Xeros Tech Regulatory News (XSG)

23 September 2021

Xeros Technology Group plc

2021 Interim Results

Xeros Technology Group plc (AIM: XSG, 'the Group', 'Xeros'), the licensor of proprietary solutions improving the sustainability and economics of garments and fabrics, today publishes its interim results for the six months ended 30 June 2021.

Highlights

· Licensees and partners have reached major milestones despite further Covid interruptions.

· Multiple testing and trial agreements with leading domestic washing machine manufacturers for XFiltraTM technology now underway.

· Licensing progress of XTendTM (XOrbTM/XDrumTM) technology platform:

o SeaLion and IFB entered Commercial Laundry markets in China and India respectively. Additional geographies being targeted.

o Progress in Denim Finishing market with pipeline of opportunities in South Asia. Significant interest from major global brands.

o IFB currently determining their 2022 product release plans, including the timing for the launch of their Xeros enabled domestic washing machine into the Indian market, with Q2 being our latest view.

· Multiple agreements signed for XFiltra technology platform which addresses microfibre pollution from washing machines:

o Girbau agreement signed for commercial version with launch expected in 2021.

o Following completion of product design of domestic version, agreements signed with washing machine manufacturers and a leading component supplier to the industry for testing and trials ahead of commercial negotiations.

o British Antarctic Survey selected Xeros' XFiltra technology for its operations in Antarctica.

o UK has proposed legislation on mandatory "in-machine" domestic and commercial washing machine filtration by 1st January 2025

Mark Nichols, Chief Executive of Xeros, said:

The apparel industry is today recognised, alongside fossil fuels, as one of the most damaging to our planet, consuming vast amounts of natural resources and creating harmful pollution. Our ability to radically improve the environmental and economic performance of this supply chain brings immediate solutions against the growing urgency for short term action.

Whilst Covid has continued to take its toll on all our licensees' operations, they have managed to reach significant milestones with a number of market launches taking place from which we can expect license income growth. With this market proof and acceptance in place, we expect to expand our geographic coverage over the coming year.

As a result of our licensees' progress, many significant enterprises in the clothing value chain including well-known brands are now becoming increasingly aware of the viability of our technologies, adding to our belief that they can and should become widely deployed.

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

This announcement contains inside information for the purposes of Market Abuse Regulation (Regulation (EU) No. 596/2014) as retained and applicable in the UK pursuant to S3 of the European Union (Withdrawal) Act 2018 ('MAR').

Enquiries:

Notes to Editors

With close to 40 patent families, Xeros' revolutionary platform technologies, XTend™ and XFiltra™, set new standards for performance and sustainability across our clothing's lifecycle. By reducing the consumption of valuable natural resources and preventing microfibre and microplastic pollution, Xeros greatly reduces the impact of our clothes on the planet.

Backed by science, we set new standards for significantly reduced water consumption, lower carbon and effluent emissions, and improved garment care/life at the manufacturing stage and throughout laundry processes, in industry, and in the home. Xeros' technologies deliver a unique combination of unbeatable sustainability outcomes, improving performance whilst reducing costs. 

The manufacture of clothes and their subsequent care consumes vast amounts of our finite, valuable resources. Xeros licenses new technologies to enable us all to consume less, helping to protect the world for our future. 

For more information, please visit - http://www.xerostech.com/

Business update

Covid-19 impacts on our plans

During the reporting period, Covid-19 has continued to impact our licensees' operations with the result that their planned market entries of Xeros' technologies have been further delayed. In some instances, entry dates have been delayed by close to a year compared to pre-Covid plans. Encouragingly, our licensees' commitment to commercialising our technologies has not changed. The consensus being that the need for environmentally sustainable technologies such as ours has increased further still during the pandemic.

A slight reduction in the global demand for domestic washing machines is expected to recover given the underlying long term, demographic trends. In many parts of the world, washing machines are considered to be an essential household item with the consequence that demand is inelastic. We are also seeing plans for increased regulation on domestic washing machine microfibre filtration. Consequently, our licensing strategy and plans for our domestic laundry and filtration technologies are unchanged.

Demand in volume terms has returned across the clothing value chain, this coinciding with increasing demands for much greater sustainability from consumers, NGOs and regulators. These secular trends are met by Xeros' platform technologies whilst simultaneously reducing manufacturing costs. Accordingly, we do not see any major impacts to our strategy and plans for our applications within this market.

Within our commercial laundry application, the greatest impact continues to be felt in the hospitality industry where broad immunisation with an effective vaccine is likely to be necessary before customer numbers return to previous levels. Despite these market challenges, our licensees for this application have entered their markets with additional focus on those segments where demand is largely unaffected by Covid including specialist cleaning where results continue to exceed expectations.

