Xeros Tech Regulatory News (XSG)

12 November 2015

Xeros Technology Group plc

Rapidly gaining traction in Commercial Laundry and proposed £40m Placing

Xeros Technology Group plc (AIM: XSG, 'the Group', 'Xeros'), the innovative developer of patented polymer bead systems with multiple identified commercial applications, today published results for the year ended 31 July 2015.

The Group also intends to raise approximately £40 million via a placing of new Ordinary Shares at a price of 225p per with both new and existing institutional investors - see separate announcement.

Highlights

· Significant progress made in Commercial Laundry:

§ Increasing US market take-up - 46% of machine sales repeat or affiliated buyers

§ Seven out of 10 largest US hotel chains now customers

o Team of seasoned industry professionals recruited and forward channel partner network established

o At end of September 2015:

§ 103 machines US customer installations - further 39 committed to be installed

§ 20 machines installed in Europe - further commitments to install of 15

· Leather Processing - accelerating progress towards scale validation

o Phase 2 covering full scale trials started mid-October 2015, due for completion by the end of H1 2016

· Domestic Laundry - market potential greatly in excess of commercial laundry

o Significant activities planned to develop the opportunity

· Earned income up 52% to £480,000 (2014: £315,000)

· As at 31 July 2015, contracted future revenues of £1.6m (2014: £0.8m)

Proposed Placing to raise approximately £40 million

Funds raised will enable the Group to maintain the momentum seen since IPO over approximately the next two and a half years as it seeks:

· to accelerate its roll out strategy of the Commercial Laundry business in the Americas and Europe

· to continue its development of technologies for the domestic laundry and leather processing markets and

· to increase the scope and scale of its polymer science and engineering platforms in order to capitalise on additional opportunities to apply its polymer bead innovations.

Circular to be sent to Shareholders today, appending a Notice of General Meeting

John Samuel, Chairman of Xeros, said:

"I am very pleased with the progress we have made in the year to 31 July 2015 and believe that we are well placed to capitalise upon that progress in the current year. We have made significant advances in our disruptive technology platform and are increasingly confident of its potential in a number of industries. We plan to continue to invest in the development of the commercial laundry business and also to accelerate the development of other applications of this technology."

Mark Nichols, Chief Executive Officer of Xeros, said:

"In the short term, we are focusing on driving our commercial laundry business to meet the growing demand, particularly in the US, for our energy and water efficient solutions with superior cleaning performance. This is providing us with increasing forward visibility on revenues. As at 31 July 2015, contracted future revenues amount to £1.6m up from £0.8m.

"In the medium term, we plan to capitalise on the excellent progress we continue to make with our application in leather processing. We are also developing the opportunity in the global domestic laundry market.

"In the longer term, we have the opportunity to commercialise a number of further applications in parallel.

"The fundraising announced today will support the execution of our strategies over these horizons. We look forward to the future with confidence."

For further information, please contact:

Chief Executive's report

Strategic overview

Since my appointment as Chief Executive in September 2015, I have spent time getting to know each aspect of the business and I am very excited by the prospects for the Group. My reviews have provided me with confidence that the business has the potential to evolve new, additional revenue streams.

The excellent progress in Commercial Laundry and the successful trials in Leather Processing provide me with this confidence. There is also increasing evidence that Xeros' polymer bead science is becoming a platform technology, which can be successfully applied across a number of water intensive domestic and commercial processes.

Our aim is to use our patented polymer bead inventions to reduce consumption of both water and energy in these processes whilst simultaneously improving the quality of their outcomes. In so doing, derive high margin revenues for the Group, based upon the savings and performance improvements delivered.

Applications of our technologies are being developed across three horizons. Firstly, Commercial Laundry which is now growing rapidly. Secondly, Leather Processing and Domestic Laundry which are currently being developed actively for commercialisation and thirdly, additional attractive applications which we are in the process of reviewing for inclusion in our development pipeline. Such potential future applications include garment finishing, elements of which are analogous with those found in commercial laundry. Our bead technologies are disruptive in each of these areas and we will continue to be open minded as to the business models and commercial arrangements we deploy to capture the value we create.

