Final Results

29 May 2013

Final Results for the Year to 31 March 2013

Highlights

Financial

·; Strong financial performance; revenue up 74 per cent to £7.5 million (2012: £4.3 million)

·; Profit after tax for the year of £0.03 million (2012: loss of £1.6 million)

·; £3.0 million investment for a 20 per cent strategic stake in Flybrid Automotive Ltd ("Flybrid") with an option to acquire remaining 80 per cent; secures access to market-leading M-KERS technology

·; Key strategic partner Allison Transmissions Inc. ("Allison"), pays £2.5 million to subscribe for new shares in Torotrak, increasing its equity stake by more than 50 per cent to 13.06 per cent

·; Advance stage licensing inflows continues to self-finance the majority of Torotrak's new product development, with positive operating cash flow generated over the last two financial years of £2 million

·; £8.9 million in cash balances at year end (2012: £10.5 million)

Operational

·; Allison commits £6.0 million for continued exclusivity rights to manufacture and sell Torotrak's main drive transmissions principally for trucks and buses - an important milestone for the technology

·; Engagement with nine major car manufacturers confirms significant opportunities for Torotrak's V-Charge technology, with second generation hardware now on test

·; Discussions progressing well with potential manufacturing partners for V-Charge

·; Volvo's on-road tests confirm Torotrak Flybrid M-KERS technology delivers market-leading 25 per cent reduction in fuel consumption in a passenger car

·; M-KERS opportunities in passenger cars proving earlier and stronger than initially planned when acquiring Flybrid stake - discussions now commenced with potential Tier 1 manufacturers

·; On track to commence in-service M-KERS bus evaluations with Arriva from March 2014

·; Univance relationship progressing well and offering new business development opportunities for Torotrak's core technology in Japanese market

Jeremy Deering, Torotrak's CEO commented: "The Flybrid investment and opportunity to acquire control, provides a catalyst for combined growth. We expect to start manufacturing M-KERS units for the bus market from 2014. Meanwhile, we are in active discussions with Tier 1 manufacturers about bringing both M-KERS and our variable engine boost product V-Charge to market to hit the 2015 to 2020 legislative window for CO2 reduction.

"With a pragmatic and diverse range of technologies, customers and partners; with our different routes to market and strategy to ensure we don't rely exclusively upon any one of them; and with a strengthening and confident Torotrak team, we are now in a better position than ever to deliver sustainable growth in value for shareholders."

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

Chairman's Statement

Having been Chairman of Torotrak now for two years, I am pleased with the development of the business to date. The revised Board strategy being implemented by our new Chief Executive, Jeremy Deering, is a departure from a traditional licensing model, but we are already seeing the fruits borne of this fresh approach with significant market engagement with potential new customers and other partners.

Financial Strength Whilst Investing in Growth

Torotrak's strategy of maintaining financial strength whilst conducting substantial technology and business development is proving effective. I am pleased to report that we reach this financial year-end with £8.9 million in cash balances (2012: £10.5 million), after making £3.2 million of strategic investments in the Company's future. These investments provide us with a 20 per cent stake in Flybrid, and an exclusive option to acquire the remaining 80 per cent; 100 per cent ownership of the assets of the Motorsport Components Limited's ("Motorsport Components") business; as well as investment in our technical facilities and capability. This is in addition to our on-going investment in Torotrak's proprietary technology and intellectual property portfolio.

Commitment From our Major Partner Allison Transmissions Inc.

I am particularly pleased to report that in March 2013, our major commercial partner and licensee, Allison Transmissions Inc. ("Allison") decided to pay a further £6.0 million to secure continued exclusivity to manufacture and sell Torotrak's main drive transmissions in commercial vehicles - the exclusivity being mainly for on highway trucks and buses. In addition, and as a further sign of support and confidence in the technology's commercial opportunity, Allison subscribed for £2.5 million in new equity, taking their shareholding up to 13.06 per cent.

A New Chief Executive

In September last year, we said goodbye to Torotrak's long-standing Chief Executive Officer, Dick Elsy. The Board expresses its gratitude for his leadership and dedication during those ten years at the helm, and wishes him well in his new role. At that same time, we welcomed Jeremy Deering as our new Chief Executive: his experience in delivering our major licensing deals and his strong relationships with our key business partners provides us with a high level of continuity as we move through an important period for the development of the Company, and ensured a smooth transition. Jeremy has established himself decisively in this new role and the team has been further strengthened with the arrival of Garry Wilson as Group Director - Engineering and Programme Delivery.

Revised Board Strategy

Following a strategic review in November 2012, we identified a number of ways where taking greater control of our routes to market would enable faster, more secure growth. These were:

·; Investing in more prototype platforms - this allows the technology to be demonstrated and made available to potential customers, giving them the confidence that only comes from hands-on experience

·; Creating low volume manufacturing capability to supply the market ourselves, or with key partners - this helps establish the technology in the market, whilst creating a growing income stream for the future

·; Growing the scale of our engineering services business through supporting customers' own evaluation and prototype programmes, and enhancing our first class test facilities - this supports both our licensing and our own product sales objectives by building greater momentum for Torotrak, opening up new IP invention opportunities and reducing the barriers to entry for our customers by allowing them to keep their engineers engaged on their product programmes

·; Expanding our technology portfolio beyond traction drive - previously, we have only issued a traction drive toolkit to our design engineers. Though that toolkit is often apposite, our primary aim is to provide the best solution to our customers' needs. This can mean taking a complete system approach and expanding our horizons as far as the market and our growing expertise dictates

Progress During the Year

In the last six months, we have taken some major steps towards delivering on our new business strategy:

·; Acquisition of a 20 per cent stake in Flybrid, a leader in mechanical hybrid technology, with an option to acquire the remaining shares by December this year. Flybrid was already a valued technical partner, providing technologies that are central to our M-KERS product line

·; The acquisition of the assets of Motorsport Component's business gives us the capability to deliver evaluation and development components quickly and cost-effectively, with tighter control over quality

·; Signing-up to the government funded "Proving Factory" initiative gives us access to a low volume manufacturing route that will make fleet trials and initial market introduction of our technologies easier, faster and more affordable for Torotrak and our customers

These three developments significantly enhance Torotrak's ability to supply products in volumes for prototype engineering development and for low to mid volume market entry; add complementary technologies to our portfolio; and provide the flywheel technology to develop our M-KERS activities for the mass market, allowing Torotrak to focus on V-Charge and our main drive transmission technologies.

