Modern Water : Final Results

RNS Number : 7016W

Modern Water PLC

18 April 2019

Modern Water plc

("Modern Water", "the Company" or "the Group")

Final Results

Modern Water plc, the owner of world-leading technologies for water and wastewater treatment and for water quality monitoring, today announces audited full-year results for the 12 months ended 31 December 2018.

Key points

Operational

·The first commercial AMBC plant commissioned in India

·Chinese joint venture company established for AMBC technology in the Chinese market

·New partnership established for the African market with WEC Projects (Pty) Ltd

·Development of upgraded Microtox® LX laboratory-based toxicity testing technology

·ASTM approved method for SRB testing achieved

Financial

·Revenue increased 18% to £4.2m (2017: £3.5m)

·Gross profit increased 31% to £2.3m (2017:£1.8m)

·Operating loss before tax, interest, depreciation, amortisation was £2.1m (2017: £2.8m)

·Total comprehensive loss for the year was £2.8m (2017: £5.0m)

·Cash outflow before financing in 2018 was £1.7m (2017: £2.2m)

·Cash as at 31 December 2018 was £0.2m (2017: £0.5m)

Commenting on the results, Alan Wilson, Chairman of Modern Water plc, said:

"Significant milestones were achieved in 2018 across the divisions of the Company: the Membrane Division commissioned its first full-scale AMBC plant in India; two new AMBC partnerships in China and South Africa were signed; the advance works contract for a waste-water treatment plant in Gibraltar was executed, resulting in a successful planning application in early 2019. The Monitoring Division has upgraded its best-selling product, the Microtox LX, and has successfully commissioned a monitoring station for a major power-generation company in the Middle East. I believe that Modern Water is now in an excellent position to start profiting from the excellent efforts of our talented employees and I sincerely hope that we can start returning value to our loyal shareholders."

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014. --Ends--

Notes to editors:

Modern Water is a pioneering and innovative technology company, specialising in membrane water treatment solutions and advanced monitoring products. The Company works for customers in a range of industries across the

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globe and owns proprietary technologies for use in a diverse range of applications. Modern Water's Monitoring Division has a portfolio of world-leading toxicity and trace metal monitoring products, some of which constitute the regulatory standard. The headline technology of the Company's Membrane Division, called "AMBC", can be used to tackle complex wastewater treatment problems at a reduced cost compared to standard processes, while being simple to operate.

www.modernwater.com

CHAIRMAN'S STATEMENT

Modern Water's financial performance in 2018 marks another year of steady improvement in the turnaround, which started towards the end of 2014. Revenues and Gross Profits in 2018 reached record highs of £4.2m (2017: £3.52m) and £2.3m (2017: £1.8m) respectively. These results generated a loss before tax, interest, depreciation and amortisation of £2.1m (2017: £2.8m), the lowest on record.

When reflecting upon the Company's financial performance since 2014, I am satisfied that substantial progress continues to be made: revenues are up by some 50%, administration costs have been slashed by 31%, whilst average annual operating losses since 2015 have been around 50% lower than those seen previously.

A significant milestone was achieved in the year, when the Membrane Division commissioned its first full-scale AMBC plant in India, serving a large textiles customer. Wider recognition and interest in our membrane technology was highlighted by signing two new AMBC partnerships in China and South Africa. Our Chinese partner, Sunup, took a 5% stake in Modern Water because they see significant potential for our AMBC and also our membrane technology when applied to treating leachate from landfill sites - a potentially huge market given there are approx.10,000 landfill sites in China.

The advance works contract for a waste-water treatment plant, located in Gibraltar, was executed during the year. This work resulted in a successful planning application, which passed a public planning meeting on 26 March 2019. Detailed design and construction of the new plant will be conducted by Modern Water, as part of a joint venture with Northumbrian Water Group, who will operate the completed facility.