Fund raising

The funds raised from the proposed Placing announced today, will enable us to accelerate our roll out strategy in the Commercial Laundry business in the Americas and Europe; to continue our development of technologies for the domestic laundry and leather processing markets and to increase the scope and scale of our polymer science and engineering platforms in order to capitalise on additional opportunities to apply our polymer bead innovations.

Excellent progress in Commercial Laundry

Commercial Laundry, the first market in which we chose to commercialise our bead technology, has made significant progress during the year. In April 2015, we established the global Commercial Laundry business led by Jonathan Benjamin, based in the US. Jonathan has responsibility for product development, sales, marketing, and operations on a worldwide basis.

Recent senior appointments include a General Manager for North America, a Vice President of Operational Excellence and a North American Director of Sales. These appointments, when combined with the balance of senior management, result in a leadership team with an average of 20 years of relevant experience with which to implement our Commercial Laundry business plan.

In addition, the business has grown its sales team with the recruitment of regional sales heads for the West Coast, South East and Mid-Atlantic. A Senior Vice President of Information Technology has also joined to lead initiatives in this area including the development and commercialisation of our remote machine monitoring systems. The Commercial Laundry business now has a total number of 41 employees worldwide with 30 based in the US.

Our Commercial Laundry business currently targets the commercial and industrial laundry equipment segments within the "On-Premise Laundry" (OPL) market. The business model is founded on offering customers an integrated washing machine purchase and service package, known as Xeros Sbeadycare®.

Our growth in these target segments has accelerated significantly. When the Group announced its results for the last financial year in October 2014, the Commercial Laundry business had 37 installed and committed machines in the US and counted four out of the five largest hotel groups as customers with machines either installed or committed to be installed in the US.

As at the end of September 2015, there were 103 machines installed at US customers' premises with commitments to install a further 39. In addition, there were a further 20 machines installed with European customers with further commitments to install of 15. In the US, 46% of sales of machines have been from repeat or affiliated buyers and seven out of the 10 largest hotel chains are now customers.

The current US customer base is now comprised of Hotel and Lodging with 59%, Retail Laundry with 35%, Industrial Laundry with 3% and others with 3%. Progress to date in the US is against a potential addressable replacement market size of circa 10,000 machines per annum with an estimated machine useful lifetime of 10 years.

In the US, Xeros machines are now installed with customers in 26 of the 50 States with multiple installations in a number of states including Georgia, Rhode Island, Missouri and California where high energy and water costs or water scarcity are particular features.

Growth in the US has been achieved by our highly experienced management team working in partnership with our Forward Channel Partners ("FCPs"), a large number of whom were brought on board in April 2015 following Xeros' exhibiting at the biennial Clean Show in Atlanta, Georgia. In combination, these resources are now providing customers with increasing numbers of Xeros machines and the high quality Xeros Sbeadycare® service.

Following the announcement in August 2015 of the recruitment of FCPs serving areas of Canada, Mexico and the Caribbean, the Commercial Laundry business intends to extend its model into additional countries during 2016 focussing on those with market structures and needs which make entry attractive.

In response to customer feedback, the Commercial Laundry business also simplified and restructured its US commercial arrangements. Customers now pay the same price for Xeros machines as they would for a conventional machine of the same size and can either buy them outright under the "Perform" contract or through a leasing arrangement, the "Complete" contract.

The benefits of reduced costs of water, effluent, energy, maintenance and chemicals that the Xeros machines and Sbeadycare® service deliver are now also being calculated and communicated to customers using our "Global Controller" machine management system and our signal processing and transmission technology, Sbeadycare® Pulse. These two technologies, which work together in an integrated manner, enable remote monitoring, analysis and diagnostics with the information received used to improve the customer's laundry performance, schedule maintenance and validate savings. The ability to provide this evidence to customers is expected to further enhance adoption rates.

