas is
more integrated and capable of better understanding and
contributing to the overall objectives of the Company.
Current Sectors
-- Transport
o Rail
Rail is a growing sector with huge investment globally, both in
developed and developing countries. As an established supplier for
auxiliary power units and battery charges TPS market share can
increase based on traction systems, electric distribution systems
and other added value services.
As part of the Board's plan to diversify the customer base,
especially in the UK, during 2015 the Company won contracts with
Wabtec Rail to supply at seat power supplies and air conditioning
power supplies which have a shorter delivery timescale which
presents fewer long term obstacles to revenue generation. These
were shipping during 2016. However, due to changes in the Class 321
upgrade programme, at Wabtec Rail's behest production of the air
conditioning power supply ceased. Production is unlikely to
recommence and the Company is liaising with the customer on the way
forward to a satisfactory commercial resolution to this
project.
As noted last year the Bombardier Sao Paulo unit continued in
production until September 2014, when shipments were halted, by the
customer, due to a delay in the introduction of the Monorail train
in Sao Paulo. There were a small number of shipments in 2016, but
current production is not due to restart until 2019.
In 2016 the Company won the coveted UK Rail Industry Award under
the 'Traction and Rolling Stock' category for innovation, planning
and execution on the Class 321 air conditioning power supply
project.
o Aerospace
The Jettison Fuel Pump motor drives for Eaton Aerospace continue
to be delivered in line with the customer's call-off rate. As the
Boeing 787 Dreamliner has entered into revenue service, orders
quantities continue to increase in line with the aircraft build and
remain a stable and profitable revenue stream.
-- Industrial
o Industrial Motors and Drives
The Company has a major ongoing relationship with Daikin and is
expanding the previous US centric relationship to the global reach
of Daikin. Current orders are continuing and the Company's
expectation is that this demand will continue in the coming
years.
Further development work is on-going on newer designs for
electric motors and drives to ensure the business remains
competitive in this market.
-- Defence
o High speed motor design
There is a growing market due to electrification of ships, one
where TPS's technologies are suitable for energy recovery, traction
and emission mitigation in marine systems. It is a specialised
field with high entry barriers. Following the market reviews in
2013, the Company identified that there were unique characteristics
to the product range that would be applicable to this market.
The Company had entered into a small design agreement for a low
power, high speed motor. It was hoped that this initial agreement
will lead to a further contract for the design of a large multi
megawatt motor. Currently this is envisaged to be design work with
the end customer performing the manufacture. This approach has been
adopted to reduce the level of working capital required to complete
the project and concentrate on the higher value intellectual
property (IP) created by design work. However, this is currently on
hold while the outcome of the Company's Strategic Review is
determined. At which point it is expected that the Company will be
able to sign the contract and start the design work.
-- Energy
o Development
Grid linked inverters is a growing and very competitive sector
with many low cost players. TPS has the pedigree and experience
with grid linked inverters, and will focus on specialised niche
applications, such as, inverters for smart grid.
In 2014 the Company announced a major contract with UK Power
Networks to supply the prototypes for the ground-breaking new
design of electrical energy controller for trials on the
electricity distribution networks in the London and Brighton areas.
This contract demonstrates the Company's ability to produce these
specialised units as well as the design work.
Awards won in 2015 and 2016 were:
-- The technology won the award for "Best Electricity Network
Improvement" at the annual Energy Innovation Awards, organised by
the Energy Innovation Centre during 2015.
-- TPS have been awarded the 'Highly Commended' certificate by
IET Innovation Awards after being shortlisted and recognised under
the Energy 2016 category.
-- Our technology won the Power 2016 category of the IET
Innovation Awards, as it formed part of the UK Power Networks
entrant for that category.
The Company continues to pursue the energy efficiency market for
its electric motors and generators. Market studies have been
conducted into energy recovery systems and the Board believes that
TPS's technology would work very well with the push into the energy
space. The Company is currently exploring opportunities with
partners to provide systems that can be self-sufficient for energy
recovery and subsequent energy generation at on site locations.
Notwithstanding that this is a market where acceptance by the
customer for production takes a considerable period, the Company
sees this as an important market for future growth in both
development design revenue and production revenues.
Principal Risks and Uncertainties
Risk or uncertainty Mitigation approach
Operating revenues
TPS has entered into large The Company is seeking
development and manufacturing to change the emphasis
contracts. The outcome on new contract signings.
of this is that large amounts The Company has a growing
of revenue are associated revenue stream associated
with one product line and with repair, maintenance
one customer. As there and overhaul that does
is reliance on large contracts not rely on large value
being signed by the Company, contracts. The Company
the impact of not signing is focusing efforts to
a large contract would increase the percentage
be high on the results of revenue associated with
of the Company in any one these activities in addition
year. The Company recognises with the new major contract
that it is increasingly awards.
difficult to forecast when The Company has always
these new contracts will worked closely with its
be signed due to the importance current customer base.
customers associate such Going forward this will
large values. The Company continue, but greater emphasis
has suffered and will continue is being put into working
to suffer from delays in with new customers and
expected contract award hence increasing the number
dates. of contracts in bid and
diluting the relative impact
of individual contract
awards.
Cost overrun on contracts
due to technology risk The Company seeks to mitigate
TPS is a technology-led these risks by significant
company. As the products up front planning and research.
that it develops are technology The new ideas are reviewed
driven, the Company is by senior personnel and
looking to use the latest approved before use in
design and practices when new projects. A project
a new contract is won. based reporting and review
This enables the Company system is in place to monitor
to make the most efficient the activities and the
solution for each project. output from design and
Due to these technology testing phases. A system
advances there is a significant of cost control is in place
risk extra costs may be to ensure that budgets
incurred while developing are monitored and any variances
new ideas to fulfil contracts. recognised early and taken
into account to mitigate
them in future activities.
Further development activities
TPS undertakes research The Company has a structure
activities to ensure that of senior engineers who
the technology used is are responsible for reviewing
current and forward looking. market trends and identifying
There is a risk that the new technologies as they
Company misses a directional become useful in our products.
change in where technology The Company also partakes
is moving and does not in research projects that
produce new and efficient are originated via bodies
designs. such as Innovate UK. These
projects typically involve
University departments
as well as a diverse group
on interested parties.
