IP : Xeros Technologies plc - Final Results

Commercialisation plans gaining momentum

Xeros Technology Group plc (AIM: XSG, 'the Group', 'Xeros'), the developer and provider of patented polymer based technologies with multiple commercial applications, today publishes its final results for the 12 months ended 31 December 2017.

Group highlights

• Significant progress towards commercialising technology across all targeted applications under IP-rich, capital-light models
• Meaningful engagement with major industry players around the world
• Group income increased to £2.3m (17-month 31 December 2016: £2.5m). Adjusted EBITDA loss £28.7m (17-month 31 December 2016: loss £20.7)1
• Year end cash £25.1m (17-month 31 December 2016: £28.9m) following £25m capital raise in December 2017 to accelerate commercialisation against specific milestones

Cleaning Technologies

• High Performance Workwear:
  Acquired Marken PPE Restoration in July 2017 and Gloves Inc in March 2018; national US coverage expected in 2019
• Domestic Laundry:
  Structured discussions with number of major OEMs, after launch of domestic washing machine incorporating Xeros technologies at the Consumer Electronics Show in Las Vegas in January 2018
• Hotel & Lodging:
  Ongoing discussions with two major OEMs on testing and validation after launch of Symphony Project in April 2017 - enables integration of Xeros technology in OEM-branded machines
  Expansion of Forward Channel Partner network reducing direct sales and pipeline of opportunities in high water shortage/price countries and regions of the US
  Total commissioned and revenue generating estate of 381 machines up 80% in the year

Tanning Technologies

• Successful scale trials with leading European tanneries; focus on completing engineering solutions to facilitate technology incorporation in existing tannery processes
• Commercial negotiations on-going with multiple tanneries
• Targeting first revenues in 2018

Textile Technologies

• Successful lab trials in Denim finishing and Garment dyeing
• Concurrent IP filing protection now permits scale trials and development with major garment manufacturers

Mark Nichols, Chief Executive of Xeros, said:

'Xeros is now providing a unique, proven technological solution in a world increasingly threatened by the environmental challenges of water scarcity and pollution.

'We now have two businesses with turnover, other applications with near term inflection points and are engaged with some of the leading market incumbents in each of our cleaning and tanning applications. We also expect to be in discussion with major garment producers in the near term for our textile applications.

'For the majority of our applications, our plans are to implement IP-rich, capital-light business models with market incumbents.

'With our resources now aligned specifically to business opportunity, we are working our way through major commercialisation milestones.

'We are now at a pivotal point in the commercialisation of our technologies.'

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

Notes to Editors

Xeros Technology Group plc (LN: XSG) is a platform technology company that is reinventing water intensive industrial and commercial processes by reducing water and chemistry usage with its polymer technologies. Its patented technologies have the capacity to provide material economic, operational and sustainability improvements that are unattainable with traditional processes. The Group is currently exploiting its intellectual property in three areas: Cleaning Technologies, Tanning Technologies and Textile Technologies. Xeros has a number of agreements in place with such international organisations as BASF, Hilton and Wollsdorf Leder.

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

XEROS TECHNOLOGY GROUP PLC

CHIEF EXECUTIVE OFFICER'S REVIEW

Strategic Overview

Xeros develops polymer based technologies which radically improve the sustainability, performance and economics of water intensive processes, dramatically reducing water, chemistry, energy and effluent whilst either meeting or exceeding the conventional quality standards for the materials being processed.

We have established that our technologies can deliver these benefits in three world-scale industries: cleaning, tanning and textiles. We are now progressively commercialising applications in these sectors to generate profitable returns, leveraging our intellectual property and know-how with low capital requirements.

Given the scale of the markets in which we operate, our strategy is to commercialise our technology with partners who already have strong international market positions and who also demonstrate a strategic intent to deliver increased levels of sustainability. The disruptive nature of our technology enables the creation of new high value-added business models and revenue streams. Where necessary, we enter markets ourselves to prove out our propositions so that our prospective partners benefit from materially lower risk profiles when they join us in the commercialisation process.