As regards our own operations, we have implemented a hybrid working policy for those staff who do not perform physical operations at our Technology Centre in the Advanced Manufacturing Park in Sheffield. Slight disruptions to contract execution continue to be experienced when key staff become infected or are required to isolate away from their co-workers but as yet, these have yet to have any material impact. Not being able to physically be present within our licensees' operations has also contributed to the overall delays experienced but has largely been overcome with our team members often changing their working hours to match those of our licensees.

It is, of course, possible that further disruption will occur due to Covid and whilst this may impact the timing of revenues in the near term, we do not believe they will materially reduce them over the medium and long term. Our patent portfolio has significant longevity with many of our patent families having coverage through the mid to late 2030s.

Execution of license contracts and joint development agreements

In May 2021 SeaLion launched their Hydrology range of Xeros enabled washing machines for the Commercial Laundry market in China with IFB doing the same in India in September with their Tuff Tec Eco range. In order to address a wide cross section of their markets, both of these partners are entering the market with two machine sizes and each have plans to add a third. With these accomplishments, we now intend to add new Commercial Laundry licensees covering additional geographic regions on a prioritised basis.

Ramsons commissioned their first machines in the denim finishing market in February 2021, with a broad range of denim finishing recipes being developed in the intervening time period. Based on the progress achieved, shipments of Ramsons XDrum machines are now expected to commence before the end of the year to additional denim manufacturers within South Asia. Further territories are planned to be entered with new licensees in 2022. Engagement continues with a number of well-known global brands with a view to Xeros' technology becoming a preferred or mandated technology for use in their supply chains.

In the domestic laundry arena, with machine design for manufacture completed by IFB, much of the period has been devoted to successfully developing cycles which meet targets for water, chemistry and energy reduction and fabric care improvement. IFB are currently determining, in the context of their broader 2022 product release plans, the most appropriate timing for the release of their Xeros enabled domestic washing machine into the Indian market. Q2 being our latest view. An extensive testing programme is in progress with Midea in China with potential commercial discussions planned to start in 2022 following their successful completion.

Since the beginning of the financial year we have completed, with our design partner, Tata, the product design for domestic XFiltra and have started to provide devices to a number of major domestic manufacturers under testing and trials agreements ahead of planned engagement on commercial terms. These activities will coincide with a targeted launch by Girbau of a commercial laundry version by the end of the year and also the shipment of an XFiltra for use in the British Antarctic Surveys station in Antarctica. Regulatory momentum continues with the UK All Party Parliamentary Group proposing legislation that all domestic and commercial washing machines are fitted with microfibre filters by the 1st January 2025 with this being the same date legislated by the French government. The earliest we might expect license revenues from domestic filtration product sales is 2023.

Intellectual Property

During the period, we further expanded our intellectual property portfolio, mainly in the area of filtration where we have 6 patent applications within a total of close to 40 patent families. The Group continues to carry significant patent defence and litigation insurance in the event that a serious patent infringement is made by a third party.

Outlook

Covid-19 has caused royalty income to be delayed further since we reported our year end results in April. Whilst this impacts our short-term revenues, our licensees commitment to our XTend platform technology remains very high as witnessed by a number of market entries. This provides us with confidence that their revenues will grow in 2022 and beyond. Successful market entry in these territories provides the evidence and credibility for us to sign additional contracts with leading OEMs in other parts of the world on a prioritised basis.

Our proprietary XFiltra platform technology has made significant progress and our ambition remains for our domestic design to be within all washing machines across Europe and ultimately, globally. The size and quality of the manufacturers with whom we have testing and trial agreements supports our belief that we have the most effective and user friendly device, with the lowest lifetime cost, on offer to the industry.

Despite 2021 revenues reflecting the inevitable impacts of Covid-19, our confidence level in our technologies remains high. Whilst broad commercialisation of our two platform technologies is in the hands of our current and future licensees, we see demand only increasing for them as their benefits are increasingly recognised as essential to the environmental sustainability of the world's fashion and garment value chains.

As previously commented, there are many factors that influence the timing to cash breakeven in Xeros with our licensees' performance against their contracts and the signature of contracts with additional licensees being fundamental to this. Under previous assumptions, our expectation was to reach breakeven by the end of 2022. Given the further delays from Covid, our best estimate is that cash breakeven will move to Q1 2023.