This helps the Company
understand potential customer
and supplier's knowledge
and requirements.
Manufacturing issues
The Company is at the forefront The Company seeks to minimise
of electrical machine design manufacturing issues by
and power electronic forethought. conforming to international
The Company is always looking quality standards such
for ways to make its products as ISO 9001, and AS 9100.
more efficient and to use The Company is fiercely
latest technology to enhance proud of its quality process
the product offering. and takes good practice
seriously.
As part of this culture,
the manufacture of the During the manufacturing
product can be extremely process all new processes
complex and time consuming. are documented with pictures
There may be issues with to ensure that they are
the design that are only easy to follow and check.
evident when in volume The process is then approved
manufacture and there may by operations, engineering
be a difficult, and therefore and quality departments
risky, manufacturing process. in line with best practice.
These may adversely impact
the quality of the units The manufacturing engineer
manufactured and the manufacturing role acts as a bridge between
efficiency cost effectiveness. the design team and the
If faults are found internally, manufacturing personnel.
then there is an increase This is pivotal in ensuring
in manufacturing costs that any issues are resolved
and therefore decrease efficiently and with the
profitability. If faults correct long term objective.
are only found when with
the customers then this The quality inspections
impacts warranty costs during manufacture should
and can have a big impact reduce the chances of incorrect
on reputation. assembly and lead to a
quality unit being produced.
Commercial relationships
TPS has longstanding commercial The Company seeks to mitigate
relationships with major this risk by working closely
customers. However, there with the customer. This
is no guarantee that customers involvement starts with
will continue to design understanding their future
and manufacture the appropriate product roadmap and working
products that require our closely at an early stage
technology. Any integration, to help overcome new design
design or manufacturing problems. This works especially
problems that the customer well on projects with existing
encounters could adversely customers. However, the
affect the financial results Company is constantly reviewing
of the Company. the profile of its salesforce
as part of seeking to expand
The risk could be that the customer base. This
the customer's designs requires the Company to
no longer require, say, bring new fresh ideas to
an auxiliary power unit the market and identify
and therefore future orders current problems encountered
cease. Alternatively, a in the marketplace.
customer could be having
issues with, say, the overall In Rail, whilst the Company
train design and manufacture tries to mitigate customer
and therefore revenue could issues with train manufacture
be delayed. in regard to its own product
line it will always be
at risk of the overall
train manufacture timing
issues. The Company seeks
to mitigate these through
contractual timeframes
and terms.
Dependence of key personnel
TPS is a technology-led The Company works closely
company and hence reliant with key personnel to ensure
on key personnel. The Company that they are fully motivated
has a group of senior personnel and engaged on interesting
who oversee the design and rewarding projects.
research and implementation. The Company believes that
Having been through major the roles should be aligned
personnel number changes to the individual's ability,
in the last few years, so these can be within
key positions exist within technical expertise or
the Company that require management responsibility.
succession plans to be
in place. Where a key position has
been identified a succession
plan has been drawn up.
Foreign currency exchange
rate fluctuations The Company seeks over
TPS is subject to foreign time, to balance currency
currency risk. Foreign requirements with currency
currency sales (and to inflows. Where there is
a much lesser extent) purchases excess currency inflow
are made in US Dollars. the Company seeks to match,
The Company's major contracts to the extent possible,
are denominated in US Dollars planned currency sales
and therefore a major portion through forward foreign
of cash receipts are in currency exchange contracts.
US Dollars. The Company The level of currency hedging
is therefore exposed to is dependent on the credit
movements in foreign currency limits available for future
rates over time. currency deals and the
perceived currency forecast
This fluctuation has been movement.
significantly severe during
2016 following the referendum Part of the Board's strategy
in June to leave the European has been to seek increased
Union. sales where contracts are
undertaken in GBP Sterling.
Future funding
The Company has been loss The Company works closely
making for a number of with VSE, its majority
years and has been critically shareholder, to ensure
reliant on regular increases that it is fully aware
in external funding. As of the financial situation
noted in the Directors' of the Company on a very
Report and Note 2 Going regular basis and also
Concern, TPS is dependent of customer concerns. The
on customers paying to Company seeks to gain approval
contractual terms in order for all budgets, working
to meet forecast working closely with VSE on all
capital requirements and financial and operational
support the Company's growth matters, assisted by the
plans. If this does not three representatives of
continue, this may well VSE on the Board.
result in the curtailment
of the Company's activities, Having started the year
partly due to customer with no borrowings, during
concerns over the Company's 2016 the Company borrowed
continuing viability. GBP314,000 (2015: Nil)
from TAO UK to support
its working capital requirements.
Strategic Review
In conjunction with VSE, The Board has been working
the Company has been undertaking closely with VSE to understand
a Strategic Review for its requirements and with
over two years. The Review's Lincoln International whom
continuation could impact the Board and VSE appointed
the future orders due to to undertake the Review.
the uncertainty that customers Notwithstanding the Review,
and potential customers the Board is operating
might perceive before the the Company in a normal
outcome is determined. manner.
Summary
In summary, the Company has continued to implement its strategy
of bidding for profitable production and development contracts,
whilst maintaining a disciplined and considered approach to
costs.
We believe that this is reflected in the significant improvement
in the gross margin and operating profit of the Company.
In line with prior years the need to win further substantial
orders, execution of those orders and completion of development
programmes in a consistent and timely manner are all key to
delivering management's plans for the improved results during 2017
and beyond.
Financial Performance
2016 saw revenue increase 4% to GBP13.92 million (2015: GBP13.39
million) and gross profit increase 8% to GBP5.57 million (2015:
GBP5.14 million). This improvement was due predominantly to
management's actions in better controlling costs, winning
profitable projects and negotiating increased margins on certain
long-term contracts. The Company's strategy continues to be the
drive towards both annual profitability and cash generation from
its operations.
During 2016 whilst the Company continued to increase production
revenues with a 14% increase over 2015, it saw less development
contracts with new customers than in the prior year resulting in a
reduction of 52% in development revenues.