In order to accelerate the adoption of our technology, we have increased and aligned our resources to each of the application areas that we are pursuing with the vast majority being applied to those with nearer term profitability. Commercialisation is in progress in our Cleaning Technologies business with Hotel & Lodging and High Performance Workwear business units generating revenue of £2.0m and £0.2m respectively. We are targeting Tanning Technologies to deliver its first revenues in 2018 with Textile Technologies revenues in 2019, once scale trials have been completed.

Having proven the scale and the quantum of the economic improvements of many of our applications we are now organised to generate revenues where the time horizons for generating significant income from our investments are increasingly in the near term.

In December, we raised £25m before fees in an oversubscribed placing to accelerate the commercialistion of our application portfolio and to achieve specific commercial milestones in each of our businesses, thereby giving a clear line of sight to monetisation of our intellectual property portfolio. The Group expects to raise further funds in 2018 for the execution of specific commercialisation strategies.

Operating Review

Cleaning Technologies

High Performance Workwear

Having extensively trialed our technology in the high added value Personal Protective Equipment ('PPE') market during 2017, we entered this market with the acquisition of Marken PPE Restoration's operations in Nevada in July 2017. Turnover for the five months ended December 2017 totaled £0.2m. This was an initial step in our aim to create a nation-wide network which will enable us to serve the US firefighter market. We have since acquired our second and third sites in Atlanta and Miami through the acquisition of the trade and assets of Gloves Inc. in March 2018 and are targeting to open two more by the end of the current year. Our target is to have a total of five sites by the end of 2018 with full national coverage of the US achieved by the end of 2019.

The US firefighter PPE market is a specialist market for the cleaning, inspection and repair of uniforms and is valued at approximately $330m p.a. With 1.1m firefighters in the US, there are 350,000 professional firefighters based in approximately 8,000 fire crews. Nearly 40% of these professional firefighters are based within 100 miles of one of the top 10 major US metropolitan areas. Each professional firefighter has, on average, 2 sets of bespoke turnout gear.

Once our network in the US is completed, we believe we will create a valuable proprietary asset which can be leveraged to bring our technology to PPE markets on a global basis.

The PPE market spans many additional sub-segments including petrochemicals, mining, military and transportation, many of which are becoming increasingly aware of the adverse and potentially dangerous effects of incorrectly or insufficiently cleaned workwear. In the transportation sector, we increased the footprint of machines in France cleaning the PPE of SNCF's workers to six by the end of December 2017.

The ability of Xeros' technology to significantly outperform conventional cleaning technologies coupled with major cost savings from extending the life of expensive PPE garments, puts Xeros in a unique position to create high added value for our customers and our shareholders.

Domestic Laundry

During 2017, we developed a new solution called the XDrumTM to simply and inexpensively incorporate Xeros' cleaning technology inside a domestic washing machine. Similar to High Performance Workwear, we have demonstrated that Xeros' technology can improve cleaning results whilst simultaneously making garments look better for longer. In so doing, we have the capacity to provide consumers with washing outcomes which are better, cheaper and more environmentally friendly than conventional washing machine technology.

We unveiled the XDrumTM technology at the Consumer Electronics Show ('CES') in January 2018, following which we have entered into structured discussions with a number of major OEMs with the objective of licensing our technology.

In response to the increasing amounts of micro-plastic pollution from synthetic fibers in fabrics and garments that are released when they are washed, Xeros also unveiled its proprietary XFiltraTM technology at CES. The company expects regulatory authorities across the world to increasingly demand that OEMs place such filters in their washing machines to reduce the micro-plastic pollution.

Xeros' XFiltraTM is a novel, simple, low cost solution to meet this need. A licensing process similar to that of XDrumTM is being developed as a potential revenue stream.

The estimated global market size for domestic washing machines in 2015 was 119m units including 57m units sold in China.

Hotel & Lodging

We entered the US market in 2013 with our own brand machines and an 'all requirements' multi-year contract package, which was sold and delivered by our own staff in combination with 'Forward Channel Partners'. In 2017, we initiated a plan to transition to a business model whereby major market incumbents incorporate and sell our proprietary technology in exchange for royalties.