M-KERS/Flybrid technology

With Flybrid, we have a first to market, first class fuel saving technology that we expect to launch in bus fleet trials by the early part of next year, and in prototype form at the end of the current year. The M-KERS solution is cost-effective, is not dependent on commodity prices for rare earth materials or lithium-ion battery cells, has attractive life-cycle environmental credentials, and can offer a commercial vehicle operator a payback in as little as three years. But the technology is not just for buses, as these attributes make it attractive in delivery vans and cars too, starting with the more premium car segments. These higher volume markets require further development of manufacturing processes, but building volumes in buses creates a strong starting point and this is our strategy.

Variable transmission

Over the last 12 months, we have delivered a crucial milestone in signing up Allison as our exclusive Tier 1 manufacturer and licensee to take our main drive infinitely variable transmission (IVT) product into the commercial vehicle market. This is not only financially significant, delivering £4.5 million of pre-production licence payments this year, but is also a key confidence milestone. Allison's arrangements include a further £4.0 million of contracted early stage licence fees payable in the 2013/14 financial year, with per unit royalties payable once production commences. Allison's exclusivity rights do not impact our previously signed up licensees in this field, the (currently undisclosed) European Truck and Bus Manufacturer ("ETBM"), and Tata Motors.

A further boost for our main drive transmission product came from the ETBM, who confirmed significant fuel economy and driveability improvements from physical testing within its trucks and buses and further simulation results. Their results support our own predictions of around 20 per cent reduction in fuel consumption in the most urban drive cycles and reduced nitrogen oxide (NOx) emissions. There is no doubt that the technology can carry a premium label in terms of its benefits and features. We will know by the end of the calendar year whether the ETBM will continue and undertake its own investment programme, in line with its vertical integration philosophy.

V-Charge

Our decision to self-finance the development of our V-Charge product is proving to be well justified, with considerable market opportunity and a clear timeframe for volume launch between 2015 and 2020 as the 2020 environmental targets dictate future model launches. In Europe, the USA and other economies, CO2 reduction targets present a clear challenge to find alternatives to high levels of costly electric hybridisation. Further downsizing of the engine while preserving power output is accepted by the industry as the most cost-effective solution, and V-Charge is well positioned as an enabler. Having undertaken comprehensive and well-received demonstration test drives with leading international vehicle manufacturers and suppliers, we have now progressed V-Charge to a second generation prototype, incorporating a number of improvements taking it closer to a production-intent design. We are currently in discussion with Tier 1 manufacturers about next steps, and have active interest from a number of major car manufacturers.

Univance

We are also taking greater control over the manufacture and supply of our core components. Our partner in Japan, Univance, has progressed well with the design and supply of prototype discs and rollers for testing, spanning a range of diameters for different applications. For this, they have used a new low-cost manufacturing process that is making our technology not just more accessible for our potentially higher volume markets, but also more affordable in lower volumes and for customer programme development purposes.

A strengthened Torotrak Team

Our revised strategy has meant expanding our expertise across all levels of the organisation, with new hires providing additional skills and perspectives. We have a high quality team, which we expect to continue to expand during the year, as necessary. Our association with Flybrid has been positive and the two businesses are working well together to generate better than anticipated opportunities to deploy our technology. Under the terms of our option arrangement, we have the opportunity to fully integrate Flybrid by December 2013, which could introduce a further positive and dynamic team, as well as some market leading intellectual property and applications for M-KERS.

Partners and Suppliers

The levels of support and investment from our partners and suppliers - existing and prospective - indicates confidence from independent third parties about our technology's advantages and the opportunities that exist for it. Forthcoming legislation creates a clear need for cost-effective solutions to the environmental challenge, meaning that on- and off-highway industries alike are seeking the most promising innovations. Alongside growing support from Tier 2 and other supply chain members, we are building a strong network of prospective major car manufacturers and Tier 1 customers across a range of markets and technologies.

Values and the Future

Our philosophy is built around a passion for great engineering and a vision to bring about real change in the industry to address the environmental challenges and comply with new legislation. Our values place great emphasis on building strong partnerships, having simple and consistent business principles, and delivering market-leading solutions to our customers.

Outlook

Environmental and fuel economy targets are becoming commonplace across all global geographies and product sectors. The most challenging known legislation has an implementation timeframe around 2020, meaning introduction of compliant products in a 2015 to 2020 window. We are already putting in place the required manufacturing and assembly capabilities to provide near term production volumes within the timeframe. We are initially focusing our technology on the lower volume commercial and bus markets, while targeting higher volume production targets at as we approach 2020.

Conditions are favourable for Torotrak and our strategy is designed to ensure that we have multiple ways of achieving success, with more than one route to market and with multiple technologies that will help vehicle manufacturers and operators across a wide range of sectors. 2012 was a year of significant progress towards our goal of making a real contribution to reducing energy consumption and emissions, and building a platform to generate real returns to our shareholders.

CEO's REVIEW

Torotrak Is A Different Sort Of Technology Company

I took over as CEO from Dick Elsy on 31 August 2012. Optimism has to be in your DNA when introducing a new technology to the market, and his enthusiasm and resilience, having spent some ten years at the helm, were unparalleled. They are certainly qualities that I intend to champion as CEO, working with a growing team that is passionate and creative but also totally focused on what we are setting out to achieve.

Torotrak is in many ways the "parallel hybrid" of technology companies, powered by two separate but synergistic business areas. On the one side, we have recently developed two entirely new technology products in engine boosting (V-Charge) and energy recovery (M-KERS) for vehicles. Both play to considerable demand in the industry for cost-effective ways to meet CO2 emissions targets and to growing markets. On the other side, we have our core traction drive transmission technology application (IVT and CVT). This has stood the test of time as our IP portfolio has developed, and continues to deliver strong underlying licensing revenues.

