Xeros Tech Regulatory News (XSG)

19 September 2019

Xeros Technology Group plc

Interim results

Xeros Technology Group plc (AIM: XSG, 'the Group', 'Xeros'), the developer and provider of water saving and filtration technologies with multiple commercial applications, today published its interim results for the six months ended 30 June 2019.

Highlights

·; Major commercialisation progress of platform technology:

o License contract in execution with India's largest domestic washing machine manufacturer

o Joint development agreement in progress with largest Chinese domestic washing machine manufacturer

o Commercial washing machine license contracts in execution with India's and China's largest commercial laundry equipment companies

o First XDrum commercial washing machine commissioned in Shanghai

o First endorsement of Xeros' cleaning technologies by garment manufacturer in US

o Joint development agreement in progress with world's largest apparel manufacturer

o Binding Heads of Terms signed for the development and licensing of Xeros' technology by the largest garment finishing equipment company in South Asia

·; Net cash outflow from operations £9.2m (2018: 12.8m), 28% reduction

·; Group cash of £5.2m at 31 July 2019

·; Adjusted EBITDA* loss down to £8.1m (2018: loss £11.6m), 30% reduction

*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:

"Since Xeros' inception, the geo-political and environmental pressures on the world's supply of water continue to increase, year on year. There is no reason to believe this will change or abate. Our technologies help to extend this precious resource whilst simultaneously reducing significantly pollution.

"After a number of years of development, manufacturers and consumers have now recognised that our innovative technologies are highly valuable, both in terms of their sustainability and cost benefits.

"The commercialisation of our products is now accelerating with a number of contracts in execution and in development in a number of countries including the two most populous.

"In 2017 we changed our strategy to commercialise our technologies under a license model in order to achieve the broadest possible market penetration from the lowest possible cost base. Our licensing contract wins and reducing cash burn rate are evidence that we are now making good progress to achieving that objective."

Enquiries:

Notes to Editors

Xeros Technology Group plc (LN: XSG) is a platform technology Group that is reinventing water intensive industrial and commercial processes.

Xeros' patented XOrbTM technologies 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, product and sustainability outcomes. The Group is applying its technology in the fields of cleaning, tanning and textiles.

Xeros' XDrumTM technology is used to apply XOrbs in world scale commercial and domestic markets and has signed multiple agreements to license its products.

XFiltraTM is Xeros' in machine filtration technology which enables major reductions in the amount of microfibres being released from washing machines into the marine environment.

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

Strategic overview

The Group has made good progress on the execution of its strategy to move to a licensing and royalty model. Xeros expects to have completed the implementation of its high margin, pure-play licensing model by the end of 2019, having won and established the performance of a number of significant contracts based on its technology in its textiles, tanning, high performance workwear and hospitality markets.

Following this, Xeros will cease to have any involvement in direct sales and physical supply chains. This will result in licensees paying Xeros royalties for the use of its extensive intellectual property portfolio.

Xeros' is extremely well placed in terms of arguably one of the greatest societal and global issues; the availability of clean water. The geo-political, growing population and environmental pressures on the world's supply of water continue to increase, year on year.

Today, 25% of the world's population live in countries facing extreme water-stress[1] and by 2025, 1.8 billion people will be facing absolute water scarcity.

According to the World Bank, one in four cities, with a total of US$4.2 trillion of economic activity is classified as water-stressed[2] and UNESCO estimates that 45% of global GDP will be at risk by 2050 if the pressure on global water resources continues at current rates[3].

The economic and social implications of water-stress are vast.

Xeros' innovative technologies help to extend the supply of clean water by using it more effectively and efficiently and reducing significantly pollution, across of range of high water usage industries.

Operational review

Cleaning Technologies

Simple, low cost XDrum commercial washing machines are now being manufactured under a license agreement with SeaLion, China's largest commercial laundry equipment manufacturer. First installation was completed in September 2019. Royalties will be payable to Xeros, based upon the number and value of machines sold and a percentage of ongoing customer savings.

XDrum commercial washing machines are now being developed under licence in India by IFB, India's largest commercial laundry equipment manufacturer, with machines intended to be available for customers in 2020. Royalties will be payable to Xeros based upon the number and value of machines sold and a percentage of ongoing customer savings.