To this end we announced Symphony Project in April 2017 and demonstrated a leading conventional branded commercial size washing machine with Xeros' technology inside at the Clean Show in Las Vegas in June. Following this demonstration, we are currently working with two major OEM's on the testing and validation of Xeros technology inside their own branded machines. The objective being to have these companies marketing, selling and servicing machines incorporating Xeros' technology through their own well-established channels.

Simultaneously, we have signed agreements with Forward Channel Partners in Australia, UAE and South Africa, who will market, sell and provide the full set of services for Xeros enabled machines. A number of additional opportunities in high water shortage/price countries are in the pipeline. We have adopted a similar approach in the US with a high focus on metropolitan areas with acute water shortages. This targeted approach to the US market will be with a reduced direct sales and service force and with focused Forward Channel Partners.

Having validated the value and benefits of our technology in the years since our market entry, the new model to which we are migrating will enable broader market penetration of our technology but with lower capital intensity for Xeros, both in operational and financial terms; the savings being redeployed to commercialise our other applications.

The Information Technology solutions required to implement the new commercialisation model met major milestones during the year, with the release of the XConnectTM online portal. The portal provides complete operational, financial and sustainability information with which to manage and optimise on-premise laundries.

As part of our strategy to commercialise our technologies in China, the Company joined the UK Department of International Trade's mission to exhibit the country's best advanced manufacturing and innovation companies at the International Industrial Fair in Shanghai in November 2017. Xeros was selected to participate alongside major UK brands and technologies including Jaguar Land Rover, Dyson, McLaren and The Graphene Institute. Xeros is now actively developing opportunities for the licensing of its Cleaning Technologies in China.

In October 2017, we started to implement the relocation of all our US operations (excluding High Performance Workwear) into a new facility in Providence, Rhode Island. It was commissioned in March 2018. The facility, which benefits from favourable tax incentives, will consolidate four office and warehouse locations and result in cost savings.

Additional measures taken to increase penetration of the market included commercialising, at scale, our 16kg commercial washing machine to supplement our 25kg version. The first trial units being delivered to US customers in late 2016, with 88 commissioned by the end of 2017.

Including both our 25kg and 16kg machine options, the total number of machines commissioned and generating revenue grew by 169 during the year commencing 1 January 2017 to a total of 381 at the end of December 2017.

Our plan in this application is for Xeros to make a financial return on its intellectual property and know-how with relatively low capital intensity. Our target is that by the end of 2020, a machine will be commissioned every working hour incorporating Xeros' technology with each providing a royalty to Xeros.

Tanning Technologies

As of the end of March 2018, our tanning team have processed over 2,300 hides in trials in the Retanning and Dyeing phases of the tanning process with multiple tanneries. Production scale trials have proven that our technology works for all hide applications, including auto and shoe leather, and in the different drum types used in their production irrespective of their construction material.

As of the end of March 2018, we have designed the engineering solutions required to introduce our polymers into the tanning process, manage them during the cycle, and then remove them from hides before their re-use. These developments are a significant step forward for transitioning tanneries from trials to contract and implementation. Under proposed contracts, the cost of the equipment that Xeros would supply would be reimbursed, so making the business one of low capital intensity for the Group.

Our business model for this industry is one of sharing gains with customers under long-term contracts. This has been validated by the contract signed with Wollsdorf Leder in July 2017 and in other on-going commercial negotiations. We await a start date for implementing our engineering solutions in Wollsdorf. Following customer acceptance of our engineering solutions, revenue will be generated.

We are currently focused on commercialising our technology in the Retanning and Dyeing stages which use large volumes of water to apply specialty chemicals. In due course, we will also move upstream to the Tanning stages of the process which typically uses proportionately more water to apply bulk chemicals.

We estimate that 300 million bovine hides are tanned per annum and we target to be applying our technology to up to 20 percent of this market by the end of 2022.

Textile Technologies

During 2017, we ratified our mid-2016 decision to include textiles applications within our commercialisation plans due to the scale of the global textiles industry and the very significant water and chemistry usage within the industry. We have now successfully demonstrated that Xeros' technology has the capacity to deliver water, chemistry, energy and effluent reductions which at least match performance outcomes in our other selected applications.