Torotrak is a unique "new technology" company in this respect, with licensing revenue generated from our more mature traction drive technology, which has substantially funded our new technology developments. It is a position that we will capitalise upon as circumstances now swing dramatically in our favour, with a relentless force of environmental legislation requiring significant technology change in our industries.

This report expands on the progress we have made to date with the strategy announced in November 2012, and sets out what we expect to achieve over the coming financial year. I hope that shareholders will appreciate this transparency and gain a clearer sense of our business direction. Most importantly, I hope this will enable stakeholders to track our progress against our aims with a better understanding of the journey we are on, and hence have more objective assurance as to the progress we are making.

In our vehicle markets our customers are faced with a number of options to address the requirement to reduce emissions. "Winners" and "losers" in bringing new technology to market will be defined by how they react to changing circumstances, and the level of creativity shown in adapting to new challenges.

We are very sure of where we are heading and are determined to succeed. With a pragmatic and diverse range of technologies, customers and partners; with our different routes to market and strategy to ensure we don't rely exclusively upon any one of them; and with a strengthening and confident Torotrak team, we are now in a better position than ever to deliver that success.

We leave the March 2013 financial year with many great positives, which will be discussed in greater detail in the report that follows:

·; IVT technology that is now very well developed and tested - £76.4 million invested in research and development since 2000, presenting others with a very major barrier to entry in our field of traction drive technology

·; Very strong intellectual property, with a 28 per cent increase in the number of granted patents in the past 14 months

·; A highly skilled and experienced team

·; A robust licensing model, which has banked £28 million of licence fees over the last 13 years. We now have a portfolio of new IP that is well developed and still provides us with significant opportunities for licensing

·; Market drivers that have changed substantially in our favour. Large potential financial penalties are sweeping vehicle manufacturers' procurement conservatism off the table. The emissions legislation is working and will bite hard if it is ignored; it won't be

·; Finally, and most importantly, a really very impressive array of world leading partners, who see the commercial opportunities of our technology and are willing to invest with us for the future

First Mover Opportunity With Flybrid Technology

We announced on 18 March 2013 that we had acquired a 20 per cent stake in Flybrid, together with an exclusive option to acquire the remaining 80 per cent by December 2013. Flybrid's technology, combined with a Torotrak traction drive or a clutched system, results in a purely mechanical energy recovery device. This can substitute for an electric system, where "electric" has become almost synonymous with the word "hybrid" in cars and buses. Electric hybrids are clever engineering with the very best of objectives, but they have quite a long way to go before they become a truly mainstream commercial option.

We believe that this Flybrid flywheel technology will be our first to market product: it is a cost-effective system that both manufacturers and end customers can afford, it is simple to maintain, and it can be packaged and fitted relatively easily. It also has a very high specific power that can launch a vehicle from rest time and time again, and can deliver considerable brake horse power. This package of benefits cannot be matched by a pure electric battery system.

Our plan, in conjunction with Flybrid, is to introduce this technology quickly in lower, but valuable, volumes in the bus market, using our own investment and capability to manufacture and supply. As the volumes are initially tens and then hundreds, before we reach thousands, the investment and manufacturing plan is very manageable. We are also benefitting from Advanced Manufacturing Supply Chain Initiative ("AMSCI") funding to help achieve this, as well as access to the "Proving Factory" shared manufacturing facilities.

Given the significant opportunities we see in this market and the progress we are making with our partners, we are targeting the start of commercial product revenues during the next two years. We have our first system installation in a bus, which is due for trial on the public roads with Arriva in early 2014.

Our work with Flybrid's flywheel technology has also given us access to the passenger car market. Things have moved much more quickly than we had first thought when making our decision to invest in Flybrid. Our M-KERS prototype installed in a Volvo S60 has delivered results that impressed the customer, with Volvo announcing that testing had demonstrated fuel savings of up to 25 per cent. We are now talking to several car manufacturers that we believe could deploy this technology in their products (initially in more premium segments), with the key being the ability to source a Tier 1 supply route. Therefore, equally encouraging to us is the active engagement we are having with a number of with Tier 1 suppliers.

We believe that there is a substantial opportunity for next generation designs for cars to provide manufacturers with a cost-effective solution for mainstream fleets. This is not just something that we believe to be possible: independent research by Ricardo Strategic Consulting indicates that flywheel technology should be able to be produced in volume at a cost of £20 per gram of CO2 saved. This would position it, after engine downsizing, as an attractive proposition and considerably cheaper than electric alternatives.

We therefore expect to see our M-KERS solution introduced progressively from 2014/2015 onwards in commercial vehicles and in passenger cars thereafter. The commercial vehicle market is valuable in terms of building a business with growing product sales that carry good margin opportunity. The passenger car market is valuable in terms of higher volume licensing arrangements, yielding licence and royalty payments.

Given these opportunities, the Flybrid stake and opportunity to acquire control, with an excellent team led by Jon Hilton and Doug Cross, provides us with a valuable differentiator. We see this relationship as a catalyst for growth and a launchpad for our new product business. It is why we acquired the stake and the exclusive option for full control, which will require shareholder approval later this year.

Favourable Market Conditions

Worldwide environmental targets have created material opportunities for new fuel saving technologies across the vehicle markets. Best known are the light-duty vehicle CO2 reduction targets in Europe and fuel economy targets in the US, but further tightening of air-quality legislation, covering cars, vans, buses, trucks and off-highway vehicles, also creates a need for technologies like Torotrak's which can allow engines to operate more cleanly.

The impact has been most dramatic in the passenger car market, where EU legislation coming into effect in 2015 brings the CO2 emissions of new cars to an average of 130 g/km, reducing further to 95 g/km by 2020, and potentially still further to 68-75 g/km by 2025. A similar pattern of legislation is also in place for vans, mandating new vehicle fleet averages of 175g/km in 2017, and 147g/km in 2020. In the USA, forthcoming regulation will require a similar pace of change, with an escalating fuel efficiency target for cars and light trucks rising to54.5 US mpg (just under 100g/km CO2) by 2025.

