Xeros Tech Regulatory News (XSG)

13 September 2018

Xeros Technology Group plc

Interim results

Xeros Technology Group plc (AIM: XSG, 'the Group', 'Xeros'), the developer and provider of patented polymer based water saving solutions with multiple commercial applications, today publishes its interim results for the six months ended 30 June 2018.

Group highlights

· Major commercialisation milestones including:

o Chinese Hydrofinity (Commercial Laundry) licence signed

o Three additional sites operational in Marken (High Performance Workwear)

o Positive engagement with major domestic washing machine manufacturers

o Heads of Terms signed with two large scale tanneries

o Tests underway with major Chinese garment manufacturers

· Planned reduction in investment levels reflects completion of application development and progressive migration to commercialisation under asset-light IP rich model - expenses down 11%

· Group earned income* £1.9m (2017: £1.1m), up 77.3% with 142.6% increase in service income

· Adjusted EBITDA** loss £11.6m (2017: loss £13.2m). Group cash of £10.4m at 30 June 2018

Cleaning Technologies 

· First Symphony Project agreement signed to commercialise commercial laundry technology in China

· First major orders from the Middle East and South Africa under new asset light business model

· Installed base of 389 revenue-earning machines at 30 June 2018 (2017: 323), up 20%

o Upgrading of the quality of US customer base ahead of plans to migrate to the new low-cost model

· Key milestone achieved of having four operational sites in High Performance Workwear

o Independent validation of Xeros' cleaning efficacy and garment life extension confirmed

· Launch of domestic machine technology at 2018 Consumer Electronics Show in January featuring XDrumTM, with formal technology evaluation underway with multiple global brands

Tanning Technologies

· Following extensive production-scale trials, Heads of Terms signed with two tanneries

· Internal development programme validation that technology also delivers substantial water and chemistry savings in the tanning phases of leather production

Textile Technologies

· Following successful scale-up trials of garment finishing technology in Xeros' UK Technology Centre, now testing garments from leading Chinese manufacturers.

· Supporting IP filings completed

*Earned income is defined as revenue plus finance lease interest income

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

Mark Nichols, Chief Executive of Xeros, said:

"The environmental macro drivers - water scarcity and pollution - are major factors in the increasing level of interest, engagement and agreements we are now seeing in our unique and proven technologies, with a number of large OEMs as well as distributors around the world.

"Changing the products and production processes of large industries is inevitably challenging but the high levels of engagement across our portfolio of applications is strong evidence that wide-scale adoption is increasingly likely. OEMs incorporating our technologies has been key to this increased uptake - as demonstrated by our first licensing deal in China.

"We are on track to deliver further major commercialisation milestones, based on our IP-rich, capital-light business models, with market incumbents during the remainder of 2018."

Enquiries:

Notes to Editors

Xeros Technology Group plc (LN: XSG) is a platform technology company that is reinventing water intensive industrial and commercial processes. Xeros' uses its patented XOrbTM technologies to significantly reduce the amount of water used in a number of major applications with the remaining water becoming far more efficient in either affixing or removing molecules from substrates such as fabrics and garments. The result being significant improvements in economic, operational and sustainability outcomes.

Xeros has three divisions covering the cleaning/laundry, tanning and garment finishing markets. In cleaning/laundry, the company has three applications covering commercial laundry (branded "Hydrofinity"), the cleaning of high performance workwear (branded "Marken") and domestic laundry.

For more information, please visit - www.xerostech.com

Operational review

Cleaning Technologies

Hydrofinity

In our Hotel and Lodging business, branded Hydrofinity, the Group signed its first "Symphony Project" (Xeros technology in branded OEM machines) licensing agreement in July. The 10-year agreement with Jiangsu SeaLion Technology Development Co. Ltd allows Sea-Lion to integrate Xeros' new XDrumTM technology in its commercial washing machines and sell them though its own extensive distribution network in China on an exclusive basis.

For markets outside of China, we signed our second Symphony Project testing and validation agreement with a large global OEM (the first such agreement was signed in September 2017). These trials have been extended to accommodate the Xeros XDrumTM design.