The business has continued to respond to water scarcity and energy conservation being an increasing focus for government, municipal authorities and utility companies in the US. By way of example, the business continues to run targeted promotions and campaigns in California with the result that eight FCPs now serve the state and four utility companies provide incentives for the use of Xeros technology. Across the US, 19 utility companies now offer incentives to Xeros customers in 24 states and in one province in Canada.

In 2015, we commenced development of a 15kg (35lb) machine as a complement to our 25kg (55lb) machine in order to broaden the offering within targeted OPL market segments. This smaller size also fits well within the Laundromat market which is the largest commercial laundry segment in the US. This addition, combined with Xeros-branded dryers added to the range during 2015, will position the Commercial Laundry business to be capable of accessing a wide customer base. This increase in market reach will be further supported by the planned opening of a Xeros-branded laundromat concept store in Boston in mid-2016.

In June 2015, our Chinese machine supplier, Sea-lion, opened a new 300,000 sq. ft. facility, in Zhangjiagang City within which the increasing levels of production required by Xeros will be manufactured. Following which, a Joint Development Agreement was signed with Sea-Lion in September 2015 to complete the development and subsequent production of the aforementioned 15kg (35lb) machine.

Domestic Laundry

Discussions continue with major machine manufacturers on three continents as we determine a suitable route and business model through which to generate an appropriate return on our intellectual property. In support of our ambitions in this market, independent, nationwide research amongst US consumers has yielded positive results when comparing the Xeros machine and technology to a leading conventional brand.

The laundromat concept store in the US will enable additional consumer engagement and feedback on Xeros' latest domestic prototypes, their performance, control systems and operability. We also intend to use the store as a marketing tool to create a widespread awareness and create broad consumer interest and demand for our polymer bead cleaning technology. This, in turn, is expected to increase momentum with manufacturers, retailers and distributors, as well as create further interest from other stakeholders such as regional and national governments.

Leather Processing

Since the establishment by Xeros of a facility at The Institute of Creative Leather Technologies ("ICLT") at The University of Northampton, we have successfully completed a number of feasibility studies using polymer bead technology instead of conventional processes in the preparation, tanning and dyeing of leather. The Group has filed six patents covering the use of its polymer bead technology in leather processing; a market which is estimated to have an annual chemical demand in the region of $2.5 billion.

On 28 April 2015, we entered into a multi-phase Joint Development Agreement with LANXESS which aimed to demonstrate that the Group's patented technology could be viably deployed in large scale tanneries. LANXESS is a DAX listed specialty chemicals business headquartered in Germany with sales of €8.3bn and is a leading supplier of specialty chemicals to the leather industry on a worldwide basis.

Small scale trials were successfully completed under Phase 1 of the agreement one month early in July 2015. The Phase 2 scale-up validation stage agreement was signed in September 2015, covering progressive full scale production trials in a tannery with completion planned by the end of the first half of 2016.

We are planning to increase our resources to support broad market penetration and to work with tanneries to assist them in adopting our bead technology. We are also working hard to identify the value Xeros brings to leather processing and to develop a commercial strategy whereby we materially benefit from the value our technology creates.

Polymer bead development

The Group continues to develop and enhance its polymer bead technology for use across a range of applications. The physical design of "Gen 1" beads (i.e. their shape, size and density) for application in laundry has enabled excellent cleaning outcomes. Further development work on "Gen 2" beads is being undertaken as part of our Development Agreement with BASF as well as research conducted independently within the Group, and in collaboration with academic institutions. The design of "Gen 2" bead enables the incorporation of chemistry to improve laundry outcomes yet further still. We anticipate that the development and introduction of beads with this active chemistry for enhanced effects will further increase the appeal and demand for Xeros' technology.

In conjunction with ICLT, the Group has finalised the physical design of a bead for application in leather processing. The design is now being used in the Phase 2 scale-up trials with LANXESS.

