Torotrak PLC Regulatory News (TRK)

29 June 2016

Torotrak plc

("Torotrak", the "Company" or the "Group")

Preliminary Final Results for the year ended 31 March 2016 (unaudited)

Torotrak (LSE: TRK), a leading developer and supplier of emissions reduction and fuel efficiency technology for vehicles, announces its Preliminary unaudited Final Results for the year ended 31 March 2016.

V-Charge - powering downsized engines

· Milestones achieved:

o Successfully achieved or exceeded key OEM target market parameters for the twin-stage boosting project conducted by the University of Bath ("Bath"),

o Independent validation of Bath project results confirms V-Charge twin-stage boosting configuration meets or exceeds target torque requirements to enable significant engine downsizing and outperforms other advanced boosting solutions.

· On track to complete Ford Focus demonstrator with V-Charge enabled 1.0L Ecoboost engine.

· Significant interest being shown by a range of OEMs and Tier 1s in V-Charge solution.

Flybrid KERS - mechanical hybrids

· Milestones achieved:

o Independent certification of real-world fuel economy/emissions benefits from KERS-equipped Euro6 StreetLite bus at Millbrook,

o Successfully achieved key OEM targets for fuel economy, vehicle driveability and KERS unit cost,

o Demonstrated fuel savings from hydraulically-connected flywheel energy recovery system operated in an excavator in conjunction with an Advanced Propulsion Centre-funded project in collaboration with JCB.

· Awarded a funded programme with one of the largest global manufacturers of off-highway equipment to demonstrate a high-power KERS for integration in the drivetrain of a large mining truck and for potential use in on-highway articulated trucks.

· Successful demonstration and testing with a global off-highway OEM of a high-power KERS in a 'load-levelling' application.

· Strong engagement with global off-highway OEMs and Tier 1s about commercialising KERS technology across multiple applications.

Financial Highlights

· Successfully delivered 22 per cent. reduction in net cash operating expenses.

· Cash balance of £11.3 million as at 31 March 2016 (which excludes R&D tax credit of £0.4 million received on 1 April 2016).

Nick Barter, Chairman, commented: "It has been an important year for the Group and I am pleased with the overall progress made in commercialising both our V-Charge and KERS technologies. We have strong engagement with potential licensing partners in both technologies to crystallise the value for Shareholders in line with our strategic objectives."

Adam Robson, Chief Executive, commented: "I am delighted with the excellent results achieved in the independent technical validation of the advantages of our V-Charge supercharger compared to other advanced boosting solutions. This has created an excellent platform for licensing this technology into the mass passenger car market. In KERS, we are confident that our technology will be adopted in the off-highway market, with encouraging discussions and opportunities to secure licensing arrangements."

For more information, please visit www.torotrak.com or contact:

About Torotrak

Torotrak is a leading developer and supplier of kinetic energy recovery systems, engine boosting and variable drive transmissions for vehicles. Our portfolio of technology solutions substantially improves fuel economy and reduces CO2 and other emissions in vehicles through capturing and recycling energy that would otherwise be lost, harnessing the power of supercharging to enable engine downsizing and managing the engine at the optimum point.

Chairman's Letter

It has been an important year for the Group with significant progress made towards developing and commercialising both our V-Charge and KERS technologies. Under the leadership of our CEO Adam Robson, who joined the Company in April 2015, the Group has reduced its net operating cash costs and focused its resources on securing nearer term commercial opportunities. Whilst the market backdrop in terms of fuel prices, economic growth, emissions regulations and government schemes to encourage the adoption of low emission technologies has been challenging, our low cost mechanical solutions offer cost-effective ways to meet the challenges of lower emissions.

Performance of the Group

Following the successful restructuring and refinancing that was completed in July 2015, the Group has focused its efforts on securing opportunities to commercially exploit its key technologies; specifically V-Charge in passenger cars and KERS in the on and off-highway commercial vehicle markets.

Adam's CEO Review details the activities of the last 12 months but I would like to highlight the key achievements and some of the difficult decisions that we have taken during the year.

In V-Charge, we have successfully conducted the independent validation of the technology in a twin-stage boosting configuration in collaboration with the University of Bath, a global Tier 1 boosting company and with the participation of the Ford Motor Company. We have demonstrated, and had independently validated, the performance advantages and system benefits of V-Charge compared to other advanced boosting technologies. These results confirm V-Charge as a market-leading technology to enable significant engine downsizing and downspeeding, to help vehicle OEMs meet the challenging emissions regulations in a cost-effective and practical manner. This represents a major milestone for the Group and is an important catalyst for engaging with OEMs and Tier 1s to license the technology into the passenger car and off-highway markets. Our target now is to crystallise the significant value that we have created over the last five years by licensing the technology to partners who can complete the product development cycle and take the technology to market.

In KERS, we have been very pleased with the development and testing of the bus KERS product, successfully meeting the demanding OEM targets for fuel saving, driveability and product cost; pre-requisites for successful market uptake. However, continued low fuel prices, lack of visibility of previously announced Government grants to kick-start the adoption of new low emissions technologies along with general difficult trading conditions for bus operators has caused the current market appetite for adopting low emission technologies in the bus sector to diminish. With bus operators now requiring paybacks of 2 to 3 years and a lack of visibility of likely customer uptake, we reluctantly took the decision, in conjunction with our OEM partner Wrightbus, to delay further investment in the commercial production of our bus KERS product until market conditions become more favourable. This was a difficult decision but a necessary one, to ensure that our engineering resources remained focussed on securing nearer term commercial opportunities in line with our strategic focus of delivering Shareholder value. We do see the potential to launch this product in the future and we have a number of discussions on-going with customers in the bus and truck sector.