Financial review

Group revenue was generated as follows:

The Group financial results for the six months ended 30 June 2021 reflect the continuing progress of Xeros in transitioning from a direct operations business model to a licensing business model, with a 58.6% increase in revenue to £0.3m (2020: £0.2m) and a 17.5% reduction in net cash outflow from operations to £3.4m in the period (2020: £4.1m). In the period the Group recorded an adjusted EBITDA loss on continuing operations of £2.8m (2020: loss £3.0m), a reduction of 5.4%

Group revenue of £0.3m is comprised of £0.1m of licensing revenue, which has grown by 311.4% (2020: £0.0m), and £0.2m of service income and machine sales, which, on a combined basis have grown by 9.4% (2020: £0.2m). Licensing income represents royalties from license partners for the sale of XDrum machines and revenue to Xeros for the sale of XOrbs. Whilst absolute amounts are small, these license revenues represent the first royalties flowing to Xeros following our licensees' market launches in India & China. Service income and machine sales represents payments from existing Xeros customers in the UK and Europe. As previously announced, these legacy customers are fully serviced by third party distributors.

Gross profit for the six months ended 30 June 2021 grew by 96.6% to £0.2m (2020: £0.1m) in line with revenue growth. The gross margin for the period of 65.7% (2020: 55.3%) reflects the move to a licensing business model.

Administrative expenses remained flat at £3.6m (2020: £3.6m) reflecting the fact that headcount remains stable with 45 employees as at the 31st August (2020: 45). Since the end of the reported period, the Group has increased the investment in XFiltra trials and the associated marketing costs, reflecting plans previously communicated as part of the equity placing in March 2021.

With the increase in revenue, the Group reduced its adjusted EBITDA loss by 5.4% to £2.8m (2020: loss £3.0m.

Adjusted EBITDA is considered one of the key financial performance measures of the Group as it reflects the true nature of our continuing trading activities. Adjusted EBITDA is defined as the loss on ordinary activities before interest, tax, share-based payment expense, non-operating exceptional costs, depreciation and amortisation.

The Group reduced its operating loss to £3.4m (2020: £3.5m), a reduction of 3.3%. The loss per share was 15.24p (2020: loss 31.64p).

Net cash outflow from operations reduced to £3.4m (2020: £4.1m), a reduction of 17.5% in line with the reduction of adjusted EBITDA in the period and an improvement in the working capital position over the prior period. The Group had existing cash resources as at 30 June 2021 of £10.2m (2020: £7.0m) and remains debt free. Group cash as at 31 August 2021 is £9.1m. In March the Group raised £8.5m, net of costs, from shareholders.

Overall cash utilisation remains in line with the Board's expectations at £0.5m per month. This cash utilisation has increased from the previously reported level of £0.4m per month and reflects the planned investment in XFiltra and marketing activity. The directors expect cash utilisation to remain at the current level until such time as higher licensing revenue is generated from our license partners.

Consolidated statement of profit or loss and other comprehensive income

For the six months ended 30 June 2021

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

Consolidated statement of changes in equity

For the six months ended 30 June 2021

Consolidated statement of financial position

As at 30 June 2021

Consolidated statement of cash flows

For the six months ended 30 June 2021

Notes to the interim financial information

for the six months ended 30 June 2021

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 licensing of platform technologies which transform the sustainability and economics of clothing and fabrics during their manufacture and over their lifetime of use.

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 23 September 2021.

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 Accounting Standards in conformity with the Companies Act 2006.

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

The accounting policies used in the financial information are consistent with those used in the prior year with the exception of the following addition:

Cash on deposit

Bank deposits where maturity is greater than three months from the date of investment are disclosed as cash on deposit.

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:

Further IFRS standards or interpretations may be issued that could apply to the Group's financial statements for the year ending 31 December 2021. 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 2020. The principal risks and uncertainties are materially unchanged and are as disclosed in the Annual Report for the year ended 31 December 2020.

The interim financial information for the six months ended 30 June 2021 and for the six months ended 30 June 2020 does 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 2020 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 accounts for Research and Development tax credits where there is certainty regarding HMRC approval. There is no certainty regarding the claim for the year ended 31 December 2020 and as such no relevant credit or asset is recognised.

4. Trade and other receivables

There is no material difference between the lease receivable amounts as in other receivables noted above and the minimum lease payments or gross investments in the lease as defined by IFRS 16.

The minimum lease payment is receivables as follows:

Contractual payment terms with the Group's customers are typically 30 to 60 days. The Directors believe that the carrying value of trade and other receivables represents their fair value. In determining the recoverability of trade receivables the Directors consider and change in the credit quality of the receivable from the date credit was granted up to the reporting date.

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 2021 and 30 June 2020 and also for the year ended 31 December 2020. 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 Group underwent a 100:1 share consolidation during the year ended 31 December 2020. The weighted average number of ordinary shares in issue for the period ended 30 June 2020 and for the year ended 31 December 2020 has been calculated assuming that the 100:1 consolidation was in effect throughout those periods, and the loss per share figure for those periods has been restated accordingly.

The calculation of basic and diluted loss per ordinary share is based on the loss for the period, as set out below. Calculations of loss per share are calculated to two decimal places.

6. Seasonality

The Group experiences no material variations due to seasonality.

7. 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.