Torotrak PLC Regulatory News (TRK)

28 May 2014

Torotrak PLC

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

Final Results for the Year to 31 March 2014

Torotrak (LSE: TRK) announces final results for the year ended 31 March 2014.

Highlights

Operational

· Durability milestone for Allison successfully passed, achieving more than 300 per cent. of target life;

· Torotrak to support Allison's next stage IVT engineering programme;

· KERS system successfully installed in a Wrightbus Streetlite bus, meeting system integration and driveability targets;

· Bus KERS testing at Millbrook by end Q2 2014; trials on a public route now scheduled with Arriva in Q3 2014;

· Collaboration with OEM and Tier 1 to optimise V-Charge in latest engine platform design;

· Discussions on-going with multiple new prospective Tier 1 / OEM customers; and

· Secured multiple part government funded development programmes including new contracts to install KERS systems in Lotus passenger cars and JCB excavators.

Financial

· Acquired remaining 80 per cent. of Flybrid Automotive Limited for £8 million plus an additional performance-based earn out of up to £15 million;

· Increased investment in core component manufacturability and prototypes, leading to increased adjusted operating losses of £4.0 million (2013: £0.1 million), in line with strategy and prospectus;

· Completed equity placing and open offer raising £16 million (gross) from new investors and existing shareholders including Allison Transmission Inc. ("Allison");

· £3 million in licensing fees received from Allison; and

· £14.9 million in cash at 31 March 2014.

Jeremy Deering, Torotrak's CEO commented: "We have this year made substantial progress in line with our strategic aims published last year to re-position the Company to capitalise on the global opportunities for our fuel saving technology. With Flybrid now integrated into the Group, we have three fuel-efficiency technologies each capable of bringing significant change to the future of automotive engineering.

"With this year's investment in manufacturing capability, and our partnership with two UK commercial vehicle manufacturers, we are positioned for the first time to take our technology to market ourselves, with start of production scheduled for 2015."

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

Chairman's Statement

A year of strategic change

During the year we have put in place substantial new capability to deliver on the strategy changes we announced last year. The acquisition of Flybrid Automotive Limited ("Flybrid"), which completed in January 2014, expanded the Group's technology portfolio, broadened the customer base and significantly increased our technical and operational capability. We have also invested in our manufacturing and specialist component capability and extended our partnerships, to give us more options to get our technology introduced into the market. The Group can now offer vehicle manufacturers a range of cost-effective technologies and services that address the challenging new regulatory requirements across all sectors of the global vehicle market.

Acquisition of Flybrid

I am pleased to report that in January 2014 we completed the acquisition of the remaining 80 per cent. of Flybrid that the Group did not already own. Flybrid's core product is a high-speed flywheel kinetic energy recovery system ("KERS") with more than five years and £9 million of investment in development and testing. The technology has been operated successfully in the motorsport industry and Flybrid has successfully completed more than twelve customer programmes. We believe that Flybrid KERS is the leading commercially viable mechanical KERS technology in the market, offering low cost and high performance for mass market adoption in passenger cars and commercial vehicles. Successful prototype systems have demonstrated significant fuel savings and performance improvements in tests conducted with automotive partners including Volvo and Jaguar.

The acquisition was financed through a placing and open offer that raised £16 million (gross before expenses). The placing was supported by our largest shareholder and major commercial partner, Allison Transmission, Inc. ("Allison") and all of our main existing institutional shareholders, as well as bringing a number of important new blue-chip institutions onto the share register. The open offer was also well supported by our existing private and other shareholders, with valid applications being received in respect of approximately 87.3 per cent. of the shares available pursuant to the open offer.

Performance of the Group

Our Chief Executive, Jeremy Deering, reports in detail in his Review on the progress made by the Group and the main achievements during the last 12 months. I would like to highlight briefly the key aspects of performance this year.

Beginning with the financial performance, the Group closed the year with a cash balance of £14.9 million (2013: £8.9 million). The increase was due to the successful fund raise completed in January this year. The strengthened balance sheet provides a robust platform to negotiate commercial arrangements with Tier 1 and OEM prospective partners and enables us to continue our programme of investing in our technology platforms. The normalised loss after tax (before amortisation of intangible knowhow and associated tax credit and exceptional items) increased to £3.4 million (2013: £0.4 million profit), reflecting the lower level of licensing revenue earned in the year and our decision to increase investment in the development of our technology platforms. This is in line with our announced strategy.

In our main drive transmission technology, I am pleased to report that the core component durability testing programme commenced in the last financial year, has been successfully completed. This is a significant milestone, and we have agreed with our major commercial partner, Allison, the next stage engineering programme. This will target developing the next generation design with improved size, weight and cost.

In V-Charge, significant improvements have been made in the technology and I am pleased to report that recent testing and market benchmarking confirmed the benefits that the technology offers compared to the incumbent boosting products. We were pleased to have been awarded a Technology Strategy Board funded project in collaboration with a well-known, global passenger car OEM, a major Tier 1 supplier of engine boosting products and Bath University, to optimise V-Charge for use in the latest design of engine platforms. This is a critical next step in demonstrating the full potential of our variable supercharging technology in the context of an engine optimised for its use.

In KERS, we are focussed on the upcoming bus trial with Wrightbus and Arriva, which will see a bus fitted with Flybrid KERS operate on a public route in England for the first time this summer. We have made substantial progress on this programme, installing a KERS system in a Wrightbus Streetlite bus that is currently undergoing testing and calibration on a test track in Northern Ireland. As part of the concurrent productionisation programme, we have been working on design improvements to further reduce parts count, weight and cost.

We are also pleased to have been awarded two new government-sponsored programmes with Lotus and JCB to integrate our KERS technology into the manual transmission of a production passenger car and the next generation of excavators, respectively.