Further applications development

In addition to Laundry and Leather Processing, the Group sees further significant opportunities for the beneficial application of its technology within other industrial and domestic aqueous processes. We plan to undertake the assessment and determination of additional potential applications in the first half of 2016 and select particularly attractive applications for further development. Such potential applications include garment finishing, which has physical production processes analogous with those found in commercial laundry.

To meet the increasing development demands, we will continue to grow the scope and scale of our polymer science and engineering capabilities. These teams which have grown, in aggregate, to the present level of 29 are now housed in the Xeros Technology Centre, a specially designed 11,000 sq. ft. facility opened in August 2015.

Investment in our polymer science and applications engineering teams will be used to complete the commercial laundry product range, support potential entry into the domestic laundry market and to speed up the commercialisation of the technology in leather processing.

Intellectual Property protection

The Group's proprietary technologies are protected by a library of patents, which in aggregate, form a comprehensive intellectual property portfolio and present a substantial barrier to entry for potential competitors.

During the year, the Group expanded its patent portfolio and now comprises 39 patent families 'pending' and 'granted' whose coverage includes bead technologies in commercial and domestic laundry, leather processing, metal surface treatment and garment finishing. The grant of two patents covering the Group's core process in March/April of 2015 now means that this coverage has now been achieved in each of our targeted major markets.

The future

Looking ahead, we have a number of opportunities in our current and future growth horizons.

By 30 September 2015, the Group had 123 machines installed with commercial laundry customers in the Americas and Europe with 54 further commitments for installations in the coming months. 103 of these installations were in the US where it is the Group's ambition for the Commercial Laundry business to achieve significant market share over the next five years in its areas of focus within the US OPL machine replacement market.

The Group anticipates taking measured growth steps in Commercial Laundry which, whilst stretching, is predicated on the requirement to continually deliver the highest levels of customer service. The resultant customer satisfaction should help to broaden and deepen market acceptance as customers' positive experiences endorse the cost and performance benefits of our Commercial Laundry business' full service offering. The next phase of growth over the coming 12 months will be enabled by the continued training and accreditation of the first wave of FCPs, following their recruitment in April 2015. Further growth is anticipated with further additions to our FCP network.

We seek to continue the progress in the Leather Processing market at a pace similar to that experienced over the last year and to progress our strategy for participation in Domestic Laundry by increasing engagement with machine and detergent suppliers.

We also look forward to concluding our appraisal of further viable applications and building our teams to deliver them.

Financial review

Group earned income was generated as follows:

Group earned income increased by 52% to £480,000 in the year ended 31 July 2015 when compared to the prior year (2014: £315,000).

Notably service income from the installed base of Commercial Laundry machines has increased significantly during the year ended 31 July 2015, to more than six times the service income generated in the previous year.

The point at which revenue and costs from machine sales can be recognised is dependent on the completion of a number of stages. These include the installation of the machine, commissioning of the machine, acceptance of the machine by the customer, completion of utility incentive formalities, where applicable, and then, in the case of lease sales, finalisation of the lease agreement. The Group does not recognise revenue and costs from a machine sale until all of these aspects are complete.

The number of machines installed in the year are as follows:

As at 31 July 2015, contracted future revenues amount to £1.6m (2014: £0.8m) and average contract length is 74 months (2014: 76 months).

Adjusted gross margin improved to £81,000 (17%) from £21,000 (7%) in the year ended 31 July 2014.

The Group has continued to invest in its R&D programme. The Group spent £3.6m on R&D including staff and patent costs (2014: £3.0m) alongside the Commercial Laundry working capital and start-up costs, in line with the Board's expectations. This has resulted in an Adjusted EBITDA loss of £9.9m (2014: loss £6.3m).

The recent strength of the US$ means that working capital and start-up costs in the US Commercial Laundry business are proportionally more expensive when translated into Sterling, the Group's functional currency. However a strong US$ will benefit the Group financial statements as the US business grows to generate cash and become profitable.

The Group reported a loss after tax of £10.2m (2014: £6.4m). The loss per share increased from 12.9p in 2014 to 15.6p in 2015.