In the off-highway sector, we are having further success in getting our KERS technology into product development programmes and into the market. Our energy recovery system for use in excavators and other hydraulic-connected applications, such as wheel shovel loaders, has been successfully tested as part of the Advanced Propulsion Centre ("APC") funded programme, demonstrating its fuel saving capability. The next stage of product development is to further reduce the system cost to enable paybacks of less than two years to be achieved even in periods of very low fuel prices. Recently, we have successfully completed a testing programme with a global off-highway customer using our high-speed KERS in a challenging 'load-levelling' application. This was a very demanding application, demonstrating the high power capability of the KERS whilst offering a lower cost, more durable solution than the incumbent technology. The market opportunity is potentially global, covering multiple market segments.

We also announced a customer funded programme in conjunction with the Energy Technologies Institute to demonstrate a transmission-connected KERS in a large mining truck application, with opportunities to take the technology into on-highway articulated trucks.

In the passenger car market, we have several feasibility programmes with OEM customers to explore the use of KERS to deliver a lower cost/gram CO2 saving than alternative technologies. Whilst the adoption of KERS in the passenger car market has always been a longer term objective, we are seeing increased interest from OEMs as they search for the most cost-effective way to meet the challenging emissions targets post 2020.

Adam also reports in detail in his CEO's Review on the Group's financial results, however I would like to highlight the successful completion of the restructuring during the year which delivered a £1.8 million reduction in net cash operating expenses and helped achieve our closing cash target of £11.3 million (2015: £7.6 million).

Regulatory environment and market drivers

As referred to earlier, whilst the global implementation of tighter emissions regulations and targets is helpful in encouraging the adoption of new low emissions technologies, the continued low fuel prices are an inhibitor to the uptake in those applications where emissions regulations is not the key focus and fuel-saving is the dominant market driver. As a Group, we continue to benefit from funding from the APC, which is a very helpful mechanism to encourage the uptake and commercial exploitation of new low emissions technologies, such as those provided by the Group.

In the global passenger car market, a recent survey of 200 passenger car OEM executives conducted by KPMG found that fuel efficiency is seen by OEMs as the most important car buyers' decision factor. Delivering improvements in fuel efficiency and therefore lower CO2 emissions, in the most cost-effective way, remains the key challenge. Our low cost mechanical solutions can offer OEMs a way to help meet these targets whilst maintaining performance in cars that customers want to buy.

The World Harmonised Light Duty Test Procedure ("WLTP"), which is expected to be phased-in from 2017, will bring significant new emissions challenges for OEMs trying to hit the more demanding emissions targets post 2020. This will help stimulate the search by OEMs for the required technology solutions and help create further market pull.

People

During the year there have been a number of changes at Board level. Jon Hilton stepped down as an Executive Director and became Non-Executive Deputy Chairman on 24 July 2015. John Weston retired from the Board on 31 December 2015 and on behalf of the Board I would like to thank him for his stewardship of the Group during his period of Chairmanship and for his contribution to the Group, we wish him well for the future. In January 2016, we were pleased to appoint Eric Alström to the Board as a Non-Executive Director. Eric brings significant international experience and understanding of the global automotive sector from both an OEM and Tier 1 perspective.

I would also like to thank all of our staff for their hard work and dedication during the last twelve months.

Outlook

During the next 12 months the focus of the Group will be licensing our V-Charge and KERS technologies and then supporting our licensee partners to develop products using these technologies. We have demonstrated that our technologies can deliver significant fuel savings and emissions-related benefits to the end customer and we look forward to collaborating with our partners and helping them to launch products into the market using Torotrak's technology.

Following the result of the referendum last week for Britain to leave the European Union, the Board does not believe that this decision will have any immediate impact on the Group's activities or its strategy to commercialise its technologies. However, the Board will continue to keep the situation under review.

Nick Barter

Chairman

28 June 2016 

CEO's Review

Since my appointment in April last year, the Group has made good progress against its strategic objectives to commercialise its technology. The journey has included a number of challenges but I am pleased with all that we have achieved and I am confident that we have built the platform to deliver value from our technology portfolio, following the restructure and reorganisation of the business which was completed last year.

Strategic objectives

The focus of the Group is to licence our V-Charge and KERS technologies to Tier 1 and OEM partners who will complete the product development and productionisation programmes and take the technology through to market. The Group has scaled back its in-house manufacturing intentions, focusing on developing a scalable flywheel assembly business in collaboration with a small number of strategic Tier 2 manufacturing partners. This enables the Group to focus its key engineering resources on supporting licensing discussions through feasibility and demonstration programmes, providing application engineering services to licensees and developing a supply of low cost flywheel assemblies.

Fund raise, restructuring and reorganisation

In July 2015, the Group successfully raised £12.4 million (net of expenses) through the issue of New Ordinary Shares in a subscription, firm placing and placing and open offer. The Group also restructured the Flybrid acquisition agreement, reducing the original acquisition price payable and refinancing the vendor loan notes. The net effect of the restructure was to settle the performance-linked additional purchase consideration through the issue of approximately 71.4 million new Ordinary Shares (equivalent to £5.0 million at the issue price), eliminating the potential maximum £10.0 million of additional cash consideration payable, converting £1.8 million of the vendor loan notes into a new five year term loan and the payment of £1.0 million in cash to the Flybrid vendors in settlement of the remaining vendor loan notes.