The last 12 months have been exceptionally busy and the Board is pleased with the substantial progress that the Group has made.

People

During the last year we have strengthened the Board with the appointment of John McLaren as Non-Executive Director and Chairman of the Audit Committee and Rex Vevers as Finance and Commercial Director. John brings significant experience from his background in corporate finance in Europe, Asia and the US, across automotive and many areas of technology. Rex has a wealth of international commercial and operational experience in both the market introduction of new technologies and in a range of broader industries.

Following the acquisition of Flybrid, Jon Hilton, the former Managing Director and joint co-founder of Flybrid, joined the Board as Product Development and Sales Director. Jon is a very experienced engineer in Motorsport, having been Technical Director of the Renault F1 team Engine Division. Jon's business partner and co-founder Doug Cross has also joined the executive management team as Chief Technical Officer of the Group. Doug has formerly worked for Ricardo plc and then at the F1 teams of Toyota and Renault.

The Board would like to express its thanks to Garry Wilson who stepped down from the Board and left the Group in March.

The senior management team has been strengthened following the integration of Flybrid into the Group. Dan Jones becomes Group Chief Designer, Andrew Deakin as Chief Development Engineer and Tobias Knichel takes on the role of Director of Business Development responsible for all of the Group's technologies and products.

We have an excellent team of talented and dedicated people and I would like to thank all of them for all their hard work and passion during the last twelve months. I would also like to welcome the Flybrid staff into the Group. We have the team in place to deliver the Group's strategy going forward.

Outlook

The current year has started very positively and I am delighted by the progress being made as we start to see the benefits of the Flybrid acquisition. The natural integration of Flybrid and Torotrak engineers into a highly capable new team has served to strengthen the capabilities of the Company.

Across all product sectors of the global vehicle market, challenging new legislation is now in place requiring major changes in vehicle manufacturers' product development programmes between 2015 and 2020 to meet the required implementation dates. With internal combustion engines (ICE) likely to remain the dominant propulsion technology for the foreseeable future, our technologies offer cost-effective solutions available for commercial vehicle and passenger car manufacturers to implement in this critical window.

I am pleased with the progress we have made since issuing our prospectus and look forward to capitalising on the opportunities that lie before our enhanced Group.

John Weston

27 May 2014

CEO's Review

Strategic re-positioning

Torotrak is a very different looking enterprise at the end of this financial year when compared to its position at the beginning. We have brought together under one umbrella three fuel-efficiency technologies, each capable of bringing significant change to the future of automotive engineering.

I am pleased to see considerable progress across the Group in line with our strategic aims published in November 2012 to re-position the Company:

· To take greater control of getting our products into the market, investing in more early stage prototype platforms;

· To ensure a robust supply chain for our core components, unique to our technologies;

· To increase the breadth of technology that we can offer to customers;

· To move from a pure licensing business model towards low volume, high value supply of products ourselves; and

· To maintain strong cash balances ahead of moving the Group to recurring income from commercialisation of our products

The most obvious step forward has been the acquisition of Flybrid, giving us access to highly advanced flywheel technology and adding Flybrid KERS to our portfolio of fuel saving products.

The business has also moved forward in a number of other ways. We have invested in lower volume manufacturing capability at our Leyland facility, with the first flywheel hubs now being produced on site and carbon fibre filament winding commenced. We have built three new flywheel durability rig facilities in support of accelerated testing for manufacture, and have reduced lead times on critical parts through the successful integration of Motorsport Components Limited, now operating from our Leyland facility.

In addition, we have restructured operationally to give a clearer focus on sales, supported by an integrated engineering team serving all group products; dedicated project managers utilise these resources to deliver our customer programmes. Whilst we are integrated operationally, we are maintaining the separate technology 'brands' (Torotrak - commercial IVT (infinitely variable transmission); V-Charge - variable boosting; and Flybrid - KERS systems), which will be developed as distinct products for the passenger car and commercial vehicle markets.

Our site in Leyland has changed from having predominantly an R&D focus to being a specialist development site for manufacture including long term testing, component manufacture and low volume assembly for high value products. Our Silverstone site, previously the base for Flybrid, is now the key engineering centre for product design and development.

I am also pleased to report that following the successful accelerated testing of our discs and rollers, we have now commenced the next phase engineering programme with Allison.

Four months after completing the acquisition of Flybrid, it is encouraging to see how our broader range of technology platforms is attracting more interest and engagement from vehicle and equipment manufacturers. Customers working with us in one product area are increasingly talking to us about our other technologies. For example, engagement with our V-Charge/ IVT has led to some very promising opportunities for Flybrid KERS, and vice versa. This supports a key strategic objective: to form long term customer relationships that build on the trust formed from the first piece of work or product that we deliver. Successful engineering and customer engagement starts with a deep understanding of our customers' real market requirements; this is much easier when we are working closely together to design products to meet their needs.

It is difficult to convey the change, and how it feels. Put simply, we are busier than ever with enquiries coming in from around the world from prospective customers. This reflects changes in the market and tightening of regulations, the increased capability we have as a group, and the relevance of the cost-effective technologies that we offer.

We have made it easier for customers to engage with us by offering a variety of fuel saving technologies - from enabling engine downsizing and energy storage through to more fundamental powertrain engineering with our IVT.

With four recent contract awards with part government funding from the Technology Strategy Board and Advanced Propulsion Centre ("APC") covering relationships with other high profile UK entities such as JCB, Lotus, and Tata Steel, Torotrak is increasingly where it should be: at the centre of innovation and change in automotive engineering. This makes it important for international manufacturers to invest their time in building long term relationships with us. It is fair to say that the exposure and financial support from these high profile awards, and the parties with which we are working, reflects the momentum the Group has achieved this last year; this level of activity and funding support has been a substantial boost and is ahead of our expectations when planning last year.