The penalties on vehicle manufacturers that do not meet the CO2 targets are significant - for example, for every gram per kilometre by which an average European car or van exceeds the target, a 95 euro penalty would apply. Whilst the precise enactment of this framework is somewhat complicated, and under discussion, we believe that the full effect of this financial penalty will be felt from around 2017/2018. Most importantly, we believe that the new World Light Duty Test Cycle ("WLTC") is likely to be phased in at around this time. This is significant, as it is a longer cycle and is much more representative of real world driving conditions. This favours our technologies considerably because our variable drive systems excel at getting the best out of a power device under most driving conditions, especially urban and mixed patterns. Fixed ratio devices, or transmissions which allow repeated cycles of upward and downward engine speed, tend to waste energy.

The likely new passenger car test cycles, and the impact of the penalties, act as strong incentives for car manufacturers to go beyond the conservative approach of adopting incremental "tried and tested" technologies and try something new. They are now on a countdown to the 2015-2020 window to clean up their products. This timetable is a huge opportunity for Torotrak, and one that drives our business plan.

However, it is not just fuel efficiency or CO2 creating a driver for change: air quality regulation continues to tighten in all markets, with standards such as Euro 6, the US LEV3, and Tier 4 off-highway, mandating very low levels of particulate and NOx emissions. Achieving these levels requires the engine to operate at optimum conditions, without violent changes of load that can create a surge of pollutants. All three of Torotrak's technologies support this requirement, thereby enhancing their core fuel efficiency offering.

Other key drivers that are acting in our favour are the more generic ones, such as rising fuel prices. End-users across all markets are looking to reduce the amount of money spent on fuel, which for commercial vehicles can be the dominant component in vehicle lifecycle costs. Fuel efficiency is therefore often the primary factor in purchasing decisions.

Consequently, we have seen a distinct growth in demand from prospective manufacturers, and the market generally, especially during the second half of the year. It is clear that our newer products, V-Charge and, as noted earlier, M-KERS, are sitting in the market's "sweet spots", namely reducing emissions by engine downsizing and alternatives to costly battery-based technologies. Our IVT also achieves a substantial reduction in all pollutants, and this is why two of our commercial vehicle licensees have paid £33 million of investment through licence and engineering income between them to gain access to Torotrak's unique technology. Both have prototype transmissions in truck and bus vehicles.

In part, this growth in market "pull" is a reaction to the perception of a lack of real progress in reducing the cost of electrified systems, in particular batteries. In part, it is also because of Torotrak's successful further development and demonstration of our prototypes in both supercharging and M-KERS.

Our business development in Europe, USA and, most recently this year, in Japan, is seeing increased levels of partner engagement and we expect to secure development programmes over the coming year.

Trend in downsized engines - V-Charge

Engine downsizing is one of the most significant technology developments by car manufacturers looking to improve their vehicles' emissions profiles. We have engineered our V-Charge product to address this market at a time when demand for engine boosting systems is at its highest ever, and is forecast to more than double between 2012 and 2017. The challenge for engine designers is that downsizing increases the use of pressure charging (turbocharging or supercharging) to regain performance. If this is achieved by turbocharging, this results in either poor pick-up from low engine speeds, or the need to add complex and costly additional engine technologies to regain driveability.

V-Charge differentiates itself favourably by being a low cost, single stage pressure charging solution that allows almost immediate boost at any engine speed, by virtue of its responsive variable drive ratio. This is a significant benefit, with full range performance hitherto only being available with mainly multi stage, more expensive supercharger and turbo charging combinations. In applications that demand maximum cost-effective performance, V-Charge is very effective as part of a multi stage solution; on its own, it offers potential for co-optimisation with the base downsized engine, taking advantage of technologies such as direct injection and variable valve actuation, which are becoming ubiquitous in developed-world markets.

Electric hybridisation not a mainstream solution - but our M-KERS could be

Electric hybrids have hitherto been another key technical direction for many vehicle manufacturers, however over the last year there has been a noticeable shift in industry thinking, as battery technology has not progressed as quickly as required. At the same time, the emerging science of "life cycle analysis" has highlighted that the battery manufacturing process itself generates significant carbon emissions reducing the overall benefit of the claimed in-use emissions reductions.

As a result, we are beginning to see a concerted move towards mechanical solutions; for example the announcement by PSA Peugeot Citroën that they are developing a hydraulic based system, Hybrid Air. In addition, Volvo Cars recently highlighted the potential of mechanical hybrid technology when it announced on April 25 2013 that a demonstrator vehicle fitted with a flywheel hybrid system developed with Flybrid is capable of achieving fuel economy improvements of up to 25 per cent while also adding an extra 80 horsepower and an impressive 0-62mph time of 5.5 seconds.

Our research, supported by Ricardo Strategic Consulting (see our website at www.torotrak.com/wp-content/uploads/2013/03/TRK-Ricardo-M-KERS-Analysis.pdf) highlights that our M-KERS offers the right level of CO2 reduction at the right price per gram of CO2 saved: around 30g of CO2 mitigated for light vehicles at a cost of around £20 per gram. Occupying a logical "sweet spot" after fundamental changes to engine design and downsizing, M-KERS is a lower-cost alternative to electric hybrids.

Ensuring Diversity Of Options For Getting To Market

Licensing

Torotrak started as a licensing company and has been a very successful one, receiving some £21 million in up front (i.e. pre-production) license fees over the last 5 years. This has allowed us to substantially fund our own research and development, retaining sole ownership of the resultant IP and to re-position ourselves in the market with new products.

Higher volume, lower unit value markets require substantial industrialisation skills and manufacturing investment. These market segments are ones where we are implementing a licensing model.

However, we now intend to play a more active role in the earlier development stage by funding more of our own prototype programmes. This reduces the barriers to entry for our customers, making it easier for them to quickly and efficiently evaluate Torotrak technologies and validate their potential application within their own product road map. We will also seek lower volume production runs, such as for special vehicle operations within vehicle manufacturers, allowing the technology to "seed" itself into the market, delivering a faster, higher value capture adoption of our technology.