The Group expects cash utilisation to continue to accelerate over the coming years, as we continue to fund our R&D programmes alongside the roll-out in Commercial Laundry. The increase in net cash outflow from operations to £11.8m (£7.2m: 2014) for the 12 months to 31 July 2015 reflects these activities and was in line with the Board's expectations. The Group had existing cash resources as at 31 July 2015 of £17.5m (2014: £29.5m) and remains debt free.

The Group has tax losses of approximately £19.8m to offset against future taxable profits (31 July 2014: £11.2m).

Accounting reference date change

Historically the Group was predominantly a research and development business with strong university and academic links. A 31 July year end was therefore consistent with the business as it then was. The Group has decided to change its accounting reference date to 31 December, primarily to bring it into line with a more conventional commercial company reporting timeframe, consistent with the development of its commercial operations, in order to provide ease of reference for investors, customers, managers and employees.

The effect of the change to the accounting reference date is to extend the next accounting period to 31 December 2016, a period of more than 15 months. In accordance with Rule 18 of the AIM Rules, therefore, the Company will prepare and notify a second half-yearly report and will have the following reporting dates:

· Unaudited results for the five months to 31 December 2015 - to be announced by 31 March 2016

· Unaudited results for the six months to 30 June 2016 - to be announced by 30 September 2016

· Audited results for the 17 month period to 31 December 2016 - to be announced no later than 18 May 2017

The Group will subsequently publish its half-yearly reports to 30 June and annual audited accounts to 31 December in accordance with the AIM Rules for Companies.

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 JULY 2015

*Adjusted EBITDA comprises loss on ordinary activities before interest, tax, share-based payment expense, non operating exceptional costs, depreciation and amortisation.

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 JULY 2015

1) BASIS OF PREPARATION

This financial information does not constitute the company's statutory accounts for the years ended 31 July 2015 or 2014 but is derived from those accounts. Statutory accounts for 2014 have been delivered to the registrar of companies, and those for 2015 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The Financial Statements for the year ended 31 July 2015 included in this announcement were authorised for issue in accordance with a resolution of the Board of Directors on 11 November 2015. The level of rounding for financial information is the nearest thousand pounds.

The Company is a limited liability company incorporated and domiciled in England & Wales and whose shares are quoted on AIM, a market operated by The London Stock Exchange.

The Company's registered office is Unit 2 Evolution, Advanced Manufacturing Park, Whittle Way, Catcliffe, Rotherham, S60 5BL.

Going Concern

At this stage in its development the company is reliant on equity share funding. When making their going concern assessment the directors assess available and committed funds against all non-discretionary expenditure, and related cash flows, as forecast for the period ended 30 November 2016. These forecasts indicate that the company is able to settle its liabilities as they fall due in the forecast period.

Accordingly the directors consider that this should enable the company to continue in operational existence for the foreseeable future and the directors believe that it remains appropriate to prepare the financial statements on a going concern basis.

2) SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared under the historical cost convention in accordance with International Financial Reporting Standards as adopted by the European Union (EU IFRS).

3) SEGMENTAL REPORTING

The information that is presented to the Chief Executive Officer, who is considered to be the Chief Operating Decision Maker ("CODM"), for the purposes of resource allocation and assessment of performance, is based wholly on the overall activities of the Group. Due to the current size and activities of the Group, there is a high degree of centralisation of activities. The Directors therefore consider that there is one operating, and hence one reportable segment for the purposes of presenting information under IFRS8; that of "Development and commercialisation of polymer bead cleaning technologies". There are no differences between the segment results and the consolidated statement of comprehensive income. The assets and liabilities information presented to the CODM is consistent with the consolidated statement of financial position.

The single operating segment includes revenue by category as follows:

During the year ended 31 July 2015 the Group had no customers who individually generated more than 10 per cent. of total revenue.

During the year ended 31 July 2014 the Group had six customers who generated more than 10 per cent. of total revenue. These customers generated 16%, 14%, 12%, 12%, 10% and 10% of revenue respectively.