However, the Company entered 2017 with a strong order pipeline
and the strategy continues the drive towards annual
profitability.
Order intake during the year amounted to GBP13.89 million (2015:
GBP10.77 million), as the Company concluded contracts with existing
and new customers. The current order book will deliver revenue for
2017 through to 2020, due to long term supply contracts.
As part of the Company's strategy to control costs, headcount
was stable, up by 1 from 31 December 2015: 111 to 31 December 2016:
112.
As reported in the Annual Report 2015, during 2015 the Company
received a claim for warranty, relating to a fault within motor
units delivered to a customer from the end of 2013. The Company
reported a one off expense in 2015 of GBP0.50 million, of which
GBP0.44 million remained as a liability at 31 December 2015. As
expected, the majority of the cash outlay of the original GBP0.50
million provision was incurred in 2016, such that the remaining
provision at 31 December 2016 was GBPNil. Having reviewed the
current situation, especially in relation to ongoing customer
relationships and insurance proceeds that might be receivable, the
Company has provided a further GBP0.65 million as at 31 December
2016 to cover any further potential negotiations. Any payment
related to this matter will be dependent on agreement with our
customer on all matters that are critical for maintaining the long
term relationship between the two companies.
Research and development net costs have increased by 24% to
GBP1.82 million (2015: GBP1.47 million), with a better focus and in
line with the Board's plans for the year. Gross costs were up 5% to
GBP2.07 million (2015: GBP1.97 million). The net costs are after a
research and development tax credit of GBP0.25 million that is
receivable from HM Revenue & Customs (2015: GBP0.50 million, of
which GBP0.25 million related to years prior to 2015).
General and administrative costs, which consist mainly of staff
costs, facilities costs and the costs associated with the Company's
public listing, grew 8% at GBP3.76 million (2015: GBP3.47 million)
as the Company maintained overheads at a sustainable level as it
moves towards profitability. There was a one-off benefit in 2016 of
GBP 0.04 million (2015: GBP0.26 million) from the release of the
asset retirement obligation following the review of the provisions
required. Excluding the one-off benefit, the underlying costs
restated would be GBP3.80 million in 2016 (2015: GBP3.73 million) a
2% increase.
During December 2016 the Company decided to terminate the
Regional Growth Fund project. As part of the early termination the
Company was required to repay GBP0.42 million of the grant
previously received. Having previously provided GBP0.24 million,
the Company suffered an additional loss of GBP0.18 million which is
reflected in the Income Statement on the "Other Operating Expense"
line in line with prior year disclosure.
The GBP0.42 million has been settled directly by TPS's 89.4%
majority owner TAO UK, which resulted in a capital contribution of
GBP0.42 million to reserves. This accounting is in line with
transactions of this nature between parent companies and
subsidiaries.
Continuing the positive trend from 2015, Adjusted EBITDA for
2016 was up 38% at GBP0.61 million (2015: GBP0.44 million).
Operating loss for 2016 was GBP0.60 million (2015: loss GBP0.09
million). Adjusted operating profit for 2016 increased 138% to
GBP0.38 million (2015: GBP0.16 million).
The loss before taxation for the year was GBP0.61 million (2015:
GBP0.70 million), an improvement of 13%.
As explained below under Transactions with Related Parties,
included in the net loss is interest expense in 2016 of GBP0.01
million (2015: GBP0.61 million, which was waived by the lender in
November 2015).
An income tax expense in the year of GBP0.16 million (2015:
GBP0.15 million) was due to tax withheld on the research and
development tax credits receivable from HM Revenue & Customs
and accrued in the year and overseas withholding taxes paid and not
recoverable.
The reduced net loss of GBP0.77 million (2015: GBP0.85 million)
continues to demonstrate the positive trend of the past 4 years
towards profitability. Of the improvement of GBP0.08 million,
GBP0.60 million was due to lower interest expense.
Capital investment in 2016 amounted to GBP0.19 million (2015:
GBP0.37 million) and related to production equipment, internally
generated development costs, computer equipment and a new
enterprise resource planning business system.
The Company recorded an operating cash outflow before working
capital movements of GBP0.66 million for the year (2015: GBP0.33
million). After adjusting for changes in working capital items and
purchases of property, plant and equipment and intangible assets,
the Company suffered an overall cash outflow before financing of
GBP0.35 million (2015: GBP1.69 million).
There was net cash inflow from financing activities in 2016 of
GBP0.31 million (2015: GBPnil), which resulted in an overall net
cash inflow for the year of GBP0.07 million (2015: outflow GBP1.33
million).
The Company finished the year with an unrestricted cash balance
of GBP0.57 million (2015: GBP0.50 million) and held further cash of
GBP4,000 associated with utility deposits(2015: GBP0.07 million,
associated with a performance bond, rent and utility deposits).
Transaction with Related Parties
During the year ended 31 December 2016 the Company undertook two
significant transactions with related parties.
First, the Company took a new loan facility of GBP0.3 million
from its majority investor TAO UK, to support working capital
requirements, bearing interest at 6% and being repayable upon
request on 1 April 2017. The balance at 31 December 2016 was
GBP0.33 million (31 December 2015: GBPNil). Following the year end,
in March 2017, TAO UK extended the loan repayment date to 1 April
2018. All other conditions remain the same.
Secondly, as noted above, the Company received a capital
contribution of GBP0.42 million from TAO UK to fund the termination
of the Regional Grant Fund.
The Company raised no invoices to VSE, the parent organisation
of TAO UK, in 2016 (2015: GBPnil).
Going Concern
These consolidated financial statements have been prepared on
the basis of International Financial Reporting Standards (IFRS)
applicable to a "going concern", which assume that the Company will
continue in operation for the foreseeable future and will be able
to realise its assets and discharge its liabilities in the normal
course of operations.
As at 31 December 2016 the Company had net operating cash
outflows, with current liabilities of GBP3.61 million and current
assets of GBP6.17 million, which includes GBP0.57 million of cash.
The Company has a cumulative deficit of GBP100.20 million as at 31
December 2016 and was loss making for the year then ended.
