MWG.L Regulatory News (MWG)

12 September 2012

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

Modern Water (AIM:MWG), the owner of world-leading technologies for the

production of fresh water and monitoring of water quality, announces

Interim Results for the six-month period ended 30 June 2012

Highlights

Operational

·; Installation and commissioning of Al Najdah plant, the world's first commercial Forward Osmosis (FO) desalination plant completed in September 2012

·; Successful transition of US operations, Modern Water Inc to a new standalone facility in Delaware, US

·; Licence agreements for distribution of additional Monitoring products signed with Multisensor Systems Limited and Chelsea Technologies Group Ltd

·; Monitoring division sales conference held for Asia Pacific distributors, to promote product range and develop routes to market

Financial

·; Revenue £2,037,000 (H1 2011: £430,000)

·; Revenue recognised on Al Najdah contract

·; Strong increase in revenue from Monitoring division

·; Gross profit increased to £790,000 (H1 2011: £141,000), with gross margin of 39% (H1 2011: 33%)

·; £8.7m cash and debt free

Commenting on the results, Neil McDougall, Executive Chairman of Modern Water, said:

"Modern Water enjoyed a major uplift in revenue in the first half of 2012 whilst achieving several key milestones. The Monitoring division has more than doubled its sales in the first half compared with the previous six month period and the Membrane Processes division has completed the commissioning of the world's first commercial forward osmosis plant in Oman.

"The Al Najdah plant, Modern Water's second desalination facility in Oman, is now operating at full capacity having exceeded contractual water quality standards. We have now entered into a 12 month operation and maintenance (O&M) period which will supply the local community with 200 cubic meters of water per day. Modern Water's forward osmosis technology, in place at the Al Najdah plant, continues to attract high levels of interest globally and we are very excited about our prospects on this front.

"Meanwhile, our Monitoring division helped the Group to achieve revenues of £2 million for the first half of 2012. We have fully integrated our US operations, agreed licences for new monitoring technologies and stepped up our international sales efforts.

"We remain committed to providing high quality technologies to those communities we operate in, ensuring a safe and stimulating environment for our employees and, of course, we continue to be dedicated to maximising shareholder value."

Report to shareholders

I am pleased to report that the first half of 2012 has seen a sustained growth in revenue to £2m for the six months to 30 June 2012. Modern Water has also achieved a number of milestones:

·; Our Advanced Membrane Processes (AMP) division has completed the installation and commissioning of the world's first commercial Forward Osmosis (FO) plant in Oman in September 2012; and

·; Our Monitoring division has more than doubled its sales on the previous six month period, through acquisition, with revenue exceeding £1.75 million (H2 2011: £0.8m, H1 2011: £0.4m).

Advanced Membrane Processes Division

In September 2012 we completed the installation and commissioning of the world's first fully commercial FO desalination plant at Al Najdah in Oman. In July this year the plant started producing water at full capacity (200 cubic metres per day) using Modern Water's world-leading patented FO technology. The water quality exceeded contractual standards and after the initial testing period was put into the public water supply. We have now entered into the 12-month operation and maintenance (O&M) phase. Revenue of £0.25m has been recognised during the first half of 2012, being 71% of the build contract value for the plant. We expect to recognise the remainder of the revenue on the build contract and start to realise additional revenue on the O&M phase in the second half of 2012.

Modern Water's FO technology continues to attract high levels of interest from around the world as it has proven to be a reliable and robust technology and the company is currently in on-going discussions regarding further desalination projects. FO delivers significant reductions in operational costs, reduced lifetime costs and reliably produces high quality product water, even in the most challenging conditions.

Monitoring Division

The first half of 2012 was an exciting period for the Monitoring division which has seen significant growth with revenue increasing to £1.75m for the six months to 30 June 2012 (H2 2011: £0.8m). The increase in revenue has been largely due to inclusion of sales by Modern Water Inc. (MWI), following its acquisition of the water quality division of Strategic Diagnostics Inc. (SDIX) in December 2011. During the period, the MWI business transitioned from SDIX to a fully standalone facility in Delaware, US, which includes laboratories and warehousing facilities, and is the base for Modern Water's operations in the Americas.

