MWG.L Regulatory News (MWG)

16 March 2016

Modern Water plc ("Modern Water" or "the Company")

FINAL RESULTS

Modern Water (AIM:MWG), the owner of leading technologies for water and wastewater treatment and the monitoring of water quality, today announces

full-year results for the 12 months ended 31 December 2015

Key points

Operational

Financial

Commenting on the results, Alan Wilson, Non-Executive Chairman of Modern Water, said:

"The outlook for 2016 looks promising because we are more market focused, we have improved our cost base and we have a refined strategy which will enable us to bring our world leading technology to key markets in a quicker timeframe."

---End---

For further information:

Notes to editors

Modern Water owns, installs and operates broad based membrane systems using world-leading Forward Osmosis (FO) membrane technologies; supplies packaged seawater Reverse Osmosis (RO) desalination systems; supplies wastewater treatment solutions; and develops and supplies advanced systems for water monitoring. Its shares trade on the Alternative Investment Market of the London Stock Exchange.

Modern Water's patented forward osmosis (FO) technology's benefits include lower energy consumption and lessen environmental impact in a variety of industries. With a sales presence in almost 60 countries, the Group's Monitoring Division includes a leading real-time continuous toxicity monitor and trace metal analysers for monitoring the quality of drinking water.

www.modernwater.com 

CHAIRMAN'S STATEMENT

Alan Wilson

This past year has seen significant changes at Modern Water. We have restructured and removed over £1m from our overheads in order to improve our competitiveness and reduce the cash burn, to the extent that we can now see clear trading visibility well into 2017. A number of senior management changes have taken place, which I believe will significantly improve our customer and market focus, whilst enhancing our overall performance. At board level, we have seen the retirement of Robert Clarke and Michael Gradon and I'd like to thank them both for their sterling efforts.

Our strategic review of the water monitoring market highlighted that our product portfolio is highly regarded by customers and there are substantial opportunities for growth. We have identified ways to refocus our market approach, so that we can directly offer spares and services, which will give rise to better customer understanding and longer-term sales opportunities. To that end, we have recently appointed a new President of the Monitoring Division, who will be based in the USA. At an operating level, I am pleased to report that sales in the Monitoring Division increased by 19% compared to last year, mostly due to increased sales of the Microtox® Continuous Toxicity Monitor (CTM) and delivery of the division's largest order to date with the sale of a purpose-built containerised trace metal monitoring system in the Middle East for a large multinational company.

In our Membrane Division, we have had encouraging endorsement of our technology with the formation of joint working agreements with some global corporations, who clearly see potential in what we've been developing to-date. One example is our recently announced agreement with Bilfinger Deutsche Babcock for the joint development of Forward Osmosis technology, in conjunction with multi-stage flash desalination plants in the Middle East and Northern Africa. We have also taken steps to refocus our sales efforts towards industrial corporations who are able to offer us direct access to live business opportunities where our technology offers them a competitive advantage as part of their overall offering to end-customers.

We are looking forward to the much-reported contract award for the construction of a waste-water treatment plant in Gibraltar materialising in due course. Our joint venture with Northumbrian Water has been selected as preferred bidder in a formal procurement tender and H.M Government of Gibraltar has announced that the project will proceed and we expect a formal contract award by mid-year.

As for our 2015 financial results, revenue and gross profit increased on the prior year, whilst overheads reduced, resulting in an operating loss of £4.2m (2014: £5.1m). Cash burn in 2015 reduced to £3.6m (2014: £4.6m). The Group's financial position remains debt free, with cash of £3.2m as at 31 December 2015 (2014: £6.8m).

The outlook for 2016 looks promising because we are more market focused, we have improved our cost base and we have a refined strategy which will enable us to bring our world leading technology to key markets in a quicker timeframe.

STRATEGIC REPORT

Simon Humphrey

The Directors of Modern Water plc (Modern Water or the Company) and its subsidiary undertakings (which together comprise the Group) present their Strategic Report for the year ended 31 December 2015.

Principal Activities

Modern Water plc is the holding company of a trading group, the principal activities of which are to own, develop and supply technologies, products and services related to the provision of fresh water and treatment and disposal of waste water, specifically:

· design construction, testing, installation, commissioning and operation of desalination plants, water cooling systems and brine concentration plants;

· packaged seawater desalination systems;

· wastewater treatment systems; and

· water quality monitoring, environmental monitoring and soil testing.