The Company is dependent upon i) major customers paying to
contractual terms and ii) the continued financial support of its
intermediate parent undertaking TAO Sustainable Power Solutions
(UK) Limited (TAO UK), who in turn is dependent on their parent
undertaking VSE (which in turn is dependent on its parent company
Vale S.A. (Vale)). The Company relies on TAO UK for continued
financial support in order to meet any shortfall in budgeted or
forecasted working capital requirements and to support the
Company's growth plans. If this support does not continue, this may
result in the curtailment of the Company's activities. The timing
of required financial support from TAO UK will depend on the
Company's ability to generate cash from operations. In reasonably
sensitised cash flow forecasts, and particularly dependent on the
yet to be agreed settlement, including payment profile, of certain
warranty provisions, support may well be required before the date
of loan repayment in April 2018.
As described in the Chairman's statement, the Board are
conducting a strategic review of the Company's business and as part
of this review are looking at a potential sale of the Company. The
Board continues to regularly discuss with its majority owner how
best to proceed with the Strategic Review. At this time there can
be no certainty that any potential transaction will proceed, as to
the terms of any such transaction. The Company may discontinue the
Strategic Review at any time.
However the Directors believe that they will succeed in
delivering the Company's projected financial performance and that
financial support from TAO UK and, ultimately, VSE, and its parent
company, Vale, Brazil's largest mining company, will remain in
place to enable the Company to meet budgeted and forecasted working
capital requirements and support the Company's growth plans. As is
typical with any company placing reliance on other group entities
for financial support, there can be no certainty that this support
will continue although, at the date of approval of these financial
statements, the Board have no reason to believe that TAO will not
do so. Although there are no formal letters of support in place for
the purpose of the directors' going concern assessment of the
Company, the directors of the Company have taken comfort from the
actions taken by TAO UK, in that loans have been provided when
required (the latest being GBP0.31 million on 29 March 2016),
rescheduling the repayment date of that loan to 1 April 2018 (see
note 11 - Post Balance Sheet Event), that all the debt existing at
12 November 2015 was waived and that VSE has Board representation,
in forming their conclusion that they believe it is appropriate to
prepare these financial statements on a going concern basis.
Accordingly, they have continued to adopt the going concern basis
of preparation.
If the Company is unable to either generate positive cash flows
from operations or ensure the continued financial support from TAO
UK and ultimately VSE and its parent company, or secure additional
debt or equity financing, these conditions and events indicate the
existence of a material uncertainty which may cast significant
doubt regarding the Company's ability to continue as a going
concern and, therefore, to continue realising its assets and
discharging its liabilities in the normal course of business.
These consolidated financial statements do not reflect any
adjustments that would be necessary if the going concern assumption
were not appropriate.
Summary of Quarterly Results
The following table sets out selected quarterly consolidated
financial information of the Company for the last eight
quarters:
Revenue Research General Operating Net (loss)/profit Loss
All amounts and product and administrative (loss)/profit per
in GBP'000 development share
pence
March 2015 4,082 544 872 202 29 0.00
June 2015 4,086 448 978 257 81 0.00
September
2015 3,246 118 831 346 34 0.00
December
2015 1,973 360 790 (895) (992) (0.03)
-------- ------------- -------------------- --------------- ------------------ ---------
13,387 1,470 3,471 (90) (848) (0.03)
-------- ------------- -------------------- --------------- ------------------ ---------
March 2016 3,350 416 916 (136) (148) (0.00)
June 2016 3,732 413 863 227 164 0.00
September
2016 3,575 486 883 66 22 0.00
December
2016 3,267 504 1,102 (753) (803) (0.02)
-------- ------------- -------------------- --------------- ------------------ ---------
13,924 1,819 3,764 (596) (765) (0.02)
-------- ------------- -------------------- --------------- ------------------ ---------
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, amortization, 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 amortization. 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.
Reconciliation of net loss to EBITDA , Adjusted EBITDA and
Adjusted operating profit
Quarter ended Year ended
31 December 31 December
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Net (loss) (803) (992) (765) (848)
Add back:
Taxation 45 12 155 148
Finance expense 5 79 14 610
-------- -------- --------- --------
Operating loss (753) (901) (596) (90)
Add back:
Depreciation 28 36 117 191
Amortisation 29 25 108 91
EBITDA (loss)/profit (696) (840) (371) 192
Adjustments
Regional Growth Fund
termination cost 177 - 177 -
Specific warranty provision 650 500 650 500
R&D tax credits relating
to the prior year - - - (250)
Bonus accrual - - 154 -
-------- -------- --------- ---------
Adjusted EBITDA profit/(loss) 131 (340) 610 442
-------- -------- --------- ---------
Adjusted operating profit/(loss) 74 (401) 385 160
-------- -------- --------- ---------
Adjusted EBITDA and Adjusted operating profit are before
non-routine items. As previously noted the termination of the RGF
grant gave rise to a charge of GBP177,000 (2015: GBPnil), the
specific warranty provision of GBP650,000 (2015: GBP500,000) as
detailed in Note 7, research and development tax credits recognised
in the year that related to the prior year and the bonus accrual
that related to the performance in 2015, but was not agreed by the
Board until October 2016.
Copies of Quarterly and Annual Results
The Company's full Financial Results and Managements' Discussion
and Analysis are available on www.sedar.com and full financial
statements will be mailed to shareholders during April 2017.
Copies of the quarterly and annual results are available from
the Company's office at 1 Queens Park, Queensway North, Team Valley
Trading Estate, Gateshead, NE11 0QD, United Kingdom or available to
view from the Company's website at www.turbopowersystems.com.
Turbo Power Systems Inc.