An analysis of revenues by geographic location of customers is set out below:

An analysis of non-current assets by location is set out below:

4) LOSS FROM OPERATIONS

Other services in the prior year related to transaction services in relation to the IPO.

5) TAXATION

Tax on loss on ordinary activities

The credit for the year can be reconciled to the loss before tax per the statement of profit or loss and other comprehensive Income as follows:

Factors affecting the current tax charges

The tax assessed for the year varies from the small company rate of corporation tax as explained below:

At 31 July 2015 the group had an amount of £477,000 (2014: £nil) receivable from HM Revenue and Customs in respect of Research and Development tax credits. This is included as a current tax asset in the Consolidated Statement of Financial Position.

6) LOSS PER SHARE (BASIC AND DILUTED)

Basic loss per share is calculated by dividing the loss attributable to equity holders of the parent by the weighted average number of ordinary shares in issue during the year. Diluted loss per share is calculated by adjusting the weighted average number of ordinary shares in issue during the year to assume conversion of all dilutive potential ordinary shares.

Adjusted earnings per share has been calculated so as to exclude the effect of non operating exceptional costs including related tax charges and credits. Adjusted earnings used in the calculation of basic and diluted earnings per share reconciles to basic earnings as follows:

The weighted average number of shares in issue throughout the period is as follows:

* The comparative figures are based on the number of shares that would have been in issue had the capital structure of the new parent company always been in place.

The Company has issued employee options over 7,368,901 (2014: 6,232,589) ordinary shares which are potentially dilutive. There is however, no dilutive effect of these issued options as there is a loss for each of the years concerned.

7) SHARE CAPITAL

As permitted by the provisions of the Companies Act 2006, the Company does not have an upper limit to its authorised share capital.

The following is a summary of the changes in the issued share capital of the Company during the year ended 31 July 2015:

(a) On 28 January 2015, 183,332 Ordinary Shares were allotted at a price of 12 pence per share, for total cash consideration of £22,000, upon the exercise of share options granted in the Company's EMI share option scheme.

(b) On 30 January 2015, 132,999 Ordinary Shares were allotted at a price of 16.2 pence per share, for total cash consideration of £21,546, upon the exercise of share options granted in the Company's EMI and Unapproved share option schemes.

(c) Between 11 May 2015 and 15 May 2015, 14,999 Ordinary Shares were allotted at a price of 16.2 pence per share, for total cash consideration of £2,430, upon the exercise of share options granted in the Company's EMI share option scheme.

At 31 July 2015, the Company had only one class of share, being Ordinary Shares of 0.15p each.

8) MOVEMENT IN RETAINED EARNINGS AND FOREIGN CURRENCY TRANSLATION RESERVE

9) ANNUAL REPORT AND ACCOUNTS

The Group's annual report and accounts for the year ended 31 July 2015 have been published today and will be posted to shareholders shortly. The annual report and accounts will also be available in electronic form on www.xeroscleaning.com 

Forward-looking statements

This announcement may include certain forward-looking statements, beliefs or opinions, including statements with respect to Xeros' business, financial condition and results of operations. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "anticipates", "targets", "aims", "continues", "expects", "intends", "hopes", "may", "will", "would", "could" or "should" or, in each case, their negative or other various or comparable terminology. These statements are made by the Xeros Directors in good faith based on the information available to them at the date of this announcement and reflect the Xeros Directors' beliefs and expectations. By their nature these statements involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. A number of factors could cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, developments in the global economy, changes in government policies, spending and procurement methodologies, and failure in health, safety or environmental policies.

No representation or warranty is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved. Forward-looking statements speak only as at the date of this announcement and Xeros and its advisers expressly disclaim any obligations or undertaking to release any update of, or revisions to, any forward-looking statements in this announcement. No statement in the announcement is intended to be, or intended to be construed as, a profit forecast or to be interpreted to mean that earnings per Xeros share for the current or future financial years will necessarily match or exceed the historical earnings. As a result, you are cautioned not to place any undue reliance on such forward-looking statements.