These activities are likely to require additional investment by Torotrak, but are key to progressing our technologies' development cycles as quickly as possible. Until a new technology can stand on its own two feet and demonstrate its capabilities, it is always vulnerable to customer conservatism and their need to focus internal resources on perceived lower risk, incremental in-house core programmes. Time delays, and minimal R&D budgets from Tier 1s and OEMs, can kill off what might otherwise have been a successful technology. Our revised strategy therefore directs investment in parallel development paths, with an element of self-funding, to ensure the very best chance of successful introduction.

Supply of product ourselves, or with partners

For lower volume, higher unit value products, where start up volumes can also be lower, reduced industrialisation and lower manufacturing investment is required. At these volumes, products such as M-KERS for buses add significant value and require less automation in manufacturing processes. They are also more likely to gain early stage customer endorsement and support.

By investing in partnership with key suppliers, we can shorten the development path considerably and also accelerate key stages such as customer trials. In addition, due to lower start up volume requirements, it is possible to "pre-invest" in an affordable level of manufacturing and assembly capability; this is what we are currently doing in relation to our M-KERS bus product.

It is also possible to accelerate some of the component and sub system testing, particularly as we are now taking a more modular approach to our designs, which allows standard system elements to be proven out and tested in advance of new designs for particular applications

Engineering services

A third tranche of strategy is to grow our engineering services by between five and ten times our current levels over the short to medium term. This supports both licensing customers and product customers with services including evaluation, design, test, simulation, feasibility, and vehicle integration. Developing new IP also results in a considerable wealth of know how that extends far beyond our own technologies - into new design and modelling tools, and other technological systems. This can be sold as a high value service in its own right, but can also help as a business development tool, accelerating engagement with partners and deployment of the technology.

Growing a self-sustaining business from product sales and services

Our strategy is to build a business in the medium to long term that is profitable after all R&D costs and that is a valuable growth business in its own right. In the short to medium term, we aim to support this with targeted up-front licence payments. Our IP portfolio remains substantially un-licensed, giving us choices and valuable rights to exploit in a wide range of end-user markets. In the main this is due to our strategy to restrict any licensing to specific vehicle applications, specific product types, specific fields and further sub categories. The only area of our IP portfolio that is now fully licensed is for main drive transmission applications in on-highway commercial vehicles, worldwide, where we still have £4.0 million of licensing payments due to be paid by Allison, and of course on top of that the significant potential income from future product royalties.

Over the coming years, the plan requires a change in revenue mix so that licensing - both up-front fees and royalties - becomes ultimately a top slice of income, and not a dependency, with the bulk of revenues coming from product royalties and engineering services. However, royalties will always represent a very high margin and revenue stream, which enables the segments earning those royalties to carry a quite distinct and visible value in their own right.

Customer, Supplier, And Technology Progress Report

Main drive transmissions

Moved on

Allison

Allison confirmed its confidence in the commercial opportunity of Torotrak's technology by exercising its final licensing option to take exclusivity (apart from our two other licensees) for main drive transmissions in the commercial vehicle market. This brings paid and committed licence and engineering payments to a cumulative £26 million. This has been a primary focus for us and our desired outcome has always been for Allison to exercise these rights, rather than open up new licensing arrangements with other Tier 1 suppliers. Our view is that Allison's substantial market presence, strategic aims in seeking technology differentiation, knowledge of our technology, and our close working relationship, makes them an ideal licensee for this market. Allison recently became a quoted company in the USA, where it came to market with an IPO on 14 March 2012.

We are currently in the first stage of what we assess to be a four-stage production programme. Having proved durability on 100mm disc and roller components, the key area of work is now doing the same on representative sized parts, whilst Torotrak is working on an optimum production design.

ETBM

The ETBM proof of concept demonstrator programme to test our IVT in a bus and in a truck, supports their assessment of our technology as a premium product capable of reducing fuel consumption by around 20 per cent in stop start urban cycles. Their feedback was excellent and noted additional improvements to drivability and NOx emissions. The ETBM's enthusiasm and support for our transmission is undoubted but their production focus is on longer haul cycles over urban cycles; we expect a conclusion on their technology direction by the end of this calendar year.

Univance

In conjunction with our supply partner, Univance, we have commenced the testing of our discs and rollers for the commercial vehicle market. The company specialises in the manufacture of highly-durable transmission components. They have substantial component testing facilities and are heat treatment experts - something that is a fundamental part of producing our components. They have facilities worldwide, including in Japan, and strategically we are very well aligned. This provides Torotrak with access to additional world-class expertise and resources that are well matched to the market introduction needs of our customers.

Tata

Currently, we do not believe that economies of scale would make it economic for Tata to engage in a self funded programme. Accordingly, our plan currently assumes that future progress rests on our other licensee(s).

Carraro and off-highway

Our work in off-highway vehicles has until now been limited to engineering support for our licensee Carraro, who has made good progress with their field trials of a Torotrak IVT equipped tractor. This market is highly valuable, but also highly fragmented; this is why we have in the past been unable to sign-up any major licensees or development programme partners. However, we believe that greater commercial progress may be made with a more direct level of investment. During the next financial year, we will evaluate the commercial and technical implications of a Torotrak funded supply route into this market.

Next milestones

Our prospects in commercialising main drive transmissions largely rest on the success of our licensees and the investment and decisions that they make; our approach is therefore to provide close support in taking the programmes towards commercialisation, strengthening our expertise and resources so that we make it easier to engage with Torotrak. We are also working on next generation IP to advance our technology following market launch. This will provide an attractive pathway for further development.

Our next milestones will be:

·; To deliver a successful outcome from our accelerated testing of new sized discs and rollers. This is key to the Allison programme, with £2.0 million of the £8.5 million in agreed final option license and engineering payments dependent upon a successful outcome. This is something we agreed to in order to give our customer full confidence in our commitment to their programme and which will open up far wider opportunities for us in the near to medium term.