The Monitoring Division has gone from strength-to-strength, by upgrading its best-selling product, the Microtox LX, which has received a strong level of interest from users of its predecessor, the Microtox M500 and also from Modern Water's international distribution network. In addition, the Monitoring Division has successfully commissioned a monitoring station for a major power generation company in the Middle East, including two OVAs. Modern Water's reputation for technical excellence was rewarded by the Frost & Sullivan Water Quality Innovation award for the Monitoring Division's CTM toxicity monitor, a highly prestigious award.

In October, the Company issued 3,792,410 new ordinary shares, which successfully raised ca. £340,000 in an open offer. This followed the investment from China in July, which saw our partner, Sunup, subscribe for 5,021,353 new shares, investing ca. £550,000 in Modern Water.

Outlook

I believe the Monitoring Division's foundations are now well set: gross profit is continually increasing as time passes, market focus has markedly improved and the successful launch of a new product sets the tone for continued increases in sales and profits in the coming period.

Over the years, the Membrane Division has struggled to find proper market traction for its impressive technology and deep knowledge of membrane systems design. Recent interest and sales of our AMBC technology from India and China highlight a turning point for the Division, which I believe is now showing that there is substantial market potential that will build sales and profits as we move forward.

HM Government of Gibraltar has given planning go-ahead for the design and construction of a new waste-water treatment plant and Modern Water's portion of this contract is valued at around £25m.

Based upon the foregoing, I believe that Modern Water is now in an excellent position to start profiting from the excellent efforts of our talented employees and I sincerely hope that we can start returning value to our loyal shareholders.

Alan Wilson

Chairman

18 April 2019

STRATEGIC REPORT

The Directors of Modern Water plc (Modern Water or the Company) and its subsidiary undertakings (which together comprise the Group) present their Strategic Report for the year ended 31 December 2018.

Membrane Division

Strategy

The Company has continued to pursue its key strategic goals and has made clear progress in the commercialisation of its technologies.

We have continued to follow our preferred business model of licensing our technologies to key partners. Under these arrangements Modern Water receives a licence fee for our technology, a design fee for high-level process design and a fee for supervising process commissioning. In addition we supply key items of process plant for each project. Our licensing business model significantly reduces the commercial and financial risk of each project.

Commercial Progress

During the year the Membrane Division achieved a number of key commercial milestones;

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Bodal Plant Commissioned and Opening Ceremony

On 4th of July following a successful commissioning period the British Deputy High Commissioner of Gujarat, Geoff Wain, opened the world's first brine treatment plant based on Modern Water's all membrane brine concentration process ("AMBC"). The plant treats technically challenging waste water for Indian chemicals giant Bodal Chemicals, a major international chemicals company and one of the world's leading manufacturer of dyes and dye intermediates. This is a crucial part of an energy-efficient treatment process for a highly saline organic-laden effluent stream from dyes manufacturing operations that achieves zero liquid discharge ("ZLD"), meaning that all waste water is purified and recycled at the end of the treatment cycle.

Joint Venture Established in China for AMBC Technology

Also on 4th of July, Modern Water and Sunup announced the formation of a Joint Venture Company, Encyclo, in China to promote Modern Water's innovative and proprietary brine concentration technology, the AMBC. 49% of Encyclo's shares are owned by Modern Water and 51% by Sunup. The parties are both represented on the board and are signatories to a joint venture agreement relating to Encyclo.

On completion of the JV formalities an opening ceremony for Encyclo was held in Changxing in December. The ceremony was attended by senior representatives of Modern Water and Sunup, together with senior representatives of the Chinese Government.

Forward Osmosis for Landfill Leachate Treatment

In September the Company licensed its proprietary forward osmosis technology for use in a demonstration plant to treat leachate from a landfill site in China. Modern Water's customer, Sunup, will use the demonstration plant to enhance its existing technological offering for the treatment of leachate from landfill sites.

AMBC Partner for Africa

In October, Modern Water entered into a collaboration agreement with WEC Projects (Pty) Ltd, a leading South-African EPC contractor which specialises in the provision of engineered solutions in the water and wastewater treatment sector. Based in Johannesburg, South Africa, WEC Projects will promote Modern Water's AMBC technology throughout the African continent.