Business plan

Our plan was set out in the December 2013 Prospectus and this drives our priorities and focuses our effort.

The Chairman reports on the financial results for the year just ended. The normalised loss after tax (before amortisation of intangible knowhow and associated tax credit and exceptional items) was £3.4 million (2013: £0.4 million profit) reflecting the operational investments to enable future growth and profitability.

Our focus during the new financial year ending 31 March 2015 (the first year of the current business plan) is on three key activities:

(1) operational investment ahead of the start of production of KERS for commercial vehicles;

(2) operational investment in producing durable core components and the capability to supply those ourselves or with partners; and

(3) funded and semi funded programmes that focus on designing and developing prototypes or low volume supply to advance the product development and market readiness of V-Charge and KERS in passenger cars.

Our plan for the second and third years of our current business plan (ending 31 March 2016 and 2017) is to build sales of Flybrid KERS for buses, whilst introducing KERS into other commercial vehicles, including construction equipment such as excavators. In this period we will also target lower volume production for Flybrid KERS and V-Charge applications in the passenger car market, being helpful in confidence building and market exposure. Following this, from 1 April 2017 periods onwards (from year four of the business plan) our priority is to secure a position on new car platforms capable of mass-market volumes and achieve launch of IVT in Commercial Vehicle markets.

Securing a position on car platforms ahead of the international mandates on lower CO2 limits for passenger cars coming into effect in 2020 is critical to our strategy and creating value for shareholders. Achieving product launch in this time window (2017 to 2020) maximises our opportunity for wider market take up as CO2 regulations then tighten further post 2020. Achieving take-up in one of our products encourages confidence and the likelihood of take-up in another, underpinned by strong customer relationships with both OEMs and Tier 1s.

Market

The global vehicle industry requires new cost-effective technologies to meet the challenging new CO2 emissions reduction and fuel efficiency regulations. With Internal Combustion Engines ("ICEs") likely to remain the dominant light duty vehicle propulsion technology beyond 2030, the main reduction in CO2 emissions will be achieved by making the ICE more efficient. This can be helped considerably through: engine downsizing; engine down-speeding; energy conservation, storage and release. Small scale incremental improvements to existing powertrain technology will not be sufficient for vehicle manufacturers to meet the required emissions standards from 2020.

In major passenger car markets, the key drivers for adoption of new technology by vehicle manufacturers are new CO2 emissions and fuel economy legislation. Specifically:

· new EU legislation from 2015 requires a significant reduction in CO2 emissions of new cars to 130 g/km in 2015 and then to 95 g/km phased in from 2020 and falling to a proposed new threshold of 68-75 g/km by 2025; and

· in the USA, new regulation requires escalating fuel targets to be met, rising to 54.5 US mpg by 2025.

These new regulations are enforced through significant financial penalties on vehicle manufacturers for failure to meet the targets and importantly, a new World Light Duty Test Cycle (WLDTC) which is expected to be phased in from 2017/18 requiring vehicles to be tested for compliance based on longer cycles and under more representative real world driving conditions. The introduction of a new WLDTC together with the introduction of random testing for compliance of cars in service favours the Group's technologies which can deliver material efficiency savings under real driving conditions rather than just 'beat the test cycle'.

The primary commercial driver in the commercial vehicle market is for a new fuel saving technology to pay its additional costs back with savings made over a defined period - known as payback. Typically fuel costs represent the largest operating cost for an operator so anything that can deliver a short-term payback (less than 5 years) is attractive. There are certain subsidies and incentives that may help contribute to this payback calculation, but our strategy is only to introduce technology that has a long term future and hence does not rely upon short term subsidies. In addition, the absolute upfront additional cost (regardless of payback) is also a significant barrier to adoption.

Longer term, new legislation is being introduced on a country-by-country basis that incentivises/penalises operators to introduce new energy-saving technologies; ultimately, commercial vehicle operators are more rational but more cost conscious.

Market introduction starts with Flybrid KERS for commercial vehicles

At the start of the financial year in April 2013, we had just invested in a 20 per cent. stake in Flybrid. Torotrak as a stand-alone entity at that point in time had developed one half of a mechanical KERS product - namely the continuously variable transmission ("CVT") element, which was successfully demonstrated in a Jaguar XF in 2008 and more recently in the Volvo S60 KERS, both in conjunction with Flybrid's flywheel.

A year on, the Flybrid acquisition has been completed and gives us more than just the 'other half' of the mechanical KERS technology; it also gives us an alternative, more conventional, clutch-based transmission system, the "CFT", as an alternative to our own CVT transmission.

Today, with Flybrid now a wholly-owned Group company, we have supplied our first KERS system to Wrightbus. The 'two halves' of this KERS product both come from Flybrid and utilise the CFT transmission, which is seen as facilitating an easier first introduction of the combined technology.

Acquiring Flybrid has therefore been critical to our strategic aims, it ensures we are first to market as a unified, recognised branded product with the world's most affordable hybrid technology, regardless of whether a clutched or Torotrak patented CVT system is used. Flybrid in turn has benefited from investment capable of bringing KERS to market, with a significant proportion of Group engineering resources focused on this technology.

The programme in collaboration with Wrightbus is progressing well. The first KERS system has been installed in a Streetlite bus, already one of the most fuel efficient buses on the market today. The bus with a KERS system installed is undergoing extensive testing, calibration and driver validation on a test track in Northern Ireland. Both Wrightbus and Torotrak are pleased with the initial testing and system integration work which is continuing with input from the suppliers of the bus powertrain. The next stage of the programme is to deliver the bus to Millbrook for independent testing and in parallel fitting the second KERS unit into an Arriva operated Streetlite vehicle which is to be run on a public bus route in England during the summer of 2014. This is slightly later than originally planned, but gives us the opportunity to fit KERS units into two Streetlite vehicles and incorporate new developments in calibration and software. I look forward to reporting to shareholders on the results of these trials in due course.