We recently announced two orders under our indirect business model with 16 machines for fanute, our FCP (Forward Channel Partner) in South Africa and 32 machines for Electro RAK, our FCP in the UAE. As previously announced, as we move towards broader Symphony Project implementation, we are migrating to a fully indirect distribution model whereby FCPs provide sales and full lifecycle services to commercial laundry customers in countries and regions with a combination of premium customers and with high water rates.

Marken

Our High Performance Workwear business unit, branded Marken, has grown from a single Nevada site to four sites across the US with the acquisition of two sites (Atlanta and Miami) from Gloves Inc in March and with the commissioning, in July, of a new purpose-built site in Southern California to serve, initially, the San Diego Fire Department.

We are finalising plans for the number and location of remaining sites required to create a network to serve a large proportion of US firefighters. This will create a valuable business and provide the evidence to support licensing of our technology for cleaning other categories of expensive personal protection equipment (PPE).

The business unit has also successfully introduced its MTrackTM garment life-cycle tracking to provide asset tracking management and analytics for its fire department customers.

Following tests conducted in the US by SCS Engineers and Intertek Group plc Xeros has received independently verified evidence on the cleaning efficacy and garment life extension delivered by Xeros' technology.

Domestic

Xeros launched its XOrbsTM, XDrumTM and XFiltraTM technologies for the home to wide acclaim at the Consumer Electronics Show in Las Vegas in January.

The XDrumTM design offers all domestic washing machine OEMs the ability to make simple and inexpensive changes at the end of their production lines to incorporate our technology. The XDrumTM design is applicable to all washing machine sizes and also garment finishing machines used in the clothing industry.

We are continuing structured discussions with leading domestic washing machine brands regarding licenses for China, India, EMEA, the Americas and Asia Pacific (excluding China and India).

Separate discussions are taking place in parallel regarding the potential licensing of Xeros' XFiltraTM technology which is designed to significantly reduce the micro-particle pollution from the washing of garments containing synthetic fibres.

Tanning Technologies 

Having successfully conducted multiple retanning and dyeing trials, Xeros has recently signed Heads of Terms with two tanneries. Trials have validated our estimates of water and chemistry saving and the resulting economic benefit. Contract awards have taken longer than anticipated with end customer approval requirements being a factor.

Heads of Terms specify an asset-light model with Xeros supplied equipment covered by an up-front payment and the XOrbsTM, which Xeros will retain ownership of, being covered by on-going payments.

Our XOrbTM technologies teams in Sheffield and the Institute of Creative Leather Technologies at the University of Northampton have completed trials validating the efficacy of our technology in the up-stream tanning process. The value of reductions in water and bulk chemicals and potentially cycle time are significant. These teams are now evaluating additional tannery processes where our technology may be of benefit.

We expect significant market penetration in this industry as constraints in water availability and effluent disposal increase over time.

Textile Technologies

Our focus has been on garment and denim finishing where scale trials in our UK Technology Centre have delivered results that have been judged by industry experts and major manufacturers as meeting brand and consumer demands. Our trials demonstrate that Xeros can process denim jeans from their raw state to a finished product in a single XDrumTM enabled machine in a continuous process at scale. Results were achieved with ultra-low chemistry, water and effluent. Following these trials we are now testing garments from leading Chinese manufacturers.

Other developments

The Group opened its new US Technology Centre in Providence, Rhode Island which consolidates a number of leased and third-party office and warehouse locations across the East coast of the US. It is the HQ for our Hydrofinity Team and technology/engineering development for commercial size laundry machines. The Group also undertook significant patent filing and trademarking to protect its recent innovations and extend the time horizon of coverage.

Current trading & outlook

In the first six months, the Group has achieved a number of its planned key milestones in its transition from a designer and seller of water saving commercial washing machines towards an IP-rich, capital-light licenser of polymer-based water saving solutions to multiple scale industries, all of which deploy the same Xeros core technologies.