We are achieving these results in Denim Finishing and Garment Dyeing with reductions in chemical and water consumption of up to 70%, initially in lab scale trials but now also increasingly at larger scale. In the case of Denim Finishing, we have also achieved significant reductions in cycle time.

Our scale trials have been conducted in our Technology Centre using adapted commercial size washing machines which are equivalent to the engineered solutions used in the industry.

We have concurrently been working on filing IP on our inventions on these applications with 4 applications made across both areas. With this protection in place, we anticipate moving to scale trials and development agreements with major manufacturers in the near term.

Xeros' solutions in these applications offer manufacturers the resource and pollution reductions that consumers and governments are demanding. One example being the plan for 'Zero Discharge of Hazardous Chemicals by 2020' which has 23 global clothing brands as signatories.

This is a sizable opportunity for Xeros, with 22.7 million tonnes of natural fibres processed annually for the clothing and textiles industries, a third of those in China.

Polymer Technologies

During 2017 we completed the polymer developments necessary to begin commercialisation of all our present applications in Cleaning, Tanning and Textiles. In Cleaning Technologies, we use the cleaning properties of nylon polymers which are supplied by our global partner, BASF, under a multi-year agreement through to 2021. Polypropylene, which is broadly available on a global basis, is used for all our Tanning and Textiles applications.

Our polymer science team continues to work on developing 'Generation Three' polymers which use novel surface effects with the objective of delivering further major reductions in process inputs or improvements in our Cleaning Technologies. We are currently scaling these developments up at lab scale and in the event they are successful, we anticipate these improvements being introduced within a two year timeframe.

All our novel polymer and engineering developments are underpinned by Intellectual Property and in the 15 months to the end of March 2018 we increased our 'pending' or 'granted' patent families by seven to a total of 48. A number of these filings have the benefit of significantly extending the time horizon of the protection of our applications.

Outlook

With the development of our Cleaning and Tanning Technologies materially completed during 2017, Xeros is now focused on their commercialisation. The proven sustainability, performance and economic benefits of our technologies have become increasingly understood and accepted by both consumers and those who serve them. They are attracting a number of major industry players to the table. We look forward to reaching formal agreements in the current year.

The results from our Textiles programme have the potential to create significant value. They indicate that we have the capacity to substantially improve the long-term viability of another global industry, which is currently under extreme pressure to reduce its environmental impact. We anticipate demonstrating these technologies at scale with manufacturers in the current year.

All of the commercialisation models for our applications are IP-rich and capital-light with our physical participation in the supply chain only undertaken at an early stage, when there is a need to prove out and de-risk our technologies for current market incumbents.

In December 2017 we raised £25m, before fees, from both existing and new investors to fund the business through to the realisation of significant commercial milestones by the end of 2018. In each of our businesses we have a clear strategy to achieve commercial inflection points in 2018 which will allow future monetisation of these businesses. With development work materially completed in 2017 and the foundations for commercialisation put in place, Xeros' costs will remain fixed whilst revenues increase from licensing and other low capital intensity models.

Overall, the Group is trading in line with the Board's expectations.

Mark Nichols

Chief Executive Officer

18 April 2018

CHIEF FINANCIAL OFFICER'S REVIEW

Financial review

Group earned income was generated as follows:

Group earned income was £2,270,000 in the year ended 31 December 2017 (17-month 31 December 2016: £2,466,000).

On a normalised basis, average monthly earned income is 30% higher than the previous period (year ended 31 December 2017: £189,000 compared to 17-months to 31 December 2016: £145,000). Service income includes £249,000 from MarKen PPE since its acquisition in July 2017. This income reflects the unit-based pricing model in this business.

In the Hotel & Lodging business, 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 period are as follows:

During the period the Group has focused on increasing its commissioning capacity in the Hotel & Lodging business through the use of Forward Channel Partners and this has resulted in an increase of 143 machines commissioned in 2017 (17-month 31 December 2016: 64). At the start of the period the Group had 104

machines installed but not yet commissioned and, due to the focus on increasing commissioning capacity these machines were either commissioned or sold during the year. Therefore the number of machines installed but not yet commissioned at the end of the year was zero and the balance reduced by 104 during the year.