In parallel with fitting the KERS units into Streetlite buses, our engineering team has completed a new design iteration in preparation for verification testing and productionisation. This improved design has reduced parts count by more than 15 per cent. and reduced weight by more than 30 per cent. which will deliver improved system efficiency and lower cost. This new design will be installed in the next 25 unit fleet trial with up to five bus operators, targeted to commence in the current financial year. This is a challenging timetable and slightly later than planned, but we have judged that it is better to invest the time earlier in the programme, to maximise the wider fleet trial benefits, as well as opening up a wider addressable market for this first production unit in terms of its packaging, cost and benefits.

We announced in April 2014 our collaboration with JCB benefitting from the high profile funding from the newly formed UK Government sponsored APC. This is an excellent 'win' and will provide a well-recognised global company, JCB, with a high profile production-ready application of a Flybrid KERS on an off-highway platform. The project takes Flybrid KERS in an entirely new direction through a product development programme in an application for excavators, targeting a production-ready design for the off-highway market in 2017. Securing an off-highway programme for KERS at this stage is ahead of our expectations at the beginning of the last financial year.

Our mechanical energy storage technology is ideally suited to off-highway applications and we expect it will offer a highly cost-effective way to reduce emissions and fuel consumption in heavy duty-cycle vehicles such as excavators, which operate in harsh environments. "Cost effective" in this context means pay back on additional costs to the customer through fuel savings in less than two years. We plan to manufacture the flywheel assemblies in-house in our Leyland facility should this programme ultimately be adopted by JCB. Initial test results on a prototype design are very encouraging and confirm the capability of Flybrid KERS to deliver significant fuel savings and CO2 emissions reductions and an improved operator experience. The next stage of the programme targets a production-intent design for testing next year.

Lower volume introduction of product for passenger cars

We announced in April 2014 the collaboration with Lotus Cars which is an excellent showcase for a lower cost, lighter weight Flybrid KERS system integrated into the manual gearbox in a Lotus signature high-performance road car. Whilst our goal and major long term value lies in licensing manufacturers for mass volume production, this project helps raise our profile, demonstrates our capability, boosts OEM/Tier 1 confidence and offers the opportunity to manufacture lower volumes of KERS units for early market entry. We will target a limited number of other such lower volume opportunities for both Flybrid KERS and V-Charge. This programme is also ahead of our expectations when entering the financial year under review.

Tier 1/OEM licensing for volume production in passenger cars

The UK media launch on March 25th 2014 of KERS for cars, in collaboration with Volvo, attracted considerable interest and also acted as a spur for other prospective vehicle manufacturers with whom we are in discussions. Volvo reaffirmed its interest in securing the support of a Tier 1 manufacturer to take the KERS product through to production and market launch.

Our activity this year has been to work with Tier 1 prospective manufacturers for KERS, whilst also engaging directly with vehicle manufacturers. During the current financial year to 31 March 2015 we are broadening our business development in this area to ensure we secure multiple opportunities for future licensing.

With regard to V-Charge, as reported in December 2013, licensing opportunities remain strong but our expectations in terms of licensing are pushed back when compared to our expectations this time a year ago. The primary reason for this is that we are conducting much deeper investigation into the full system benefits that V Charge can achieve. In this respect, we announced in April 2014 our collaboration with a major car manufacturer, a Tier 1 and Bath University to optimise our V-Charge product around a state-of-the art production passenger car engine. It is important to recognise that V-Charge, like our other technologies, is not simply a 'bolt on' component, and its impact and interaction within an overall powertrain and transmission system are critical to maximising the overall benefits - and hence market positioning and selling price.

The additional work we are doing is focused on fully exploiting the capability of V-Charge by optimising various engine parameters such as valve timing, injection modes, and exhaust gas recirculation to develop the production-feasible installation for a homologated vehicle. This enables us to evolve a purpose-made unit that brings the technology much closer to market than previous proof-of-concept hardware and help to secure licensing agreements.

As well as the current interest in variable supercharging as an emissions reduction enabling product, there is an increasing awareness of the potential performance benefits that the technology can bring. Rapid response and strong drivability are V-Charge characteristics that are compelling in performance applications, and are generating more enquiries in this segment of the market.

Potential passenger car customers continue to work with us conducting simulation and trials of V-Charge units on current and next generation engine technologies. Our collaboration with a commercial partner, who is looking to use our variable drive technology to enable fuel savings in on-highway commercial vehicle applications, continues. Next stage prototype hardware for on engine trials is targeted to be delivered mid-year.

Main drive transmissions

At the start of the 2013/14 financial year, we commenced a programme of accelerated testing of representative sized discs and rollers to demonstrate their durability and meet the requirements of the Allison product development programme. I am pleased to report that we successfully completed the test programme, comprehensively exceeding the target life. Our development programme this year has pushed the boundaries considerably, and we have been rewarded with some exceptional results, considerably exceeding expectations a year ago and with favourable consequences for future design iterations of CVT and IVT products.

Out of the £2.6 million final license payment, £2.0 million was linked to the successful outcome of the tests. Allison has paid £1.6 million with the Group agreeing to defer receipt of the remaining £1 million into the 2014/15 financial year in conjunction with the next stage of the engineering programme; this is a sign of our commitment and confidence in this programme. Both companies have now agreed a funded engineering programme targeting reduced package size, cost and weight. I look forward to reporting to you on progress in completing this design.

Application engineering

Our team of experienced development and production engineers is at the centre of everything we do, and is highly regarded in the industry. They support our own product development and also provide support to our licensees and vehicle manufacturers.