Consolidated statement of comprehensive loss
________________________________________________________________________________
Notes Quarter Year Ended
ended 31 December
31 December
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Revenue 5 3,267 1,973 13,924 13,387
Cost of sales (2,210) (1,626) (8,356) (8,246)
-------- -------- -------- --------
Gross profit 1,057 347 5,568 5,141
Expenses
Distribution costs (133) (98) (400) (314)
Research and product development (504) (360) (1,819) (1,470)
General and administrative (1,102) (790) (3,764) (3,471)
-------- -------- -------- --------
Total expenses (1,739) (1,248) (5,983) (5,255)
Other operating expense (177) - (177) -
Other (losses)/gains net 106 - (4) 24
Operating loss (753) (901) (596) (90)
Finance expense (5) (79) (14) (610)
Loss before tax (758) (980) (610) (700)
Income tax expense (45) (12) (155) (148)
Net loss and total comprehensive
loss for the periods (803) (992) (765) (848)
======== ======== ======== ========
Loss per share - basic
and diluted 6 (0.03)p (0.03)p (0.02)p (0.03)p
======== ======== ======== ========
The Notes are an integral part of these Consolidated Financial
Statements
Turbo Power Systems Inc.
Consolidated statement of financial position
________________________________________________________________________________
Notes As at As at
31 December 31 December
2016 2015
GBP'000 GBP'000
Current assets
Restricted cash 4 66
Inventories 3,163 3,253
Trade and other receivables 2,272 2,675
Prepayments 170 162
565 496
Cash and cash equivalents -------- --------
6,174 6,652
-------- --------
Non-current assets
Intangible assets 431 433
Property, plant and equipment 402 434
-------- --------
833 867
-------- --------
Total assets 7,007 7,519
==== ====
Current liabilities
Trade and other payables 2,569 3,075
Derivative financial 4 -
instruments
Loans and borrowings 8 328 -
712 635
Provisions 7 -------- --------
3,613 3,710
-------- --------
Non-current liabilities
262 331
Provisions 7 -------- --------
262 331
-------- --------
Total liabilities 3,875 4,041
Equity surplus
Share capital 9 71,408 71,408
Convertible shares 9 17,310 17,310
Capital contribution
reserve 9 12,786 12,367
Other reserves 9 1,823 1,823
(100,195) (99,430)
Retained deficit ---------- ----------
Surplus 3,132 3,478
Total liabilities and
equity 7,007 7,519
===== =====
Approved by the Board:
F Senhora Chairman
15 March 2017
The Notes form an integral part of these Consolidated Financial
Statements Turbo Power Systems Inc.
Consolidated statement of changes in equity
________________________________________________________________________________
Share Convertible Capital Other Retained Total
capital shares Contribution reserves deficit
reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1 January
2015 71,408 17,310 - 1,823 (98,582) (8,041)
-------------------------- --------- ------------ -------------- ---------- --------- --------
Total comprehensive
income for the
period
Net loss for the
year - - - - (848) (848)
-------------------------- --------- ------------ -------------- ---------- --------- --------
Total comprehensive
income for the
period - - - - (848) (848)
-------------------------- --------- ------------ -------------- ---------- --------- --------
Transactions with
owners, recorded
directly in equity
Capital contributions
by owners - - 12,367 - - 12,367
-------------------------- --------- ------------ -------------- ---------- --------- --------
Total contributions
by and distributions
to owners - - 12,367 - - 12,367
-------------------------- --------- ------------ -------------- ---------- --------- --------
Balance at 31 December
2015 71,408 17,310 12,367 1,823 (99,430) 3,478
========================== ========= ============ ============== ========== ========= ========
Balance at 1 January
2016 71,408 17,310 12,367 1,823 (99,430) 3,478
-------------------------- ------- ------- ------- ------ ---------- ------
Total comprehensive
income for the
period
Net loss for the
year - - - - (765) (765)
-------------------------- ------- ------- ------- ------ ---------- ------
Total comprehensive
income for the
period - - - - (765) (765)
-------------------------- ------- ------- ------- ------ ---------- ------
Transactions with
owners, recorded
directly in equity
Capital contributions
by owners - - 419 - - 419
-------------------------- ------- ------- ------- ------ ---------- ------
Total contributions
by and distributions
to owners - - 419 - - 419
-------------------------- ------- ------- ------- ------ ---------- ------
Balance at 31 December
2016 71,408 17,310 12,786 1,823 (100,195) 3,132
========================== ======= ======= ======= ====== ========== ======
The Notes form an integral part of these Consolidated Financial
Statements
Turbo Power Systems Inc.
Consolidated statement of cash flows
________________________________________________________________________________
Year ended
31 December
Notes 2016 2015
GBP'000 GBP'000
Cash flows from operating
activities
Loss after tax for
the year (765) (848)
Adjustments for
Taxation 155 148
Finance expense 14 610
R & D Tax Credits (294) (500)
Depreciation of property,
plant and equipment 117 191
Amortisation of intangible
assets 108 91
Derivative financial
instruments 4 (24)
--------- ---------
Operating cash flows before
movements in working capital (661) (332)
Changes in working
capital items
Decrease/(increase) in inventories 90 (359)
Decrease in restricted
cash 62 2
Decrease in trade and other
receivables 444 317
(Increase)/decrease in
prepayments (8) 64
Increase in provisions 8 255
Decrease in trade and other
payables (87) (1,259)
--------- ---------
Cash used in operating activities (152) (1,312)
--------- ---------
Taxation received 100 356
--------- ---------
Net cash used in operating activities (52) (956)
Cash flows from investing
activities
Purchase of property, plant
and equipment (87) (84)
Purchase of intangible
assets (106) (289)
--------- ---------
Net cash used in investing (193) (373)
activities --------- ---------
Cash flows from financing
activities
Proceeds from increase 314 -
in loans
--------- ---------
Net cash from financing 314 -
activities --------- ---------
Net increase/(decrease)
in cash and cash equivalents 69 (1,329)
Cash and cash equivalents
at the beginning of 496 1,825
the year ---------- ----------
Cash and cash equivalents 565 496
at the end of the year ====== ======
The Notes form an integral part of these Consolidated Financial
Statements.
Turbo Power Systems Inc.
Notes to the consolidated financial statements
________________________________________________________________________________
1 Reporting entity
Turbo Power Systems Inc. ("The Company") is subsisting pursuant
to the Business Corporations Act (Yukon Territory). The Company's
registered office is Suite 200-204 Lambert Street, Whitehorse,
Yukon Y1A 3T2, Canada.
The Company conducts operations through its wholly owned
subsidiary company, Turbo Power Systems Limited ("TPSL"). The main
trading address is 1 Queens Park, Queensway North, Team Valley
Trading Estate, Gateshead, NE11 0QD, United Kingdom.