AquaPak for Omani Safari Park

In December Modern Water was awarded a contract to provide a desalination plant for an exciting new safari theme park in Oman in the illustrious Adam location of the Sultanate.

Further AMBC Order in India

Post year-end, in March 2019, Modern Water received an order from one of the world's leading chemicals producers for an AMBC plant. The plant, which will be delivered with Modern Water's Indian partner Advent Envirocare Technology Pvt. Ltd., will treat technically challenging waste water. It is a crucial part of an energy-efficient treatment process for a highly saline organic-laden effluent stream, achieving ZLD, meaning that all waste water is purified and recycled at the end of the treatment cycle, leaving only a small amount of concentrated dry solids. Modern Water's AMBC will significantly reduce the cost of achieving ZLD for our client.

Gibraltar Wastewater Treatment Project

In January 2018, H.M. Government of Gibraltar awarded an Advance Works Contract to the Joint Venture between Modern Water Services Ltd and NWG Commercial Solutions Limited ("Northumbrian Water"), covering the design and survey work required for final planning and environmental approvals, as well as preliminary site works. This contract was successfully completed in March 2019 following the presentation of the project to Gibraltar's Development and Planning Commission. Work continues on closing the main contract for a wastewater treatment plant to treat all the wastewater from Gibraltar.

Modern Water is responsible for the design and build portion of the contract. Northumbrian Water will be responsible for the operation and maintenance of the plant for 20 years following its completion.

Monitoring Division

Strategy

The Monitoring Division is focused on three core product segments: Toxicity, Trace/Heavy Metals and Environmental Contaminants, with a geographic focus on North America, China and Europe.

2018 was a significant year for the Monitoring Division. The year-on-year increase in revenue was 19%, resulting in an increase in gross margin of 25% over 2017. In addition to the significant improvement in revenue and gross profit the Division also undertook a significant product development programme.

In April 2018, the Division completed the commissioning of a Monitoring Station for a major power generation company in the Middle East to help ensure environmental compliance. The Monitoring Station monitors critical parameters such as Chlorine, PH, Aluminum and 12 critical trace metals.

The development programme for the new Microtox LX, the Division's laboratory-based toxicity monitoring product, was completed at the end of 2018 and the new product was launched in January 2019. Initial feedback from customers on the new product has been very favourable.

Another achievement in 2018 (announced post year-end in January) was that Modern Water's SRB Test Kits meet the proposed new ASTM standards, which aim to address corrosion in petrochemical pipelines by helping to detect quantities of corrosion-inducing bacteria in water. The test method produces real benefits to customers: the real-time detection of corrosion inducing bacteria allows faster and more accurate remediation, which in turn reduces corrosion costs in pipelines and equipment.

Recurring revenue from service contracts and reagent sales was £1.4m in 2018 (2017 £1.0m).

Capital Raise

In October, the Company issued 3,792,410 new ordinary shares, which successfully raised £310,864 (after costs) in an open offer supported by management and existing shareholders. This followed the investment from China in July,

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which saw Modern Water's partner Sunup subscribe for 5,021,353 new shares, investing £552,348.83 (before costs) in Modern Water.

Outlook

Modern Water continues to make steady progress in commercialising its core membrane technologies and in the last year has signed up partners in two new key markets, China and Africa. Alongside the new projects, a number of pilot trials have been successfully concluded and we expect to see new orders resulting from this work.

We expect the Monitoring Division to continue to build on the record sales achieved in 2018 with the launch of the new Microtox LX product at the end of 2018.

Modern Water has developed an attractive range of technologies which offer demonstrable benefits to our target markets. This range of capabilities, developed over many years, now offers the Company an exciting series of opportunities, as we continue to commercialise our technology. In addition, increasingly efficient operational practices, close control of costs and the careful use of capital allow us to maintain this commercial traction and continue to develop new products and techniques in parallel.