During the year, engineering activity has been largely focused on internal engineering development. Engineering development on behalf of customers is expected to grow considerably during the current financial year ending 31 March 2015. However, we will still focus a significant element of activity on internal product development (for example, design for manufacture and accelerated lifetime testing of KERS for buses), as well as collaborative projects that are better viewed as joint investment. Moving out of 2014/2015, I expect to see growth in full customer application engineering. This reflects a move from feasibility through concept studies and then into engagement with vehicle OEMs on application specific prototype hardware.

Licensing

It is important to note that, with 520 patents, we have substantial products, applications and territories yet to license at a time when worldwide regulation of emissions and demand for fuel economy is increasing the value in our IP portfolio is increasing too.

Allison, our current main licensee and a 13 per cent strategic shareholder, is our major Tier 1 manufacturer for IVT in commercial vehicles, with rights relating to on highway applications for IVT in the above and below 14,000 kilogram gross vehicle weight field (other than Tata and ETBM who are also licensed in this field). Allison also has certain non-exclusive rights relating to the off-highway and military commercial vehicle market.

For the passenger car markets, for our IVT, technology we have got a limited licensing right agreement with Tata Motors. This therefore enables the Company to have significant opportunities to enter into licensing deals in this automotive space. This is true also of V-Charge and KERS where we have not yet made any licensing commitments. The value inherent in up front licensing fees and the potential value thereafter in per unit royalties, is a significant and valuable asset.

The timing and commercial structure of future licensing arrangements will play an important part in our future value creation. As we strive to achieve this objective, the strength of our balance sheet and availability of strong cash funding is essential in discussions with possible partners with potential multi-year programmes and for maximising our financial opportunities.

Business development

Our objectives for the coming year are clear:

· To build prospects for future orders of bus Flybrid KERS following a successful launch in the UK with Wrightbus, who will be the 'first to market' bus OEM;

· To secure further Flybrid KERS trials with bus operators around the UK;

· To create diverse opportunities for Tier 1 licensing for a volume passenger car application for Flybrid KERS or V-Charge;

· To reach agreement with at least one manufacturer and potential licensee in the passenger car market;

· To target markets with a high demand for emissions control, with high volumes and an appetite to invest in earlier, more rapid take up; Asia is one such opportunity; and

· Continue investment in developing our in-house manufacturing capability to allow us to commence commercial production by the end of calendar year 2015.

During the year we conducted a review of the opportunities for IVT in the off-highway market. This confirmed the applicability of the technology, but in a market that is highly fragmented and which has the potential to be time consuming and costly to pursue. Business development going forward for IVT in off-highway will be customer specific and subject to customer funding, or will build on relationships that we have or expect to create with our other products. We are therefore investing more of our resources towards our V-Charge and KERS technologies as we believe these will provide a quicker route to market than our IVT in the off-highway market.

Measuring up - how we fared against last year's targets

A summary of our expectations set out in last year's Annual Report is repeated in the table below. It will never be the case that every element will fall into place as planned. As you will see from the narrative above, some areas are ahead of expectations and some are a little behind. Our aim is to achieve a balance and a focus on our core strategic aims and to be measured on our progress towards them. As we diversify our technologies and routes to market and build recurring revenues, this "balance" will become easier to maintain and predict.

IVT

KERS

V Charge

What we plan to achieve this coming year 2014/15

Successful progression of IVT

· Milestone - Allison engineering programme continues targeting a new design;

· Milestone - Allison pays £1 million deferred license fee;

· Definition of market segment targeted for IVT introduction for on-highway commercial vehicles; and

· Secure one new customer/ programme for off-highway IVT.

Preparation for low volume manufacturing of high value products (e.g. KERS for buses)

· Confirm/announce manufacturing strategy and partnering approach.

Preparing for start of production in calendar year 2015 for KERS for buses

· Milestone - complete testing at Millbrook test track;

· Milestone - complete initial trial of a Wrightbus fitted with Flybrid KERS operating on a public bus route by Arriva;

· Commence design verification testing of the new bus KERS system, in readiness for commercial production by end calendar year 2015;

· Milestone - accelerated durability tests underway and on track to meet target requirements;

· Build and commence testing of a further 25 KERS units for fleet trials with multiple bus operators running on a range of UK bus routes; and

· Build a pipeline of sales prospects for bus KERS to support the start of commercial production by end calendar year 2015.

Develop KERS for off-highway application

· Milestone - JCB excavator production-intent design completed, hardware build underway; and

· Identification of other off-highway vehicle applications for the KERS system.

Automotive application of V-Charge and KERS

· Announce new feasibility programme secured as the first step in commercialisation programme with Tier 1 / OEM; and

· Supply of next generation hardware for trials on multi-stage premium automotive application.

Securing Tier 1 engagement for V-Charge and KERS for passenger cars

· Key simulation work completed in collaboration with Bath University and OEM/Tier 1 support, confirming performance/fuel efficiency benefits in a downsized state-of-the art production engine; and

· Secure funded Tier 1 engagement.

Summary

Our objective is clear - we are focused on capitalising on the substantial opportunities available in mass volume car markets seeking CO2 reducing and fuel efficiency technology to meet legislative targets, as well as the demand in the commercial vehicle markets for technology that reduces fuel consumption and offers operators an attractive payback.

With more diverse technologies to offer, and a dedicated approach to commercialisation that includes self-manufacture, we are in a strong position to exploit those opportunities. With a number of years of technology development and a market that has focused investment mainly on more expensive, electric alternatives and under-invested elsewhere, our competitors face considerable barriers to entry.

Managing the introduction of new technology into automotive industries with extended lead times is not a precise science and is not without risk. Torotrak's strategy is to systematically reduce risk and increase opportunity through a diversity of technology, a diversity of routes to market and through a dedicated focus on customer relationships, whilst focusing on key 'first to market' opportunities.

Building excellent customer relationships, demonstrating our technology, and retaining, growing and developing a high capability, high aspiration team of employees is key to everything. That is what we are doing and who we are.