The Group successfully implemented a reorganisation and major cost reduction programme. I am pleased to report that we have exceeded our target of a 20 per cent. reduction in net cash operating expenses, achieving a reduction of £1.8 million. The main cost reductions have been achieved through headcount reductions, simplification of the business, elimination of cash bonuses and other employment-related benefits and eliminating other non-essential cash costs. Going forward, controlling and where possible further reducing cash costs, will remain a key focus for the senior management team. The reorganisation of the Group's key engineering resources under Steve Hughes, Chief Operating Officer and Doug Cross, Chief Technology Officer has significantly improved the focus of the engineering team and has been a key factor in the successful delivery of a number of the key milestones achieved during the year. 

Market backdrop and key trends

Passenger cars:

It is almost 12 months since 'dieselgate' hit the headlines and a number of other automotive OEMs have begun investigations into the true level of emissions from their vehicles. The broader impact of the emissions scandal has been to highlight the need to amend the drive-cycle emissions testing process to capture more 'real-world' driving conditions and more accurately measure tailpipe emissions.

In the EU, the current timeline for the introduction of the new Worldwide Harmonised Light Vehicles Test Procedure ("WLTP") is September 2017, with all new vehicles tested using WLTP from September 2018 onwards. To ensure that new diesel vehicles deliver low emissions on the road, a new real-world driving emissions ("RDE") testing procedure is being introduced. For the first time it will see cars and vans being taken out of the laboratories to be tested on roads, and is the best technology available today to measure real emissions. Current indications are that RDE will be implemented progressively from September 2017 onwards.

'Dieselgate' has also provided further support for the global trend towards tightening emissions regulations. The EU continues to lead the world in imposing the most challenging emissions targets. The 2020/21 mandated fleet average CO2 target of 95g/km will fall further and could reach ~68-78g /km by 2025 (equivalent to 84-96 mpg in gasoline engined cars). The penalty in the EU is €95 per gram of CO2 over the target for every vehicle sold by that manufacturer. CO2 emissions legislation in America, Japan and China has typically lagged behind the EU, but is now starting to catch up. For example, in America, more aggressive targets are being set towards 109g/km by 2025. The more challenging and realistic WLTP is also expected to be adopted in all three countries post 2020.

The more demanding regulatory environment of lower emissions targets and real-world test cycles creates significant challenges for automotive OEMs and their Tier 1 partners in meeting emissions targets and fuel economy standards, whilst preserving performance and affordability; in short, selling passenger cars that customers want to drive and can afford to buy. To meet this goal a number of key trends are emerging:

· Diesel engines are here to stay, albeit possibly at lower volumes in Europe - it is particularly challenging to meet the mandated fleet average emissions targets, cost-effectively, through conventional gasoline technologies alone;

· Vehicle electrification - some level of electrification is likely on most vehicles (e.g. start-stop), with 48-volt electrical systems still challenging for OEMs to implement in smaller vehicles;

· Engine downsizing - engines will continue getting smaller but will require performance and transient response to be maintained;

· Improving internal combustion engine efficiency - improving thermal efficiency of internal combustion engines to above 50 per cent., from around 40 per cent. today; and

· More transmission speeds - to maintain the engine running at its sweet spot where it delivers optimum fuel economy.

The Group's technologies can help OEMs in delivering a number of these targets in a cost-effective way and importantly we are agnostic on the fuel used; gasoline, diesel, CNG and ethanol-based fuels.

Off-highway vehicles:

Emissions legislation in the global off-highway market is also becoming more onerous. The focus of regulation is on the reduction of noxious emissions for off-highway engines. With low total cost of ownership being a key driver for end customers and equipment operators, introducing technologies that can eliminate the need for expensive exhaust after-treatment systems by enabling engine downsizing to the 37 - 56kW power range where emissions legislation is less stringent is a potential market opportunity. However, both fuel economy and performance/productivity are also key customer requirements so engine downsizing cannot compromise low end torque and transient response. The Group's V-Charge and KERS technologies can help OEMs downsize and address these challenges.

Oil price

The price of oil declined throughout most of the year and reached a record low in February 2016 before starting to recover. The current price however remains low at around US$50/barrel. This creates a difficult environment with our customers whose motivation to adopt KERS is primarily driven by fuel cost savings rather than reduced emissions or improved performance. This is particularly true in the off-highway, bus and truck sectors. Our response to the sustained low fuel price has been twofold. Firstly, we have redoubled our efforts to drive down the cost of our products and are already achieving considerable success in this area. We now expect to be able sell our leading off-highway energy recovery product at a cost some 30% below that expected a year ago. We have also launched further programmes to continue this cost reduction journey. Secondly, we are targeting those applications/customers in which our technology is used either to meet mandatory emissions regulations and/or to improve machine productivity/performance, cost-effectively. There are multiple opportunities across different market sectors which we believe our technologies can address.

V-Charge

V-Charge is a variable speed supercharger for both gasoline and diesel engines that uses the Group's unique traction drive technology. It has been developed by the Group over the last five years and enables the level of engine boosting to be adjusted independently of engine speed and provides rapid torque response at any engine speed. As a result, V-Charge eliminates the 'lag' associated with conventional boosting technologies, particularly at low engine speed when other boosting solutions struggle. V-Charge enables OEMs to radically downsize and downspeed engines by producing more torque from smaller engines at lower engine speeds therefore delivering lower emissions whilst maintaining the driving 'feel' of a larger engine.

Engine downsizing and downspeeding is seen by the industry as critical to meeting the demanding post 2020/21 emissions regulations in passenger cars in the most cost-effective way. With the majority of OEMs having already made their first downsizing step, other boosting solutions are now required to meet the more aggressive downsizing targets. In a recent study, conducted on behalf of the Group by Ricardo plc, involving 34 primary OEM interviews, engine downsizing/downspeeding via boosting was confirmed as the primary way to achieve the CO2 emissions between 2020 and 2025. The report also confirmed that by 2022, it is expected that over 90 per cent. of European, and approximately 60 per cent. of North American, passenger car production will be 2.0L or smaller. Extreme downsizing of gasoline engines is expected in Europe, with 25 per cent. of engine production at 1.0L or smaller capacity; technology will replace displacement.