Membrane Division

Strategy

The Company has continued to pursue its key strategic goals and has begun to see clear progress towards commercialisation of its technologies. The focus of the Company is on four market areas within a clear framework to:

· develop and commercialise our membrane technologies that have unique competitive advantage; and

· work with strategic partners, by product and territory, who have proven track records in the target sector, on joint development and commercialisation; risk sharing; licensing; and protecting and expanding our IP.

Forward Osmosis (FO) Pre-treatment for Thermal Desalination

In January 2016 Modern Water signed an agreement with Bilfinger Deutsche Babcock Middle East, one of the region's leading service providers for construction, rehabilitation, operations, maintenance and life cycle services in a range of industries.

The agreement covers the joint development and commercialisation of Modern Water's proprietary Forward Osmosis technology, in conjunction with multi-stage flash (MSF) desalination plants across the Middle East and Northern Africa. The product offering will allow MSF desalination plant owners and operators to improve the performance and energy efficiency of both existing plants and any new plants under development.

Following a detailed successful assessment of the combined process, the parties are now developing their product offering for deployment at an operational desalination plant. During the initial pilot phase, the plant will develop and demonstrate the effectiveness of Forward Osmosis to osmotically dilute and soften the recirculating brine of the desalination plant, allowing an increase in top brine temperature (TBT), which crucially reduces both the thermal and electrical energy consumption, whilst maintaining the same output.

Our refined strategy is to focus on industrial applications of our cutting-edge proprietary technologies, and this agreement with Bilfinger Deutsche Babcock Middle East is a significant endorsement of this focus. Bilfinger Deutsche Babcock Middle East is a major player in the MSF desalination market, having built, maintained and upgraded many of the existing stock of plants in the region. This project secures us another significant foothold in the large and important Middle East and North Africa markets.

Membrane Brine Concentration

During 2015 the Company has developed an All Membrane Brine Concentrator (AMBC). Using this technology the company is able to concentrate wastewater flows to higher levels than existing membrane technologies. We are engaged in on-going discussions with potential partners to commercialise this technology in industrial applications in India and China.

Forward Osmosis (FO) Evaporative Cooling Systems

The Company has continued to refine its technology to reduce the cost and environmental impact of the evaporative cooling system. In line with our stated strategy for the membrane business we are in discussion with a number of potential partners to undertake field tests of our technology in water scarce regions.

Aquapak

During 2015 the Company launched its range of low cost seawater and brackish water reverse osmosis plants using the AquaPak brand name.

To support this initiative the Company appointed a dedicated Middle East Sales Manager in August 2015 based in the UAE. This has created a large number of enquiries and we are confident of closing the first projects in the first half of 2016.

In Oman the division continued to successfully operate and maintain the Al Najdah Forward Osmosis (FO) desalination plant, which is 100% locally managed.

Wastewater Treatment

Following an EU public procurement process in October 2014, H.M Government of Gibraltar selected a joint venture between Modern Water Services Limited and Northumbrian Services Limited as preferred bidder for a wastewater treatment plant in Gibraltar. Negotiations with the Government of Gibraltar are on-going. The next stage of the procurement process after the preferred bidder stage is the award of the contract.

The contract includes the design, build, and operation of a wastewater treatment plant capable of treating urban wastewater for the entire population of Gibraltar as well as storm flows. Modern Water would be the lead contractor and undertake the design and build of the treatment plant with a current contract value of approximately £21m.

Monitoring Division

Strategy and Performance Review

During the year the company undertook a strategic review of its Monitoring Division. The review highlighted our customers' recognition of the high quality products offered by Modern Water. As a result of the review the division has undertaken to focus resources on key markets and key products.

The division's three key geographical markets are North America, Europe and China. The divisional objective is to be the global leader in toxicity and trace metals monitoring.

The Company has appointed Doug Workman as President of the Modern Water Monitoring Division with a mandate to lead the division to achieve these goals. Doug is based in our US Head Office in Delaware.

The Monitoring division achieved sales of £3.2m in 2015 (2014: £2.7m). The revenue increase was due to increased sales of the Microtox® Continuous Toxicity Monitor (CTM) and delivery of the division's largest order to date with the sale of a purpose-built containerised trace metal monitoring system in the Middle East for a large multinational company.

The containerised system marks a step-change in the Monitoring division's activities as it was Modern Water's first purpose-built unit of this kind, and one which demonstrates our ability to supply fully containerised monitoring systems anywhere in the world. The unit was completed in 2014 and delivered to the customer and payment received in 2015.

Recurring revenues of service contracts and reagent sales remained constant at £1m in 2015.