Finally I would like to take this opportunity to thank our new investors, existing institutional and private shareholders and Allison all of whom supported the fund raising and the acquisition of Flybrid.

Jeremy Deering

27 May 2014

Financial Review

Highlights

This has been a busy year for the Group. The major event has been the acquisition of Flybrid and the associated fund raise; both successfully completed in January 2014. Our main commercial partner Allison paid £3 million in license fees to retain exclusivity in the truck and bus fields of the commercial vehicle market. In addition, Allison invested a further £2.3 million as part of the placing and open offer, maintaining its position as our largest shareholder.

The major highlights are as follows:

Primary cash inflow:

· £16 million (before expenses) cash raised in a placing & open offer from both existing and new institutional investors and existing private shareholders; and

· £3.0 million of cash payments received from Allison for continued exclusivity for main drive transmissions.

Investment in business growth:

· £8 million to acquire the remaining 80 per cent. of Flybrid, with further earn-out payments due of up to £15 million based on meeting performance targets;

· £0.3 million investment in test rigs and software development; and

· £0.2 million investment in flywheel manufacturing equipment and additional prototype manufacturing and assembly capability.

Acquisition

In March 2013, the Group paid £3 million in cash to acquire an initial 20 per cent. of the issued ordinary share capital in Flybrid and to secure an option to acquire the remaining 80 per cent.

On 8 January 2014, following approval by shareholders at a General Meeting, the Group acquired the remaining 80 per cent. of the issued ordinary shares in Flybrid for a total maximum consideration of up to £23 million, of which £15 million is subject to an earn-out based on the performance of the Flybrid business up until March 2021. Of the £8 million due on completion, £4.2 million was paid in cash; £1.8 million was satisfied by the issue of subordinated loan notes, repayable subject to meeting certain commercial targets; and £2 million by the issue of 7,836,990 new ordinary shares in Torotrak at a price of £0.2552 per share.

In the eleven weeks since acquisition, Flybrid has contributed revenue of £0.2 million and an operating loss of £0.3 million. This loss is a reflection of the investments made as the Flybrid team progressed towards the KERS trials with Wrightbus and Arriva and the work involved in securing the new commercial contracts with Lotus and JCB that were announced after the year-end. As set out in the Chief Executive's review of the year, the acquisition of Flybrid represents a significant opportunity for the Group as it broadened our technology portfolio and helped underpin our growth opportunities as we seek to install our technology in commercial vehicles and passenger cars.

In accordance with the requirements of IFRS 3 ('Business Combinations'), the Group has recognised the fair value of the assets and liabilities acquired as part of the purchase of Flybrid. One of the principal assets acquired is the intellectual property portfolio ("knowhow"), including patents, knowhow, trade secrets, trademarks and other intangible assets. The Directors have determined that the fair value of this knowhow at the date of acquisition was £11.5 million and in accordance with the Group's accounting policy this intangible asset will be amortised through the income statement over its estimated useful life of 15 years. Under the requirements of IAS 12, the Group has also recorded a deferred tax liability (the matching asset being goodwill) of £2.3 million; calculated as 20 per cent. of the intangible asset recognised on acquisition. This deferred tax liability will be amortised through the income statement so as to match the amortisation of the intangible asset.

Revenue and gross profit

At this stage of the Group's development, and as noted in previous annual reports, the main source of revenue and gross profit is from up-front license payments for granting pre-production licenses to commercial partners including Tier 1 and international OEMs. Pre-production licenses give partners access to our technology platforms during the important product development phase, enabling them to integrate the technology into their products in preparation for the start of commercial production. During the product development phase, the Group often receives additional fees for providing services to support licensees' product development from design and development to system integration and test. Once production commences, the Group will earn per unit royalties based on product sales by our licensee partners.

Another significant revenue stream for the Group comes from providing a variety of different engineering services to licensees, non-licensees and other commercial partners. For prospective licensees and commercial partners, engineering services includes feasibility studies, demonstrator programmes and productionisation programmes. As part of these programmes, the Group offers a full engineering service from analysis and simulation, design, prototype build and test, through to verification and validation. For existing licensees, the Group will typically support their product development programme ensuring efficient technology transfer and complete system integration. The Group is also developing a design, prototype build and test service available to commercial partners independent of the Group's technology products. This leverages the engineering, manufacturing and test capabilities of the Group and maximises utilisation of the Group's resources.

License revenue in the current financial year was £3 million, being 85 per cent. of Group revenue (2013: £6.0 million and 80 per cent.). All of the license revenue in the current year arose from the exercise by Allison of its final exclusivity option all of which was received in cash in the year (2013: £3.3 million). The remaining £1 million license fee due to be received from Allison has been deferred into 2014/15 and is due to be received from Allison as part of the next stage engineering programme. Engineering services revenue was £0.5 million (2013: £1.5 million), reflecting the reduction in invoiced services whilst we focused on achieving an agreed level of durability on production intent components in relation to the Allison programme as well as our focus on self-funded product development and prototypes, in line with our strategy of taking greater control of our routes to markets.

The gross profit for the year was £3.0 million (2013: £6.0 million). The significant decrease arises from the lower level of high margin license income in the year (£3.0 million) and the reduction in engineering services income (£1.0 million), net of the provision made last year (£0.8 million) for the estimated costs of completing the core component durability testing programme for Allison.

For the three-month period following its acquisition in January 2014, Flybrid contributed £0.2 million of engineering services revenue and a break even gross margin. During this period, Flybrid has focused its resources on preparing for the upcoming Wrightbus trials and securing the new engineering services contracts that have been awarded post the year-end and reported on elsewhere in the Strategic Business Review.