We were pleased to announce last month the on-engine V-Charge testing programme conducted by the University of Bath ("Bath") in collaboration with a global Tier 1 supplier of engine boosting systems and with the participation of the Ford Motor Company ("Ford"), had successfully achieved or exceeded the demanding key OEM target market requirements. These independently validated test results confirm:

· V-Charge in a twin-stage boosting configuration meets the target torque requirements to enable significant engine downsizing; and

· V-Charge outperforms other advanced boosting systems over a broad range of performance attributes.

The Innovate UK funded Bath project commenced in 2014 to develop a production-orientated V-Charge twin-stage boosting system, to independently validate the real-world performance and emissions reduction benefits of Torotrak's variable speed supercharger and demonstrate the capability of the technology to enable significant engine downsizing whilst maintaining driveability. Critically, these results have been independently conducted and validated by Bath in conjunction with a global engine boosting Tier 1 supplier on the class-leading 1.0L Ford EcoBoost engine.

The key OEM target market parameters set for the project which were successfully achieved or exceeded by V-Charge during the independent testing by Bath, were as follows:

The successful results from the Bath study confirm the capability of V-Charge to enable more radical engine downsizing and downspeeding whilst maintaining the driveability and performance of the vehicle. Importantly, V-Charge enables OEMs to put much smaller engines into cars to meet the challenging post 2020 emissions targets without sacrificing performance or incurring significant additional costs. V-Charge offers OEM customers the following key benefits when compared to other advanced boosting solutions:

· Uses less fuel at full load than an equivalent non-variable mechanical roots supercharger, by delivering only the air that is required;

· Achieves faster torque response than two-stage turbocharging, or clutched mechanical superchargers;

· Is much quieter in operation than both eBoosters and alternative mechanical superchargers (which use roots type positive displacement compressors);

· Can produce higher peak power than equivalent eBoost systems, as the V-Charge supercharger operates continuously at low engine speeds, which means that the turbocharger can be sized for higher engine speeds only and hence optimised for peak power; and

· Offers significant performance advantages on alternative engine cycles such as Miller/Atkinson currently being investigated by OEMs for next generation engine platforms.

As noted earlier, V-Charge enables OEMs to meet the challenge of reducing emissions and fuel consumption in cars that customers want to drive and can afford to buy.

The next stage of the V-Charge programme is to install the V-Charge enabled EcoBoost engine in a standard Ford Focus to demonstrate the performance and driveability of the vehicle; this is expected to be completed in late summer 2016. In parallel, a second V-Charge enabled 1.0L Ford EcoBoost engine will be installed in an S-MAX (replacing the normal 1.5L engine) and used to demonstrate the potential for V-Charge to enable radical engine downsizing, whilst maintaining the required performance and driveability of the vehicle; this is expected to be completed later in the year.

The successful Bath test results are a major achievement for the Group. Together with the Ford Focus and S-MAX demonstrator vehicles this represents tangible, independent, real-world validation of the benefits of V-Charge and confirms V-Charge is a significant part of the solution to achieving the necessary engine downsizing to meet the emissions regulations.

We are actively engaged in meeting a wide range of potential OEM customers creating the market pull for the technology. In parallel, we are in discussions with Tier 1s about the opportunity to license the technology and offer a market-ready product to automotive customers.

KERS

Off-highway:

The sector which in the last 12 months has demonstrated the highest level of interest in our high-speed flywheel-based energy recovery and storage technology is the off-highway sector. The KERS technology is power dense, highly flexible, with a range of possible configurations including hydraulic and non-hydraulic couplings and engine and transmission-connected solutions. The low cost mechanical nature of KERS is attractive to the off-highway market and offers significant benefits over more expensive alternative battery-based and other hybrid solutions for which the harsh operating environment can prove particularly challenging.

The Group has recently been awarded a contract with one of the largest global manufacturers of off-highway construction and mining equipment within the Energy Technologies Institute's Heavy Duty Vehicles Efficiency programme. Work has commenced on this fully funded programme to design, develop and demonstrate a high-power KERS for integration in the main drivetrain of a large mining truck. The project will demonstrate the scalability of the Group's KERS technology and all the project partners believe there are significant potential opportunities for the Group's low cost KERS technology in a range of on and off-highway vehicles. 

Since late 2015, the Group has been working closely with a large global off-highway OEM to design, develop and demonstrate KERS for application in a wide range of possible vehicle/machine types. The first development KERS unit has been successfully rig-tested by the OEM in its facilities and achieved all of the key target performance criteria in multiple demonstrations. The OEM is now evaluating KERS across a broad range of other possible applications. The Group is in discussions with the OEM about how to apply KERS to the initial target application and the commercial terms under which the technology would be made available by the Group, including a range of possible licensing arrangements. We are encouraged by the progress being made in these commercial discussions and we expect to report further to Shareholders on these discussions later in the current financial year.

As previously reported, the flywheel-based, hydraulically connected energy recovery system developed with funding from the Advanced Propulsion Centre ("APC"), and in conjunction with JCB, demonstrated fuel savings from testing on an excavator and is ready to enter validation testing. With the current sustained low fuel prices, we have agreed with the project partners to amend the programme to include a cost-down design iteration to further reduce the manufactured system cost. All the project partners are confident that this additional design step will significantly reduce the system-level cost and deliver operator paybacks of less than two years even at the current low fuel price and on a broader range of duty cycles. In parallel, we are in initial discussions with a range of Tier 1s and OEMs about opportunities to incorporate KERS in a range of other off-highway machines. Achieving the lowest manufactured cost is critical in enabling KERS to be deployed on the smaller lower cost machines where achieving the target operator paybacks is more challenging.