Domestic XDrum washing machines are also being developed under licence in India by IFB, India's largest domestic washing machine manufacturer, with machines intended to be available for consumers in 2021. Royalties will to be payable to Xeros based on number and value of machines sold.

The Group has signed and is progressing a Joint Development Agreement in China with Wuxi Little Swan, a wholly owned subsidiary of Midea, one of the world's largest producers of domestic washing machines.

In September 2019, Xeros received its first endorsement from a garment manufacturer with Kappler Inc endorsing Xeros technologies for the cleaning of its DuraChem® 500 product; a suit designed to protect wearers from chemical, biological, radioactive and nuclear hazards.

Textile technologies

In August 2019, binding Heads of Terms were signed with Ramsons, the largest supplier of garment finishing equipment in Asia, to develop, manufacture and sell garment XDrum finishing equipment used to produce denim jeans. Principle commercial terms have been agreed and are expected to be finalised in Q4 2019 ahead of equipment being available to consumers before mid-2020.

The first garment finishing XDrum machine has been produced and installed for trials under a Joint Development Agreement with Crystal International Group, the world's largest apparel maker by volume.

Tanning technologies

Xeros' first tanning contract is currently in the commissioning phase with LEFARC, a supplier of leather to major brands including Timberland. Production of leather using Xeros' technologies is expected in Q4 of this year.

Filtration technologies

The Group published a patent for its domestic XFiltra in-machine filtration technology to drastically reduce the microfibre pollution generated by the washing of garments in the home, the largest source of microfibre pollution. Xeros has also now filed a patent for micro-particle filtration in larger commercial washing and garment finishing machines.

Intellectual property

Xeros is currently prosecuting and maintaining in excess of 40 patent families, having completed the majority of the patent and trademark filings necessary to protect its Intellectual Property.

Recent filings are in the areas of biodegradable XOrbs and enhancements to XDrum and XFiltra designs. The Group continues to carry significant patent litigation and defence insurance and does not currently have any material patent infringements that it is aware of.

Exit from operational businesses.

The Group has outsourced the servicing of its UK hospitality installations to WashCo Limited, one of the largest commercial laundry equipment suppliers in Europe. This is a first step towards all sales and service across Europe being undertaken by licensees. This follows the sale of the Group's installed based in the US hospitality industry to channel partners who are responsible for the sales and service of Xeros' commercial washing machines.

Discussions have also commenced to progressively license Xeros' technologies in the firefighter and adjacent markets in the US and Europe. This follows "real world" affirmation of Xeros' decontamination and life extension capabilities. The Company no longer requires a physical presence to license its products in this market and a competitive bid process is underway to sell the operations of Marken in the US.

As previously announced, Xeros is progressing the option to spin-out its Qualus (tanning) business to the management team in exchange for an ongoing royalty agreement.

Outlook

As previously announced, the Group expects to raise further equity funding of between £5m and £10m in 2019, in order allow the business to achieve its objective of reaching cash breakeven. Furthermore, Xeros expects the cash burn rate to fall further as it completes its migration to a licensing business.

The Company expects to materially complete the implementation of its current contracts over the next 18/24 months. During this time, Xeros intends to increase the number of license agreements with OEMs to increase geographic coverage of its products. 

In the short term, with the majority of the product development and market validation complete, the Group's cost base will reduce to that of a licensing organisation which is focussed on commercialisation and technology transfer.

Financial review

Group revenue was generated as follows:

Group revenue was £1,594,000 in the six months ended 30 June 2019 (2018: £1,865,000).

Machine sales revenue represents the revenue generated from the physical sales of commercial washing machines by the Hydrofinity division which operates in the hospitality market. Machine sales income decreased to £393,000 (2018: £658,000), reflecting a reduction in new placements as the Group exits from the direct sales of commercial machines ahead of licensees selling XDrum commercial washing machines under license in 2020. Direct machine sales represented 25% of the Group's overall revenue (2018: 35%).

Service revenue fell, by 7.1%, to £1,116,000 (2018: £1,201,000). Of this service revenue, £756,000 was from the Hydrofinity division (2018: £789,000) and £360,000 was from the Marken business (2018: £412,000). The Hydrofinity reduction was the result of selling a number of US customer leases to Forward Channel Partners (FCPs).