The Company's intermediate parent undertaking is TAO Sustainable
Power Solutions (UK) Limited ("TAO UK"), a company registered in
England and Wales, UK. The Company's ultimate parent undertaking is
Vale S.A. ("Vale"), a company registered in Brazil.
The Company's subsidiaries comprise:
Trading Place of % Ownership
status incorporation
Turbo Power Systems Limited Trading England 100%
Turbo Power Systems Development
Limited Dormant England 100%
Intelligent Power Systems
Limited Dormant England 100%
Nada-Tech Limited Dormant England 100%
The registered office for all of the above subsidiaries is 1
Queens Park, Queensway North, Team Valley Trading Estate,
Gateshead, NE11 0QD, United Kingdom.
2 Going concern
These consolidated financial statements have been prepared on
the basis of International Financial Reporting Standards (IFRS)
applicable to a "going concern", which assume that the Company will
continue in operation for the foreseeable future and will be able
to realise its assets and discharge its liabilities in the normal
course of operations.
As at 31 December 2016 the Company had net operating cash
outflows, with current liabilities of GBP3.61 million and current
assets of GBP6.17 million, which includes GBP0.57 million of cash.
The Company has a cumulative deficit of GBP100.20 million as at 31
December 2016 and was loss making for the year then ended.
The Company is dependent upon i) major customers paying to
contractual terms and ii) the continued financial support of its
intermediate parent undertaking TAO Sustainable Power Solutions
(UK) Limited (TAO UK), who in turn is dependent on their parent
undertaking VSE (which in turn is dependent on its parent company
Vale S.A. (Vale)). The Company relies on TAO UK for continued
financial support in order to meet any shortfall in budgeted or
forecasted working capital requirements and to support the
Company's growth plans. If this support does not continue, this may
result in the curtailment of the Company's activities. The timing
of required financial support from TAO UK will depend on the
Company's ability to generate cash from operations. In reasonably
sensitised cash flow forecasts, and particularly dependent on the
yet to be agreed settlement, including payment profile, of certain
warranty provisions, support may well be required before the date
of loan repayment in April 2018.
As described in the Chairman's statement, the Board are
conducting a strategic review of the Company's business and as part
of this review are looking at a potential sale of the Company. The
Board continues to regularly discuss with its majority owner how
best to proceed with the Strategic Review. At this time there can
be no certainty that any potential transaction will proceed, as to
the terms of any such transaction. The Company may discontinue the
Strategic Review at any time.
However the Directors believe that they will succeed in
delivering the Company's projected financial performance and that
financial support from TAO UK and, ultimately, VSE, and its parent
company, Vale, Brazil's largest mining company, will remain in
place to enable the Company to meet budgeted and forecasted working
capital requirements and support the Company's growth plans. As is
typical with any company placing reliance on other group entities
for financial support, there can be no certainty that this support
will continue although, at the date of approval of these financial
statements, the Board have no reason to believe that TAO will not
do so. Although there are no formal letters of support in place for
the purpose of the directors' going concern assessment of the
Company, the directors of the Company have taken comfort from the
actions taken by TAO UK, in that loans have been provided when
required (the latest being GBP0.31 million on 29 March 2016),
rescheduling the repayment date of that loan to 1 April 2018 (see
note 11 - Post Balance Sheet Event), that all the debt existing at
12 November 2015 was waived and that VSE has Board representation,
in forming their conclusion that they believe it is appropriate to
prepare these financial statements on a going concern basis.
Accordingly, they have continued to adopt the going concern basis
of preparation.
If the Company is unable to either generate positive cash flows
from operations or ensure the continued financial support from TAO
UK and ultimately VSE and its parent company, or secure additional
debt or equity financing, these conditions and events indicate the
existence of a material uncertainty which may cast significant
doubt regarding the Company's ability to continue as a going
concern and, therefore, to continue realising its assets and
discharging its liabilities in the normal course of business.
These consolidated financial statements do not reflect any
adjustments that would be necessary if the going concern assumption
were not appropriate.
3 Basis of preparation
These financial statements comply with and have been prepared in
accordance with the recognition and measurement principles of
International Financial Reporting Standards (IFRSs) in issue and
effective at 31 December 2016.
The consolidated financial statements were authorised for
issuance by the Board of Directors on 15 March 2017.
The consolidated financial statements have been prepared under
the historical cost convention.
The consolidated financial statements are presented in GBP
sterling, rounded to the nearest GBP1,000, which is the Company's
functional and presentation currency.
4 Critical accounting judgements and key sources of estimation uncertainty
These consolidated financial statements have been prepared on
the basis of International Financial Reporting Standards applicable
to a 'going concern', which assume that the Company will continue
in operation for the foreseeable future and will be able to realise
its assets and discharge its liabilities in the normal course of
operations. As at 31 December 2016 the Company had net operating
cash outflows. Therefore the Company may require additional funding
which, if not raised, may result in the curtailment of activities.
The Company has a cumulative deficit of GBP100.20 million as at 31
December 2016.
Further information on Going Concern is provided in Note 2.
The preparation of financial statements in conformity with IFRS
requires management to make judgments, estimates and assumptions
that affect the application of accounting policies and the reported
amounts of assets and liabilities, revenue and expenses and the
related disclosures of contingent assets and liabilities. Although
these estimates are based on management's best knowledge of the
amount, event or actions, actual results ultimately may differ from
those estimates.
Estimates and underlying assumptions are continually evaluated
and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances. Revisions to accounting estimates are
recognised in the period in which the estimates are revised and in
any future period affected.
5 Segmental analysis
The Company operates an integrated operation structured along
the lines of product research and development, and production. The
Board and management make strategic decisions and review the
results of the Company on this basis. Corporate charges relating to
the financing of the Company and other related management
activities are allocated between the two reportable segments.
The Board together with the Chief Executive Officer and the
Chief Financial Officer are the chief operating decision makers for
the Company.
Both segments operate in the United Kingdom. Except for the
investments held by the Company which are located in Canada, all of
the Company's assets are located in the United Kingdom.