·; Moving to the next stage prototype with Allison, incorporating design improvements including packaging improvements and potential further potential efficiency improvements

·; Obtaining a decision by the ETBM. We are currently working on design solutions that can improve our transmission's fuel economy for heavier, longer-haul vehicles, which are this customer's focus

·; To report on the outcome of our off-highway market review, with a potential re-positioning of our business approach in this area

Achieving these milestones would move our main drive IVT product on to the next stage of the programme. We will also have received confirmation as to whether a second programme will commence with the ETBM. In the off highway market, we will have explored, together with third parties, different business options to exploit targeted opportunities for main drive transmissions, reporting back to shareholders on prospects and next steps.

M-KERS

Moved on

In March 2013, we announced our acquisition of a 20 per cent stake in Flybrid Automotive, with the exclusive option to acquire the remaining 80 per cent by December. As our M-KERS commercial vehicles engineering programme overlaps substantially with Flybrid activities, we decided to focus on the more mature, production-representative hardware for the Flybrid M-KERS system described above. Overall, this has freed up around a third of our engineering resources to provide greater support for our V-Charge programme, and to exploit the valuable opportunities in off-highway main drive transmissions.

Flybrid is actively working on a number of programmes in the automotive, off-highway, and city bus markets. The Technology Strategy Board sponsored city bus programme being undertaken with partners Wrightbus, Arriva, Voith, and Productiv, is progressing well, with the bus scheduled to run at Millbrook later this year and to commence in-service evaluations with Arriva from March 2014.

In addition, the prospects for commercialising M-KERS for cars have improved significantly due to important cost reductions and favourable market conditions. Volvo's M-KERS equipped demonstrator vehicle has delivered excellent results of up to 25 per cent reduction in fuel consumption, highlighting the high total system fuel economy benefits and additional performance features, at a fraction of the cost of an electric hybrid. This system utilises a Torotrak CVT and a Flybrid flywheel energy storage system.

Next milestones

Flybrid will now be our primary engineering and sales route for all M-KERS products, and will focus on the city bus application as our first self-supplied product.

Our next milestones will be:

·; A decision about new joint manufacturing facilities

·; Release of quantitative data

·; Successful installation in the Wrightbus vehicle

·; Commencement of trials by Arriva

·; Securing additional bus programme(s)

·; Identifying a potential Tier 1 manufacturing partner for M-KERS for passenger cars

Achieving these milestones would move our M-KERS product for buses on to the pre-production stage with customer trials, allowing early stage production to commence in the following financial year (2014/2015). In passenger cars, further vehicle manufacturer development programmes would allow the product to be developed to market specification, and would make quantitative results available for more detailed up-front evaluation. The engagement of a Tier 1 supply route would then allow us in 2014 to more confidently assess initial stage production volumes within identified market segments.

V-Charge

Moved on

Following the success of the first-generation V-Charge engineering vehicle, we progressed from the first version prototype to the second generation hardware, V2, reducing size and weight, improving efficiency, and building on feedback from prospective customer trials. The V2 unit also incorporates new advances in low cost variator components, bringing the unit's already competitive price down further still. V2 is currently in the final phases of sub-system and in-house system testing.

During the year, we continued with our successful demonstration programme using the Clio demonstrator vehicle, engaging with five vehicle manufacturers and seven Tier 1/Tier 2 manufacturers. Our plan now is to fit this with the V2 unit for further demonstration events, showing the improvements made and confirming the results in a production oriented system.

We are currently in active discussions with potential manufacturing partners regarding next steps for the supply of product into the passenger car market. We expect a successful conclusion of these discussions in the next 12 months.

Next milestones

Our aim is to progress V-Charge on to a definite "commercialisation" path from its current "concept" status.

Our next milestones will be:

·; Fitting V2 next generation hardware into the Clio demonstrator vehicle

·; V2 testing in customer applications

·; Moving to V3 generation hardware targeted at a specific passenger vehicle segment

·; Confirming a Tier 1 manufacturer partner - this is the next significant commercial milestone and is a priority for the next 12 months

·; Industrialisation and design for manufacture by the government backed "Proving Factory" consortium

·; Identification of partner vehicle manufacturers for appropriate first low volume applications (for example, special vehicle operations), to provide a parallel route to market

·; Introducing a second demonstrator vehicle applicable to a new market segment

·; Press launch later in the year of more quantitative performance data, allowing specific performance and fuel economy benchmark calculations to be assessed

Achieving these milestones would take the V-Charge programme towards production design for particular market segments, with identified product specification. We would also want to be in a position to have a higher volume route to market with a Tier 1 customer or partner, as well as a lower volume route for special vehicle operations.

Advanced technology development - for our next generation products

Moved on

We have met a number of key challenges over the past year and created a wealth of valuable new IP. Since last reporting, we have generated nine new patent families spanning variator fundamentals, system architectures, and new technology variants.

We achieved an important milestone for our core technology with the prove-out of variator technology for use in compact, low cost/high volume applications such as V-Charge. The V2 demonstrator contains several of these elements, and has undergone thorough testing which validated the models that describe the variator's fundamental behaviour.

Further incremental, but significant, developments have also been made that increase system efficiency and reduce package size. This has led to a shift in some of our design rules, enabling the variator roller size to be downsized by up to 20 per cent in some applications, which effectively halves the variator's weight.

Over the year, we completed approximately 20,000 hours of durability testing for our various customers and suppliers using bespoke rigs across a range of sizes, from 47.5mm to 140mm. We also designed, built and commissioned two new durability test rigs to experimentally demonstrate the rolling contact fatigue life of large size disc and rollers for commercial vehicle applications.

We commenced a detailed test programme with cost-reduced discs and rollers from our partner, Univance, using new materials, heat treatment, and manufacturing methods. We have also worked with other suppliers on disc and roller evaluation.

On the traction fluid side, a key specialist component of our technology, we have undertaken considerable testing with fluid suppliers such as Shell and Santolubes. This is crucial to ensure cost effective supply routes for our products.