Operating loss

Total operating costs for the Group, excluding intangible asset amortisation (knowhow only) and exceptional costs, have increased by £0.9 million to £7.0 million in 2014. Of this increase, £0.3 million arose from the operating costs of Flybrid for the three-month period following the acquisition and £0.6 million relates to the existing Torotrak business. This increase includes £0.5 million of additional employment-related costs, largely relating to the increase in headcount to support development programmes, including the core component durability test programme for Allison, from an average of 39 in 2013 to 56 (excluding Flybrid) in 2014; the inclusion of Motorsport Components for a full year; and £0.1 million due to increased depreciation and rig running costs as a result of the significant capital investments.

The adjusted operating loss (before knowhow intangible asset amortisation and exceptional items) for the current financial year was £4.0 million (2013: £0.1 million). The increase is attributable to the reduction in revenue and the increase in operating costs, both of which are described above. After deducting intangible asset amortisation (knowhow) and exceptional items of £0.8 million (2013: £0.4 million), the operating loss for the year is £4.8 million (2013: £0.5 million). The strategy described in the CEO's Review describes the plan for future revenue growth and path to positive operating profit; this includes four key ingredients:

1. Progressively increasing the quantum of services and recovery from customers of our engineering time and costs, leading to higher engineering services revenues and gross profit;

2. Commencing the sale of KERS product for commercial vehicles in the financial year ending 31 March 2016 and moving from operating cost investment on this activity, to revenue and gross profit contribution;

3. Of material impact to revenue and the income statement over the coming three years will be securing new sources of pre-royalty lump sum licence fees, relating to some substantial areas of unlicensed technology, as set out in the CEO Review; and

4. Converting our licensees from a development phase, to a production phase, and hence the commencement of per unit royalties.

Exceptional costs and intangible asset amortisation

Exceptional costs in the current financial year increased to £0.7 million (2013: £0.4 million). This relates to £0.6 million in professional and other fees incurred during the acquisition of Flybrid (2013: £0.3 million) and re-organisation costs of £0.1 million arising from the integration of Flybrid into the Group (2013: £0.1 million general restructuring costs). The charge of £0.1 million (2013: nil) relates to the amortisation of the intangible assets (knowhow only) arising on the acquisition of Flybrid.

Loss attributable to shareholders

Finance income of £0.04 million was in line with the previous year. The income tax credit for the year of £0.5 million (2013: £0.4 million) arises primarily from increased research and development tax credits.

Normalised loss for the year after tax (before amortisation of intangible knowhow and associated tax credit and exceptional items) attributable to the shareholders increased to £3.4 million (2013: £0.4 million profit) largely driven by the lower level of revenue and higher operating costs recorded in the year. Including intangible asset amortisation, associated tax credit and exceptional costs, the loss attributable to shareholders was £4.2 million (2013: breakeven).

Cash flow and closing cash

Net cash used in operations in the year was £4.3 million, an increase of £3.9 million compared with 2013. The higher cash outflow is driven by a combination of lower cash receipts from licensing and engineering services (a decrease of £1.7 million), increased operating costs and three months' operating costs for Flybrid. Net cash used in investing activities increased to £5.0 million (2013: £3.8 million), primarily due to the acquisition of Flybrid, being £3.9 million net of cash acquired of £0.3 million (2013: £3.0 million) and capital expenditure including test rigs and flywheel manufacturing of £0.8 million (2013: £0.2 million). Cash flow from financing activities of £15 million (2013: £2.7 million) arose from the issue of new shares in the placing, open offer and subscription by Allison (£16 million, less expenses of £1.0 million).

The closing cash balance was £14.9 million (2013: £8.9 million).

Intangible assets

During the year, the Group's intangible assets increased by £14.1 million, primarily arising from the acquisition of Flybrid. The key elements are: £11.5 million of knowhow acquired; £2.3 million of goodwill; and £0.2 million of patent costs acquired through the acquisition. An analysis of the fair value of the assets and liabilities acquired is set out in note 14.

Rex Vevers

27 May 2014

Financial Statements 2014

Consolidated Income Statement

There is no other comprehensive income in the year and therefore no separate Statement of Other Comprehensive Income is required (2013: Nil).

Consolidated Balance Sheet

Statements of Changes in Equity

Consolidated Statement of Cash Flows

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 London Stock Exchange.

The Annual Report and Financial Statements for the year ended 31 March 2013 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 2014 will be posted to shareholders and made available on Torotrak's website in June 2014.

The auditors have reported under section 495 of the Companies Act 2006 on the Group's statutory accounts for the years ended 31 March 2014 and 31 March 2013 and the auditors' reports were unqualified and did not contain any emphasis of matter paragraphs or statements under Section 498 of the Companies Act 2006.

2. Basis of preparation

This announcement was approved by the Board of Directors on 28 May 2014. The financial information in this announcement does not constitute the Group's statutory accounts for the years ended 31 March 2014 or 31 March 2013 but it is derived from those accounts. Statutory accounts for 31 March 2013 have been delivered to the Registrar of Companies, and those for 31 March 2014 will be delivered after the Annual General Meeting. The auditors have reported on those accounts; their reports were 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.

The audited 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 (May 2014).

After making enquiries, the Directors have reasonable expectations that the Group has adequate resources to continue to operate for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the consolidated financial statements.

3. Accounting policies

The accounting policies adopted in the preparation of these financial statements are consistent with those adopted for the year ended 31 March 2013, 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 and/or Company

The following standards have been adopted by the Group for the first time for the financial year beginning on 1 April 2013 and have an impact on the Group:

IAS 1, 'Financial statement presentation'

The amendments to this standard are regarding other comprehensive income. The main change resulting from these amendments is a requirement for entities to Group items presented in 'other comprehensive income' on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments).

IFRS 13, 'Fair value measurement

This standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs.