On-highway:

We commenced the financial year with the objective of completing in-vehicle testing and independent certification of fuel savings on a KERS-equipped Euro6 StreetLite Micro Hybrid bus, followed by the planned production launch of KERS in mid-2016. As reported to Shareholders in April this year, the Group successfully achieved the target in-vehicle fuel savings and emissions improvements and met the key driveability and cost targets set in conjunction with our OEM partner, Wrightbus. Specifically, fuel savings of 11.1 per cent. were achieved on the standard MLTB (Millbrook London Transport Bus) test cycle when compared to the highest-efficiency new Euro6 StreetLite bus. Importantly, our simulation shows that the work we are now doing with Wrightbus to develop a more complete integration of the vehicle and Torotrak control systems has the potential to take the overall fuel savings up to between 13 and 14 per cent. On the MLTB cycle, the KERS-equipped bus achieved a reduction in CO2 emissions of 11.1 per cent. and a reduction in greenhouse gas emissions of 14.8 per cent. The Millbrook testing also certified the KERS-equipped bus as a Low Emission Bus, exceeding the threshold required to be eligible for maximum capital grant funding; being 75 per cent. of the KERS cost. This is an excellent result and demonstrates the real-world capability of KERS to deliver significant fuel savings and emissions reductions.

During the year the market conditions for the launch of our bus KERS deteriorated significantly. Fuel prices declined further and have remained at record lows for most of the last 12 months. In addition, the major UK bus operators have seen a deteriorating trading environment resulting in a reduction in available capital budgets to spend on new low emission bus technologies. In recent discussions with Wrightbus and bus operators, it would appear that the bus operators' minimum required payback for new low emission technologies has fallen from around 5 years to between 2 and 3 years. To compound an already difficult market backdrop, the results of the UK Government's Ultra Low Emission Bus ("LEB") grant applications have been delayed and there is no indication when, or if, these grant awards will be confirmed. At the time of writing there is still no news on the status of the LEB grant applications.

In the absence of any visibility of the availability of LEB grant awards and with the current low level of fuel prices (which bus operators have locked-in with forward hedging) and following discussions with our partner Wrightbus, the Board decided to delay further investment in production tooling and delay the planned production launch of bus KERS, which was due later this year. The duration of the delay is uncertain, depending upon the eventual award of LEB grants for KERS-equipped vehicles, sustained higher fuel prices (net of fuel subsidies) and an increased investment appetite amongst bus operators for new low emissions technologies. We are very disappointed to have had to delay the launch of the Group's bus KERS product, but in view of the continuing uncertain market conditions we felt it was better to redeploy our engineering resources onto other more promising near-term commercial opportunities in line with our commercial focus. A small team of engineers are continuing to work on the engineering demonstrator KERS-equipped StreetLite bus which will be showcased to OEMs and bus operators and used for ongoing bus operators' fuel trials.

We are seeing some interest in both the UK and US to explore the opportunity to use our bus KERS technology in on-highway bus and truck applications. We are investigating the potential to conduct feasibility and demonstrator projects to evaluate the opportunity to deliver fuel savings and emissions reduction benefits when compared to alternative technologies.

Passenger cars:

The Group continues to see increased levels of interest and engagement from automotive OEMs interested to understand how KERS can help deliver lower CO2 emissions/improved fuel economy at a lower cost than alternative technologies and/or improve the performance of the car. We are actively engaged on feasibility studies to explore the cost/benefit of installing KERS on a range of vehicles. A number of other proposals for feasibility studies have been submitted and we are waiting to hear if these have been successful. It has been interesting to note that the very high power density of our KERS is seen as being increasingly attractive for hybridisation of vehicles when compared to electric/battery solutions on the basis of both weight and cost per grams of CO2 saved.

The passenger car market remains a key long term target market for KERS, particularly given the inherent low cost nature of our mechanical flywheel-based solution. The market opportunity for KERS is substantial but timescales to secure uptake on mass market platforms can be slow.

IVT/CVT

The Group continues to develop and validate new volume-capable low cost manufacturing methods for the supply of core components such as discs and rollers that can be used in applications from V-Charge up to main drive transmissions. This multi-year programme, part-funded by Innovate UK, is on track and is delivering new intellectual property that can be licensed to Tier 1 partners. Demonstrating low cost, durable mass manufacturing materials and processes is an important element in reducing the risk and cost to Tier 1s of bringing the Group's technology to market.

In main drive transmissions, the Group is supporting its strategic partner, Univance, in exploring opportunities to use our CVT technology in a range of off-highway vehicles. There is no active programme being pursued in conjunction with Allison Transmissions Inc.

Flywheel assembly manufacturing

We have made good progress during the year in developing our in-house manufacturing capability and establishing the path to achieving the lowest cost, production-capable flywheel assemblies. We have established a number of important relationships with partners who can help us to develop and supply key flywheel assembly components, leveraging their existing supply chains and manufacturing know-how. These collaborations have already delivered significant performance and cost improvements giving us direct line-of-sight to achieving the challenging cost targets for flywheel assemblies. These relationships enable the Group to focus on developing the core KERS technology, helping customers/licensees with application engineering and offering licensees a credible, low cost supply of flywheels. For global mass markets such as passenger cars, the Group's flywheel assembly manufacturing capability helps underpin the value of the licence, reduces the technology transfer risk for licensees and enables the Group to offer ramp-in volumes, where relevant.