Group Key Performance Indicators (KPIs)

At the company's current stage of development, the Directors consider that strategic and operational progress is best measured by achievement in terms of technical and business development milestones. Key milestones against which progress was made in 2015, and on which we will continue to focus on during 2016, are:

· strengthened relationships in the Middle East, via the recruitment of a Regional Sales Manager for the region and the delivery of a containerised Monitoring station into the territory;

· development of relationships with industrial partners; and

· deployment of wastewater technologies, specifically in joint venture similar to the arrangement with Northumbrian Water plc as preferred bidder to the Government of Gibraltar, for the construction of a state-of-the-art wastewater treatment plant.

Further details of strategic and operational progress for the two main operating divisions are outlined in the Membrane and Monitoring sections of this Strategic Report. The Board reviews strategic, operational and financial information on a monthly basis to measure progress. The key financial performance indicators for 2015, covered in more detail in the Financial Review and the financial statements, were:

· revenue increased to £3.2m (2014: £2.8m);

· gross profit £1.2m (2014:£1.2m);

· operating loss before tax, interest, depreciation, amortisation and exceptional items decreased to £3.7m (2014: £4.5m);

· loss for the year £3.8m (2014: £17.7m), after exceptional items, £nil (2014:£12.8m);

· cash outflow decreased to £3.6m (2014:£4.6m); and

· cash as at 31 December 2015 was £3.2m (2014:£6.8m)

Further information on the financials is detailed in the Group Financial Review section of this Strategic Report.

Group Research & Development (R&D)

The Group continues to invest in R&D across membrane, wastewater and monitoring technologies to support the development and delivery of commercial products for customers and expand the patent portfolio of the Group. Expenditure recorded in the Statement of Comprehensive Income for R&D during the year was £156,000 (2014: £339,000). The Group has benefited from the HMRC R&D tax credits scheme during 2015 with the receipt of £0.1m cash for 2013 R&D. The Group will submit claims for recovery of 2014 and 2015 R&D expenditure to HMRC in 2016.

Group Patent Portfolio & Intellectual Property

Our patent portfolio continued to strengthen in 2015, with patents granted in new territories across a number of different patent families. The Membrane division holds 104 (2014: 96) granted patents across eight main patent families comprising solvent removal, improved solvent removal, secondary oil recovery, osmotic energy, separation process, evaporative cooling, cooling tower improvements and thermal desalination.

A first patent was granted for electro-coagulation in 2015 which now brings the total of Modern Water's innovative wastewater treatment patents to seven (2014: 6). The Monitoring division currently holds 18 granted patents (2014: 18).The Group holds 129 granted patents in total (2014: 120) with a further 29 pending applications (2014: 43).

Group Resources

Modern Water strives to create a community, not just a workplace, and makes an effort to encourage collaboration and networking across the Group. We also support the ongoing development of our employees and have an excellent track record in key staff retention.

Our strategy of employing local workers wherever we operate continued during 2015, especially in Oman where our operations continue to be 100% locally managed with support from our central technical team. Both our Membrane and Monitoring divisions have adopted this strategy which is working well.

As at 31 December, the Group employed 49 permanent staff (2014: 52), supplemented by contract staff as required.

Group Financial Review

Summary

The Group had £3.2m cash in the bank and no debt at 31 December 2015 (2014: £6.8m cash). During the year the Group continued to incur losses, reflecting the early stage of commercial roll out, prior to securing significant sales contracts, particularly in the Membrane division. Loss before exceptional items, interest, tax, depreciation and amortisation reduced to £3.7m (2014: £4.5m). The reduction on the prior year losses was primarily due to a reduction in operating costs, following a staff reorganisation in the first half of 2015, and an increase in gross profit from the Monitoring division. The reorganisation has removed £1.1m of administrative expenses, of which £0.2m has been reinvested, delivering a £0.9m recurring annual saving in overheads.

The Group generated revenue of £3.2m in 2015 (2014: £2.8m), with the increase primarily due to the sale of a large containerised trace metals monitoring station and an increase in sales of the Microtox® Continuous Toxicity Monitor (CTM). The Group incurred exceptional costs of £nil (2014: £12.8m), consequently total comprehensive loss reduced to £3.9m (2014: £17.7m).

Cash Flows

The Group cash outflow, for the year was £3.6m (2014: £4.6m). This reduction in cash burn was due to the increase in gross profit, reduction in operating expenses and improvement in working capital movement during the year.

Cash inflow from interest was nil (2014: £0.1m). Cash inflow from R&D tax credit was £0.1m (2014: £nil). Cash outflows comprised £0.1m on property, plant and equipment (2014: £0.1m), £0.1m on patents (2014: £0.1m) and £3.6m on operating activities (2014: £4.5m).