(b) A number of other standards have been adopted by the Group in the year which have no impact on the Group financial statements

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

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, financial and commercial highlights, the Chairman's letter, the CEO's review, the Financial Review, and the Principal Risks and Uncertainties (note 16) 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 analysis

Year ended 31 March 2014

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

Exceptional items to the value of £672k and the amortisation of the intangible asset created as a result of the Flybrid acquisition to the value of £127k have been included in other operating costs not allocated to segments.

Year ended 31 March 2013

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

Exceptional items to the value of £400k have been included in other operating costs not allocated to segments.

Significant customers

The following revenues are attributable to significant customers:

Note: The revenue from Allison Transmission, Inc. has been generated from engineering services and licence agreements.

6. Exceptional items

The re-organisation costs relate to redundancy, severance and associated expenses in relation to a reduction in employees undertaken as part of a restructuring process.

In 2013 the one-off costs relate to the acquisition of a 20% stake in Flybrid Automotive Limited and the 5% subscription taken by Allison Transmission Inc. In 2014 the one-off costs relate to the acquisition of the remaining 80% stake in Flybrid Automotive Limited.

7. Intangible assets

The carrying value of intangible patent assets and knowhow, 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.

The average remaining life of the assets is 13 years (2013: 13 years).

8. 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 value. The deferred tax liability will be 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 the Group is not forecast to generate sufficient 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.

9. Trade and other receivables

There is no provision for impairment for receivables at 31 March 2014 (2013: £nil). £2k of trade receivables were overdue at 31 March 2014 (2013: £nil). These relate to a number of independent customers for whom there is no recent history of default. All amounts overdue but not impaired are less than 3 months overdue.

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

All trade and other receivables are denominated in UK pounds (2013: 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.

10. Trade and other payables

Amounts owed to the joint venture are repayable on demand but are expected to be paid after more than one year. Interest is charged on this payable. No security is given.

The vendor loan notes relate to the acquisition of Flybrid Automotive Limited. The loan notes are unsecured and non-interest bearing and are repayable from 7 July 2014 until 31 March 2017, subject to Flybrid achieving certain revenue performance criteria (see note 14).

11. Provisions

The provision for core component testing related to the costs expected to be incurred in relation to the testing and supply of fully conformed discs and rollers into Allison Transmission Inc. The provision was booked against direct costs in the year ended 31 March 2013.

12. Issued share capital

The increase in the authorised share capital of the Company to 450,000,000 shares was approved by shareholders at a General Meeting held on 8 January 2014.

Shares issued as part of the open offer and firm placing and approved by shareholders at a General Meeting held on 8 January 2014 are shown net of the expenses relating to the issue, totalling £1.0 million.

13. Share premium

At the Annual General Meeting held on 26 July 2012, a special resolution was passed approving the cancellation of an amount of £53,725,966 previously held in the share premium account. Following the approval of the Court and the subsequent registration of the Court Order, the balance has now been transferred to the Company's retained earnings.

14. Business combinations

On 9 January 2014 the Group completed the purchase of the remaining 80 per cent. of Flybrid Automotive Limited ("Flybrid"). This acquisition provides the Group with the leading commercially viable flywheel technology in the market, offering low cost, high performance hybrid systems for mass market adoption in passenger cars and commercial vehicles.

The consideration for the acquisition of the remaining 80 per cent was £6.0 million in cash and £2.0 million in the Company's new ordinary shares valued at the average of the closing middle market share price for 30 days prior to the date of the sale and purchase agreement. Of the £6.0 million cash consideration due, £4.2 million was paid to the vendors on completion with a further £1.8 million satisfied by the issuance of loan notes payable no earlier than 7 July 2014 and subject to Flybrid Automotive Limited meeting certain revenue performance criteria.

In addition, up to a further £15 million could be payable to the vendors subject to the satisfaction of certain revenue and gross margin targets linked to the successful development and commercialisation of the flywheel technology up to the period ending 31 March 2021. The fair value of assets and liabilities recognised on the acquisition of Flybrid was £11 million. The intangible assets of Flybrid are Intellectual Property and Know-How. The analysis of the fair value of assets acquired is as follows:

Total acquisition-related costs incurred to date for Flybrid are £0.6 million which have been recorded in the Income Statement for the year ended 31 March 2014. These acquisition costs are presented in administration expenses and as exceptional costs.

Since acquisition, Flybrid has contributed £0.2 million to Group revenue and £0.3 million to Group operating loss. If the acquisition had taken place at the beginning of the year, Group revenue would have been higher by £0.8 million and Group operating loss would have been higher by £0.8 million.

The contingent consideration arrangement requires the Group to pay, in cash, to the former owners of Flybrid Automotive Limited up to £1.8m upon Flybrid securing new commercial arrangements.

The potential undiscounted amount of all future payments that the Group could be required to make under this arrangement is between nil and £1.8m.

The fair value of the contingent consideration recognised was estimated based on the Group Directors' expectations of such commercial arrangement being achieved. The contingent consideration has not been discounted as the full amount is expected to be settled within 1 year and as such the effect of discounting would not be significant.

As part of the acquisition the Group assessed the fair value of its 20% equity stake in Flybrid Automotive Limited held before the business combination. No change in fair value was identified and therefore no gain or loss has been recognised.

15. 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 be these forward looking statements.

16. Principle risks and uncertainties

The principal risks and uncertainties which the business faces are: commercialisation, Creation or acquisition of technical solutions and intellectual property protection, Competition and technical advances, Financial risks, Senior management and skilled personnel and Economic drivers and environmental legislation. A full description of these risks and the mitigating actions taken by the Group will appear in the 2014 Annual Report and Accounts.

17. Approval

The Preliminary Announcement was approved by the Board of Directors on 27 May 2014.

Date and Venue of AGM

The Annual General Meeting of the Company will be held at 11am on 31 July 2014 at Silverstone Circuit.

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