Group Key Performance Indicators (KPIs)

As previously stated, at the Company's current stage of development the Directors consider that strategic and operational progress is best measured by achievement in terms of technical and business development milestones and at this stage does not monitor non-financial KPIs. In 2018 we achieved progress against our goals and will continue to focus on these elements to drive future growth. In 2018 the key milestones reached were:

·The first commercial AMBC plant commissioned in India

·Chinese joint venture company established for AMBC technology in the Chinese market

·New partnership established for the African market with WEC Projects (Pty) Ltd

·Development of upgraded Microtox® LX laboratory-based toxicity testing technology

·ASTM approved method for SRB testing achieved

Further details of strategic and operational progress for the two main operating Divisions are outlined above in the Membrane and Monitoring sections of this Strategic Report.

The Board reviews strategic, operational and financial information on a monthly basis to measure progress. The key financial performance indicators for 2018, covered in more detail in the Financial Review and the financial statements, were:

·Revenue increased 18% to £4.2m (2017: £3.5m);

·Gross profit increased 31% to £2.3m (2017:£1.8m);

·Operating loss before tax, interest, depreciation, amortisation was £2.1m (2017: £2.8m)

·Total comprehensive loss for the year was £2.8m (2017: £5.0m)

·Cash outflow before financing in 2018 was £1.7m (2017: £2.2m); and

·Cash as at 31 December 2018 was £0.2m (2017: £0.5m).

Group Research & Development (R&D)

The Group continues to invest in R&D across membrane, wastewater and monitoring technologies to support the development and delivery of commercial products for customers and expand the patent portfolio of the Group. Expenditure recorded in the Statement of Comprehensive Income for R&D during the year was £72,000 (2017: £165,000). The Group has benefited from the HMRC R&D tax credits scheme with the receipt of £155,386 in cash from claims made in 2018, related to R&D expenditure in 2017. The Group will submit claims for the recovery of 2018 R&D expenditure to HMRC in 2019.

Group Patent Portfolio & Intellectual Property

We have continued to file new patents to strengthen our portfolio in important markets whilst, as part of our active patent management, we have decided to abandon patent coverage in some strategically unimportant jurisdictions, thereby achieving cost savings.

As a result our patent portfolio in the Membrane Division now consists of 114 (2017: 86) granted patents across eight main patent families comprising solvent removal, improved solvent removal, secondary oil recovery, osmotic energy, separation process, evaporative cooling, cooling tower improvements and thermal desalination. The Monitoring Division currently holds 11 granted patents (2017: 13) and Modern Water has 2 (2017: 6) innovative wastewater treatment patents. Altogether the Group holds 127 granted patents (2017: 105) with a further 27 pending applications (2017: 42).

Group Resources

Modern Water continues to view its employees as a community, not just a workforce, and collaboration and networking across the Group is encouraged and welcomed. We also believe in developing and nurturing all our staff. Making Modern Water a great place to work is a key element in our successful attraction and retention of the most talented people to help us reach our goals.

As at 31 December 2018 the Group employed 37 permanent staff (2017: 41), supplemented by contract staff as required.

Group Financial Review

Summary

The Group had £0.2m cash in the bank and a bank loan of £0.5m at 31 December 2018 (2017: £0.5m cash). The Monitoring Division ended the year with an order book of £368,000. The overall loss before interest, tax, depreciation and amortisation decreased to £2.1m (2017: £2.8m).

The Group generated revenues of £4.2m in 2018 (2017: £3.5m). Total comprehensive loss was £2.8m (2017: £5.0m, £3.5m before goodwill impairment).

Cash Flows

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The Group cash outflow for the year was £1.4m (2017: £2.2m) and during the year a net £0.9m was raised through the issue of new equity.

Cash inflow from R&D tax credits was £0.2m (2017: £0.2m). Cash outflows comprised £0.1m on property, plant and

equipment (2017: £0.2m), £0.3m on patents (2017: £0.1m) and £1.4m on operating activities (2017: £1.9m).

Accounting Policies

The Group financial statements have been prepared in accordance with EU Endorsed IFRS, IFRS Interpretations Committee (IFRIC) interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The key accounting policies to note are those concerned with intangible assets and share-based payments.

Capital Structure

The Group is primarily equity funded which is appropriate during the current stage of development. As the Group develops, the capital structure will be reassessed on a project by project basis.