The Group's flywheel assembly manufacturing business model is consistent with the Group's low capital cost strategy and will deliver an additional revenue stream from licensees and customers.

Financial

Revenue for the current financial year fell to £1.2 million from £3.8 million in the previous year. Licensing income was £0.1 million (2015: £1.0 million) reflecting the cessation of licence fee income from Allison Transmissions Inc. During the year, a significant proportion of the Group's engineering resources were deployed on key internally funded development programmes such as bus KERS and V-Charge. This focus on self-funded projects resulted in a reduction in engineering services revenue from £2.8 million to £1.1 million. Gross profit for the year was £0.1 million (2015: £2.0 million), due largely to the reduction in revenues.

As part of the reorganisation implemented earlier in the year, the Group has successfully delivered a £1.8 million (~22 per cent.) reduction in net cash operating costs to £6.3 million. This reduction has been achieved through a combination of a headcount reduction, elimination of cash bonuses and removal of other employee incentives. Total operating costs (including non-cash costs such as deprecation, but excluding intangible asset amortisation (know-how) and exceptional items), decreased from £9.2 million to £7.5 million during the year.

The adjusted operating loss (before intangible asset amortisation (know-how) and exceptional items) for the current financial year was £7.4 million (2015: £7.2 million). The increase is attributable to a £1.9 million reduction in gross profit, largely offset by the £1.8 million reduction in net cash operating costs referred to above. After deducting intangible asset amortisation (know-how) costs of £0.8 million (2015: £0.8 million) and exceptional costs of £6.1 million (2015: £0.4 million) the operating loss for the year was £14.3 million (2015: £8.4 million). The exceptional charge for the year includes a £0.7 million cash restructuring cost, non-cash costs of £5.0 million (2015: £Nil) relating to the renegotiation of the Flybrid acquisition agreement and a £0.4 million (2015: £Nil) provision against the diminution in the long term value of the investment in Rotrex A/S.

Net finance cost was £0.06 million (2015: £0.04 income), due largely to the interest cost on the five year term loan arising from the renegotiation of the Flybrid acquisition agreement. Income tax credit, mainly in relation to research and development tax credits, of £0.8 million increased by £0.2 million (2015: £0.6 million), due to an adjustment to the Group's deferred tax liability as a result of the changes to future corporation tax rates. The loss for the year attributable to Shareholders was £13.5 million (2015: £7.8 million), the increase being driven largely by the one-off, non-cash exceptional costs of £5.4 million.

Net cash used in operating activities during the year increased by £0.7 million to £6.9 million (2015: £6.2 million). The increase was driven by a £0.2 million increase in cash restructuring costs and a reduction in tax credit receipts of £0.5 million; £0.4 million of which was received immediately after the end of the financial year. Net cash used in investing activities fell to £0.6 million from £1.1 million in the previous year, largely due to the reduction in investment in plant and equipment, in line with the Group's change in strategy to scale back our in-house manufacturing intentions. Net cash generated from financing activities of £11.3 million (2015: £0.1 million) arose from the issue of new shares in a subscription, firm placing, placing and open offer (£13.8 million, less expenses of £1.4 million) being offset by a £1.0 million repayment of vendor loan notes relating to the Flybrid acquisition. The remaining £1.8 million of vendor loan notes have been converted into a five year term loan.

The closing cash balance was £11.3 million (2015: £7.6 million). The outstanding balance on the five year term loan was £1.8 million (2015: £2.8 million short term vendor loan notes).

Outlook

Our focus for the next 12 months is to deliver initial licensing commitments with our commercial partners.

For V-Charge, the independent validation of the performance and overall system benefits compared to other advanced boosting technologies in conjunction with the demonstrator vehicles provides an excellent opportunity to showcase the technology and license it into the passenger car and other markets.

For KERS, our target is to convert the interest we have seen in the off-highway sector into licensing and/or other commercial commitments to take the technology to market. The global off-highway market remains in a significant downturn, however I am confident that the high power density and low cost advantages of our technology will enable us to secure the commercial traction required.

To support our commercial discussions, a key objective for the business over the next 12 months is the continued development and cost reduction of our in-house flywheel assembly manufacturing capability in collaboration with our supply chain partners. Achieving the lowest cost, volume-capable, productionised and validated design is important to give our licensees the confidence to make the investment to take the technology to market. This equally applies to the work we are doing to develop new low cost manufacturing processes for discs and rollers for use in V-Charge, where achieving a low cost mass manufacturable design is essential.

I would like to thank all of our staff for their hard work and passion during the last year and for helping to achieve a number of important technical and commercial milestones. We have achieved a great deal during the year and I look forward to beginning to realise the fruits of our continued hard work in the coming year.

Adam Robson

Chief Executive Officer

28 June 2016

Financial Statements 2016

Consolidated Income Statement

There is no other comprehensive income in the current or prior year and therefore no separate Statement of Other Comprehensive Income is required (2015: £nil).

Balance Sheets

Statements of Changes in Equity

Notes to the Financial Statements

1. General information

Torotrak plc (the "Company" or "Parent Company") is a publicly traded company incorporated and domiciled in the UK. The address of its registered office is 1 Aston Way, Leyland, Lancashire PR26 7UX. The Company is listed on the Main Market of the London Stock Exchange.

The Annual Report and Financial Statements for the year ended 31 March 2015 have been delivered to the Registrar of Companies and are available on Torotrak's website www.torotrak.com and the Annual Report and Financial Statements for the year ended 31 March 2016 will be posted to Shareholders and made available on Torotrak's website in July 2016.

The preliminary final results for the year ended 31 March 2016 are unaudited.