The division is now focused on implementing its strategy for growth, developing routes to market, both directly and through its network of approximately 60 distributors, and growing its product range. In June, we held our first distributors' conference in Indonesia where our team gave detailed training on our new and existing products to more than 40 delegates. In July, Modern Water exhibited at Singapore International Water Week where we demonstrated our broad range of innovative technologies and products. Most recently, we are also pleased to have agreed terms to license new monitoring products from Multisensor Systems Limited and Chelsea Technologies Group Ltd and continue to take full advantage of opportunities for cross-selling all of our products.

Overview

We have made significant progress during the first half of 2012. A particularly noteworthy achievement is the commissioning of the world's first commercial FO desalination plant at Al Najdah which puts us in a strong position to win further desalination contracts. The Group's operating loss before depreciation, amortisation and share-based payments was £2.2m (H2 2011: £2.2m, H1 2011: £1.9m). The Group's financial position remains robust, debt free, with £8.7 million of cash as at 30 June 2012.

On behalf of the Board I would like to thank the team at Modern Water for its dedication and reiterate our commitment to deliver long-term value to our shareholders.

Neil McDougall

Executive Chairman

12 September 2012

Group Statement of Comprehensive Income (unaudited)

Six month period ended 30 June 2012

The notes form an integral part of this condensed consolidated interim financial information.

Items in the statement above are all derived from continuing operations.

Group Statement of Financial Position (unaudited)

As at 30 June 2012

The notes form an integral part of this condensed consolidated interim financial information.

Group Statement of Changes in Equity (unaudited)

Six month period ended 30 June 2012

The notes form an integral part of this condensed consolidated interim financial information.

Group Statement of Cash Flows (unaudited)

Six month period ended 30 June 2012

The notes form an integral part of this condensed consolidated interim financial information.

Notes to the consolidated interim financial statements (unaudited)

Six month period ended 30 June 2012

1. GENERAL INFORMATION

Modern Water plc ('the Company'), its subsidiaries and joint venture (together, 'the Group') invests in, develops and deploys new water technology.

The Company is a public limited company incorporated and domiciled in England and Wales, whose shares are publically traded on the AIM market of the London Stock Exchange. The registered office and principal place of business is Bramley House, The Guildway, Old Portsmouth Road, Guildford, Surrey GU3 1LR.

This condensed consolidated interim financial information was approved for issue by the Board of Directors on 12 September 2012.

These interim financial results are unaudited and do not comprise statutory accounts within the meaning of section 438 of the Companies Act 2006.

Statutory accounts for the year ended 31 December 2011 were approved by the board of directors on 14 March 2012 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

2. BASIS OF PREPARATION

The principal accounting policies have been applied consistently throughout the period in the preparation of these financial statements.

This condensed consolidated interim financial information for the six months ended 30 June 2012 has been prepared in accordance with the AIM Rules for Companies of the London Stock Exchange plc and with IAS 34, 'Interim financial reporting' as adopted by the European Union.

The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2011, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

3. ACCOUNTING POLICIES

3.1 Accounting policy and disclosure changes

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2011.

3.2 Taxation

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

4. SEGMENTAL ANALYSIS

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

At the Group's current stage of development the majority of the costs (business development, technical, legal, marketing, finance, facilities and directors' expenditure) are managed and reported centrally. As the commercial activities of the Group develop, this financial information is expected to evolve.

5. BUSINESS COMBINATIONS

There were no business combinations during the reporting period. Business combinations during 2011 are detailed in the 2011 Annual Report and Accounts.

6. ADMINISTRATIVE EXPENSES BY NATURE

In addition to the above costs for permanent staff, the Group utilises the services of contract and agency staff as circumstances require.