We believe that these milestones provide strong evidence that our technologies have the capacity to transform industries and that market incumbents in cleaning, tanning and textile industries are increasingly accepting this situation.

We have set a time horizon of completing the commercialisation of our current applications by the end of 2019 and anticipate further milestones in the current year to validate our progress towards this objective. As previously communicated in April, the Group expects to raise further funds in 2018 for the execution of this strategy.

Financial review

Group earned income was generated as follows:

Group earned income increased by 77.3% to £1,908,000 in the six months ended 30 June 2018 (2017: £1,076,000). The proportion of service income to total income has increased to 62.9% (2017: 46.0%) which reflects the growing focus on customers paying fees for the use of Xeros' technology as opposed to Xeros earning income from the provision of equipment.

Machine sales income increased by 23.7% to £658,000 (2017: £532,000) reflecting the growth in the Hydrofinity installed estate of commercial laundry machines. Service income increased by 142.6% to £1,201,000 compared to the prior period (2017: £495,000). This figure is a combination of service income from Hydrofinity of £789,000 (2017: £495,000), a growth of 59.3%, and service income from Marken of £412,000 (2017: nil). The growth in the Hydrofinity service income is a reflection of the growing quality of the installed customer base, with 100% of installed machines producing revenue for Xeros.

The point at which income and costs from machine sales for Hydrofinity 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 income and costs from a Hydrofinity machine sale until all of these aspects are complete. When a machine is sold to an international channel partner, the Group does not recognise machine income and costs until the above steps are completed by the channel partner and the customer.

The results for the six months ended 30 June 2018 are reported under IFRS 15 as a result of the change of accounting policy in the year. As the Group has applied the cumulative effect method, the results for prior periods are not restated. Further details of the change can be seen in note 2.

The number of Hydrofinity revenue generating machines converted in the period is as follows:

As at 30 June 2018, the total revenue generating estate is 389 Hydrofinity machines and has grown by 8 (31 December 2017: 381). This comprises of 187 machines that are sold with full revenue and costs taken to the income statement (31 December 2017: 142), an increase of 45, and 202 machines that are commissioned and generating service revenue (31 December: 239), a decrease of 37.

These 202 machines are either in the process of being converted to full sales or are sold as operating leases, thereby remaining on Xeros' balance sheet. The decrease of 37 machines reflects two trends: a focus on converting previously commissioned machines to full sales, reducing the number of these machines, and a removal of a number of machines from poor credit quality customers in order to redeploy these machines to better quality customers.

Having focused on improving the quality of the Hydrofinity customer base in the US and with a number of significant orders flowing through from newly signed international channel partners post period end, the Group expects to see a pick-up in the number of revenue generating machines converted in the second half of the year.

The Marken business reported income of £412,000 (2017: nil). This includes a full six months of the original Marken business in Nevada, acquired in July 2017, and three months contribution of the two sites acquired in March 2018 from Gloves Inc. Post-period end, Marken began operations at its fourth North American site in Corona, California. The capital expenditure for this site was incurred before 30 June 2018.

Adjusted consolidated gross margin* was a loss of £52,000 (2017: profit of £139,000). This is a combination of an adjusted gross profit for Marken of £23,000 (2017: nil) and an adjusted gross loss of £75,000 for Hydrofinity (2017: gross profit of £139,000). As reported at the end of 2017, the gross margin for Hydrofinity was negatively impacted by the provision of consumables and service to customers over a large geographical basis in the US. The increasing focus of servicing US Hydrofinity customers through Forward Channel Partners has improved the gross margin position and the Group is expecting an overall positive margin for the full year.

The Group has continued to invest in its commercialisation programme although overall expenses of £12,947,000 have fallen by 11.1% (2017: £14,558,000). Excluding the expenses attributable to the Marken acquisitions of £866,000, Group expenses would have been reduced by 17.0%. This reduction in expenses reflects the Group's shift to a fully indirect business model for Hydrofinity allowing US headcount to fall and a reduction in overall R&D headcount as all applications move closer to full commercialisation.

Headcount increased by 11 to 157, including the 14 employees that joined as a result of the acquisition in March 2018.