2. Basis of preparation

This announcement was approved by the Board of Directors on 28 June 2016. The financial information in this announcement does not constitute the Group's statutory accounts for the years ended 31 March 2016 or 31 March 2015 but it is derived from those accounts, which for the year ended 31 March 2016 are unaudited. Statutory accounts for the year ended 31 March 2015 have been delivered to the Registrar of Companies, and those for 31 March 2016 will be delivered after the Annual General Meeting. The Auditors have reported on the accounts for the year ended 31 March 2015; their report was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

As at the date of issuing this financial information, the Auditors have not reported on the Group Financial Statements for the year ended 31 March 2016 and therefore the financial information in respect of that period is unaudited. The unaudited consolidated Financial Statements from which these results are extracted have been prepared under the historical cost convention in accordance with IFRS (International Financial Reporting Standards), as adopted by the EU, IFRS IC interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The standards used are those published by the International Accounting Standards Board (IASB) and endorsed by the EU and effective at the time of preparing these financial statements (June 2016).

The unaudited Group Financial Statements have been prepared on a going concern basis, as the Directors confirm that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for a period of at least 12 months from the date that the Financial Statements were approved, given the cash resources available to the Group and the future cashflow forecasts.

3. Accounting policies

The accounting policies adopted in the preparation of this financial information are consistent with those adopted for the year ended 31 March 2015, as included in the published financial statements, other than in relation to new and amended standards, as set out below, which have been adopted for the first time in the year:

(a) New and amended standards adopted by the Group.

The following standards have been adopted by the Group for the first time for the financial year beginning on 1 April 2015:

· Annual improvements 2010-2012 (effective 1 July 2014) (endorsed for 1 Feb 2015)

· Annual improvements 2011-2013 (effective 1 July 2014) (endorsed for 1 Jan 2015)

· IFRIC 21, 'Levies' (effective 1 January 2014) (endorsed 17 June 2014)

The adoption of the new and amended standards above has not had a material impact on the Group Financial Statements.

(b) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group.

The following new standards and amendments to standards, which have been issued but are not yet effective, and have not been early adopted by the Group:

· Annual improvements 2012-2014 (effective 1 January 2016)

· Amendment to IFRS 11, 'Joint arrangements' on acquisition of an interest in a joint operation', (effective 1 January 2016) (subject to EU endorsement)

· Amendment to IAS 16 , 'Property, plant and equipment' and IAS 38,'Intangible assets', on depreciation and amortisation (effective 1 January 2016) (subject to EU endorsement)

· Amendments to IAS 16, 'Property, plant and equipment' and IAS 41, 'Agriculture' on bearer plants (effective 1 January 2016) (subject to EU endorsement)

· Amendments to IAS 27, 'Separate financial statements' on equity accounting (effective 1 January 2016) (subject to EU endorsement)

· Amendments to IFRS 10, 'Consolidated financial statements' and IAS 28, 'Investments in associates and joint ventures' on applying the consolidation exemption (effective 1 January 2016) subject to EU endorsement

· Amendments to IAS 1, 'Presentation of financial statements' disclosure initiative (effective 1 January 2016) (subject to EU endorsement)

· IFRS 9, 'Financial Instruments' (effective 1 January 2018)

· IFRS 15, 'Revenue from contracts with customers' (effective 1 January 2018)

· IFRS 16, 'Leases' (effective 1 January 2019)

The Group is currently assessing the impact these new standards may have on the Group Financial Statements and will provide a further assessment of the potential impacts in future years.

4. Statement of Directors' Responsibilities

Each of the Directors confirms that, to the best of their knowledge:

· the Financial Statements within the full Annual Report and Accounts from which the financial information within this Final Results announcement has been extracted, have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and

· the Strategic Report, which includes the Strategic Review, the Chairman's Letter, the CEO's Review, and the Principal Risks and Uncertainties include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that it faces.

5. Segmental reporting

Year ended 31 March 2016 (unaudited)

Note:

(i) Development activities include research and the creation of intellectual property. Some technology information has been combined where the values are deemed immaterial.

(ii) There were no transactions between segments.

Year ended 31 March 2015

Note:

(i) Development activities include research and the creation of intellectual property. Some technology information has been combined where the values are deemed immaterial.

(ii) There were no transactions between segments.

Significant customers

The following revenues are attributable to significant customers:

Note: (i) The revenue from Allison Transmissions Inc. has been generated from engineering services and licence fees.

The revenue from the remaining significant customers has been generated from engineering services.

The chief operating decision maker does not review measures of assets, liabilities, depreciation or amortisation at an operating segment level and therefore no disclosures have been presented. The results, assets and liabilities of all segments arise in the Group's country of domicile, being the United Kingdom.

6. Exceptional items

The severance related restructuring costs relate to severance and associated expenses in relation to a reduction in employees and costs connected to the termination of a Director.

On 22 July 2015 the Group received Shareholder approval to restructure the acquisition agreement with the vendors of Flybrid Automotive Limited and as such a one-off settlement was agreed with the vendors by way of issuing new Ordinary Shares in the Group to the value of £5 million. The vendors of Flybrid Automotive Limited, Jon Hilton (Non-Executive Director) and Doug Cross (Chief Technology Officer), received shares to the value of £3.5 million and £1.5 million respectively as part of the settlement. The £5 million has been treated as an exceptional item.

The investment in Rotrex A/S and the loan due from Rotrex A/S have been written down due to the uncertainty of the value of the net assets of Rotrex A/S and also the recoverability of the loan.

The one-off legal and other costs relate to the restructuring of the Flybrid acquisition agreement.