31 December 2016 Production Development Unallocated Total
GBP'000 GBP'000 GBP'000 GBP'000
Revenue 12,981 943 - 13,924
=========== ============ ============ ========
Segment operating
profit/(loss) 2,542 (3,134) (4) (596)
Finance expense - - (14) (14)
Taxation expense - - (155) (155)
----------- ------------ ------------ --------
Net loss and total
comprehensive loss 2,542 (3,134) (173) (765)
=========== ============ ============ ========
Total assets 6,047 637 323 7,007
Total liabilities (1,927) (642) (1,306) (3,875)
31 December 2015 Production Development Unallocated Total
GBP'000 GBP'000 GBP'000 GBP'000
Revenue 11,431 1,956 - 13,387
=========== ============ ============ ========
Segment operating
profit/(loss) 1,293 (1,407) 24 (90)
Finance expense - - (610) (610)
Taxation expense - - (148) (148)
----------- ------------ ------------ --------
Net loss and total
comprehensive loss 1,293 (1,407) (734) (848)
=========== ============ ============ ========
Total assets 6,082 903 534 7,519
Total liabilities (2,310) (765) (966) (4,041)
6 Loss per share
Loss per share has been calculated using the weighted average
number of shares in issue during the relevant financial
periods.
2016 2015
Loss attributable to ordinary GBP765,000 GBP848,000
shareholders
Weighted average number
of shares outstanding 3,336,865,922 3,336,865,922
As the Company experienced a loss in both years all potential
common shares outstanding from dilutive securities are considered
anti-dilutive and are excluded from the calculation of diluted loss
per share.
Weighted average number of common shares:
2016 2015
Issued common shares at 1
January 3,336,865,922 3,336,865,922
____________ ____________
Weighted average number of
common shares at 31 December 3,336,865,922 3,336,865,922
Details of anti-dilutive potential securities outstanding not
included in loss per share calculations at December 31 are as
follows:
2016 2015
Common shares potentially
issuable:
- under stock options (Note
28) 4,872,728 6,012,728
- pursuant to A Ordinary
stock conversion (Note 28) 892,777,778 892,777,778
__________ __________
897,650,506 898,790,506
7 Provisions
Asset Retirement Warranty
Obligations
2016 2015 2016 2015
GBP'000 GBP'000 GBP'000 GBP'000
Balance at
1 January 285 324 681 310
Provided during
the year - - 650 500
Utilised during
the year (191) (39) (451) (56)
Released during
the year - - - (73)
--------- -------- --------
Balance at
31 December 94 285 880 681
========= ======== ======== ========
31 31
Dec Dec
Analysed as: 2016 2015
GBP'000 GBP'000
Current liabilities 712 635
Non-current
liabilities 262 331
Total 974 966
======== ========
Asset Retirement Obligations:
During 2010 the Company recognised a requirement for a provision
for the asset retirement obligations related to the two properties
it then leased. One lease has subsequently terminated in 2013 and
the other will terminate in 2022. Accordingly a provision, based on
the present value of the future expected expenditure was recorded
at GBP674,000 as at 31 December 2010. Following a 2015 review of
the provision against expected costs the Company released GBP39,000
of this provision. In 2016 the Company agreed a settlement for the
lease that was terminated in 2013 and consequently released the
provision of GBP191,000 relating to this lease. The Company has
recorded no further increase in accretion expense in 2016 (2015:
GBPnil). After the expiry of the current lease in 2022 the
provision is expected to be released.
Warranty:
Production units sold by the Company are provided with a
warranty against operational failure. The warranty period provided
is dependent upon the sales agreement with the customer and the
nature of the unit, but typically is between one and two years from
the date of delivery. The warranty provision is maintained at a
level calculated to reflect the current costs of repair and
incidence of failure of existing and similar units.
During the final quarter of 2015 the Company received a claim
from a customer for warranty, relating to a fault within motor
units delivered to a customer during 2013 to 2015. The Company
included a one off provision expense in 2015 of GBP0.50 million, of
which GBP0.45 million remained at 31 December 2015, during 2016 the
GBP0.45 million has been fully utilised.
The Company reported a contingent liability as at 31 December
2015 in relation to further costs that might be arising out of the
warranty claim. Having reviewed the current situation, especially
in relation to ongoing customer relationships and insurance
proceeds that might be receivable, the Company has provided a
further GBP0.65 million as at 31 December 2016 (2015: GBP0.50
million) to cover any further potential negotiations. Subject to
those negotiations, this matter has been treated as a current
liability as it is more than likely to be resolved within the next
twelve months. Any payment related to this matter will be dependent
on agreement with our customer on all matters that are critical for
maintaining the long term relationship between the two
companies.
8 Loans and borrowings
On 29 March 2016 the Company announced that its wholly owned
subsidiary Turbo Power Systems Limited had entered into an
agreement to draw down on a new loan to be provided by TAO UK, to
support working capital requirements. The additional amount
available to draw down as follows:
29 March 2016 GBP314,000
This amount was repayable on 1 April 2017, which can be
extended, at the Company's request, for a further year, and accrues
interest at 6% per annum, payable annually. Following the year end,
in March 2017, TAO UK extended the loan repayment date to 1 April
2018. All other conditions remain the same.
31 31
Dec Dec
2016 2015
Fixed rate loans GBP'000 GBP'000
Due within one year 328 -
Total 328 -
======== ========
The Company has drawn down on all its borrowing facilities as at
31 December 2016 (2015: all loans drawn down in full).
Unpaid interest of GBP0.01 million (2015: GBPnil) is recorded in
the loan amount.
9 Share capital and other reserves
Share Capital
Common Shares Convertible Shares
(A Ordinary Shares)
Number GBP'000 Number GBP'000
At 1 January
2015 3,336,865,922 71,408 892,777,778 17,310
-------------------- -------------- ------------------ --------------
At 31 December
2015 3,336,865,922 71,408 892,777,778 17,310
-------------------- -------------- ------------------ --------------
At 31 December
2016 3,336,865,922 71,408 892,777,778 17,310
==================== ============== ================== ==============
The Company is authorised to issue an unlimited number of common
shares and an unlimited number of preferred shares, issuable in
series, without nominal or par value. All common shares rank
equally with regard to the Company's residual assets. All common
shares have been issued at nil par value.