Overall, adjusted EBITDA loss was reduced to £11.6m (2017: loss £13.2m). Adjusted EBITDA comprises loss on ordinary activities before interest, tax, share-based payment expense, non-operating exceptional costs, depreciation and amortisation.

The Group reported a loss after tax of £13.0m (2017: loss £15.1m). The loss per share was 13.09p (2017: loss 17.36p).

The reduction in net cash outflow from operations to £12.9m (2017: £13.1m) was in line with the Board's expectations. The Group funded a number of exceptional items including the fit out and opening of the new US Technology Centre in Rhode Island and the acquisition of the two sites for the Marken business. The Group also received £1.3m in the form of R&D tax credits from HMRC.

The Group had existing cash resources (including bank deposits) as at 30 June 2018 of £10.4m (2017: £16.2m) and remains debt free. As previously communicated in April 2018 the Group expects to raise further funds in 2018 for the execution of its strategy.

*Adjusted consolidated gross margin is defined as gross margin including lease interest income

Consolidated statement of profit or loss and other comprehensive income

For the six months ended 30 June 2018

* The Group has applied IFRS 15 in 2018 using the cumulative effect method. Under this method, the comparative information is not restated. See note 2 for further details.

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

*** Non-operating exceptional costs are the costs of the fundraising in December 2017.

Consolidated statement of changes in equity

For the six months ended 30 June 2018

* The Group has applied IFRS 15 in 2018 using the cumulative effect method. Under this method, the comparative information is not restated. See note 2 for further details. 

Consolidated statement of financial position

As at 30 June 2018

* The Group has applied IFRS 15 in 2018 using the cumulative effect method. Under this method, the comparative information is not restated. See note 2 for further details.

Consolidated statement of cash flows

For the six months ended 30 June 2018

* The Group has applied IFRS 15 in 2018 using the cumulative effect method. Under this method, the comparative information is not restated. See note 2 for further details.

Notes to the financial statements

for the six months ended 30 June 2018

1. General information

The principal activity of Xeros Technology Group plc ("the Company") and its subsidiary companies (together "Xeros" or the "Group") is the development and commercialisation of patented polymer based systems with multiple potential commercial applications.

Xeros Technology Group plc is domiciled in the UK and incorporated in England and Wales (registered number 8684474), and its registered office address is Unit 2 Evolution, Advanced Manufacturing Park, Whittle Way, Catcliffe, Rotherham, S60 5BL. The Company's principal activity is that of a holding company.

The interim financial information was approved for issue on 12 September 2018.

2. Basis of preparation

The interim financial information has been prepared under the historical cost convention and in accordance with the recognition and measurement requirements of International Financial Reporting Standards ("IFRS") as adopted by the European Union, IFRIC interpretations, and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The interim financial information has been prepared on a going concern basis and is presented in Sterling to the nearest £'000.

The Group has applied IFRS 15 using the cumulative effect method - i.e. by recognising the cumulative effect if initially applying IFRS 15 as an adjustment to the opening balance of equity at 1 January 2018. As a result, the comparative information has not been restated and continues to be reported under IAS 18. The details of accounting policies under IAS 18 are disclosed in detail within the Annual Report for the year ended 31 December 2017.

Revenue on contracts with multiple elements, such as those sales made through the Xeros service, is split according to the amount of consideration expected to be received for the transfer of the relevant goods or services to the customer. This consideration is calculated using cost data and an appropriate margin.

In the comparative periods, where sales were made through the Xeros service, contract revenue was allocated to the different elements of the contract with based on their relative fair values.

IFRS 9 'Financial Instruments' replaces the classification and measurement models for financial instruments in IAS 39 with three classification categories: amortised cost, fair value through profit or loss and fair value through other comprehensive income. Consistent with the non-complex nature of the Group's financial instruments, the impact of the new standard is not material and therefore the Group has not restated prior year comparators. The Group has amended its accounting policy for the establishment of provisions against trade receivables to reflect the lifetime expected loss model (consistent with the simplified approach under IFRS 9), however given the low level of receivables within the business this has not had a material impact.