After the Half Year, the Group reported the sale of 164 US customer leases to ELS and WashIQ, two major FCPs on the East and West coasts of the US respectively. These leases generated an annual revenue of approximately £750,000 and a gross margin loss of approximately £300,000 in 2018. The Marken revenue reduction was the result of the closure of the site in Medley, Florida.

The Group reported its first direct XDrum licencing revenue of £76,000 (2018: nil) derived from the payment of technology fees.

Adjusted gross loss improved by 10.5% to £85,000 (2018: £95,000) and includes the contribution from licencing revenue.

The Group reduced its adjusted EBITDA loss to £8,090,000 (2018: loss £11,573,000). This is a reflection of the Group's planned migration to a licensing business model with headcount reducing by 28% from 148 at December 2018 to 107 at August 2019.

The Group has reported an operating loss of £9,056,000, down 30.6% (2018: loss £13,042,000). The Group's loss per share was 0.04p (2018: loss per share 13.09p), reflecting both the reduced losses and the increase in share capital as a result of fundraise in December 2018.

Similarly, net cash outflow from operations also fell, from £12,847,000 to £9,215,000, a reduction of 28.3%. The cash utilisation was in line with the Board's expectations.

The Group had cash resources as at 30 June 2019 of £6,448,000 and remains debt free.

Consolidated statement of profit or loss and other comprehensive income

For the six months ended 30 June 2019

* Exceptional cost of sales relate to the exceptional write off of obsolete inventory

**Adjusted EBITDA comprises loss on ordinary activities before interest, tax, share-based payment expense, exceptional cost of sales and administrative expenses, depreciation and amortisation.

*** Exceptional administrative expenses are the costs of the fundraising in December 2018, an exceptional write-down of Property, Plant & Equipment and the release of deferred consideration.

Consolidated statement of changes in equity

For the six months ended 30 June 2019

Consolidated statement of financial position

As at 30 June 2019

Consolidated statement of cash flows

For the six months ended 30 June 2019

Notes to the financial statements

for the six months ended 30 June 2019

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 water saving and filtration technologies 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 18 September 2019.

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 IFRS16 on a modified retrospective approach and therefore the comparative information is not restated and continues to be reported under IAS 17. The reclassifications and adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019. The full details of the accounting policies under IAS 17 are disclosed within the Annual Report for the year ended 31 December 2018.

Under IFRS16, when the Group as a lessee enters into a contract which it determines is a lease or contains a lease element, a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost and is subsequently depreciated on a straight-line basis over the course of the lease term. The lease liability of initially measured at the present value of the lease payments. The lease liability is subsequently measured at amortised cost using the effective interest rate method.

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 17 Insurance Contracts effective 1 January 2021

·; IFRS 3 (amended March 2018) Business Combinations effective 1 January 2020

·; IAS 1 and IAS 8 (amended October 2018) Definition of Material effective 1 January 2020

·; Amendments to Reference to the Conceptual Framework in IFRS standards effective 1 January 2020

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 2018. The principal risks and uncertainties are materially unchanged and are as disclosed in the Annual Report for the year ended 31 December 2018.

The interim financial information for the six months ended 30 June 2019 and for the six months ended 30 June 2018 do not constitute statutory financial statements as defined in Section 434 of the Companies Act 2006 and is neither reviewed nor audited. The comparative figures for the year ended 31 December 2018 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 results for the 6 months to 30 June 2019, the 6 months to 30 June 2018 and for the year ended 31 December 2018 are shown split out by operating segment below.

Unaudited six months ended 30 June 2019:

Unaudited six months ended 30 June 2018:

Year ended 31 December 2018:

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 2019 and 30 June 2018 and also for the year ended 31 December 2018. 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 IFRS 16 not been adopted for the 6 months to 30 June 2019, the financial information presented would not be materially different. The adoption of IFRS 16 resulted in an adjustment to opening net assets of £83,000 due to the recognition of the lease assets and liabilities. Had IFRS 16 not been adopted, the Group's loss before tax would have been £12,000 higher.

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.