7. SHARE-BASED PAYMENTS

The share-based payment plans are described below. The number of shares issued under these plans is limited to 10% of the issued share capital of the Company.

7.1 Modern Water Incentive Plan (MWIP)

The MWIP was adopted on 1 June 2007 and contains provisions relating to the making of awards in the form of options, conditional awards of ordinary shares (to be received once performance conditions are satisfied) and matching awards of ordinary shares (in respect of bonuses deferred by participants) to all employees, including executive directors. Activity on share options and conditional shares is detailed below.

(a) Options

Under this scheme share options are granted to senior management. The exercise price is equal to the market price on the date of the grant. The options may be exercised if certain Total Shareholder Return (TSR) performance criteria are met. If the increase is not met the options lapse. 

During the period the performance criteria on options over 50,000 shares were not met and the options therefore lapsed. No options were granted, exercised, vested or forfeited during the period.

The fair value of the equity-settled share options granted is estimated as at the date of grant using a Black-Scholes model, taking into account the terms and conditions upon which the options were granted.

The total number of options outstanding at 30 June 2012 was 560,877 (WAEP 119p), these options had vested and were exercisable, but at above the current market price.

(b) Conditional share awards

The conditional share awards are provisional awards of ordinary shares in Modern Water plc, which vest three years after the date of the award to the extent that performance conditions have been met. The extent to which the award will vest depends on the Group's share price on the vesting date. 

The movement in the number of conditional shares awarded is set out below:

The fair value of the award is estimated as at the date of award using a Monte Carlo model, taking into account the terms and conditions upon which the shares were awarded.

The following table lists the inputs into the model used for the shares awarded in the period and the prior year.

Vesting criteria required on vesting date three years after grant date are set out below:

* 1,500,000 shares conditionally awarded during 2009 and 2010 will vest in full if the share price is £1.40 or more on the vesting date. If the share price is £1.00 or below the award does not vest at all. If the share price is between £1.00 and £1.40 the award partially vests, on the basis of 2.5% of the award for each £0.01 above a share price of £1.00. 650,000 shares conditionally awarded during 2011 will vest in full if the share price is £1.00 or more on the vesting date. If the share price is £0.80 the award does not vest at all. If the share price is between £0.80 and £1.00 the award partially vests, on the basis of 5% of the award for each £0.01 above a share price of £0.80. 50,000 of these shares were forfeited during the period.

** 1,050,000 shares conditionally awarded during the period will vest in full if the share price is £1.00 or more on the vesting date. If the share price is £0.70 the award does not vest at all. If the share price is between £0.70 and £1.00 the award partially vests, on the basis of 3.33% of the award for each £0.01 above a share price of £0.70.

8. TAXATION

During the period there were no taxable profits.

The deferred tax liability of £350,000 at 30 June 2012 (2011: £407,000) arises from taxable temporary differences on intangibles recognised on business combinations and is expected to unwind over the useful economic life of these assets. £24,000 has been credited to the Group Statement of Comprehensive Income to 30 June 2012 (2011: £29,000).

At the balance sheet date the Group had a deferred tax asset in respect of unutilised trading losses. This asset has not been recognised as its utilisation is not yet sufficiently certain.

9. LOSS PER SHARE

9.1 Basic

Basic loss per share is calculated by dividing the loss attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.

9.2 Diluted

As the Group is loss making, the diluted loss per share is equal to the basic loss per share.

10. CAPITAL EXPENDITURE

11. NET CASH FLOWS FROM OPERATING ACTIVITIES

12. RELATED PARTY TRANSACTIONS

IP Group plc holds 20.86% of the ordinary share capital of the Company and appoints a non-executive director, it is therefore deemed a related party. A service agreement dated 1 December 2006 was made between the Company and IP Group plc, whereby IP Group plc provides strategic, business development and administrative services to the Company. Fees for the period were £15,000 and as at 30 June 2012 £7,500 (30 June 2011: £7,500) was outstanding under this agreement.

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation in the Group accounts.