Accounting Policies

The Group financial statements have been prepared in accordance with EU Endorsed IFRS, IFRS Interpretations Committee (IFRIC) interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The key accounting policies to note are those concerned with intangible assets and share-based payments.

Capital Structure

The Group is entirely equity funded which is appropriate during the current stage of development. As the Group develops, the capital structure will be reassessed on a project by project basis.

Treasury Management

The Group has adopted a low risk approach to treasury management. Cash balances are invested in instant access current and deposit accounts. Credit risk is addressed by the Group's treasury policy. Deposits are selected based on achieving the optimum balance of yield, security and liquidity. Foreign exchange risk is primarily mitigated through natural hedging of receipts and payments. See note 3 to the Accounts for further detail of financial risk management.

Going Concern

The directors are required by company law to be satisfied that the Group has adequate resources to continue in business for the foreseeable future. A review has been conducted and the directors have concluded that such resources are available, and that the going concern basis is justified in preparation of the financial statements.

The Group's forecasts prepared by the directors reflect that funding requirements have reduced since 2014, as the result of the restructuring plan, delivering an annual net £0.9m reduction in expenditure. The Group's cash burn has reduced to £1.0m for the 6 months to the end of February 2016, and is planned to remain at this level through 2016 and 2017.

The Group's funding requirements will be met from:

· £3.2m opening cash balance;

· R&D tax credits receipts from HMRC for 2014 & 2015;

· favourable movement in the Group's working capital, specifically reduction in inventories and aged trade receivables in the Monitoring Division; and

· continued improvement in the Monitoring Division trading.

In addition Modern Water is pursuing a number of commercial opportunities, which would provide incremental positive cash inflows, the most significant of which is the joint venture between Modern Water and Northumbrian Water. In the event of these commercial opportunities not progressing through 2016/2017, the Group would need to obtain additional funding in the second half of 2017.

Principal Risks and Uncertainties

The principal risks inherent in the operation of the Group are well understood by the Board of Directors and the Management Team. Control measures have been established to ensure that these, and other, risks are adequately controlled both in terms of frequency and consequence. The internal control environment is described in the Corporate Governance Statement. The principal risks and uncertainties affecting the Group and the steps taken to manage these are:

Customer acceptance of the Group's technologies and emergence of competing technologies

The Group's success depends on potential customer acceptance of its products and processes. There are significant risks in predicting the size and timing of material revenue. The target customers of the Group's products and processes are often in developing countries which carry additional potential risks. The Group seeks to address these risks by building a track record and proving technology capabilities to future customers and industry players. The Group has increased investment in business development as product development progresses. Modern Water has formed a number of strategic partnerships to create local presence in target countries, overcome pre-qualification criteria on contract tendering and establish new routes to market. The range of applications for the Group's products provides mitigation against the risk of failure in a specific country or application. The Group continues to invest in research and development (R&D) to mitigate the risk of the emergence of competitor technologies.

Socio-political risks

Modern Water operates, and is looking to secure further contracts and sales, in a number of countries around the world. This exposes the Group to a range of social and political developments and consequentially to potential changes in the operating, regulatory and legal environment. The Group operates and generates revenue in countries where political, economic and social transition is taking place. Some countries have experienced, or may experience in the future, political instability, changes to the regulatory environment, changes in taxation, expropriation or nationalisation of property, civil strife, strikes, acts of war and insurrections. Any of these conditions occurring could disrupt our operations and revenue. The Group seeks to manage these risks through diversifying the regions in which it operates.

Scaling up the technology

The Group's Membrane division and certain monitoring products are not yet well established commercially. They have been developed over recent years and whilst the proving of the technology is largely complete there remain significant risks associated with commercialising technology and a portfolio of new products. There are technology and procurement risks in scaling up the products through to large scale commercial deployment. The Group seeks to mitigate these risks through the use of partners with proven manufacturing and fabrication capabilities, rather than developing in-house capabilities, and through the development and operation of pilot plants prior to full commercial deployment.

Additionally there are risks related to developing the optimum contract, royalty and licensing models to derive value from the products. The Group manages these risks through employment of executives and senior management with significant experience both in the water industry and in the development and growth of early stage companies.

IP protection

The Group's ability to generate value from its products depends in part on the development and protection of its IP. The Group assigns significant resources, both internally through the Company's General Counsel and technical staff, and externally through patent attorneys, to enhance and protect its patented and non-patented IP.

