Torotrak is asking investors to stump up £13.8 million. But will it be money down the drain?
In conjunction with the fund raise, the earn-out agreement related to the acquisition of Flybrid Automotive has been restructured and results in the elimination of £10 million of additional cash consideration.
The net proceeds of the Issue will also be used to settle the cash consideration due to the Flybrid Vendors under the Flybrid Agreement and to provide the Group with additional working capital.
The past year has been marked by the arrival of Adam Robson who took over from Jeremy Deering as chief executive officer on 13 April 2015.
Robson admits the financial performance of the Group has been disappointing.
The normalised loss after tax (before amortisation of intangible asset (know-how), associated tax credit and exceptional items) increased to £6.7 million (2014: £3.4 million), reflecting lower licensing revenues, a full year's operating costs for Flybrid and the investment in developing and productionising the bus and off-highway KERS product.
The Group closed the financial year with a cash balance of £7.6 million (2014: £14.9 million) and loan notes due to the vendors of Flybrid Automotive of £2.8 million (2014: £2.8 million). The net reduction in cash of £7.3 million arises from the operating loss for the year and the investment in capital expenditure, being plant, machinery and patents.
Robson says he has spent much of his time since starting at Torotrak “resetting the strategic focus” of the Group to commercialise its technology and reorganise the Group's executive management team, engineering and other resources to deliver on this commitment.
This will not be the first time that Torotrak’s strategic focus has been reset.
Robson claims he is “excited” to have joined Torotrak “at this important time” and looks forward to “helping deliver the significant value embedded in the Group's different technologies”.
Under the terms of his restructuring, Flybrid Vendors receive a one-off settlement of 71,428,571 New Ordinary Shares and will convert £1.8 million of loan notes into a five year term loan, secured on the assets of Flybrid and repayable by the Group at any time during the five year term and the remaining £1 million will be paid out of the proceeds of the fund raise.
The company claims the cash funding will enable the Group to commercialise its technologies and launch bus KERS in the market in mid-2016.
In addition, restructuring the earn-out agreement “removes a potential conflict and ensures that all members of the Board and Executive management are fully aligned to maximise the commercial opportunity for the KERS technology”.
As part of Robson’s strategy “to reset the focus” of resources on commercialising the Group's technology, a “reorganisation” will reduce on-going cash operating expenses by 20 per cent and align resources to deliver commercial success.
Robson claims that by “leveraging the capabilities of the Group's current and future Tier 1 partners, such as Univance”, in conjunction with the reorganisation “will help the Group deliver shareholder value” through licensing and other product sales.
KERS for buses
The Group's primary focus since acquiring Flybrid Automotive has been completing the design, development and testing of the bus KERS product and commencing the in-service trials in a Wrightbus StreetLite vehicle with Arriva. During the year the engineering team has successfully completed the following programme activities:
Installed KERS units into two Wrightbus StreetLite vehicles, successfully completed the necessary calibration and drivability tests to maximise energy capture and fuel savings. The KERS-enabled vehicles have undergone an extensive series of tests both on public roads and test tracks such as Millbrook Proving Ground, Bedfordshire. The Vehicle Certification Agency has confirmed the KERS-enabled bus has successfully passed the braking performance tests necessary to operate on a public bus route;
Independent testing completed at the Millbrook test track, confirms the bus KERS system can deliver fuel savings and can give bus operators an attractive payback. With the new £30 million incentive fund announced by the Government for Low Emission Bus (LEB) procurement, Robson anticipates payback to bus operators could be significantly faster with initial capital grants. The Group has also conducted its own testing at the Millbrook test track which confirms the significant fuel savings that are available to bus operators in real-world use;
In March this year, Arriva commenced a public trial of a Flybrid KERS-enabled Wrightbus StreetLite vehicle. The vehicle is in service with Arriva on a public bus route in Gillingham, Kent. The Group, in conjunction with Arriva, will monitor the in-service performance of the vehicle using on board telemetry. This is an important validation of the KERS product that “will provide an excellent opportunity to showcase the technology to potential customers including bus operators and other bus OEMs”.
Extensive accelerated flywheel assembly durability testing equivalent to more than 10 years of in-service operation has been completed successfully; this confirms the target design life of at least 1 million kilometres. Robson claims this confirms an important benefit of the Group's flywheel hybrid compared to battery hybrids which require a mid-life battery pack replacement, increasing through-life costs and operating downtime. Destructive testing to validate the flywheel functional safety has also been successfully performed proving the patented safety features of the system.
In parallel, the engineering team has completed the production-intent design for the low cost industrialised bus KERS system, reducing weight, parts count and estimated cost. The first units are currently being assembled at the Group's facility in Leyland and will be used as part of a comprehensive design verification test programme to validate the functional performance, reliability and improved fuel efficiency of the KERS system.
Light commercial vehicle uses
Torotrak has been working in close collaboration with a major global Tier 1 manufacturing and assembly partner which is a technology leader in commercial vehicle and light vehicle driveline systems.
Robson says the combined engineering teams of Torotrak’s Tier 1 partner and the Group's development team are focused on optimising the design for manufacture, reliability and cost and building a supply chain to deliver the volumes required by bus operators and to support a commercial market launch in mid-2016.