Underpinning all our work, we have continued to focus on developing our own bespoke design tools, and are pleased to announce that we have successfully released design software for each of our main product areas. These tools can be licensed to our partners and have been suitably protected with industry-leading encryption software.

Finally, the quality of our technology innovation depends upon our people. We have implemented a very successful graduate programme, which shareholders can see for themselves on our website. This mix of high calibre new and experienced engineers, combined with our supportive and energetic work environment, means that we are never short of good ideas! Our website also includes press articles and other documents, such as customer press releases, that provide independent comments about Torotrak.

Conclusion

The last twelve months have been a period of great change in which we have developed a deep understanding of our route to market and implemented strategies to make that route simpler, faster and more secure. Technical progress has been excellent and the test results and feedback from customers have been very positive. With a strengthened management team, new technologies, and new capabilities, we have a busy and important year ahead. I look forward to reporting to shareholders on performance against the milestones described above.

Jeremy Deering

29 May 2013

Financial Review

This financial year has been one of investment in new opportunities and business growth, whilst maintaining strong cash balances through early stage licensing income flows. During the year, our main commercial partner Allison paid £4.5 million in additional licence and engineering service payments with a commitment to pay a further £4.0 million in the next financial year to maintain exclusivity mainly in the truck and bus fields of the commercial vehicle market. In addition, Allison paid £2.5 million to increase its equity stake in the Company from 8.86 per cent to 13.06 per cent. Taken together, these actions demonstrate their confidence in the commercial opportunities for the Group's main drive transmission systems and other technologies.

It has been a busy year, with major highlights as follows:

Notable Cash Inflows:

·; £5.0 million of cash payments received from Allison for licensing and engineering services.

·; £2.5 million cash raised through an additional 5 per cent equity stake in the Company taken by Allison

·; £0.6 million cash received from Tata Motors in licence fees

Investment in New Opportunities and Business Growth:

·; £3.0 million investment to acquire 20 per cent stake in Flybrid Automotive Ltd and an exclusive option to acquire the remaining 80 per cent

·; £0.2 million investment in the acquisition of the assets of Motorsport Components

·; £0.6 million investment in test rig upgrades and software modelling tools

Revenue and Licensing

The timing of recognition of the licence income has a major impact on our reported results and is a material accounting judgment. In accordance with our accounting policy, licence income is recognised as revenue in the income statement when the rights can be freely transferred to the licensee. This is a prudent policy and often means that cash from licensees is received in advance of the licence fees being recognised as revenue in the income statement, with the balance recorded as deferred income and included on the balance sheet as a current liability.

Pre-production licence fees continue to represent a significant portion of our overall revenue. In the financial year ended March 2013 revenue from licence fees amounted to £6.0 million, being 80 per cent of Group revenue (2012: £3.0 million and 68 per cent). All of the licence fee income in the current year arose from the licence and exclusivity agreement (LEA) with Allison of which £2.7 million was deferred from cash received in previous financial years and £3.3 million from cash received in the current financial year. This has largely impacted the reduction in deferred income on the balance sheet from £2.8 million to £0.3 million.

Revenue and Engineering

Revenue from engineering services was £1.5 million (2012: £1.4 million), being £1.1 million from services provided to Allison and the balance from the remaining ETBM contract, fluid testing, and the sale of V-Charge units. Going forward, our aim is to continue to diversify our sources of engineering services revenue and grow this part of the business in line with our revised strategy announced in November 2012.

Our investment in the assets of Motorsport Components in February 2013 has also helped to strengthen our engineering services capability through in-house, high-precision manufacturing for components. The Motorsport Components business has turnover of around £0.2 million and we expect this to grow through the provision of engineering services to third party customers as well as providing rapid prototyping support for our in-house programmes.

Gross Profit

Gross profit grew by £2.3 million to £6 million during the current financial year, which equates to a gross margin of 80 per cent of revenue (2012: 86 per cent). This increase arises from the additional £3.0 million of higher-margin income from licence agreements, partly offset by the reduction of £0.8 million in gross profit from engineering services. The latter reduction has arisen from the decision to make full provision in this year's accounts for the estimated costs (£0.75 million) of completing our core component testing and development programme for Allison, which commenced during the current financial year.

Operating Costs

Total operating costs (being development and operating expenses) have increased by £0.8 million from £5.7 million in 2012 to £6.5 million in 2013. This increase was signalled in November 2012 in relation to revised strategy and is explained below.

Operating Costs - Development Expenses

Development costs have increased slightly in comparison to the previous financial year to £3.8 million (2012: £3.7 million).

It is likely that we will continue to increase resources in developing our V-Charge product and our newer growth technology areas in the coming financial year and beyond.

Operating Costs - Administrative Expenses

Administrative expenses have increased by £0.7 million to £2.7 million (2012: £2.0 million). This includes the legal costs incurred as a result of the acquisition of the 20 per cent stake in Flybrid and the 5 per cent share subscription taken by Allison, which amounted to £0.3 million and which has been recorded as an exceptional cost. We also invested an additional £0.2 million in marketing and business development support to progress our engineering services business and help provide useful market analysis data that can support future business development targeting. The remaining increase of £0.2 million arises from the last of the costs of the restructuring exercise commenced in 2011 (£0.1 million recorded as an exceptional cost), increased depreciation and amortisation due to this and prior years' capital investment in test rigs, patents, upgrade of software modelling tools and a more efficient ERP system, plus continued investment in improved quality systems and disciplined processes.

Our software modelling tools are at the core of our design tool, data analysis and rig/vehicle control code capability. Our commitment to upgrade these tools helps to strengthen our bid to support partners with the latest design tools, through access to 'protected' versions of the software, and gives us another platform for engineering services consultancy in the future. Sufficient seats of the new edition software have been purchased in order to roll out our design tools for each of the product areas.

Resources

Employee numbers have fallen slightly from an average of 40 last year, to 39 this year. However, this masks the true level of activity within the Company including our important contractor support, who work with us very much as part of our team, allowing peaks in workloads and specialist activities to be undertaken in a more flexible and cost-effective manner. With full time equivalent contractors included, this statistic is 49 (2012: 47).