Recruitment and retention of key personnel

The Group's directors and employees are highly qualified and experienced. Recruiting and retaining key staff is critical to the overall success. Knowledge and experience of the Group's products and customer base is retained by a relatively small number of individuals. The risk of staff loss is mitigated through its HR policies, competitive remuneration (including the Modern Water plc Incentive Plan), performance appraisals and training.

Health and safety

There are inherent health and safety risks with the deployment of the core membrane and monitoring products. The mitigation of any health and safety events involving the Group's products is key to the strategy for growth. The Group mitigates its health and safety risks through its Group Health and Safety Policy, which includes regular reporting to the Board and to the Management Team.

Capital risks

It may be desirable for the Company to raise additional capital by way of the further issue of Ordinary Shares to enable the Company to progress through further stages of development. Any additional equity financing may be dilutive to shareholders. There can be no assurance that such funding, if required, will be available to the Company.

Financial risks

These risks and mitigating controls are described in note 3 of the Group's statutory financial statements for the year to 31 December 2015.

GROUP STATEMENT OF COMPREHENSIVE INCOME

Year ended 31 December 2015

GROUP STATEMENT OF FINANCIAL POSITION

As at 31 December 2015

GROUP STATEMENT OF CHANGES IN EQUITY

Year ended 31 December 2015

The merger reserve resulted from the acquisitions of Surrey Aquatechnology Limited on 12 June 2007 and Cogent Environmental Limited on 2 February 2011 and represents the fair value of equity-based consideration. During the year the goodwill, intangible and investment assets resulting from the acquisition of Surrey Aquatechnology Limited were impaired, as a result there has been a transfer between the corresponding balance in the Merger Reserve and Accumulated Losses. The Merger Reserve balance relates solely to the acquisition of Cogent Environmental Limited.

GROUP STATEMENT OF CASH FLOWS

Year ended 31 December 2015

NOTES TO THE FINANCIAL STATEMENTS

1. Authorisation and basis of preparation

The board of directors approved these results on 16 March 2016. The financial information set out above is abridged and does not constitute the Group's statutory financial statements for the year to 31 December 2015. Statutory financial statements for the year ended 31 December 2015 have been reported on by the Group's auditors. The report for the year ended 31 December 2015 was unqualified.

The principal accounting policies have been applied consistently throughout the year, unless otherwise stated, in the preparation of these financial statements. The financial statements of Modern Water plc ("the Company") have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU, IFRS Interpretations Committee (IFRIC) interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention.

2. Segmental analysis

Reportable segments

The chief operating decision-maker is deemed to be the Board, for whom monthly financial information is provided by division to gross profit and direct overheads; below this financial information is reported in a consolidated Group format. For management reporting purposes the Group is organised into two operating segments (i) membranes; and (ii) monitoring, which matches this divisional split.

Administrative expenses which are directly attributable to the two main operating divisions (comprised of business development, sales, operations and technical expenditure) are reported as expenditure in the respective division. However, a significant proportion of the Group's expenditure (legal, marketing, finance, facilities and directors' expenditure) is managed and reported centrally. As the commercial activities of the Group develop, this financial information is expected to evolve.

The Monitoring division recognised £3,222,000 (2014: £2,715,000) from sale of goods and services and £nil (2014: £nil) revenue from royalties. The Membrane division recognised £10,000 (2014: £57,000) from the sale of water and operating and maintenance contracts and £nil (2014: £nil) from the sale of desalination equipment.

Geographical information

The Group operates in four main geographical regions, based on customer location.

The Group has non-current assets in four countries (2014: four), based on location of the assets.

Assets and liabilities are presented to the chief operating decision maker in a consolidated Group format. Assets and liabilities are not presented by segment.

Major customers

Within the Monitoring division revenue to one customer totalled £497,000 (2014: £512,000), representing 15% (2014: 19%) of the division's revenue. No other customer represented more than 10% of the division's revenue. All revenue in the Membrane division came from a single customer (2014: 100%).

3. Administrative expenses by nature

4. Intangible assets

5. Notice of Annual General Meeting

Notice is hereby given that the Annual General Meeting of Modern Water plc will be held at 10.00am on 26 April 2016 at the offices of Modern Water plc, Bramley House, The Guildway, Old Portsmouth Road, Guildford, GU3 1LR.

6. Availability of Annual Report

Copies of the full statutory accounts will be posted to shareholders at least 21 days before the Company's Annual General Meeting and may be obtained from the date of posting from the registered office of the Company office at Bramley House, The Guildway, Old Portsmouth Road, Guildford, GU3 1LR, as well as from the Company's website at www.modernwater.com.