Treasury Management

The Group has adopted a low risk approach to treasury management. Cash balances are invested in instant access current and deposit accounts. Credit risk is addressed by the Group's treasury policy. Deposits are selected based on achieving the optimum balance of yield, security and liquidity. Foreign exchange risk is primarily mitigated through natural hedging of receipts and payments. See note 3 to the Accounts for further detail of financial risk management.

Going Concern

The Directors are required by company law to be satisfied that the Group has adequate resources to continue in business for the foreseeable future. The Group has recorded a loss for the year of £2.3m and has net cash out flows from operating activities of £1,352,000. The Directors have performed a detailed analysis of the cash flow projections for the Group as a whole covering the period through to the financial year ended 31 December 2018 and beyond.

The forecasts support that the Company will remain a going concern for at least twelve months from the date on which these financial statements have been approved and signed. The cash flow forecasts are based on the key assumptions set out below, some of which are subject to material uncertainty that may cast significant doubt on the Group and the Company's ability to continue as a going concern:

·Monitoring Division: Continuing revenue growth over 2018.

·Membrane Division: Significant increase in number of technology licences sold vs 2018.

·Gibraltar Waste Water Treatment Plant: full contract commences during 2019.

·R&D tax credit receipts from HMRC of a broadly similar amount to 2018.

·Continued availability of a £0.5m bank loan from Barclays Bank Plc.

As disclosed in Note 21 a covenant on the bank loan was breached as at 31 December 2018, but the bank has waived this breach and reset the covenant.

Post year-end, the $0.5m credit facility that was available to the Group was terminated and is to be replaced with a new $0.75m facility to be finalised, providing additional available resources to the Group.

Modern Water is also pursuing a number of new commercial opportunities across its divisions and also believes it has a variety of external financing options available should they become necessary.

Following the review, the Directors have concluded that adequate resources are available and therefore that they are justified in using the going concern basis for the preparation of the financial statements.

Principal Risks and Uncertainties

The principal risks inherent in the operation of the Group are well understood by the Board of Directors and the Management Team. Control measures have been established to ensure that these, and other, risks are adequately controlled both in terms of frequency and consequence. The internal control environment is described in the Corporate Governance Statement. The principal risks and uncertainties affecting the Group and the steps taken to manage these are:

Customer acceptance of the Group's technologies and emergence of competing technologies

The Group's success depends on potential customer acceptance of its products and processes. There are significant risks in predicting the size and timing of material revenue. The target customers of the Group's products and processes are often in developing countries which carry additional potential risks. The Group seeks to address these risks by building a track record and proving technology capabilities to future customers and industry players. The Group has increased investment in business development as product development progresses. Modern Water has formed a number of strategic partnerships to create local presence in target countries, overcome pre-qualification criteria on contract tendering and establish new routes to market. The range of applications for the Group's products provides mitigation against the risk of failure in a specific country or application. The Group continues to invest in research and development (R&D) to mitigate the risk of the emergence of competitor technologies.

Socio-political risks

Modern Water operates, and is looking to secure further contracts and sales, in a number of countries around the world. This exposes the Group to a range of social and political developments and consequentially to potential changes in the operating, regulatory and legal environment. The Group operates and generates revenue in countries where political, economic and social transition is taking place. Some countries have experienced, or may experience in the future, political instability, changes to the regulatory environment, changes in taxation, expropriation or nationalisation of property, civil strife, strikes, acts of war and insurrections. Any of these conditions occurring could disrupt our operations and revenue. The Group seeks to manage these risks through diversifying the regions in which it operates.

'Brexit' risk

Approximately one-third of the Monitoring division's sales are to EU Countries, but these sales are invoiced and predominantly supplied from Modern Water Inc in the USA. The Membrane division does not currently have any projects in any EU Countries. During 2019, Modern Water did undertake work in Gibraltar- however although Gibraltar is not part of the UK, but as a British Overseas Territory it will, by default, cease to be part of the EU upon UK's withdrawal.

Possible outcomes for Monitoring Division sales:

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