Except for the changes noted above, the accounting policies used in the financial information are consistent with those used in the prior year. The following adopted IFRSs have been issued but have not been applied by the Group in these financial statements. Their adoption is not expected to have a material effect on the financial statements unless otherwise indicated:

· IFRS 16 Leases effective 1 January 2019

· IFRS 17 Insurance Contracts effective 1 January 2021

· IAS 19 (amended February 2018) Employee Benefits effective1 January 2019

· IAS 28 (amended October 2017) Investments in Associates and Joint Ventures effective January 2019

· IFRIC 23 Uncertainty over income tax treatments effective 1 January 2019

· Amendments resulting from the 2015 cycle of Annual Improvements to IFRS effective January 2019

· Amendments to Reference to the Conceptual Framework in IFRS standards effective January 2020

The Group will implement IFRS 16 for the year ended 31 December 2019. An update on the implementation of this standard in the Annual Report for the year ended 31 December 2018.

Further IFRS standards or interpretations may be issued that could apply to the Group's financial statements for the year ending 31 December 2018. If any such amendments, new standards or interpretations are issued then these may require the financial information provided in this report to be changed. The Group will continue to review its accounting policies in the light of emerging industry consensus on the practical application of IFRS.

The preparation of financial information in conformity with the recognition and measurement requirements of IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual events ultimately may differ from those estimates.

The interim financial information does not include all financial risk management information and disclosures required in annual financial statements. There have been no significant changes in any risk or risk management policies since 31 December 2017. The principal risks and uncertainties are largely unchanged and are as disclosed in the Annual Report for the year ended 31 December 2017.

The interim financial information for the six months ended 30 June 2018 and for the six months ended 30 June 2017 do not constitute statutory financial statements as defined in Section 434 of the Companies Act 2006 and is unaudited. The comparative figures for the year ended 31 December 2017 are not the Group's consolidated statutory accounts for that financial year. Those accounts have been reported on by the Group's auditor and delivered to the Registrar of Companies. The report of the auditor was (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 Sections 498(2) or 498(3) of the Companies Act 2006.

3. Taxation

The Group has not recognised a deferred tax asset in the consolidated statement of financial position in respect of accumulate trading losses due to the uncertainty in the timing of their crystallisation.

The Group accounts for Research and Development Tax Credits where there is certainty regarding HMRC approval.

4. Segmental analysis

The Group has two operating segments, the result of which are presented below. These segments are distinct as a result of the markets they serve. The internal reporting structure of the Group changed during the year ended 31 December 2017, resulting in the change to two operating segments. The results for the 6 months to 30 June 2018 and for the year ended 31 December 2017 are shown split out by operating segment below.

The Hotel & Lodging business unit has been renamed Hydrofinity and the High Performance Workwear business unit has been renamed Marken during 2018.

Unaudited six months ended 30 June 2018:

Year ended 31 December 2017:

During the 6 months to 30 June 2017 there was only one operating segment and as such, revenue and losses arising from that segment are the same as presented on the face of the consolidated statement of profit or loss and other comprehensive income for that period.

5. Loss per share

Basic loss per share is calculated by dividing the loss attributable to equity holders by the weighted average number of shares in issue during the period. The Group was loss-making for the 6-month periods ended 30 June 2018 and 30 June 2017 and also for the year ended 31 December 2017. Therefore, the dilutive effect of share options has not been taken account of in the calculation of diluted earnings per share, since this would decrease the loss per share reported for each of the periods reported.

The calculation of basic and diluted loss per ordinary share is based on the loss for the period, as set out below.

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

6. Changes in accounting policies

Except for the changes detailed in Note 2, the Group has consistently applied the accounting policies to all periods presented in this interim financial information.

Had the IFRS 15 and IFRS 9 not been adopted for the 6 months to 30 June 2018, the financial information presented would not be materially different.

7. Seasonality

The Group experiences no material variations due to seasonality.

8. Availability of interim statement

This interim statement will be available on Xeros' website at www.xerostech.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.