The Group signed a Memorandum of Understanding with the Tier 1 earlier this year which is expected to lead to a formal volume supply agreement. The initial agreement is that the Tier 1 will supply KERS units (excluding flywheel assemblies) and Torotrak will manufacture flywheel systems and assemble these into the complete KERS unit for shipment to bus OEMs.
The Group is targeting in-vehicle trials of the new production-ready KERS units later this year and, following investment in tooling, the commercial launch of KERS is scheduled for mid-2016.
This is 12 months later than originally planned, however Robson believes that KERS can deliver the required bus operator payback.
The recent announcement by the UK Government's Office for Low Emission Vehicles of a £30 million fund for (Ultra) Low Emission Bus procurement (LEB) is a welcome initiative to encourage bus operators to procure new low carbon vehicles. Initial indications suggest that a Flybrid KERS unit could be eligible for a capital grant of up to 75 per cent, which would enable KERS to offer bus operators a rapid payback.
The LEB programme is also designed to stimulate the uptake of new low carbon technologies that offer value for money and that help to reduce the need for government subsidy over the period of the scheme and beyond. Torotrak is working with partner, Wrightbus, to ensure the Flybrid KERS equipped StreetLite is eligible for grant funding under this scheme.
KERS for off-highway, cars
The collaboration with JCB, part-funded by the UK-Government formed Advanced Propulsion Centre, to design, develop and commercialise Flybrid flywheel systems for excavators is progressing well. In-vehicle and rig tests of flywheel systems are encouraging.
Torotrak is looking at other opportunities for its KERS systems in other off-highway applications.
Robson says Torotrak has recently completed feasibility studies for two major European-based OEMs. (It has worked closely in the past with Jaguar and Volvo.)
Whilst these studies are early-stage feasibility studies, Robson claims these confirm the view that OEMs are looking at mechanical-based energy recovery systems as a lower cost, more effective solution than battery based hybrid solutions.
Torotrak is engaged also with a number of other passenger car OEMs and Tier 1s in Europe, North America and China, who are investigating the opportunities for KERS with potential feasibility and demonstrator vehicle programmes.
In April this year, Torotrak announced it was working with Ford Motor Company, a leader in efficient passenger car engines, to evaluate the potential benefits of V-Charge technology in engine downsizing.
The project, funded by Innovate UK, in collaboration with the University of Bath (a world recognised centre of excellence in this field, according to Torotrak) and a global Tier 1 engine boosting supplier is developing a production orientated version of V-Charge.
This work is focused on exploiting the capability of V-Charge technology through optimisation of multiple engine parameters demonstrating the emissions reduction and performance improvement opportunities for the technology.
Robson says the technology has the potential to reduce the complexity and cost of multi-stage boosting systems that are necessary to achieve increased specific engine outputs.
Initial simulation results from the University of Bath collaboration confirm V-Charge has the potential to improve the performance of a modern downsized gasoline engine when compared to competing advanced boosting technology, making it a potential enabler for more aggressive engine downsizing, according to Torotrak.
Using current supercharger compressor technology, V-Charge can provide improved low speed torque output, and under full-load conditions is predicted to deliver improved fuel consumption and CO2 emission reductions without the 'lag' associated with existing boosting solutions.
The next stage will see V-Charge hardware integrated into two passenger cars and the University of Bath will independently validate the performance and fuel-efficiency benefits delivered by V-Charge in real-world drive cycles.
Torotrak is working closely with Univance (an existing licensee for the Group's continuously variable transmission (CVT) technology), to explore the commercial opportunity to use V-Charge CVT technology to improve fuel efficiency, with a focus on on-highway commercial vehicle boosting applications.
Univance is working with several Japanese OEMs interested in commencing demonstration programmes to confirm the benefits of using Torotrak's CVT in conjunction with a turbocharger over and above competitor technologies.
Main drive transmissions
In November 2014, Allison Transmission paid the final £1 million licence fee, deferred from earlier in the year; confirming the step-change improvement in key component durability and lifetime. Robson says the Group is working with Allison to determine the most appropriate product for the Group's technology, taking into account the market opportunities and the key drivers of fuel efficiency, packaging and cost.
Torotrak has been invited to participate in a feasibility study for off-highway applications to be commissioned and completed during 2015.
Univance has recently secured a Japanese government grant to develop a family of variators for off-highway and auxiliary drive applications using the Group's CVT technology and has identified a number of lead customers for this product family.
On a recent to visit to Japan, Torotrak agreed to support these programmes as part of the drive to secure new commercial opportunities.
During the year Torotrak has invested in low volume manufacturing, test and build equipment at the Leyland facility. Investments include:
Carbon fibre filament winding and flywheel hub manufacturing capability to manufacture complete flywheels in lower volumes up to a few thousand units per annum, meeting the initial requirements for on and off-highway commercial vehicle markets;
CNC machining capability to manufacture multiple high-value components enabling multiple engineering programmes to be delivered more quickly and cost-effectively and to help capture valuable design-for-manufacture learnings and IP.
In addition, investment has also been made in 24-hour ('lights-out') accelerated flywheel durability testing capability to further KERS development test facilities in order to support product development programmes for the Torotrak’s key KERS programmes including with Wrightbus.
Whether all of this activity with Robson at the helm yields “shareholder value” remains to be seen. Investors have certainly been waiting a long time for that “value” to materialise. If not, it will be back to square one.
Likewise, Robson appears to have set some targets; again it remains to be seen if they can be met.
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