The acquisition of Motorsport Components and the intention to strengthen the team's business development and manufacturing competencies is likely to see the average number rise in the next financial year. In addition, our agreement to participate in the UK government funded manufacturing facility, "The Proving Factory" with Tata Steel, MIRA and Productiv will require us to further invest in people resources going forward.

 During the year we launched a graduate recruitment scheme with the intention of attracting high calibre, ambitious and creative graduates that will become the future of Torotrak and reinforce our reputation for constant invention. As a result of this launch we recruited two high quality graduates who are already making an impact on our future. We also launched an apprenticeship scheme with the aim of recruiting talented engineers from all educational backgrounds. This will be a hands-on learning process with the intention of developing good quality engineers who have the ability to tackle critical project work and hence grow in responsibility.

We believe in recruiting for the future and see all recruitment as an investment towards achieving our ultimate strategy.

Cash

We ended the year, as predicted, with an £8.9 million cash balance, a decrease of £1.6 million compared to the last financial year. Operating cash outflow of £0.4 million compared with a cash inflow of £2.5 million in 2012 shows the impact that the timing of significant licence payments have on our cash flow position; during the year we received £5.0 million from Allison in licensing and engineering services fees. Overall cash flow has been further impacted this year by expenditure of £3.2 million for the acquisition of investments in Flybrid and Motorsport Components, largely offset by a cash inflow of £2.7 million (including £2.5 million from Allison's subscription for an additional 5 per cent holding of new ordinary shares in the Company).

Financial Statements 2013

Consolidated Income Statement

There is no other comprehensive income in the year (2012: Nil)

Balance Sheets

Statements of Changes in Equity

Statements of Cash Flows

Notes to the Financial Statements

1. General information

Torotrak plc (the 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 2012 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 2013 will be posted to shareholders and made available on Torotrak's website in June 2013.

The auditors have reported under section 495 of the Companies Act 2006 on the Group's statutory accounts for the years ended 31 March 2013 and 31 March 2012 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

The Group Financial Statements of Torotrak plc have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRIC interpretations and the Companies Act 2006 applicable to Companies reporting under IFRS. The Group Financial Statements have been prepared under the historical cost convention.

The financial information has been prepared using accounting policies consistent with those set out in the 2012 Annual Report. The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2013 or 31 March 2012 within the meaning of Section 434 of the Companies Act 2006, but is derived from those accounts.

3. IFRS standards effective in future financial statements

The IASB and IFRIC have issued new or amended standards and interpretations which are effective for accounting periods as noted below. Management are currently assessing the impact of adopting these new or amended standards and interpretations.

IFRS 9, 'Financial instruments' (effective 1 January 2015)*

IFRS 10, 'Consolidated Financial Statements' (effective 1 January 2013)†

IFRS 12, 'Disclosures of interests in other entities' (effective 1 January 2013)†

IFRS 13, 'Fair value measurement' (effective 1 January 2013)

IAS 19 (revised 2011), 'Employee benefits' (effective 1 January 2013)

IAS 27 (revised 2011), 'Separate Financial Statements' (effective 1 January 2013)†

Amendment to IAS 1, 'Presentation of Financial Statements' on other comprehensive income (effective 1 July 2012)

Amendment to IFRS 7, 'Financial Instruments - Disclosures' on offsetting financial assets and liabilities (effective 1 January 2013)†

Amendment to IAS 32, 'Financial Instruments - Presentation' on offsetting financial assets and liabilities (effective 1 January 2014)†

* Not EU endorsed.

† EU endorsed effective from 1 January 2014.

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 Financial Statements 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 Group; and

·; The outlook, trading performance overview and regional reviews include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

5. Basis of Financial Statements

The 2013 results are an abridged version of the statutory Financial Statements for the year ended 31 March 2013 which have been approved by the Board of Directors and which carry an unqualified audit report. The results for the year ended 31 March 2012 which were prepared in accordance with IFRS carry an unqualified audit report and have been filed with the Registrar of Companies. The 2013 and 2012 Financial Statements do not contain a statement in respect of s.498(2) or (3) of the Companies Act 2006.

6. Segmental analysis

Year ended 31 March 2013

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

Year ended 31 March 2012

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

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.

7. 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.

The legal costs relate to the 20 per cent stake in Flybrid Automotive Ltd and the 5 per cent subscription taken by Allison Transmission Inc.

8. Trade and other receivables

There is no provision for impairment of receivables at 31 March 2013 (2012: £nil). No trade receivables were overdue.

9. 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.

10. Issued share capital

11. Provisions

The restructuring provision relates to the costs incurred for redundancy, severance and associated expenses in relation to a reduction in employees as part of a restructuring process.

The provision for core component testing relates to the costs expected to be incurred in relation to the testing and supply of fully conformed discs and rollers to Allison Transmission Inc.

12. Business combinations

On 18 March 2013 the Group acquired a 20 per cent holding in Flybrid Automotive Limited for a cost of £3 million with an exclusive option to acquire the remaining 80 per cent by 20 December 2013.

On 12 February 2013 the Group acquired the business and specified assets of Motorsport Components Limited for an initial cost of £230k. Deferred consideration of £9k may be paid based on recoverability of selected work-in- progress balances. Since acquisition the business acquired has generated a gross profit of £16k on revenue of £26k. Had the business been acquired at the start of the period it is estimated that a gross profit of £165k would have been generated on revenue of £215k.

The fair value of assets and liabilities acquired are as follows:

13. 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 of risks and uncertainties and actual results and events could differ materially from those expressed or implied by these forward-looking statements.14. Approval 

The Preliminary Announcement was approved by the Board of Directors on 29th May 2013.

15. Contingent Liability

£2million of the £8.5million which has been agreed with Allison as being the final license payment is contingent upon a successful outcome from the testing of new sized discs and rollers.

Financial record

For the years ended 31 March

Date and Venue of AGM

The Annual General Meeting of the Company will be held at 11.00 am on 25 July 2013 at the Heritage Motor Centre, Banbury Road, Gaydon, Warwickshire, CV35 BJ.

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