The holders of common shares are entitled to receive dividends
as declared from time to time, and are entitled to one vote per
share at meetings of the Company.
Holders of A Ordinary Shares of Turbo Power Systems Limited
("TPSL") (Convertible shares), carry no voting rights, cannot
attend any shareholder meetings and, in the event of winding-up of
TPSL are entitled to a maximum distribution of GBP500,000 in
aggregate, to rank before the Common Shares. The A Ordinary shares
are convertible into an equal number of Common Shares of the
Company on request by the holder, having given 61 days' notice.
Under certain take over or change in control events, the A Ordinary
Shares are exchangeable under "super exchange" rights, converting
for 3 Common shares of the Company for every A Ordinary Share
held.
As the A Ordinary Shares are non-participating interests in TPSL
and are non-voting, no current year or cumulative net losses have
been allocated to the A Ordinary Shares.
Issue of common shares:
There were no common shares issued in the year. (2015: nil).
Capital Contribution reserve
On 12 November 2015 Tao Sustainable Power Solutions (UK) Limited
waived the entire outstanding loan of GBP10.48 million and accrued
interest of GBP1.89 million. This created a Capital Contribution
reserve in 2015 of GBP12.37 million. In December 2016 Tao
Sustainable Power Solutions (UK) Limited agreed to repay GBP0.42
million of the government grant which increased the capital
contribution reserve to GBP12.79 million.
Other reserves
At 31 December 2016, other reserves comprise of the stock
compensation reserve of GBP1,823,000 (2015: GBP1,823,000).
Potential issue of common shares
The Company has issued share options under the 2002 Stock Option
Plan and A Ordinary Shares that are convertible into common shares
of the Company.
31 Dec 31 Dec
2016 2015
Under stock option plan 4,872,728 6,012,728
Pursuant to A Ordinary stock
conversion (Note 29) 892,777,778 892,777,778
-------------
897,650,506 898,790,506
------------- -------------
10 Related party transactions
Transactions with the parent and ultimate parent company
On 16 June 2010 the Company completed a fundraising and
investment transaction that resulted in TAO UK, the wholly owned UK
subsidiary of the Brazilian energy solutions company VSE, investing
GBP6.5 million in exchange for 1,083,333,334 Common Shares in the
Company, giving TAO UK a 75.4% controlling stake in the Company on
an undiluted basis. The transaction was recorded at exchange
amount. On 25 May 2012 the Company issued 1,899,111,111 common
shares to TAO UK as a result of the conversion of GBP8.54 million
of debt in the Company, at a price of 0.45p per share, increasing
the controlling share to 89.4%
On 22 October 2010 the Company agreed a loan facility with TAO
UK (as subsequently amended), which bears interest at 6% per annum
and is repayable upon demand commencing 2 January 2012. The loan is
secured by a fixed and floating charge over the assets of the
Company's subsidiary Turbo Power Systems Limited. During 2012 the
loan repayment date was extended to 1 April 2014. During March 2014
the repayment date was further extended to 1 April 2016. On 16
March 2015 it was announced that the repayment date had been
extended by one year to 1 April 2017.
On 12 November 2015 TAO UK agreed to waive the entire
outstanding loan of GBP10.48 million and all unpaid accrued
interest of GBP1.89 million. TAO UK agreed to this waiver for the
benefit of all TPS shareholders. The total amount of the loans and
interest of GBP12.37 million have been transferred to a Capital
Contribution reserve.
On 29 March 2016 the Company announced that its wholly owned
subsidiary Turbo Power Systems Limited had entered into an
agreement to draw down on a new loan to be provided by TAO UK, to
support working capital requirements. The additional amount
available to draw down as follows:
29 March 2016 GBP314,000
This amount is repayable on 1 April 2017, which can be extended,
at the Company's request, for a further year, and accrues interest
at 6% per annum, payable annually. Following the year end, in March
2017, TAO UK extended the loan repayment date to 1 April 2018. All
other conditions remain the same.
A summary of the loan movement is:
GBP'000
Balance as at 1 -
January 2016
29 March loan drawdown 314
Accrued interest
2016 14
Balance at 31 December
2016 328
--------------
Accrued interest is recorded within the loan balance GBP14,000
(2015: GBPnil)
During December 2016 the Company decided to terminate the RGF
project. As part of the early termination the Company was required
to repay GBP419,400 of the grant previously received. Having
previously provided GBP242,000, the Company suffered an additional
loss of GBP177,400 which is reflected in the Income Statement on
the "Other operating expense" line in line with prior year
disclosure.
The GBP419,400 has been settled directly by TPS's 89.4% majority
owner Tao Sustainable Power Solutions (UK) Limited ("TAO UK"),
which resulted in a capital contribution of GBP419,400 addition to
reserves. This accounting is in line with transactions of this
nature between parent companies and subsidiaries.
During 2016 or 2015 the Company did not transact business with
VSE or TAO UK. No amounts are owed by either VSE or TAO UK at 31
December 2016 or 2015.
Key Management personnel compensation
In addition to their salaries, the Company provides non-cash
benefits to executive management and contributes to a defined
contribution pension plan. Some executive officers participate in
the share option programme.
Key management personnel compensation comprises the
following:
2016 2015
GBP'000 GBP'000
Salaries 556 550
Bonus 154 -
Pension contributions 38 37
748 587
============== ==============
The bonus of GBP154,000 charged to 2016 related to the Company's
performance in 2015. No bonus had been paid as at 31 December 2016
or accrued for 2016's performance.
11 Post balance sheet date event
Subsequent to the year end the Company's wholly owned subsidiary
Turbo Power Systems Limited had entered into an agreement to
reschedule the repayment date of the loan provided by TAO UK on 29
March 2016 from 1 April 2017 to 1 April 2018. All other conditions
remain the same.
The principle amount of GBP314,000 plus any accrued interest,
will therefore be repayable on 1 April 2018. The loan accrues
interest at 6% per annum, payable annually.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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