As at 31 December 2017 the total revenue generating estate increased by 169 machines (17-month 31 December: 140) to 381 machines. As there were 212 revenue generating machines at the start of the year this represents growth of 80% during the year.

As at 31 December 2017, contracted future revenues amount to £4.2m (31 December 2016: £3.8m) and average contract length is 24 months (31 December 2016: 59 months). As the Group's commercial activities have expanded this average contract period reflects normal trading terms.

Gross loss was £448,000 (17-month 31 December 2016: gross profit £290,000). Adjusted gross loss, defined as gross loss plus lease interest income, was £368,000 (17-month 31 December 2016: gross profit of £363,000). The gross loss figure includes a loss of £74,000 from the MarKen business since its acquisition in July 2017. The move to a gross loss in the period was a result of an increase in consumables costs (principally chemistry and machine spare parts) used to support a larger customer base.

Adjusted gross profit/loss and adjusted EBITDA are considered the key financial performance measures of the Group as they reflect the true nature of our continuing trading activities.

The Group has continued to invest in its R&D programme but, as the Group has now completed all fundamental development, the total R&D spend in the period has fallen in comparison with the prior period. The Group spent £5.1m on R&D including staff and patent costs (17-month 31 December 2016: £7.6m). This includes direct R&D expense of £1.8m (17-month 31 December 2016: £3.1m), patent and intellectual property expense of £1.2m (17-month 31 December 2016: £1.7m) and £2.0m of salary costs (17-month 31 December 2016: £2.8m). This R&D spend was all expensed during the period as it represents Group expenditure on Textiles, Domestic laundry development and Tanning engineering development, none of which yet meet the full criteria for capitalisation of these costs in accordance with IAS 38. When these business areas are deemed to have met the IAS 38 capitalisation criteria ongoing development costs will be capitalised.

Total administrative expenses (which include the R&D expenses) increased to £30.9m (17-month 31 December 2016: £22.6m). During the period the Group began the reallocation of expenses away from the US Hotel & Lodging business and towards the new areas of High Performance Workwear and Domestic Laundry. This was achieved through a reduction in direct headcount in the US and an increase in the use of Forward Channel Partners. This reallocation of expenses will continue in 2018.

Administrative expenses include a foreign exchange loss of £2.2m resulting from movements in the US dollar rate (17-month 31 December 2016: gain of £3.8m) and £0.4m of administrative expenses from MarKen since its acquisition in July 2017. After adjusting for MarKen and the impact of foreign exchange, underlying administrative expenses increased from £26.4m (17 months ending 31 December 2016) to £28.3m.

This has resulted in an Adjusted EBITDA loss of £28.7m (17-month 31 December 2016: loss £20.7m). Adjusted EBITDA is defined as the loss on ordinary activities before interest, tax, share-based payment expense, non-operating exceptional costs, depreciation and amortisation. Non-operating exceptional costs are the professional advisory costs related to the December 2017 fundraising.

Whilst Sterling is still weaker against the US$ compared to the previous reporting period, which increases the reported losses in 2017, it has gradually strengthened against the US$ during 2017. As we continue to fund the working capital and operating costs of the US Hotel & Lodging and MarKen businesses this stronger Sterling benefits the Group.

The Group reported an operating loss of £31.3m (17-month 31 December 2016: loss £22.4m). The loss per share was 34.92p (17-month 31 December 2016: loss 25.04p).

The Group expects cash utilisation to remain at current levels over the coming years, as we continue to fund the current portfolio of businesses. The increase in net cash outflow from operations to £27.1m (17-month period ended 31 December 2016: £26.4m) reflects these activities and was in line with the Board's expectations.

The Group had existing cash resources as at 31 December 2017 of £25.1m (31 December 2016: £28.9m) and remains debt free. The Group expects to raise further funds from investors in 2018.

The Group has tax losses of approximately £72.5m to offset against future taxable profits (31 December 2016: £42.4m).

Paul Denney

Chief Financial Officer

18 April 2018

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