7. Intangible assets

The carrying value of goodwill, patents and know-how, and their potential impairment, is reviewed annually on a case by case basis, having regard to the commercial classification of a patent and its commercial applicability by market and territory. Expenditure relating to patent cases which do not meet defined criteria, as approved by the Board of Directors, is subsequently abandoned and the resulting costs charged to the Income Statement. Having completed the 2016 annual impairment review, the Group has abandoned patents with a net book value of £30k and created an impairment provision of £40k for patents to be abandoned once Board approval has been obtained (2015: £nil). No further impairment is considered necessary.

The average remaining life of the assets is 14 years (2015: 14 years).

Following the restructure of the Flybrid acquisition agreement at the General Meeting held on 22 July 2015 the vendors of Flybrid Automotive Limited were granted a charge over all patents, know-how, trademarks and other intangible assets owned by Flybrid Automotive Limited, or in which it may have an interest, in relation to a £1.8 million loan due to the vendors.

8. Income tax credit

9. Deferred tax

The deferred tax liability relates solely to the intangible assets recognised on the acquisition of Flybrid Automotive Limited and is based on 20 per cent. of the intangible asset (know-how) value up to 31 March 2017, 19 per cent. up to 31 March 2020 and 18 per cent. up to 31 March 2029. The deferred tax liability is being amortised through the Income Statement to match the amortisation of the underlying intangible asset, being over 15 years.

Deferred tax assets have not been recognised relating to tax losses or unclaimed capital allowances as uncertainty remains over the sufficiency of future taxable profits against which the losses could be utilised. The Group also has unrecognised deferred tax assets relating to potential future deductions on the exercise of share options issued to Group employees.  

The movement in the deferred tax liability arises from £153,000 being credited to the income statement to match the amortisation of the know-how intangible asset and £159,000 credited to the income statement due to the change in the corporation tax rates in future periods.

£153,000 of the deferred tax liability is expected to be recognised in the Income Statement in the 12 month period following the balance sheet date.

10. Trade and other receivables

The Group net trade receivables includes a provision for impairment of £51k in relation to a potentially unrecoverable debt as at 31 March 2016 (2015: £nil) in accordance with the Group's accounting policy. No other trade receivables were overdue at 31 March 2016 (2015: £nil). No trade receivables were written off in the year.

The other classes of trade and other receivables do not contain impaired assets.

All trade and other receivables are denominated in UK pounds (2015: All UK Pounds).

The fair value of trade and other receivables has been considered to be consistent with the book value due to the short-term nature of trade and other receivables.

11. Trade and other payables

At a General Meeting held on 22 July 2015, the Shareholders approved the restructure of the Flybrid acquisition agreement. As part of the restructure, £1.8 million of the £2.8 million vendor loan notes, arising from the initial consideration for the acquisition in January 2014, have been converted into a 5 year term loan. The loan is secured on the tangible and intangible assets of Flybrid Automotive Limited, which can be repaid by the Company at any time during the five years. The loan carries a fixed annual interest rate of 7 per cent., payable in cash, monthly in arrears (the previous vendor loan notes did not attract any interest). The remaining £1.0 million of the £2.8 million loan notes was paid in cash on 23 July 2015.

Assuming the loan to the Flybrid vendors runs its full duration to July 2020, the future undiscounted cashflows, at 7 per cent., will be £2,343,000.

12. Issued share capital

Note:

(i) The Company received Shareholder approval to reorganise the share capital, reducing the nominal value of the Ordinary Shares by sub-dividing and converting the 276,286,047 Ordinary Shares of 10 pence each, existing on 30 June 2015, into 276,286,047 Ordinary Shares of 1 pence each and 276,286,047 Deferred Shares of 9 pence each.

Following the General meeting held on 22 July 2015 the Company issued 197,642,939 of new Ordinary Shares under a Subscription, Firm Placing, Placing and Open Offer and 71,428,571 of new Ordinary Shares as a result of the restructure of the Flybrid acquisition agreement.

13. Loss per share

Basic loss per share is calculated by dividing the loss attributable to equity holders of the Parent Company for the year by the weighted average number of Ordinary Shares in issue during the year, excluding those held in trust. For diluted loss per share, the weighted average number of Ordinary Shares in issue is adjusted to assume the issue of all potentially dilutive Ordinary Shares, being those share options with non market-based performance conditions granted to employees where the exercise price is less than the average market price of the Ordinary Shares during the year, and those shares with a market-based performance condition based on the current estimate of the number of shares that will vest under the performance criteria.

For the year ended 31 March 2016 potentially dilutive Ordinary Shares were antidilutive, as their inclusion in the diluted loss per share calculation would have reduced the loss per share, and hence have been excluded.

14. Forward looking statements

Certain statements in this Preliminary Announcement are forward-looking. The terms 'expect', 'should be', 'will be' and similar expressions identify forward looking statements. Although the Board believes that the expectations reflected in these forward looking statements are reasonable, such statements are subject to a number risks and uncertainties and actual results and events could differ materially from those expressed or implied by these forward looking statements.

15. Principal risks and uncertainties

The principal risks and uncertainties which the business faces are: maintaining sufficient cash to meet the on-going working capital requirements, commercialisation of products and technology, creation or acquisition of technical solutions and intellectual property protection, competition and technical advances, senior management and skilled personnel, quality of supply, product liability claims, economic drivers and environmental legislation. A full description of these risks and the mitigating actions taken by the Group will appear in the 2016 Annual Report and Accounts.

16. Approval

The Preliminary Announcement was approved by the Board of Directors on 28 June 2016.

Date and Venue of AGM

The Annual General Meeting of the Company will be held at the offices of Tavistock Communications Limited, 131 Finsbury Pavement, London, EC2A 1NT on 5 September 2016.

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